Transferring a business Premises “Real Business Property” into your Superannuation Fund
“Real business property”
Transferring the business premises, referred to as “real business property”, into a SMSF is a good way of saving funds out of the business, in a tax effective environment. It means the business owner is paying rent to the super fund, rather than to a bank or another landlord. This is one of the few ways to utilise superannuation investments in the business.
Do not rush to transfer the business property to the SMSF, You should apply the same investment fundamentals to any other investment. A key consideration is that holding the property in the SMSF has to make sense from an investment, tax and income perspective, and not simply because this sounds good.
If the business premise is the only asset of the superannuation fund, questions should be asked as to whether it is the best option. There are a number of problems in having a large portion of superannuation savings tied up in one asset. Having one dominant asset class brings increased risk to any superannuation portfolio. Having only one asset in that asset class increases the risk further. Additionally, property is usually illiquid, which may cause issues for the SMSF if any of the fund members are in pension phase and also need regular income from the fund.
Selling your business property to your Super Fund is a popular option, and often for a good reason.
What can be Purchased/transferred?
What constitutes business real property.
It can be a factory, a shop or an office. But it can’t generally be a residential property, and it is not normally vacant land either.
The use of the property is another key consideration before any SMSF transfer can take place. The property must be used solely for business. This means it cannot be of mixed use commercial and residential.
Company title or shares in a company that solely owns the business property is not a Real Property.
The definition or Real Property by the tax office is land and buildings that are used wholly and exclusively in a business.
Once the suitability of the property is established, the sale can take place. The business property can be transferred in specie, that is, as a contribution in the form of an asset other than money or cash, and be treated as a contribution by the transferor. Alternatively, the fund can acquire the premises by paying cash, with available cash already in the fund, or by borrowing from the Bank.
The biggest benefit of this strategy is that the business receives a tax deduction for the rent paid to its super fund. The rent received by the SMSF is taxed at the low superannuation rate of 15 per cent (or zero if fund is in pension phase).
Significantly, the rent received by the SMSF is not subject to a cap in the way that superannuation fund contributions are. This provides an additional, tax-effective means of building up retirement savings.
As well, when there are significant assets in the SMSF, there is the advantage that the business is able to use the member’s retirement funds to support the business without having to use debt.
Other advantage is the possibility that the transferor (be it the business entity or the fund member) can access the small business capital gains tax (CGT) concessions with the transfer of the business premises to the super fund. This may have the effect of reducing or eliminating any CGT liability on the transfer or sale of the business premises to the super fund thus eliminating or reducing the Tax payable upon the eventual sale of the property.
Finally, In some states there are stamp duty concessions on the transfer where, only a nominal duty is imposed on the transfer, for transfers between an individual(s) into a super fund with members been the same individuals.
The biggest disadvantage of this strategy, is that depending on what other assets are available, it can reduce the diversification and liquidity of the fund.
These liquidity issues can be long-ranging and difficult to foresee, and can be triggered by the death of a fund member.
It may be that the business premises may not be the best type of investment to hold in the fund, as commercial properties can have lower rates of growth than residential properties or other asset classes. Also, if the business falls behind in rental payments and the fund takes no action to recover the shortfall, then the fund’s compliance status is at risk because the fund is effectively providing financial assistance to a related party, which is a breach of the SMSF investment rules.
There is no question that property investment can reward SMSF investors with capital growth and steady rental income.
The decision whether to sell the business property into the SMSF is a matter of determining not only the investment merits of the business real property in question, but also the current and future needs of the members of the SMSF
*This is not tax or investment advise , it is only to be used as part of your overall search and NGA Accounting and its staff do not accept responsibility on the above statement and you should seek professional advise before you implement any of the above.