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Owning a commercial property with your SMSF

Owning a commercial property with your SMSF

Ever thought about investing in property using your super? Transferring commercial property into superannuation is commonplace – and has been for many years – and the benefits of owning property in superannuation can be significant.

In order to understand the real-word application of owning property in your super, consider the following example.

In this situation, the SMSF will be buying the property using a limited recourse borrowing arrangement, where their SMSF will borrow to fund the purchase. The target property has debt owing in the family trust via a mortgage, and the property is currently rented.

Considerations

There are several considerations in this example. The first is the stamp duty: Should the fund acquire the property directly from the family trust, then stamp duty will be levied at the full rate based on the value of the property. However, if the property is vested to the beneficiary then stamp duty is paid on the debt associated not the value.

Assume that for this particular case that the value of the property is higher than the debt owed. A deed of partial vesting is prepared, and the property is transferred to the beneficiary. The difference based on debt vs value was a $22,000 saving – significant indeed! While it is a noticeable saving, be aware of some potential traps…

Trap #1: any reduction of debt associated with the target property within the preceding 12 months may be dutiable. For example, if the beneficiary was to sell assets outside the family trust and use the proceeds to reduce the debt this could be caught for duty purposes.

The second consideration is capital gains tax (CGT). Generally speaking, if the property is vested from the family trust for more than it cost to purchase, then CGT applies. There are, however, CGT exemptions relating to assets used in your business, called active asset exemptions.

Trap #2: The active asset exemptions can be complex and there are several criteria to be met. If your total turnover is more than $2.0m or your total net assets are more than $6.0m, as a general rule you will incur a CGT obligation.

The third consideration is GST, generally where commercial property is being acquired by a superannuation fund the purchase will be subject to GST.  However where the property is rented and a business is operating from the premises then the property can be transferred as a going concern and be GST free.

Trap #3: When acquiring a commercial property that is subject to GST, banks will not fund the GST. As a result, the fund will need enough cash to pay the deposit, stamp duty and GST.

Outcome

 With proper planning and consideration, buying and owning a commercial property with your super can be an incredibly fruitful venture. As long as you partner with the right SMSF accountants and are aware of the potential pitfalls, it could prove to be an amazing investment.

For more information and a FREE initial consultation with our in-house superannuation expert, contact McKinley Plowman today on 08 9301 2200 or visit www.mckinleyplowman.com.au.

Ian Gath

written by:

Ian brings to McKinley Plowman more than 25 years of experience in superannuation and auditing across a range of industries dealing with corporate and self-managed superannuation funds. Ian offers specialist advice in a range of areas such as in-house structuring, property development, pension estate planning and complex compliance issues.

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