Turn your DIY fund into your landlord
Tuesday, 6 February 2007
Last Updated: Friday, 3 August 2007
Michael Laurence
DIY landlord
Smart SME owners are contributing their business premises such as strata offices and small factories into their self-managed super funds to take more advantage of the Government’s proposals to make super much more tax-effective from July 2007. And special transitional provisions allowing fund members to make extremely large super contributions over the next few months are accelerating this trend.
These business owners are determined to boost their super balances as quickly as possible. And one of the smartest ways to lift a super balance quickly is for members to contribute their highly valuable business premises.
Business real estate is among the few assets that funds are allowed under super law to acquire from their members. And it is one of the few assets that funds can lease to related parties (including fund members and their businesses) without a restriction on its value.
The centrepiece of the Government’s revamping of the super system is to make super lump sums and pensions tax-free for those over 60 – no matter the size of the retirement payout. Between May 10, 2006 and June 30, 2007, members are permitted to contribute undeducted (after-tax) contributions of up to million dollars, then much lower annual contribution limits will apply.
Apart from the advantages of holding more assets in super with the Government’s vision for tax-free super payouts, the transfer of an SME’s business premises to a self-managed fund can deliver other breathtaking investment, tax and business benefits.
SME owners can either contribute or sell their business premises at market value to their self-managed funds.
1. Eliminate CGT on transfer
The transfer of an appreciating asset from a member to a DIY fund would usually trigger capital gains tax (CGT) on past capital gains. But fortunately, small business owners who transfer business premises to their funds can often legitimately eliminate any CGT at this point by combining various CGT concessions.
Gordon Cooper, principal of specialist tax consultancy Cooper & Co in Sydney, says the standard 50% CGT discount for assets owned by individuals and trusts for at least 12 months before disposal plus the special CGT concessions for small business owners on their disposal of active business assets may be combined, depending upon the circumstances, to remove CGT.
2. Lock-in small business CGT concessions
The contribution of business premises to a self-managed fund may provide a way for a small business owner to ensure eligibility for the small business CGT concessions. (The net market value of the small business owners’ business assets and some of their private assets must not exceed $5 million to qualify for any of the small business CGT concessions. This will rise to $6 million from July 2007 under Government proposals.)
Cooper explains: “If the principal of the business is approaching this net asset ceiling, the transfer of business premises to a self-managed fund may be an opportunity to lock in those concessions.” Otherwise, the concessions would be lost once the threshold is exceeded.
3. Gain big tax deductions for contribution of business premises
Self-employed business owners – as distinct from employees of family companies – are entitled to deductions for certain super contributions. This applies even if a contribution is in the form of business premises.
And from July 2007 under Government proposals, the self-employed will be entitled to a 100% tax deduction for their deductible contributions, replacing the existing partial deductions.
4. Gain commercial rents
The members’ SME would pay a commercial rent to the self-managed fund for use of the business premises. And the fund would be subject to the standard superannuation tax of just 15% on the rental income. And the super fund would gain the usual tax deductions for landlords as well as the security of a reliable investment income.
5. Seek asset protection
The transfer of business premises to a self-managed fund should provide valuable protection from creditors in most circumstances even after tougher proposed bankruptcy laws are introduced. The Government intends to amend the Bankruptcy Act to allow bankruptcy trustees to recover super contributions made before bankruptcy with the intention of defeating creditors.
As a means of seeking asset protection, members should ideally build up their super savings on a regular basis for as long as possible and transfer business premises to their self-managed fund before any suggestion of financial difficulties.
6. Plan business succession within your family
The business premises could remain in the self-managed fund between generations of a family – provided there is sufficient other investments in the fund to pay retirement benefits to retiring members. Cooper says this is a valuable strategy when arranging an orderly and financially effective succession for a family business.
Martin Heffron, the co-principal of the self-managed super fund administrator and consultancy Heffron Consulting, says the keeping of business premises in a fund between generations of a family would occur when second generations are also members of the same self-managed fund.
7. Plan tax-free sale of business premises
Heffron points out that once a member is retired from the workforce and begins to receive a super pension, assets of the fund that are sold to support the payment of that pension are exempt from CGT. He says this should provide an opportunity in the future for the eventual tax-free sale of the business premises.
Be aware of possible downsides
Cooper says a possible downsides of transferring business premises into a self-managed fund is that the fund may become too exposed to a single, highly valuable asset. If its value fell, members’ retirement benefits might be adversely affected without the protection of a widely diversified portfolio. Cooper says this could particularly be a problem if business premises are purpose-built for the proprietor’s business and possibly difficult to sell.
If the marriage of the husband and wife members of a self-managed fund fails, the Family Court has the power to order the splitting of the super savings – even if a fund’s assets comprise only the premises of a family business. However family lawyer Stephen Bourke, a partner of Farrar, Gesini & Dunn in Canberra, says the court would exercise this power extremely carefully in such circumstances if the sale of the business premises could severely damage the business itself and deprive the separating couple of their only income.
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