Tax with Max: Buying a property from a super fund

How to purchase property from an SMSF, working out tax with a complying lifetime pension and withdrawing a lump sum from a super fund in pension mode.

Summary: A member of a super fund and a related party can buy residential property from a super fund. The property should be valued to ensure it is transferred at market value. The property can be purchased or paid out as an in specie super benefit payment. The sale of the property could have capital gains tax and stamp duty implications.

Key take-out: Anyone considering transferring a property from an SMSF to a member of the fund should seek professional advice to correctly reduce the impact of stamp duty and capital gains tax.

Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

Buying a residential property from a super fund

My family have an SMSF, of which I am a trustee and a member of the fund. One of the assets of the fund is a residential property which we want to sell. I know that the fund cannot buy residential real estate from a fund member, but I want to know if a member or related party can buy a residential property from the super fund at market value?

I was interested in your answer to a previous question “Leaving a property to a non-dependent” from the SMSF (see Tax with Max, December 3, 2014).  I always took the literal of “cashing” of super lump sum death benefits to mean payment in cash, but now understand they can be done in specie.  With the transfer of this property asset as a payment of the super benefit to the non-dependent or in fact beneficiary what are the stamp duty and capital gains tax consequences on the relevant parties?

Answer: A member of a super fund, and a related party, can purchase residential property from a super fund. As a part of the transaction the property should be valued to ensure the property is transferred at market value.

The value of a property can be established by the trustees of the SMSF and a written valuation does not need to be obtained from a registered valuer. If the trustees did the valuation they would need to keep all documentation they used to establish the value.

The property can either be purchased from the fund or it can be paid out as an in specie super benefit payment. Benefit payments can only be made to members that have met a condition of release. They cannot be made to dependents unless a member has died and the in specie payment is made as a death benefit payment.

If the person that you want to transfer the property to is not a member of the fund one of the members must have met a condition of release, and be happy to have the value of their superannuation decreased by the value of the property.

Transferring the property from the fund will result in a sale that could have capital gains tax and stamp duty implications. The tax payable can be reduced to nil when the transfer of the property takes place and the fund is in pension phase. Stamp duty can be avoided depending on the state where the property is located, and if the transaction is structured correctly.

Before taking any action you should seek professional advice to ensure the strategies used to reduce the impact of both stamp duty and capital gains tax are correctly implemented.

Working out tax with a complying lifetime pension

My wife and I are the trustees of our SMSF that has a portfolio of shares and cash. I am 72 and my wife is 68. In September 2004 I commenced a complying lifetime pension for $200,000, prior to the change in the Centrelink assessment of complying pensions. Consequently we receive a part age pension.

In January 2011 arrangements were set in place for my wife to commence an allocated pension. Each year we are advised of the minimum amount we have to draw and our financial statements prepared have an actuarial certificate prepared. Each year the fund pays some tax on its earnings, which we are told is the result of the complying lifetime pension we have in place.

I have queried having to pay tax because of our age, but the answer always comes back that the actuary calculates the amount of tax we pay. I would appreciate your comments/understanding on the so-called implications of having a complying lifetime pension.

Answer: The lifetime pension you commenced in 2004 has significant benefits because the value of the pension account is not counted as an asset when assessing your entitlement to the age pension. As a result lifetime pensions are not treated the same for income tax purposes as account-based pensions.

Superannuation funds do not pay tax on income earned to fund an account-based pension, but they do pay tax on income earned to fund a complying lifetime pension. In a situation where a superannuation fund is now fully in pension phase, but with an account-based pension paid to the wife and the husband receiving a lifetime pension, tax still is payable by the fund. The age of the members of a fund has no bearing on whether it is taxable or not.

This means an actuarial report must be obtained to certify that the assets of your super fund, plus the future earnings, are sufficient to meet its liability to pay the complying pension. In addition the actuary each year calculates what income is taxable and what isn’t.

You should contact an SMSF specialist to see if you would get any advantage by segregating the assets of the fund between your lifetime pension and your wife’s account-based pension.

Withdrawing a lump sum from an SMSF

Am I wrong in thinking that you can withdraw a lump sum from an SMSF while it is in pension mode provided you make an “election” to take the amount as a lump sum not a pension amount? Thus the fund stays in pension mode from the original start date.

For Centrelink purposes, do you have to stop the pension, do a partial commute, withdraw the lump sum and restart the pension? In which case, every SMSF pensioner who takes a lump sum from next year will lose the grandfather deeming provision.

Answer: When it comes to a person’s or couple’s eligibility for the age pension, and they are covered by the grandfathering provisions for the income test, members must be careful when choosing the type of lump sum to take. It is possible to take a lump sum pension payment, or to take a lump sum payment from an account in accumulation phase.

If a lump sum pension payment is taken the grandfathering provisions would still apply but this could result in a member losing some or all of their age pension. This is because the pension payment would be counted as income and, even after allowing for the purchase price deduction, the income counted could exceed the upper income limit.

If you take a lump sum your pension would need to cease so it can be taken with the account in accumulation phase. If this was done the grandfathering provisions would no longer apply.

Depending on the value of your superannuation account, and whether your pension is affected by the assets or income test, you may be in a better position by taking the lump sum and losing the benefit of the grandfathering. Before taking any action you should seek professional advice. 


Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs. Also go to www.smsfsurvivalcentre.com.au.

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.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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