My parents have been suggested (by their financial advisor and tax barrister) they may be entitled to transfer their residential investment properties comprised of 3 houses and 1 block of 4 units into a SMSF, in the view that they are conducting a “business”. They are both retired so this is now their primary activity, ie. the running and maintenance of the properties, using a real estate agent to collect the rental income.
The current situation stands as follows…the intial Interpretive Advice given by the ATO has dismissed the idea the properties constitute “business real property”. Which leads to my question, how are we able to put forth the idea that it is a legitimate business activity that is taking place?
We addressed APRA’ s Superannuation Circular IID3 with our intial correspondence with the ATO that our IP activity consists of some form of organised activity to no avail.
We’ve invested a considerable amount of time and money on the matter, so were hoping to get a second opinion on how we could go about it. We’ve been suggested the option of pursuing an ATO private ruling via a senior tax barrister, but were concerned we may be more pouring $$$s into a bottomless pit. [glum]
Any thoughts would be greatly appreciated! Thanks.
I use to work in tax accounting (15 years) and back in those days you couldn’t transfer any asset into a Self Managed Super Fund that the trustees had any interest.
Where do you live ?
Do they have cash in other super that could be rolled into the new SMSF ?
What are you trying to achieve by putting the assets in the SMSF ?
If you’re trying to reduce taxation and this is their only income why not just make super contributions which are tax deductible ?
Need more information to help you here ?
Regards,Amanda
“It is better to be inconspicuously wealthy, than to be ostentatiously poor…”Hi Amanda,
Thanks for your post!
Where do you live ?We live in Melbourne, Aust.
Do they have cash in other super that could be rolled into the new SMSF ?Yes, they do have cash in another super fund, and it will be transferred as soon as they gain access to it. A cash management fund is set up in the SMSF that collects the rental income at present. Any cash will be transferred into this fund.
What are you trying to achieve by putting the assets in the SMSF ?If you’re trying to reduce taxation and this is their only income why not just make super contributions which are tax deductible ?The main reason my parents are pursuing the idea is that they have been advised they may be entitled to a government allowance if the properties are structured under the SMSF, in addition to the tax benefit.
Kind regards,
BumbleHi Bumbles,
Note I am not a tax specialist so I may well be talking out of my hat but I suggest your folks maybe getting incorrect advice. I recommend you have a look at http://www.chrisbatten.com.au/ and look at the section titled ‘Poisoned Property’.
As an aside if your parents are seeking to set up a structure that entitles them to receive the government allowance (pension?) then they may be better off taking a more proactive stance and seeking more investments that will add to their quality of life without the need for the pension.
Certainly from an asset point of view they seem well placed. It is possible that they could consider having a chat to people who can create income from their existing situation.
Derek
[email protected]
http://www.pis.theinvestorsclub.com.au
0409 882 958From my very limited dealings with SMFS I believe that you can’t just transfer to a super fund, and they would possibly have to sell their properties to the fund.
A super fund can’t borrow money, so they will need enough cash in the super fund for this.
It is worth thinking about as it will also give some great asset protection and tax minimisation benifits.
Just my thoughts
CATA
Asset Protection Specialist
[email protected]Hi,
First & foremost I must point out this is general information and takes no persons/entities goals and objectives into consideration.
I agree with the previous posts – please check the advice you are receiving as there are several angles to take under consideration if your parents were going to move this way.
As the ATO points out in their 2004 publication:
“You must ensure the level of investment in business real property still meets the investment strategy of the fund, including diversification of assets, liquidity and maximisation of member returns in the fund’. .A fund with 100% investment of assets in business real property could struggle to meet these requirments.
As with other superannuation fund investments, there cannot be a charge over a property ie. a loan or covenant.”
NOW – thats if the ATO deems it to be business real property and as it encrouches on things like ‘Aquisitions of assets from a related paty’ , ‘Arms length investing’ & ‘In house Assets’ they would have to be extremely careful.
There are MASSIVE penalties if you get it wrong.
Not trying to scare you here or deter you just want to point out that it does seem like a bit a grey area to most who have responded and even to those your parents are seeking advice off – so is it really worth risking it?
Also, grab a copy of the ATO’s latest – Roles & Responsibilities of trustees and have a read. Quite information as is their DIY SUPER -Its Your Money But Not Yet hand book.
Hope that helps.
Again the is post is not to be seen in any way as financial advice but to elaborate on what has been stated before.
All investment transactions of superannuation entities must be made and maintained on an arm’s length basis. Transactions need not necessarily be at arm’s length (i.e they maybe between related parties) but investment transactions must be an arm’s length (commercial) basis.
Prior to the 23rd December 1990 Super Funds were prohibited (with limited exceptions) from acquiring assets from members or relatives of members. After the royal ascent Superannuation Legislation Amendment Act this was extended to related parties of the fund.
There are however some exceptions to the rule where the assets is acquiried at market value.
Prior to Royal Ascent of SLAA above there were 2 exemptions being
1) Listed securities
2) Business real property upto 40% of the value of the fundThese exemptions have been extended to enable Super Funds to acquire certain assets from members.
With regards to In house assets these are often confused with acquiring an asset from a related party. In house assets are generally investments or elases between the superannuation fund and related party of the fund.
These rules were designed to attack arrangements where the employer sponsor of the fund made contributions to the superannuation fund and the proceeds of those contributions were loan back to the employer. Tax mimimisation on other words.
Under the SIS Act the limit of in house assets is 5% phased in dependant on the year.
Whilst, i would not say your Financial Advisor is wrong i would want to gain a lot more information before making a judgement.
Richard Taylor
Residential & Commercial Finance Broker
Ph: 07 3720 1888
[email protected]Richard Taylor | Australia's leading private lender
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