Avoiding hurdles with in-specie property transfers
Transferring a client’s business premises as an in-specie contribution can have considerable tax benefits, but SMSF practitioners need to understand the significant requirements involved.
Superannuation law requires trustees to maintain investment transactions at arm’s length. This means investment transactions must be conducted on a commercial basis – as if there was no relationship between the parties.
For asset purchases, an arm’s length transaction means that the purchase price should be at market value. Where assets have a publicly available price, the arm’s-length price would reflect this. Where the asset is not listed on a public market, one or more independent valuations should be obtained.
Section 109 of the Superannuation Industry (Supervision) Act (SIS Act) requires that all investment transactions of an SMSF must be made and maintained on an arm’s-length basis.
Because of this requirement, the following must be prepared:
1. Independent valuation of the property
2. Rental appraisal report from an estate agent (since the property will be leased back to the client’s business)
3. Contract of sale of real estate
4. Vendor statement
5. Lease of real estate
6. Landlord’s disclosure statement
It is also important to ensure that the SMSF deed has the necessary provisions and powers to accept transfer of property as contributions.
In the particular case following, the client wants to transfer a Victorian property to their SMSF. Transferring the property as an in-specie transfer will mean it is exempted from duty. Requirements for this are set out in section 41(1) of the Victorian Duties Act 2000. This section broadly states that no duty will be chargeable in the report of a transfer of dutiable property if:
• The transfer is made without monetary consideration;
• The contribution is made to a complying superannuation fund; and
• There is no change in the beneficial ownership of the property.
The evidentiary requirements of the State Revenue Office (SRO) also have to be met (for example, a statutory declaration has to be prepared).
The transaction will be part sale and part contribution. The benefit of a sale is that the clients can access the funds in their SMSF. The property was valued at $830,000.
The property was sold for $650,000 and this amount was stated in the contract. The balance of $180,000 is the in-specie contribution. Capital gains tax calculation is based on $830,000 since that is the deemed market value. Stamp duty is based on $650,000 since the $180,000 is exempted under section 41(1) of the Duties Act.
Two transfer of land forms are prepared:
• One for part of the land with $650,000 as consideration
• One for part of the land “the transferee being entitled in equity” as consideration with no beneficial ownership passing.
It is important to be aware that the sale and contribution of the property to the SMSF will trigger CGT consequences where the property’s market value will exceed its cost base. Such tax consequences could, however, be reduced by using the small business tax concessions.
Where the transferor of non-residential property is registered for GST, then GST must be considered. Where the recipient is not registered for GST and the transfer is treated as a taxable supply, then one eleventh of the market value of the property will be payable by the transferor as GST, while the unregistered recipient will not be able to claim it back. In such situations, the GST will be a sunk cost of the transfer.
It should be considered whether the transfer can deregister or whether the recipient can register for GST. In the latter case, potentially no GST will be triggered on the basis that the transfer is not a taxable supply, or the going concern exemption applies.
From 1 July 2014, the non-concessional contribution cap will increase, as a result of indexation, to $180,000. For individuals who are able to exercise the ‘bring forward rule’, they can bring forward three years’ worth of contributions in the one year. For example, they could make non-concessional contributions of $540,000 for the 2014-15 year (meaning they could not make any further concessional contributions for the 2015-16 to 2016-17 years).
Although members aged over 65 are unable to use the ‘bring forward rule’, its operation can be triggered in the financial year in which the member turns 65.
A member can effectively stagger the contributions of a property over the 2014-15 and 2015-16 financial years (i.e. make a $180,000 non-concessional contribution prior to/on 30 June 2015 and a $540,000 non-concessional contribution on or after 1 July 2015), which will allow for total non-concessional contribution transfers of the property worth up to $720,000 for an individual, or $1,440,000 for a couple.
If the value of the property is more than $720,000 (or, where couples are making the contributions $1,440,000), the SMSF could buy the excess amount from the member(s) (noting that any part of the property purchased will be subject to duty).
In addition, the member may be able to utilise the small business tax concession contribution caps allowing the member to make further contributions of up to $1,355,000 for the 2014-15 year.
Contributions can only be accepted by an SMSF if permitted under the Superannuation Industry (Supervision) Regulation 1994. Those regulations restrict the acceptance of contributions by members aged 65 and over.
For members aged 65 to 75, non-concessional contributions can only be accepted if they satisfy the ‘work test’ – that is, during the financial year, members in that age group must work for 40 hours during a 30-day period. Members aged 75 cannot make non-concessional contributions.
Kenneth Ang, principal, K Ang & Co