| Self Managed Super Funds and Property Transfers |
 |
 |
|
The entitlement Self-Managed Super Funds (SMSF) have to invest in business property and other real estate is being investigated very seriously by those with SMSFs. Many are interested in the circumstances under which they can transfer property they own personally into their Funds. For example, if a commercial office is owned in joint names by a husband and wife as an investment and they rent it out, does it qualify as a business property and can it, therefore, be transferred to the SMSF. Another who owns a four-unit block of flats through a Family Trust is curious whether this property qualifies as a business property. He considers the block is conducted as a business as it is managed by a real estate agent. But is this a business property than can be transferred into a Self–Managed Super Fund. Firstly, there is no reason the commercial office investment cannot be transferred to a SMSF. The definition of a business property that can be transferred into a SMSF includes such property as an office, a shop or a factory that can be owned by Fund Members, but actually used in someone else’s business. An important difference between a business property that is leased to someone else and one that is leased to a member’s business is in the capital gains tax treatment of the property when it is transferred to the Fund. Whether the Fund buys the property or the property is transferred into the Fund as an in-specie (in-kind) contribution, a transfer from an individual or entity such as a Family Trust into the Super Fund is a sale. In addition, it must be at market value and backed up with appropriate third party valuations and paperwork. This means the member owner is required to pay capital gains tax on any capital profit. In both cases, there should be an entitlement to the 50 per cent discount on capital gains that applies to individuals and Trusts. However, if the property is part of the member’s business, it could be entitled to extra capital gains tax concessions, firstly if it can satisfy a test of being an active asset used in the business. It is entitled then to a further 50 per cent discount on the balance of any capital gain. Finally, a member who is prepared to transfer the remainder of any capital gain into his or her Super Fund and leave it there until retirement is entitled to claim up to $500,000 of gain as a small business capital gains tax retirement exemption amount. In respect to the block of flats, if the owner can show they are in the business of renting out property it could also qualify for a transfer into the SMSF. Whether a portfolio of residential investment properties would be a business depends on a number of factors that have been set down in Superannuation property investment guidelines originally issued by the Australian Prudential Regulation Authority and now being developed and reviewed by the Australian Taxation Office. The criteria for being classified as a business real property include the number of properties, the capital invested and whether the activity is run according to a proper business plan. Four properties could be at the borderline of satisfying the business property definition but if they are a decent value, that could make up for the lower number. Once again, however, in this circumstance a property that was transferred into a SMSF would not qualify for the additional capital gains tax concessions such as the active assets test or the small business retirement exemption. That’s because of rules that state that these concessions are not available to businesses where the assets are rental property. To be entitled to the extra capital gains tax concessions, such as the small business retirement exemption, it must be an active asset of the business. An active asset is defined as one that is owned and used or held ready for use in the course of carrying on a business and is not excluded by exemptions that are designed to exclude passive investments from this entitlement. This has been interpreted to apply to assets whose main use in the course of carrying on a business is to earn rent. Tony Martin – Director |
+ 61 8 8333 1944
