|Summary: This article provides answers on whether GST is payable on buying a super fund property, rolling back a TTR pension, reversionary pensions, calculating the tax payable on a pension with taxable and tax-free components, and on whether in-specie share transfers are worth the effort.|
|Key take-out: The requirement to include GST in the sale price of a property used for business purposes will depend on whether the seller is or needs to be registered for GST.|
|Key beneficiaries: SMSF trustees. Category: Portfolio management.|
GST on a property purchased from a super fund, and blind trusts.
I watched with interest your recent video interview on purchasing a residential property from your own SMSF. I plan to run my advisory business with three employees for a period of three years from a residential property to be purchased on the market. I will then renovate the property extensively. I then intend purchasing the property from my SMSF at market value.
On selling from the fund to the member does the fund have to charge the purchasing member GST on the purchase or is it exempt from GST having been a residential property, even though it was used as commercial premises? On selling, is stamp duty levied at the normal residential rate or at business rates? Is it necessary to set up a blind trust to purchase the property if the SMSF is purchasing the residential property outright without requiring a loan?
The requirement to include GST in the sale price of an item will depend on whether the seller is or needs to be registered for GST. Even though you are buying a residential property it will be leased for business purposes. This means if the rent paid by your business exceeds $75,000 a year the super fund must be registered for GST.
This would mean when your super fund sold the property it must include GST in the price. As the super fund will be buying a residential property that will more than likely not include GST it could use the margin scheme when it sells. Before taking any action in relation to purchasing this property you should seek advice from a GST expert.
I am not aware of there being a difference between the stamp duty charged for residential property and business property. You will need to seek advice from a lawyer that specialises in this area.
As the super fund will not be borrowing to purchase the residential property the limited recourse borrowing rules will not apply and therefore a trust will not need to be set up to purchase property.
To be able to purchase this property in your SMSF the fund trust deed and its investment policy must allow the purchase. As you plan to purchase the property, renovate it, and then purchase it from your SMSF, you could be challenged on whether the property is being purchased purely for retirement purposes, or it is being purchased because you do not have sufficient funds or borrowing capacity.
Rolling back a transition to retirement pension
I am currently 63 and have finished working. When I am 71 my wife will officially be of pension age. We have had some advice in relation to protecting my capital in our self-managed super fund. To protect our super fund capital and claim some age pension we should roll back my super balance to accumulation phase, withdraw $450,000, and then re-contribute this amount into my spouse’s super account using the three-year bring forward rule.
Can this be done part-way through the financial year? What are the tax consequences on my super account currently in TTR pension phase - i.e. will the earnings be taxed for the whole year or just from the date of the rollback?
This strategy can be implemented part-way through a financial year, but it could result in increased accounting and audit costs. As you would be commuting your TTR part-way through a year the tax-free status of the income earned by the fund will cease once the TTR pension ceases. This will necessitate your SMSF getting an actuarial certificate to apportion the income of the fund between what is taxable and not taxable.
Paying reversionary pensions to non-fund members.
My brother and I are the only beneficiaries and trustees in an SMSF that is a closed fund to new members. Our wives will receive a reversionary pension on our death and there are Binding Death Nominations in place. Is it the case that our wives need to be also beneficiaries in this super fund to receive a reversionary pension, and if so how can this be done as the fund is closed to new members?
I have not come across closed funds before but from what you have described no new members can join your fund. Before a person can receive a pension from a super fund they must be a member of the fund. In normal circumstances this would mean a reversionary pensioner would become a member of the fund upon the death of the original member.
You should seek legal advice as to whether a reversionary pension can be paid by your super fund. If it can’t you should consider setting up a new SMSF and roll over the superannuation from your existing fund to the new fund. You should also consider setting up two SMSFs, one for you and your wife and the other for your brother and his wife.
Calculating taxable and tax-free pension amounts.
If a super fund has an 80% taxed component and 20% untaxed component in pension phase and the beneficiary is 56 years-old and a monthly pension is being paid, how is the tax calculated on the monthly pension amount?
Also, if in the same fund investment income is accumulating that is not being paid out as a pension, does this money left in the fund attract 15% tax and then becomes classified as a taxed component in the fund? If this is the case does this then continually change the percentage ratios of taxed to untaxed money in the fund therefore changing the tax payable on the monthly pension amount.
It would appear that your fund is made up of 80% taxable benefits and 20% tax-free benefits. Untaxed superannuation tends to relate to government superannuation funds where 15% income tax has not been paid on contributions or income of the fund.
When a superannuation fund pays a pension made up of taxable and tax-free benefits, and the person is under 60 as you are, the percentage relating to taxable benefits is included as taxable income. If in your case the pension was $10,000 a year, $8,000 would be included as taxable superannuation pension income. The tax payable on this would be reduced by the pension tax offset.
If your total fund is in pension phase no tax is payable on income earned by the fund. If the pension paid is less than the income earned there is still no tax payable on this excess income. Once a pension is started in the super fund the taxable and tax-free components remain the same for as long as the pension is paid.
Disadvantages of in-specie share transfers
My wife and I have drawn our minimum pensions from our SMSF for 2012-2013. Before the changes to in-specie share transfers happens at June 30 this year, we would like to transfer some of our ASX-listed shares from the fund to our own names as we wish to build up our non-SMSF assets. The actual transfer will be straight forward as they will all involve the same broker but we would like to know if you are aware of any issues with such a move?
The legislation has not yet been issued in relation to how the ban on in-specie transfers of listed shares will work. With the low cost of brokerage fees charged by many online brokers any savings from an in-specie off market transfer may be minimal and not worth the time it will take.
The main issue to be aware of is capital gains tax would be payable by the fund as in-specie transfer must be made while the fund is in accumulation phase. Pensions cannot be taken as in-specie payments.
The potential capital gains tax cost of transferring the shares in-specie is another reason why it may be better to sell the shares while the fund is in pension phase. You would then buy those shares on the market. Before doing anything you should seek professional advice as I am not sure whether you would be better off by transferring the shares into your personal names out of the tax advantaged superannuation environment.
Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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