Transferring Business Real Property to a Self-Managed Superannuation Fund

In general terms, owning property (or any other investments for that matter) through a Self-Managed Superannuation Fund (SMSF) can provide significant tax advantages that aren’t ordinarily available under other ownership structures.

It must be noted however that before investing you should always seek professional financial advice as individual circumstances are always unique.

If you are a business owner you might find yourself in the situation where you personally own the business premises which your business operates in. Your business rents the premises off you, claims the tax benefit (likely to be 28.5%) and you record the rent in your personal return and pay the tax at your marginal tax rates (perhaps 34.5% or higher).

If this is the case it might make sense to rearrange the structure to give you a far better future tax outcome by transferring the ‘business real property’ into an SMSF. This structure also gives you a far better asset protection structure as it further protects the property from potential creditors. To do so however requires careful planning, good advice and a clear position on a potential tax event.

For the sake of simplicity we’ll first assume the property is unencumbered. If there is a loan on the property the transaction can still be done provided the loan is discharged but would require further advice and would be significantly more expensive as a ‘non-recourse borrowing arrangement’ would be involved.

The first thing to consider is stamp duty costs. In NSW the Office of State Revenue provides a nominal duty payable for transactions where an individual transfers business real property into their own SMSF for $500. The next thing to consider is any potential Capital Gains Tax. Being a business real property the Capital Gain is subject to potential Small Business CGT Exemptions. The transaction would require you to work through the exemptions with your accountant because there is a potential that the capital gain can be reduced to a minimal amount and possibly to no CGT at all.

In terms of making the actual transfer you have three options. Either the fund could provide a cash consideration for the market value of the asset, you could make what’s called an in-specie contribution (which is a non-concessional contribution) to the fund (up to the amount of your non-concessional caps) or a combination of both.

Once the transfer has been done, the advantage is now that the rental income (which must be at fair market value) will be taxed in the hands of the SMSF at the rate of 15% as opposed to your marginal tax rate. Furthermore, once you enter retirement (let’s say you sell your business but keep the property and lease it to a new tenant) you can draw down on the rent as a tax free pension OR alternatively you can sell the property, pay no Capital Gains Tax and draw the lump sum pension tax free.

It should be noted that to do the transaction would obviously require the rent to go into the SMSF and not your personal funds, so if you depend on the rent from the business real property then this scenario might not be a good option for you.

NOTE – You cannot transfer Residential property from a member into an SMSF

This article is general in nature and should not be relied upon in making an investment decision. We strongly recommend you seek financial advice prior to making any investment decisions.

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