Property investments within SMSFs are becoming an increasingly popular choice for Australians, and using super to buy commercial property has its own range of benefits. But, what happens if you establish an SMSF and you already own property? In some circumstances, SMSF members can make an ‘in-specie’ contribution, which involves contributing an asset to the fund, rather than cash.
Transferring property into your SMSF
Property owned by members can be transferred into an SMSF, providing it classifies as business real property. This means it cannot be a residential property or holiday home, unless the property is solely used for business purposes. Unfortunately, leasing the property to tenants or short term stays does not qualify as business activity.
Providing the property is considered business real property, it can be transferred into an SMSF either via a contribution, or via an asset sale. Contributions are subject to contribution caps (concessional and non-concessional), and asset purchases are handled in a similar way to transactions outside of a superfund – your fund buys the asset from you, the vendor.
Once the property is in the superfund, if any party associated with the fund or its members intends to lease the transferred business property, it must be done so on an arms-length basis in compliance with superannuation law.
Business real property should be valued by an independent valuer ahead of its transfer into your SMSF in order to establish market value. Remember – the valuation will then dictate the contribution or sale value, and any capital gains that the contributing member and fund will be liable for.
Tax implications of transferring property into your SMSF
When you transfer a property into an SMSF, the fund is considered to have purchased the asset from you, regardless of whether the transfer was via asset purchase or contribution. As such, the transfer may trigger a capital gains event for the member.
If transferring your property into your SMSF via a contribution, you can use your non-concessional contribution allowance. If transferring property into your SMSF via an asset sale, the fund is able to take out a Limited Recourse Borrowing Arrangement loan if it doesn’t have sufficient capacity to purchase the asset at market value.
The benefit of doing so is that once the property is within the SMSF, income generated from it is taxed at 15%, and eventually 0% once you commence a pension. Likewise, when the fund sells the property, any realised capital gains are taxed at 15% for properties owned for less than 12 months, or 10% for those owned for more than 12 months – and 0% once a pension is commenced.
If you’re looking to transfer property into your SMSF and require associated commercial property valuations, contact SMSF Valuation Reports for more information on how we can support the process.
Information in this article is general in nature and does not represent true SMSF financial advice.