Treatise on buying or transferring of a business real property into a self-managed superannuation fund (SMSF) AND as an In Specie non-concessional contribution.
I have detailed a general advice information statement relevant to buying or transferring of a business real property into a self-managed superannuation fund (SMSF) AND as an In Specie non-concessional contribution and I make no specific recommendation allowing the individual Trustee to determine what is the best course of action to suit the Funds Investment Strategy and in compliance with regulations. Nor is the statement to be considered exhaustive of all implications and the Trustee should make their own enquiries with the relevant authorities and as to legislation applicable.
A person may transfer real property from their sole name to joint ownership with their spouse without incurring stamp duty on the transfer
Business Real Property is defined Section 66 of the SIS Act to mean property used “wholly and exclusively in one or more businesses (whether carried on by the entity or not)” where it is:
(a) any freehold or leasehold interest of the entity in real property; or
(b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer.
Section 71 the SISA deems assets leased to a related party to be an in-house asset, with the resulting restrictions and potential penalties. However this doesn’t apply if, among the other exceptions, the fund is an SMSF and the asset is:
Real property subject to a lease, or to a lease arrangement enforceable by legal proceedings, between a trustee of the fund and a related party of the fund, if, throughout the term of the lease or lease arrangement, the property is business real property of the fund.
A contribution to a SMSF by way of an In Specie contribution is based on title of ownership. The value and the determination of the contribution is based on individual circumstances of members. The In Specie contribution is normally treated as a non-concessional contribution to the individual members Superannuation accounts within a SMSF and must be made within the prescribed limits regarding non-concessional contributions to avoid penalties as previously advised.
A person may transfer property from their sole name to joint ownership with their spouse without incurring stamp duty on the transfer. A transfer of a share to a spouse or defacto partner is not liable to stamp duty where a number of conditions can be met, but the transfer must be marked by the Office of Sate Revenue (OSR) accompanied by a statutory declaration that the conditions have been met. (i.e., no monetary consideration, complying superannuation fund, no change in beneficial ownership).
Any business real property that is transferred under the In Specie arrangement must comply with Section 109 of the Superannuation Industry (Supervision) Act. This section requires that all investment transactions of an SMSF be made on an arm’s length basis.
An independent valuation of the property is required.
A rental appraisal report from a qualified real estate agent is required if the property is to be leased (e.g. back to a client’s business) at fair market value
A contract of sale for real estate is prepared along with a vendor statement.
A lease is also prepared for lease back to a business at fair market value.
A landlord’s disclosure statement is required.
TRANSFER OF TITLE
Each individual situation will bring to light other considerations in regards to legal contingencies in the In Specie transfer of property and in order to meet compliance legally it is highly recommended that a qualified legal adviser ideally experienced in In Specie contributions be consulted and that any proposed lender be approached well beforehand so that the lending resources of the lender as an authorised licensed financial services adviser are applied to act in accordance with the Superannuation Industry (Supervision) Act.
CAPITAL GAIN IMPLICATIONS
Capital Gain will need to be assessed based on the difference between the acquisition cost and fair current value.
Original purchase documents will need to be consulted.
If the property is sold for less than the market value, the difference is treated as an In Specie contribution. If transferred only and not sold, the entire contribution is assessed as an asset and an In Specie contribution for which no Stamp Duty should be payable under Section 41(1) of the Duties Act apart from perhaps the nominal fee of $50 depending on circumstances.
The implication of a capital gain can be reduced by using the small business Capital Gains Tax (CGT) tax concession.
Properties owned for less than twelve months are not subject to the 50% Capital Gain discount however the Retirement Exemption or 15 year exemption could be claimed provided either that the taxpayer satisfies the Net Asset Value Test that the combined assets of all entities do not exceed $6 million(excluding main residence, superannuation holdings etc) or that the Small Business or turnover test applies, that the taxpayer/s carrying on a business have an aggravated turnover of less than $2 million.
15 Year Exemption-To use the 15 year exemption, the property must have been owned for 15 years and the owner over 55 years.
Retirement Exemption-There is a CGT exemption on the sale of an active business asset, up to a lifetime limit of $500,000 per person. If the owners are under 55, money from the disposal of the asset must be paid into a complying superannuation fund or a retirement savings account to be CGT exempt. This will reduce the capital taxable gain to Nil if $1 million.
Ownership can be transferred into a SMSF by making an In Specie contribution equal to the market value of the business property of which by election part of the capital gain is treated as CGT exemption amount of the Retirement Exemption and the balance counted towards the non-concessional cap of $180,000 per year, per person over three years or one year at $540,000 per person under the Bring-forward rules.
An exchange of funds could take place to the business property owners from the SMSF of any difference between what is claimed as an In Specie contribution and the market value. Alternately any funds in the SMSF could be invested as required by the Trustees in other real business property or suitable investments in accordance with the Funds Investment Strategy.
Ideally as ownership is under the sole or joint names of the individual owners, there should be no GST implications as the owners make the transfer as a non- taxable supply (In Specie) and also the going concern exemption applies.
The following is an extract from the ATO WEBSITE
You may be able to treat your sale as a GST-free supply of a going concern.
If you sell property as part of a GST-free sale of a going concern:
- you’re not liable for GST on the sale
- the seller and the purchaser may be able to claim GST on other expenses that relate to selling and buying the property – such as the GST in solicitors’ fees.
A sale of a going concern is GST-free if all of the following apply:
- payment is made for the supply
- the purchaser is registered (or required to be registered) for GST
- the buyer and seller have agreed in writing that the sale is of a going concern
- the supplier supplies all things necessary for the continued operation of the business
- the supplier carries on the business until the day of supply.
Property that is part of a sale of a going concern can include:
- the premises, together with the assets and operating structure of the business
- a fully tenanted building, where the property and all leases, agreements and covenants are included in the sale
Any SMSF buying under these arrangements should be registered for GST.
As the SMSF becomes a landlord, should the rental income exceed $75,000 it is prescribed that the SMSF register for GST and have the obligation to charge GST as a taxable supply to claim GST INPUTS for a commercial property as opposed to the restrictions for residential property investment for which GST cannot be applied. Thus any related costs for residential property are not claimable for the GST component by BAS but instead the total cost is an allowable deduction inclusive of GST and the rental collected GST excluded as no taxable supply.
NON CONCESSIONAL CONTRIBUTION CAPS
The market value of the property will determine each members SMSF non concessional contribution limits in regards to meeting the cap limits of $180,000 per member per year of members under 65 years or under the Bring-forward rules a maximum of $540,000 over the proceeding three years and great care must be taken not to exceed those limits to avoid penalties. This amount is dependent on whether the CGT exemption applies.
Finance should be assessed based on what a finance lender is prepared to lend against the business real property asset. Alternately a related party could lend to the SMSF. In either case the process requires compliance with Limited Recourse Borrowing( LRB) arrangements.
A SMSF cannot acquire a business real property that has an existing charge or loan against the property.
If any charges do exist a lender would be approached so that any encumbrances are released or otherwise extinguish any related debt by other arrangements. Any finance required as to Real Business property introduced requires a separate LRB arrangement per property.
As previously explained once all the pre-conditions required prior to the In Specie transfer are met, then the requirement of the Limited Recourse Borrowing arrangements come into force as explained in my previous advice in regards to purchasing an Investment Property through a SMSF for each individual asset or property.
CHANGES IN LEGISLATION
Always at risk is what legislation changes are passed and what the newly elected Federal Government current superannuation proposals have of being successfully passed through the upper and lower houses and what changes may be negotiated in the legislative process until passed and any possible impact these changes may have on an indeterminable future.
Please contact us should you require further explanation or assistance.
For a more detailed explanation you can also refer to the ATO website.
Gregory Asher Sernack
FSL License Number 484657
Level 2 Unit 10 33 Kinsellas Drive
LANE COVE NSW 2066
Ist January 2018.
Gregory Asher Sernack. MIPA, M.Comm, IPA.
Gregory Sernack Financial Services is a personalized financial services practice run solely by the principal, Gregory Asher Sernack, a CERTIFIED PUBLIC ACCOUNTANT and member of the Australian Institute of Public Accountants, holder of a Master of Commerce degree and an Australian Financial Services License No 484657.Gregory Sernack is a member of the Financial Planning Institute and the Financial Ombudsmen Services.The holding of this financial services license required meeting stringent statutory requirements regulated by the Australian Investment and Securities Commission. We are somewhat unique in that we provide therefore not only accounting but also financial services.
Gregory Sernack is licensed to provide advice under a Limited Australian Financial Services License (AFSL) as a recognised public accountant to give general advice for Financial Planning and Superannuation. Information provided is of a general nature and is based on factual information and is not intended to imply a recommendation or opinion about a financial product or course of action..
Please be advised that (a) that the advice has been prepared without taking into account clients objectives, financial situation or needs; (b) the client should, therefore, consider the appropriateness of the advice, in light of their own objectives, financial situation or needs, before acting on the advice; and (c) the advice does not relate to the acquisition, or possible acquisition, of a particular financial product. If the client is considering a particular product, the client should obtain a Product Disclosure Statement (PDS) (if required) relating to the product and consider the PDS before making any decision about whether to acquire the product: s949A (2).