Self-managed super fund property investors took some hits from the federal budget, but by and large, the upshot was that property is still a valid strategy in an SMSF — despite the new $1.6 million cap on tax-free pension balances in super having the potential to cause problems.
The $1.6m transfer balance cap poses a conundrum for SMSFs that own property, says Steven Wild, partner at business advisory and financial planning firm Edwards Marshall — especially if the property is likely to exceed the $1.6m cap.
“If an SMSF in the retirement phase holds property with a value of $1.6m, it could consider selling the property before July 1, 2017, because any capital gain arising will be tax-free: of course, any rental income earned before July 1, 2017, will also be exempt,” Wild says.
Alternatively, says Wild, the rules announced in the budget covering the capital gains tax relief available for the transfer of assets between the retirement and accumulation phases of the SMSF could come into play.
SMSFs may need to transfer assets from the pension phase back to accumulation phase before July 1 to comply with the introduction of the $1.6m transfer balance cap.
But funds can choose to reset the cost base of eligible impacted assets to market value, says Wild: this broadly means that the tax-free capital gains that have been accumulated up until the date of transferring the excess to the accumulation phase will remain tax-free. Tax will only be payable on the increments in the value of the assets held in the accumulation phase since the cost base was reset.
Liam Shorte, SMSF and family wealth specialist adviser at Verante Financial Planning, says this resetting of the cost base means that if an SMSF member is in a transition-to-retirement pension with a $300,000 capital gain, they can reset that capital gain to zero as at July 1.
As asset valuations are determined as of June 30, SMSF members only have to demonstrate they have written to their trustee to order the relevant actions.
“Before July 1, make sure you have the minutes in place to ensure that your balance is not over $1.6m; you must meet that balance cap on July 1,” Shorte says.
“You need to put a set of minutes in place that tells the trustees to ensure that the balance on July 1 in pension phase is no more than $1.6m.
“With the CGT relief, you have until you actually lodge your tax return for the 2016-17 year to decide whether to seek that. But if your fund does decide to reset the cost base of a property, it must obtain a proper market valuation of the property before June 30.”.
The $1.6m cap will affect strategies for small business owners who were planning to move their business property into their SMSF, and draw retirement income from it, he says.
“There was a popular succession strategy where the children couldn’t afford to buy the whole business, so the parents would put the business’s real property — the premises — into their super fund, and lease it back to the children,” Shorte says.
“This meant that the parents would have a steady income in retirement from the rental, and the children only have to borrow to buy the actual business from them.
“It was a really good strategy, but now the limits are $1.6m each, it’s just about knocked it out, which is a pity.”
Holding property in an SMSF still remains very tax-effective, says Wild, with earnings being taxed at 15 per cent instead of potentially 49 per cent. But if the property is to remain in the SMSF, the fund must consider how it will fund the CGT liability when it eventually sells the property — even at the lower super rate.
The government also proposed in the budget to include, from July 1, the outstanding balance of a limited recourse borrowing arrangement in an SMSF member’s annual total superannuation balance.
Among the potential repercussions was a restriction on non-concessional contributions where a portion of the loan amount takes a member’s super balance above the $1.6m total super balance cap.
But Shorte says the government has “pulled back” from this change.
“It wasn’t included in the legislation,” he says.
“It may come back on to the table, but they appear to have recognised that it’s a silly idea.”
2 June 2017