Contact: Geoff Tierney; ESV (New South Wales, Australia)
A key benefit of establishing and operating a Self Managed Superannuation Fund (“SMSF”) is the ability to make investments which are not available through retail or industry funds, such as property acquisition. We have previously discussed limited recourse borrowing and the associated rules with this strategy.
While the trend of acquiring property through SMSF’s is growing, there are some potential issues which can arise in relation to succession and the sale of the property.
ACQUIRING PROPERTY THROUGH YOUR SMSF
Property is usually acquired in an SMSF in one of two situations:
Residential – acquiring residential rental property to rent to non-related tenants;
Commercial – acquiring commercial rental property to rent to a related or non-related business entity.
Due to the tax environment in which superannuation currently operates, properties are often sold when the fund is in pension phase and no capital gains tax is paid, which ultimately means a better investment return than if the property was held outside of super.
However, this assumes that the property can be sold on favourable terms at a desired time.
POTENTIAL ISSUES
Problems may arise for the fund where property needs to be sold outside of a planned situation above, particularly where the fund’s major asset is the property. One scenario in which this could arise is due to the death of a member.
Where a member of the fund passes, the fund is in most circumstances, required to pay the death benefit out of the fund to nominated beneficiaries or the estate. If the fund has insufficient liquidity to pay a death benefit, the property may need to be sold at short notice which may mean not at optimal market conditions. Whilst the instance of capital gains tax may be avoided if the fund is in pension phase at the time of the sale, selling the property whilst in accumulation phase can give rise to capital gains tax within the fund.
In circumstances where the property is transferred to the beneficiaries in satisfaction of a death benefit, state stamp duties may be triggered, creating additional costs of transfer.
There are a number of strategies that can be put in place to reduce the impact that selling a property at unwanted times can cause. Items such as life insurance, reversionary pensions and segregation of assets can be used to reduce the impact of the some of the additional costs discussed above.
These strategies should form part of your overall estate planning for your assets both inside and outside of the superannuation environment. Should you require further information on the rules around property acquisition in your SMSF or succession options in general, please contact us or call your ESV Engagement Partner on 02 9283 1666.
