November 27, 2012
Superannuation, Accounting & Taxation
There can be some solid reasons to consider having the ownership of your business premises in the name of your self-managed superannuation fund (SMSF). To start with, if your business is travelling along steadily, it may provide a steady source of rental income for the SMSF and capital growth. It may also provide a level of stability for you as a business owner by not having a third-party landlord. There are additional advantages that, depending on a business owner’s circumstances, may make transferring commercial property into an SMSF a tempting option.
One of the primary reasons for making such a change is tax. As the asset, which is the business premises, will be held by a superannuation fund, tax on income and capital gains will generally be less than the business would have been liable for. For an SMSF, earnings (which include rental income) are taxed at 15%. For the business, rent or lease expenses are deductible for the business taxpayer, which pays tax at a rate of 30% (if a corporate). The end result is that the people behind these two entities — the SMSF and the business finish up overall saving 15 cents in the dollar of tax paid.
There are two other positives that can come out of the business making lease payments to the SMSF. These payments are a monetary contribution to the fund that is not counted towards the members’ contribution caps for the year, as they are “investment earnings”. It should be noted that rent must be charged at market rates. The situation can also be further improved once fund members commence pension phase, as tax on earnings then reduces to nil where the asset is supporting the pension.
A second reason to consider having the SMSF buy ones commercial premises is the resulting transaction will be a monetary fillip for business and can either refresh its capital situation or perhaps pay down debt.
A third reason, depending on which state the business premise is in, can be stamp duty exemptions or concessions. Many states have legislated to provide stamp duty concessions when a commercial property is transferred into a super fund. However these concessions can vary depending on the state, so advice may be needed to confirm your personal situation.
A fourth potential attraction, which may depend on circumstances, is that assets can be rendered less accessible to creditors once they are held by superannuation funds. There are various allowances made within the bankruptcy laws, for example, that can open these transactions up to being unwound in some circumstances — so the fact that assets are held in an SMSF may not be an iron-clad strategy on the off-chance that creditors could come knocking.
One inflexible requirement, in order to comply with the regulations, is that the property in question must be “business real property” that is used wholly and exclusively for the business. And although the regulations permit purchasing from a related party, the acquisition must be made at fair market value, therefore an independent valuation must be carried out and recorded.
Buying the property must be consistent with the written investment strategy of the SMSF, and the asset must be acquired with the “sole purpose” of providing for the retirement savings of the fund’s members.
An important consideration is the capital gains tax (CGT) implications that will be triggered by moving the property asset from one owner to another, which is the liability of the “seller” of the business premises to the SMSF. In many cases, the business owner may be eligible for the small business CGT concessions, which can significantly reduce or even remove altogether CGT payable on the sale of the property asset. Ask this office for more details.
Another potential benefit that should be mentioned at this point is that once the premises are owned by the SMSF, and over the course of time the members of the fund commence to take a pension, the subsequent sale of the (hopefully increased in value) property will not be subject to CGT if the property supports the pension liability. And even if the property is sold before any pension is commenced, as long as it has been held for at least 12 months the tax on any capital gain is still taxed on a concessional basis in the SMSF at 10%.
It is possible to complete the transfer of property into the hands of an SMSF for “nil consideration” — that is, no money changes hands but the property is transferred as an “in-specie” contribution to the fund. Its value however will then be considered a contribution, and will therefore be included in the annual contribution cap limits. A combination of an exchange of cash plus proportional in-specie transfer is possible. It should also be mentioned that CGT can still apply to in-specie transfers.
If circumstances make it a better option for the SMSF to buy the business premises, but the fund has limited cash resources, it is possible for the SMSF to take out a loan for the property purchase via a limited recourse borrowing arrangement. One essential requirement is that the property must be unencumbered — that is, any existing mortgage must be discharged. Such a loan has the benefit (due to its being of “limited recourse”) of isolating the other assets of the SMSF from the lender should the borrower default.
One option here is that the business is at liberty to provide this loan. One feature of gearing in a super fund is that anyone can lend the money. So many small business property owners are using these provisions to allow their SMSF to borrow money from the business under a limited recourse borrowing arrangement to enable it to buy their commercial property.
If you are considering entering into an SMSF borrowing, it is imperative that appropriate advice be obtained at an early stage.