Selling member’s business real estate into SMSF
Townsend Lawyers’ Jeff Song explains that this strategy, though perhaps not quite as attractive, is still viable.
From 1 July 2018 new law provides that in certain circumstances the outstanding amount of a limited recourse borrowing arrangement (LRBA) will count towards the relevant member’s total superannuation balance (TSB).
How will these new provisions affect the plans of SMSF members who could otherwise have benefitted from putting their business real property into their super fund?
Let’s consider an example of Bruce and his plan to sell/transfer his property to his SMSF:
• Bruce and his wife Linda have an SMSF of which they are the only members and trustees.
• Bruce is 65 and Linda is 60 and in full time employment.
• Bruce solely owns a commercial property in NSW worth $2 million and wants to sell this property to the SMSF.
• Bruce and Linda have recently reviewed and revised the investment strategy of their SMSF.
• Bruce and Linda have approximately $1 million and $500,000 respectively of liquid assets in their SMSF available to spend on this property purchase.
• To fund the shortfall for the purchase price the SMSF will borrow using an LRBA.
Assuming the property is a ‘business real property’ in NSW, the SMSF’s purchase from Bruce may be eligible for stamp duty concession, meaning a potential saving of up to $94,800 on stamp duty. One of the requirements for this concession is that the purchase is financed by only Bruce’s interest in the SMSF and an LRBA (i.e. Linda’s interest of $500,000 cannot be used towards the purchase).
If the SMSF uses Bruce’s interest of $1m, and borrows under an LRBA a further $1m to finance the purchase, any outstanding LRBA loan amount as at the next 30 June (i.e. 30 June 2020) will count towards Bruce’s total superannuation balance as he has reached the age of 65.
It would also have applied if Bruce had not reached 65 but had borrowed from a related party.
Once added to Bruce’s TSB, it will affect his eligibility in the following financial year (i.e. FY2020/2021) for carry forward concessional contributions, non-concessional contributions cap and bring forward of the non-concessional contribution caps, spouse tax offset, and segregated asset method to calculate exempt current pension income.
So, is the strategy of selling your business real estate into your SMSF effectively dead? Not quite.
Let’s now consider a different scenario where the SMSF’s purchase is structured into 2 separate transactions of:
(1) purchase by SMSF of the first 50% of the property to be segregated in the SMSF for sole benefit of Bruce (first purchase); and
(2) purchase by the SMSF of the other 50% of the property to be segregated in the SMSF for sole benefit of Linda (second purchase).
The first purchase will:
– only use Bruce’s balance (approx. $1m)
– be segregated in the fund for sole benefit of Bruce
– be eligible for stamp duty concession (subject to other conditions being satisfied for the concession of course)
– be transferred to the Fund Trustee(s)
– be without any use of LRBA, thereby not affecting Bruce’s TSB.
The second purchase will:
– only use Linda’s balance (approx. $500,000) and an LRBA loan
– be segregated in the fund for sole benefit of Linda
– not be eligible for stamp duty concession (full stamp duty on this 50% will be payable)
– be transferred to a bare trustee/holding trustee for the SMSF (LRBA)
– will not affect Bruce’s TSB as this 50% secured under the LRBA doesn’t support his superannuation interest (it is segregated for the sole benefit of Linda)
– will not affect Linda’s TSB as she hasn’t satisfied the condition of release (i.e. has not obtained the age of 65 and is still employed)
The above example is used for the purpose of demonstrating potential implications of the new laws relating to LRBAs counting towards members’ TSB.
If you are considering a similar transaction, actual implementation would be complex and require legal, financial and tax advice as well as negotiation with the lender.