USING YOUR SELF MANAGED SUPERANNUATION FUND TO ACQUIRE PROPERTY
Many advisors inadvertently misinform clients interested in the stamp duty concessions available to self managed superannuation funds when property, including business real property, is transferred into the self managed super fund. Leigh Adams Business Lawyers cuts through the maze with this key point summary. With the wrong advice, clients can pay up to double the usual ad valorem duty. With the right advice, the duty can be a mere $500.
1. Dealings in dutiable property by trustees of self managed superannuation funds are mostly dutiable although specific concessions may apply in certain circumstances.
2. The concessions only apply where there is no change in the beneficial ownership of the property: s 62A and s 62B of the Duties Act 1997 (NSW).
3. Section 62A applies concessional stamp duty where there is a transfer of dutiable property to a trustee of a self managed superannuation fund or to a custodian of the trustee of the self managed superannuation fund. In other words, it applies whether or not the self managed superannuation fund is buying the property outright, has to borrow to buy it, or is simply accepting a transfer of the property to it without paying for it.
4. Section 62A was last amended on 23 October 2014, and has been amended several times since self managed superannuation funds were enabled to acquire property by borrowing, almost 10 years ago.
5. This rate of change renders the transaction “high risk” if clients are relying on their non-specialist legal advisors to help them out using documents prepared by low cost “off the shelf” document suppliers. Are their documents up-to-date?
6. Section 62A requires that if one member is transferring dutiable property into their self managed superannuation fund, but there are two or more members of the fund, then the dutiable property must be “segregated” from other fund property.
7. This section states that dutiable property is segregated if:
a. the property is held specifically for the benefit of the member or members transferring or agreeing to transfer the dutiable property, as fund members, and
b. the property (or proceeds of sale of the property) cannot be pooled with property held for any other member of the superannuation fund (besides the member or members transferring or agreeing to transfer the property), and
c. no other member of the superannuation fund (besides the member or members transferring or agreeing to transfer the property) can obtain an interest in the property (or the proceeds of sale of the property).
8. In most cases, the requirement for “segregation” means that the self managed superannuation fund trust deed will need to be amended before the transaction is entered into. Moreover, many non-specialists are unaware of the specific requirements that the OSR now demands beyond the mere “letter of the law” legal compliance with this section. Upfront knowledge of these specific requirements can save clients substantial time and money.
9. Section 62A also mandates that it only applies if the self managed superannuation fund continues to be a complying fund after the transaction has been effected. Therefore issues arise in respect of business real property for example, as to firstly whether the so-called business real property does in fact comply with the requirements of s 66 of the Superannuation Industry (Supervision) Act 1993 (which defines business real property) and then, how to prove it.
10. That sounds easy but it can be complicated. Merely lodging a valuation, photographs and a zoning certificate can result in full ad valorem duty applying. Full compliance with the applicable self managed superannuation fund rulings is the only way to ensure that the Office of State Revenue will accept that the stamp duty concession should apply. By strictly complying with those rulings and lodging a statutory declaration dealing with all the relevant issues, we recently successfully acted on the transfer of business real property into a self managed superannuation fund, where the “business” had not made a profit for over ten years!
11. This section applies where borrowing is required by the self managed superannuation fund to acquire the business real property. The section was created and began operation on 23 October 2014 and replaces the application of s 55, as far as bare trust deeds used by self managed superannuation funds are concerned.
12. But its wording differs from s 55 and so the following issues arise for the legal advisor:
i. What can the bare trust deed contain and still pass muster?
ii. When should it be dated? Before the transfer, on the date of the transfer, or after the date of the transfer?
iii. What does s 62B mean when it says “a declaration of trust…that dutiable property is or is to be held in trust for the trustee (of the self managed superannuation fund)”?
13. As there is currently no stamp duty ruling on the meaning of this new section, uncertainty abounds for the uninformed advisor. For example, s 66 of the Superannuation Industry (Supervision) Act 1993 provides that the asset must be acquired at market value, but s 62B only deals with transfers. If you have to have a transfer at market value, then does that mean you need a sale and purchase? No, it does not. An examination of the relevant rulings (in particular SMSFR 2010/1) explains how a transfer may be made even though full consideration is not actually paid by the self managed superannuation fund.
14. A good understanding of these rulings enables the informed advisor to apply the stamp duty concessions to a far wider range of circumstances than generally thought. For example where the business real property is owned by a company, then shares in the company, held by a member, can be transferred into the self managed superannuation fund providing Regulation 13.22C of the Superannuation Industry (Supervision) Regulations 1994 is satisfied. If the shares in the company are acquired at market value (and this requirement can be met by an in specie contribution – see SMSFR 2010/1 at ) and if the land-holding is valued at less than $2 million, then a stamp duty saving of over $75,000 can be obtained in New South Wales.
15. A further advantage of using Regulation 13.22C is that the property owned by the company does not have to be “business real property”. It can be residential property.
Transfers from the bare trustee
16. Where limited recourse borrowing arrangements are used by a self managed superannuation fund to acquire business real property (or other real property under Regulation 13.22C) many investors instruct their advisors to transfer the business real property from the custodian (or bare trustee) into the self managed superannuation fund at the first available opportunity.
17. Duty can be imposed on the transfer of the business real property from the bare trustee/custodian to the self managed superannuation fund. Providing the self managed superannuation fund is “absolutely entitled” to the business real property under the bare trust deed, the duty should only be $50.
18. However, we do not always recommend this course of action upon payout of the limited recourse loan. Provided that a subsidiary loan say, of a relatively small amount, is taken out and remains after the primary loan has been paid out, then it may be prudent to retain the property in the bare trust structure to limit land-holder risk. Land-holder risks include negligence claims against landholders for faulty wiring causing a fatal electrocution (Giovenco v Dick (2010) NSW DC4). Claims like this can wipe out a superannuation fund.
Call Leigh for further details. We work with accountants, financial planners and banks to get you the stamp duty concessions that suit your transaction.
Leigh Adams Lawyers