We recently received an interesting question from a reader:
“A [deceased] close relative has left me (via their deceased estate) a share in a property zoned business, which was acquired pre September 1985. I understand CGT (capital gains tax) will accrue from when ownership passes to me.
“The property will need a fair amount spent on it for repairs and upgrading before it could be leased, however it could just remain vacant. The business ended when the relative became ill, and it closed. He lived in a small house next to the shop, but no one remains there now. When they changed the zoning to business, Council advised they don’t throw out existing residents, but due to the changed zoning, it can’t be used for residential purposes in future. No leases or tenants remain, the place is empty … it’s very run down and would need money to upgrade for tenancy … if we don’t upgrade it, then at a sale, only the land would be of value.
“The solicitor organising probate suggested transferring my share (a bit over 1/2) to my personal name however I’m wondering if it might be better to transfer it to my Family Trust, or start an SMSF and transfer it there.
“The solicitor doesn’t know what’s best. Any thoughts or considerations?”
There is a lot to consider here. What follows is a discussion about some of the issues as I see them:
- How will ownership be determined? Once the property is transferred, it’ll probably be best if both parties own the property as tenants in common because this will make it easier for you or your preferred entity, such as an SMSF, to dispose of your portion of the real estate separately if this would ever be necessary.
- The other owner – are your needs and wants aligned with the other owners? For example, do you both want to retain ownership for roughly the same period? In the event of disposal, would the other party have first right of refusal to buy the other party out? Will the other party ever want to use their portion of the asset as a security for any borrowings? If yes, and they’re related to you, then assuming your portion is held in an SMSF then this can lead to problems complying with a specific super law that prohibits using super fund assets to provide financial assistance to fund members or their relatives.
- The asset itself – does it satisfy the super law definition of “business real property” or BRP? That is, is it used wholly and exclusively in the running of one or more businesses? At present, the land is vacant and no business is carried out on it.
In a ruling about this legislative term issued in 2009, the ATO (Australian Taxation Office said:
a. “The key is that there must be use of land – that is, there are activities, operations or actions occurring on the land.”; and
b. “… if the freehold interest holder abandons plans to lease the property, the property will no longer be business real property.”
It would seem to me therefore that there is some doubt about this property currently satisfying the BRP definition.
Given that the asset could be transferred from a relative’s deceased estate, is this a problem?
Yes because a transfer from the estate is the same as an acquisition from the relative. Super fund acquisitions of relatives’ real estate that isn’t business real property are prohibited. In fact, you can receive a one-year jail sentence, or monetary equivalent for breaching this rule. The ATO could also elect to fine or penalise you in other ways.
The only logical approach therefore is to seek advice about this issue from a lawyer experienced in superannuation matters, or request the ATO to issue a SMSF Specific Advice about this question.
Some additional issues about using a super fund:
a. Does the trust deed for your potential SMSF allow for the acquisition of the property?
b. Are you eligible to be a member of the fund?
c. Who else would be members and trustees of the fund?
d. What type of trustee would the fund use – a corporation or individual trustee(s)?
e. It is likely that any deemed distribution from the deceased estate would be classed as a non-concession contribution.
Do you satisfy the associated age limitations for NCCs? These contributions can be made when a person is aged under 65 but between 65 and under 75, a work test must be satisfied. Once you turn 75, no further contributions are permitted.
f. Does the value of the property, when it is placed into the fund, cause problems with the contribution caps? At present the maximum NCCs you can make in a financial year is $180,000. If you’re aged under 65 at the start of a financial year, you can contribute three times this amount in one financial year, that is $540,000, but this restricts what you can contribute in the future years.
Let’s assume that you obtain approval for a super fund to receive your share of the property. Is super better than other structures?
- Holding the asset personally – any income will be taxed at your marginal rates and cannot be split with any relatives. Capital gains tax will accrue from the date of death. In addition, in the event that you personally face financial difficulty, such as bankruptcy, then the asset may be seized by creditors.
- Family trust – income can be split with eligible dependants; distributions to minor children will be taxed heavily once their income goes above a very low threshold; CGT will again accrue from the date of death. However, depending on the wording of the trust’s deed, this could be split between eligible beneficiaries. If the asset is gifted into the trust, then it could still be seized by creditors in the event of personal financial difficulty.
- SMSF – as you would be aware, super funds are taxed at 15% for non-pension assets and 0% for pension assets, including capital gains on realised assets – these can be particularly attractive for some investors. However, there are many rules that have to be followed for pensions. Under the preservation rules, this includes the ability to pay yourself a pension as well as the need to pay increasing pension amounts each year, based on your age and the market value of the underlying investments.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.