Selling assets to an SMSF
Superannuation strategies for SMSF trustees.
One of the greatest advantages of an SMSF is the ability of the fund to have direct investments. Where a super fund has sufficient funds, and the members have high debt levels, a super fund can buy business real property (tax speak for real estate) from the members.
The aim of this strategy is to reduce the debt payments of the members, use the increased cash flow to increase super contributions to the fund, and provide the super fund with a direct property investment that produces a commercial rate of return.
The main cost of this strategy will be stamp duty paid on the selling value of the property. In addition, there will also be extra costs incurred in having the business property valued and legal costs related to the transfer of the property.
The underlying principle of this strategy must be commerciality. In addition to a market value being paid for the property, the rent paid by the business must also be at a commercial rate and paid regularly and on time, just as would be the case if the property was rented from an independent third party.
Example of how selling a business property to an SMSF reduces debt
Michael and Mary Bosch, aged 57 and 55 respectively, who run a manufacturing business through a partnership. In 1987 the company bought the factory it operates from for $150,000 using a bank loan. There is still a balance owing on the loan of $50,000.
Four years ago Michael and Mary purchased a holiday home for $350,000 with a bank loan of $200,000. Their only other major asset is a self managed super fund that has $550,000 in total investments.
Having been worried about the inflated value of the sharemarket they sold most of the shares owned by the super fund, resulting in it having $380,000 in cash. Michael and Mary like the security of a property investment and have decided that the super fund will buy the factory from the company. A real estate agent values the factory at $350,000 and estimates its market rent is $28,000 a year.
As trustees of their SMSF, Michael and Mary have a meeting and pass a resolution to change the investment strategy of the fund to allow the purchase of the factory. In the trustees' minutes they note that as the factory is classed as business real property the super fund under the regulations is permitted to purchase it from a related entity.
A solicitor is engaged who transfers the ownership of the factory to the super fund and draws up a commercial rental agreement between the company and the super fund for an annual rental of $28,000 a year. The legal fees and stamp duty on the sale total $18,000.
As Michael and Mary qualify for the small business retirement exemption they will not pay any tax on the capital gain of $200,000. Also as they have both reached retirement age the retirement exemption can be paid directly to them.
With the proceeds from the sale Michael and Mary pay off the loan on the holiday house. The balance of the sale proceeds is used to pay off the $50,000 bank loan and the balance of the funds are used to make non-concessional contributions.
The benefits of this strategy to Michael and Mary are:
- their business is debt free
- the cash flow that went to make loan repayments on the holiday house can now be redirected to the super fund as extra super contributions
- the super fund has a steady cash flow from the rent paid by the company that Michael and Mary can use to fund tax-effective TTR pensions for them both
- the tax deductible and non-concessional super contributions paid for Michael and Mary can be further increased due to the TTR pensions they are receiving.
- One disadvantage of this strategy can be when capital gains are made and large tax bills result due to not being able to claim the small business CGT concessions.
Documentation and Actions Required
- Contact a real estate valuer to have the property valued and a market rent established.
- If needed alter the investment policy of the SMSF to make sure that it can invest directly in business real property.
- Once the sale to the SMSF has been completed set up a regular monthly payment from the business bank account to the SMSF to ensure no rental payments are missed.
As this strategy involves the sale of the property capital gains tax could be payable on any increase in the value over the time it has been owned. Where the owners of the business qualify for the small business capital gains tax relief the tax payable can be reduced substantially.
In addition the property being transferred must also satisfy the “wholly and exclusively” business test. This means if the property has a joint use, business and private, this test will not be satisfied. One of the exceptions is where a person must live on a property, such as a farm, the test can still be satisfied. If you are not sure if your property meets this test you should seek professional advice.
Before using this strategy you should seek professional advice as to whether you will actually benefit from following the strategy and will not end up worse off if the strategy does not really apply to you.
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