For many business owners, the acquisition of their factory or office premises was needed to be acquired in their own names or via a family trust structure as a result of a prohibition of borrowing inside a super fund and having a charge placed over the asset. The only exception to this ability for the fund to ‘leverage’ was for those who were fortunate enough to have a pre-August 1999 unit trust in which their SMSF acquired units. These arrangements evolved post August 1999 into ungeared unit trusts that had to operate in accordance with the provisions of SISR 13.22C. These were typically undertaken where an individual had some equity in their own home (or other assets) in which to acquire some of the units with their SMSF.
So, what is the benefit of transferring business real property from a family trust arrangement into a SMSF? Think about these benefits:
- the ability to potential transfer the asset into super with CGT
- the ability to potentially restructure non-deductible debt into deductible debt
- the ability to make tax deductible super and rent payments to accelerate the repayment of the loan and
To demonstrate the power of this strategy, let’s take a look at an example.
Joe (50) and Kate (47) run a successful widget business which operates from a factory they own via their family trust. The factory was originally acquired in 2001 for $425,000 (incl. Legals and stamps), with a bank loan $300,000. They have recently had the property valued at $750,000, with the outstanding loan now at $180,000.
Joe & Kate’s home is worth $900,000 and has $200,000 remaining on the loan. They have three children, John (18), Emily (15) and Ben (11), all of whom are attending private school. Joe & Kate have superannuation of $250,000 and $150,000 respectively in a public-offer super fund.
How would an SMSF Instalment Warrant Loan benefit their position?
Joe and Kate can transfer their existing superannuation and establish a new Self Managed Super Fund. They can use their existing superannuation benefits to acquire the property along with borrowings using an SMSF instalment warrant loan, in accordance with the requirements of section 67(4A) of the SIS Act.
|Stamps & Legals (est.)||$45,000|
|Made up of:|
|Cash required to acquire property (SMSF)||$355,000|
|SMSF Instalment Warrant Loan (LVR 58.5%)||$440,000|
As a result of the sale and transfer of the factory (as a contract of sale) into the SMSF Instalment Warrant Trust (Custodian/Bare Trust), the family trust will now have $750,000 of cash available. After extinguishing the outstanding family trust loan on the factory of $180,000, Joe & Kate have the ability to draw on balance of these funds to pay-off their own home loan (non-deductible debt) of $200,000.
This would leave $370,000 of cash available within the family trust for use. Assuming Joe & Kate qualify for the Small Business Concessions, they potentially need to contribute between $40,000 – $80,000 back into superannuation as part of the retirement exemption (subject to use of active asset test), which leaves between $290,000 to $330,000 cash available for use. Subject to their personal needs, Joe and Kate could make non-concessional contributions back into super subject to their caps to reduce the level of borrowing within the fund.
I have outlined in the diagram below the steps involved in the effective transfer of the property into the SMSF instalment warrant arrangement:
The strategy has provided Joe & Kate to:
- Draw down on the equity of their existing factory and restructure their non-deductible debt (home loan) into tax deductible debt (which they could not previously do).
- Make further tax deductible payments into superannuation (as rent) above and beyond any concessional contributions (i.e. SGC and salary sacrifice).
- Eliminate any future capital gains tax (where sold in pension phase); and
- Accelerate building wealth using superannuation for their retirement.
This is a simple example but demonstrates the power of the strategy for any business operator to consider.
Whilst the transfer of the property is dutiable (i.e. stamp duty to be paid by SMSF as purchaser), the ability to use the small business concessions to wipe of CGT is a very powerful part of the strategy. GST shouldn’t present any major issues either where the asset is sold as a going concern.
Whilst all the tax benefits as part of strategy are extremely appealing, none is more powerful than being able to tell someone that you’ve just created a strategy that hands over the title of their home from the bank!!