Making a $540,000 non concessional contribution without any money
On 1 July 2017 the maximum amount a member can contribute to their super fund each year non-concessionally (ie no tax deduction) will decrease from $180,000 to $100,000.
Currently, a member can make a so-called “non concessional” contribution (NCC) of either $180,000 or $540,000 (an advance contribution covering the next three years, triggering the so-called "bring forward rule").
If a member has not made any NCCs in the 2014/2015 and 2015/2016 financial years, (and provided the member has not triggered the 'bring forward rule' in the 2013/2014 financial year) this means that a member can make a NCC of the full $540,000 (being $180,000 x 3) this financial year (ie, before 30 June 2017).
One way to utilise the maximum NCC of $540,000 prior to 30 June, if a member does not have enough cash, is to transfer business real property owned by the member in their personal name into their SMSF, effectively treating up to $540,000 of the value of the property as a NCC for the transferring member.
For example, Homer and Marge are members of a SMSF. Homer owns business real property in NSW in his personal name with a market value of $1,000,000. Homer wants to transfer $540,000 of the property by way of NCC and then pay the remainder $460,000 from his member balance in his SMSF.
In NSW this type of transaction attracts concessional stamp duty of $500 provided certain requirements are met, including:
1. The property must be "business real property" in NSW.
2. The member must own and hold the property in their personal capacity (ie, not as trustee of a trust).
3. The property once transferred into the SMSF must be "segregated" for the benefit of Homer only (being the person who transferred the property) and this is irrevocable (this means once the property is transferred into the SMSF only Homer will benefit from the property (ie, any incoming rent from that property is credited towards Homer's member account and not Marge's account).
4. The transfer must be at market value (the property will need to be valued by an independent qualified valuer).
If Homer did not have sufficient funds in his member account in the SMSF to pay $460,000, Homer could transfer a part interest in the property to the SMSF. In our example, Homer could transfer a 54% interest in the property into the fund as a NCC with the end result of the property being held as follows:
• 46% share by Homer in his own capacity; and
• 54% share held by the fund.
The transfer of Homer’s 54% interest in the property to the SMSF may be liable for only $500 duty if all the other relevant requirements were met.
We’re sometimes asked, if Homer has maxed out his NCC, can he transfer the property as a NCC for Marge?
Homer as the owner of the property needs to transfer the property to his SMSF and once transferred, the property needs to be segregated for the benefit of Homer only (see point 3 above). This means that in order to be eligible for the $500 concessional duty (subject to other requirements being met) the NCC needs to be for Homer and not for Marge. If this was not the case and Homer decided to transfer the property as a NCC for Marge this transfer would attract full stamp duty on the value of $540,000.
All of these types of transactions are complex and may require trust deeds to be amended (to ensure the relevant rules to permit the transaction are inserted) and other "segregation documents" to be prepared to show that the property is segregated for Homer's benefit only.
If you or your clients are considering this transaction, it is important the SMSF seeks the relevant advice from their adviser first.
Our firm specialises in preparing documents to effect the transaction including amending the trust deed of the SMSF, the necessary segregation documents to meet the requirements of the Duties Office, and to be compliant with the Superannuation Industry (Supervision) Act 1993 (Cth).
It is important that no documents are signed (eg, a contract of sale) prior to the deed being amended and relevant segregation documents being prepared and signed.
There is also a similar transaction which is permitted with business real property owned by a member in VIC where the transfer is exempt from stamp duty. However, the transfer can only occur by way of a contribution (no money can be paid by the SMSF) whereas in NSW the transaction can be done by way of part purchase and a NCC.
These transactions take time and lodgement times with the various state revenue offices and titles office take weeks. Depending on the circumstances and structure of the transaction, it is possible for the transaction to be effected prior to 30 June but a member who is considering this should get a move on!
If you require any assistance with this type of transaction, please contact Townsends Business & Corporate Lawyers on 02 8296 6222.