As you would be aware, if you (or your clients) own commercial real estate, one of the most tax effective strategies can be to hold that property in self-managed super (SMSF). This includes property leased to third parties and property at which you (or your client) operate their own business.
Stamp duty on transfers of real estate often makes any possible restructuring of the ownership of property assets prohibitively expensive. However, section 62A of the NSW Duties Act provides a valuable concession for the transfer of dutiable property in NSW from a person to their self-managed superannuation fund. This concession applies if:
- the property is held for the benefit of the transferor member only; and
- the property is used solely for the purpose of providing retirement benefits for the transferor member.
In such case, nominal duty of $500 is charged on the transfer. If the transfer is made to a custodian of the SMSF who holds the property for the trustee, additional duty of $500 is payable on the declaration of the custody trust under section 62B of the Duties Act.
To satisfy these requirements Office of State Revenue (OSR) normally requires a deed of amendment to the SMSF trust deed to ensure the irrevocability of the exclusive benefit of the property for the transferor member. Generally, it is is not sufficient to simply segregate member assets to meet the exclusive benefit test.
We get many questions on sections 62A and 62B of the Duties Act. A set of frequently asked questions below may provide you with some background about how the sections 62A and 62B concessions may be used.
|What sort of property qualifies for the concession?||“Dutiable Property” as defined in the Duties Act, that is any property that would otherwise be subject to stamp duty. However, as section 66 of the Superannuation Industry (Supervision) Act (SIS Act) restricts purchases of assets by an SMSF from related parties to essentially business real property and listed securities (there is no duty on such securities), the concession is essentially limited to business real estate and primary production land.|
|Does the member transferring the property have to be the only member of the fund?||No, however, the property may only be used for the retirement benefits of the transferring member.|
|What if the property is held jointly by a husband and wife?||They can both transfer the property into their shared SMSF. However, one-half of the property must then be exclusively used for each of them. Alternatively if only one of them wants to make use of the strategy the property can be converted from joint tenancy to a tenancy in common (no stamp duty) and then one of them can transfer their half share of the property to the SMSF.|
|Does the trustee of the fund have to be a company?||No, however, be aware that if the trustee is an individual and they die or resign you will need to show that any continuing trustee and any new trustee will never benefit from the property to obtain the benefit of section 54 of the Duties Act. Otherwise, full ad valorem duty could be levied on any transfer of dutiable property to the new trustee. We generally, advise our clients to consider using a corporate trustee for their SMSFs.|
|What if the SMSF wants to sell the property?||A requirement of obtaining the concession is that the proceeds of sale remain in the fund and only be used for the member who transferred the property into the fund in the first place.|
|Can the transfer be treated as a contribution to the fund?||Yes. Naturally, this is subject to the contribution caps.|
|If an outright transfer would exceed the contribution caps what can be done?||The SMSF could consider using borrowed funds. These could be lent by a Bank or even by the transferring members themselves in their personal capacity (subject to meeting the arms-length terms and various other tests).|
|Can the limited recourse borrowing rules and the ss.62A and 62B concession be taken advantage of at the same time?||Yes. A concessional stamp duty of $1000 is applicable for a limited recourse borrowing custodian if certain requirements are met|
|Can one part of the contribution be designated as past ordinary non-concessional contribution and the other part CGT non-concessional contribution?||Yes. Naturally, again this is subject to the contribution limits.|
|Do we need a valuation of the property?||A valuation is normally obtained even though for stamp duty purposes it is technically irrelevant (the concessional duty is a fixed amount). The valuation is also needed for the SMSF and their members to know and record the value of the contribution and members benefit per section 66 of the SIS Act – which requires the purchase transfer to be at market value.|
|Do the SMSF trust deeds need to be amended?||Normally yes. To satisfy these requirements, the OSR often requires a deed of amendment to the SMSF trust deed to document the irrevocability of the exclusive benefit of the property for the member.|
|Is CGT payable on the transfer of the property into the SMSF?||Unfortunately, there is no CGT roll-over relief available for the disposal by the member of the property to the SMSF.|
|Will the member have to charge the fund GST on the transfer?||In most circumstances, the fund can only accept a transfer of business real property. It is common that the going concern GST exemption applies to the sale of business real property. Normally, a lease would need to be in place – a lease is a necessity if your (or your client’s) business will be leasing the property from the SMSF to comply with section 71 of the SIS Act.|
|What rules apply to the member’s use of the property?||The normal rules that prevent member’s use of all but business real property will apply – that is the strategy does not affect the need of an SMSF to comply with all the normal SIS Act requirements.|
|What about a primary producer who lives on the land they want to transfer to the SMSF – is this permitted?||This is a complicated question, which needs to be assessed on a case by case basis.|
|Can we transfer the member’s property to the fund and claim only a part of the stamp duty concession but treat the remainder as a spouse contribution and not claim the concession?||The member could transfer half their interest in the property to the SMSF and claim the duty concession on that half and in a second document transfer the other half to the fund as a spousal contribution on which duty is payable at the ad valorum rate.|
Simpson Partners Lawyers can help you and your clients
Simpson Partners Lawyers can help you and your clients with transfers of business real estate to SMSFs, establishing, reviewing and amending your SMSF trust deed and obtaining stamp duty concessions.
Naturally, the above is intended to provide general information only. It was prepared without taking into account any particular person’s objectives, financial situation or needs. You (or your clients) should, before acting on this information, consider the appropriateness of this information having regard to their personal objectives, financial situation or needs. We recommend your (and your clients) obtain financial advice specific to their situation before making any financial investment or insurance decision from qualified financial planners. This includes making any transfers of property to a SMSF.