Transferring business property into your DIY super fund can provide a range of invaluable benefits.
The advantages you get from such a transaction will depend on your personal circumstances. Most people will obtain one or more tax advantages. For example, in nearly all cases your super fund will be paying less tax than you or your company are currently paying.
Additionally, you might be eligible for some stamp duty concessions when the asset is transferred into your super fund. The final potential benefit is that as the asset will be held in super it will reside in a structure, which might provide better protection in the event of bankruptcy than that available from other assets. You can read more about the benefits in Four reasons to put commercial property in super [1].
How to make the transfer
So what is the process of transferring your property into super? Over the next few weeks I’ll delve into this topic in greater detail, but here are six steps to get you started:
1) I think the best place to begin is to accept that you can’t do this transaction on your own. You will need expert advice. There are a number of complicated and confusing issues that have to be dealt with when you deal with commercial properties, super funds and, if relevant, lending institutions.
2) Next, you need to be absolutely sure the property you want to transfer into super is “business real property’ – that is, property used wholly and exclusively in the running of a business.
3) The next issue that must be addressed is to check your property’s title documents. The property’s title has nothing on it – for example a caveat – which might stop you from transferring it into your super fund.
4) After the title has been checked you need to be sure your super fund’s trust deed is up to scratch. If relevant, are you or your business permitted to make in-specie contributions? Can the super fund own business real property?
5) In a similar fashion will your super fund’s investment strategy have to be updated to take into account the proposed property holding? You will need to consider a range of issues here including what would happen if you had to sell the property quickly, or what will happen when your super fund begins to pay you a pension and how long you intend to hold the asset.
6) The next task is to work out what you’re trying to achieve by moving the property into super. For example, how will the super fund acquire the property? Will it buy some or all of the property from you or will you want to contribute some or all of property as an in-specie contribution? Here you’ll probably want to focus on stamp duty concessions (in Victoria) and the value of the property now compared to when you originally bought it. If it’s worth more, then you’ll need to think about Capital Gains Tax (CGT).
Capital gains tax
In most cases, dealing with CGT will probably bring Small Business CGT Concessions into play. If so, you must make sure you meet all qualification and asset valuation requirements of these concessions. These are quite strict tests and the Australian Tax Office (ATO) has been auditing this area looking for people falling foul of these rules.
Daniel Butler of DBA Lawyers told me of a situation involving the value of an asset. A taxpayer had received an independent valuation of several million dollars. The ATO disagreed with this valuation and thought it should be significantly higher and applied their revised value. The taxpayer objected to the Administrative Appeals Tribunal, but it ruled in favour of the ATO.
The ATO’s asset valuation made the taxpayer ineligible for the CGT Small Business Concessions. This caused their small business CGT concession contributions to be reclassified as non-concessional contributions, which in turn caused the non-concessional contribution cap to be breached. This meant the taxpayer was lumped with excess contributions tax.
In my next article on this subject I’ll look at in-specie contributions issues, stamp duty considerations, super gearing issues and the property’s contract for sale.
Important information: 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. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
Also in the Switzer Super Report
- Peter Switzer: It’s a tight race to finish in the black this fiscal year [2]
- Paul Rickard: Road test: five SMSF bank accounts compared [3]
- Lance Lai: Chart of the week: an engulfing bear emerges [4]
- Rudi Filapek-Vandyck: The broker wrap: two buys and three sells [5]