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'SMSF Property investment can offer tax benefits'

​Many people are attracted to buying property through their Self Managed Super Fund (SMSF) however, most do not have the time to navigate the SMSF investment landscape and keep within the rules.

The complex nature of SMSF investing, combined with property spruikers who tempt SMSF investors into purchasing shoddy investments can make it a risky investment without professional advice.

As Sir Francis Bacon said ‘Knowledge is power’. If you are a business owner, there are potential property investment opportunities that you may not be aware off. For example; as a business owner you are able to own the property you work from. There is then an opportunity for your SMSF to acquire the property which could provide significant tax concessions.

As the property is wholly owned by and used by the business, it is defined as ‘business real property’ under superannuation legislation. This allows you to be able to transfer the property into the fund as an in-specie contribution or sold to the fund.

Whilst this strategy has great benefits when you are transferring your Business Real Property (BRP) into your fund, there are contribution caps to consider.

Firstly, you need to ensure that your fund trust deed allows for in-specie contributions and that your investment strategy reflects your wish to have property as an investment option.

Secondly, you need to be aware of the contribution caps if your property value is higher than the allowable caps; you may then want to consider transferring the property to the SMSF over two or three financial years to avoid exceeding the contribution caps. Note: if you sell the property you do not need to worry about contribution caps. You will need to make sure the agreed value of the property is at an arm’s length transaction; this is where a certified valuation can help.

You must also ensure the reason for the acquisition is to provide for your retirement.You need to consider that a sale/transfer of property may attract capital gains tax and therefore it is beneficial to engage your adviser. You may be eligible for small business CGT concessions as you may be liable for Capital Gains Tax on the transaction.

To be eligible for the small business CGT concession, the business must either have a combined yearly turnover of less than $2 million or the net value of its assets must not not exceed $6 million.

There are 2 main concessions available in relation to business real property. 15 Year exemption 50% active asset reduction Retirement exemption.

To qualify under the “15 year asset exemption”, you need to be at least 55 years old and selling/transferring your property and retiring. You should also have owned your business property for at least 15 years – the benefit of qualifying under this concession is that you are exempt from the entire capital gain.

The advantage of qualifying under this concession is that you can contribute the entire sale proceeds into your Super fund, without the value of the transfer or sale counting towards your traditional non-concessional contributions cap. (as long as you complete the ATO NAT 7116 form and elect for the money to be counted under the CGT cap). The CGT cap for this year is $1,395,000 (2015/2016). Any excess of the CGT cap is counted towards your traditional non-concessional contribution cap. One of the drawbacks of the concession discussed above is the fact that you need to retire to be eligible?

So, if you are not in a position to retire then you may qualify for the “Retirement Exemption”. Even though it is called the “retirement exemption” you don’t actually need to retire from business. It should really be called the “Non-Retirement Exemption” to avoid confusion. To qualify under this exemption you must be under 55 and be able to contribute the capital gains from the sale or transfer of the BRP into your Super.

This CGT exemption cap has a lifetime limit of $500,000. There is an added bonus to this, you can also utilise the ‘50% active asset reduction’ by reducing your capital gains by a further 50% discount. This way, not only can you claim the traditional 50% CGT discount on the sale of assets held for more than 12 months, you can also claim a further 50 % discount.

You can apply the remaining balance towards the ‘Non-retirement exemption’ CGT cap of $500,000, which therefore means you don’t have to pay any Capital Gains Tax if the remaining capital gain is not greater than $500,000. Finally, when considering property investment with your Super, it’s best to get professional advice first before diving in.

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