Julianne Dowling looks at some tax pitfalls for business owners who want to sell property to their self-managed super fund.
Business owners facing uncertain times may want to release cash through a transfer or a sale of their business property to their self-managed super fund. But is that a smart investment decision?
Louise Biti, co-founder and director of Strategy Steps, a company supporting financial planners, says that although it sounds like a good plan for the cash-strapped, there are many things to consider.
She says the first question to ask is whether your business can grow and expand in a difficult period and how much do you really need the spare capital.
"If so, you may want capital to be released by a transfer or a sale of the property to the self-managed superannuation fund," she said. "There's also the benefit of asset protection, where the property will be separated from the business, particularly if your business faces tough times, and there are long-term tax advantages."
But short term the costs can be significant.
Biti explains that you will need to have an independent market valuation on the property, money to pay any capital gains tax on the sale of the property and enough spare cash in your self-managed fund to pay for stamp duty on the acquisition, maintenance, repairs and any ongoing tax liabilities.
Tax-wise, she adds the different marginal rates are often a reason to consider transferring the property to a super environment.
"If it's in the company name, it doesn't qualify for the 50 per cent [capital gains tax] discount although it may get small business concessions," she says.
"But you may also get better concessions by transferring the asset into the [self-managed fund] and starting an income stream [after age 55] before selling the asset, so that no CGT is payable - so the future tax benefits could be worthwhile."
With only 15 per cent tax in the self-managed fund against 30 per cent company tax and up to 40 per cent individual tax rate, you need to weigh up all the options on why the fund should buy it - and the restrictions.
Another twist regarding capital gains tax and property comes from a recent legal case in the Federal Court. Although the decision will be appealed, Federal Court Justice Arthur Robert Emmett held that the Australian Taxation Office has an unlimited time to amend tax assessments if an asset were sold under a contract that was signed in one financial year and settled in the next.
Based on this ruling, the chartered accountants GMK Centric says taxpayers cannot have certainty about their capital gains tax affairs from the 1998-99 financial year.
"There are likely to be many taxpayers whose property sales straddle the end of a financial year," they said in a recent statement.
Not good news for those who bought or sold in May or June and settled 90 or 120 days later. And certainly bad news for anyone who falls into this category, because they have to keep all their capital gains tax records for a lifetime.
The capital gains tax event usually occurs at the signing of the contract of sale rather than settlement, although settlement is required as a trigger. This case means that the Tax Office can amend your assessment if the taxpayer does not have the records to substantiate a cost base query from them.
The Tax Office is also focusing on people who put $1 million undeducted contributions into super, usually from property, up to June 30 last year.
That puts valuations of the asset plus GST issues under the radar.
According to GMK Centric's Chris Wookey, investors who transferred assets may have mistakenly believed that this was GST-free.
"If you had a family trust property then the trust would distribute the property to mum and dad and that would be transferred, but each move may have GST attached to it."
GST is applied to each transfer if the property is not a "going concern" and other requirements are not met.
To be GST-free, the property must be a leasing enterprise so it must generally have a current lease in place.
Usually you would expect there would be a lease on a commercial property, but it may be that the lease has run out and the tenant is staying in the property under a "tenancy at will" arrangement. This is not adequate for GST purposes, warns Wookey.
"I think that's an area where it would be easy to trip up."
Ernst & Young's Noelle Kelleher, national director of superannuation, agrees that a "tenancy at will" arrangement can be distinguished from a periodic arrangement, so this needs to be carefully considered.
The GST penalties are even more stringent. They can range from 25 per cent of the total owed if you are not taking care, up to 75 per cent (where it is tax avoidance) of the tax plus payments back plus interest.
Kelleher believes that the capital gains tax, land tax and stamp duty aspects may come back to bite investors who transferred assets to maximise their super contributions last financial year.
"While many people were focusing on how to maximise their contributions, some didn't consider the bigger picture."