Tax with Max: Transferring a holiday unit to an SMSF

Understanding the rules on SMSF property purchases and renting out a principal residence.

Summary: An investor who owns a holiday unit may wish to transfer it to their SMSF in a tax-effective way. Regulations covering superannuation mean that the only property an SMSF can purchase from a member is business real property. The property must be used wholly and exclusively in one or more businesses, but this condition can be met if a specific part of the property where the business is carried on contains a residential dwelling.

Key take-out: If a holiday unit does qualify as business real property, transferring it into an SMSF would be classed as a sale and subject to capital gains tax.

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

Transferring a holiday unit to an SMSF

I own a unit that has no borrowings in a holiday resort which is rented out under an on-site managed letting pool arrangement. My annual outgoings are the usual: management fees, council rates, water, body-corps, insurance, etc. The occupancy rate has remained quite high so the asset continues to produce a positive annual income, although the net is reduced significantly by tax.

I am about to reach my preservation age and commence a TTR. Can I transfer this asset into an SMSF and reduce the tax? If so can it be done without triggering excess fees, capital gain, stamp duty, even though no sale will actually occur? Will any other negative outcomes be raised, or is the tax benefit alone enough to justify the transfer?

Answer: Under superannuation regulations the only property that can be purchased from a member by an SMSF is business real property. In the relevant legislation business real property is defined as any freehold, or leasehold interest in real property, that is used wholly and exclusively in one or more businesses.

The definition specifically states that the property does not have to be used by the owner for business purposes but could be used by another entity. An example of this would be an individual that owns a factory that is leased to a tenant. In this case although the owner is producing rental income, because the property itself is used for a business purpose, the property would qualify as business real property.

Once a property has been classed as business real property it is important that the second part of the legislative requirement, used wholly and exclusively in one or more businesses, is satisfied. This potentially means that where a shop with a residence attached is owned it would not qualify as business real property because of a significant portion being used as a residence.

The ATO, in a ruling setting out their understanding of what constitutes business real property, states that the “wholly and exclusively” condition can be met where “a part of the real property in which the business is carried on contains a residential dwelling”.

For a property that has a residential dwelling on it the “wholly and exclusively” requirement will be met if the land that the residential property is situated on does not exceed two hectares, and the domestic or private use is not the predominant use of the property. This exception tends to mainly apply to agricultural properties where there is a requirement for a manager to live on the property.

The holiday unit in question could only be classed as business real property if it was part of an accommodation business, or you owned multiple holiday units and ran a holiday letting business. An example of a property being a part of a holiday letting business would be if the unit was in a resort and the resort management let it out as part of running their business.

Under income tax law if the unit does qualify as business real property, transferring it into an SMSF, whether that is done by the fund purchasing it or it is transferred as an in specie contribution, would be classed as a sale and subject to capital gains tax.

As a result transferring the property into an SMSF would result in a capital gain made by you, which would be added to any other income you earned in that year, and tax would be paid on 50 per cent of the gain at your relevant marginal income tax rate. This could mean any benefit of reducing the income tax payable on the net rent could be more than offset by the tax payable on the capital gain.

Depending on the state where the unit is located, assuming that it qualifies as business real property, stamp duty can be avoided on the transfer into the SMSF. This depends on a number of criteria being met, and depends on being able to show that there has been no real change in beneficial ownership.

I know that property located in Victoria and Queensland can be transferred into and out of an SMSF, from or to a member, and no stamp duty is payable. This is because in an SMSF the trustee of the fund holds the assets on behalf of the members and so there is no real change in the beneficial ownership.

Given the complexities of the business real asset test, the stamp duty regulations that differ between states, and the fact that capital gains tax would be payable if you are able to transfer the unit into an SMSF, you should seek professional advice before taking any action.

Renting out a main residence

I currently live in my principal home with the mortgage having been paid off but left open for future borrowings.  I have recently purchased an investment property where I now want to live and rent out my home as an investment property. Is there a way in which I can do this through refinancing and still claim the negative gearing loss from my current mortgage? 

Answer: The tax rules relating to whether interest is tax deductible are very clear and unambiguous. Whether interest paid is tax deductible depends on how the borrowed funds have been used, and does not depend on the property used to secure the mortgage.

If someone in this situation shifted from their current home into the investment property, and they drew down on their still open home mortgage to pay off the loan taken out to purchase the investment property, none of the interest would be tax deductible. This is because although the loan would be secured by the now new investment property, the proceeds would have been used to pay out the mortgage on the property that would become the investor’s new home.

Another problem with what you are thinking of doing is that the capital gains tax clock would start ticking on the current home once it commences to be rented. The only time that a property can retain the principal residence capital gains tax exemption is if the owner does not have another principal residence.

For example had an owner been shifting interstate and rented a property there to live in, but retained their current home and rented it out while living in the other state, the principal residence exemption would be retained for up to six years even though the property is rented.

From a capital gains tax and a negative gearing point of view an investor should consider selling their current home, making a capital gains tax-free profit on the sale of it, using the proceeds from that sale to pay off all or as much of the loan used to buy the investment property that becomes their new home, and then looking for a new investment property using borrowed funds to make the purchase.

Depending on the age of the current home, in other words if it had been built pre-1985, a better after-tax result may be achieved by purchasing a new investment property that was constructed in the last 10 to 15 years. This is because an investor could maximise their tax deduction due to the 2.5 per cent write-off of the construction cost.

Because of the complexities of the principal place of residence and negative gearing rules you should seek professional advice before taking any action.

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

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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