Considering all the media attention around SMSF’s and investing in residential property, in reality the value of SMSF funds invested into commercial property is much higher, courtesy of the superannuation rules that permit related party transactions in relation to “business real property”.
An SMSF can acquire business premises from a related party either as an in specie transfer (investment purchase) or an in specie contribution, or use a combination of both. Where the related party is operating a business from these premises the strategy can be very effective.
Have a look at the following two scenarios:
- Joe owns a factory where he manufactures toys, he purchased the factory 4 years ago for $150,000 it is now valued at $450,000.
Joe has an SMSF with assets of $600,000.
Joe’s SMSF acquires the factory from Jo at Market Value for $450,000. While Joe will be subject to capital gains tax he can potentially use the small business concessions to reduce or eliminate the realised capital gain as the factory is an active asset of his business.
Joe can then lease the factory at market value rates from his SMSF. He can then use the funds for other purposes either to reinvest or pay down other debt.
- Jenny (age 63) owns business real property used in running her own business that is valued at $300,000.
She contributes the business real property in specie to her SMSF and triggers a capital gain of $100,000. As she is eligible to make tax-deductible contributions to super she can claim up to $35,000 as a tax deduction against the capital gain. And the remaining $265,000 is treated as non-concessional contribution using the bring forward rule.
(In this case we would also consider the various concessions available for small business, which may effectively reduce the capital gain to Nil and preserve her concessional and non concessional caps)
So what are the advantages?
- A steady source of income for the SMSF that is taxed at a maximum of 15% within the fund, or if the SMSF has moved into pension phase this income will be tax free.
- Any capital gain on the sale of the property is concessionally taxed or may be tax free in the fund.
- The business premises may be protected from potential creditors to the fund.
- The trustee of the fund maintains control over the business premises
And the disadvantages?
- Stamp Duty may be triggered on the transfer, each state has varying rules.
- There may not be enough liquidity in the fund to purchase the entire business premises.
- Business premises are generally a large asset so it could potentially lead to a lack of diversification of the fund. Or preclude other investment opportunities.
- In the event a members benefit needs to be paid, there may not be sufficient liquidity within the fund to pay the benefit forcing the sale of the business property.
This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs.