Q: I have a client who owns a commercial property in his own name. He would like to transfer the property into his SMSF, which has a small amount of cash in it. He is 58 years old and the current value of the property is $575,000. Can he transfer the property into the fund at 30 June 2013, allocating only part of the value at 30 June, that is, $150,000, with the balance of the value of $425,000 allocated to a contribution reserve, so that he can benefit from the bring forward rule?
A: There are a number of baby boomers in Australia who have chosen property, including commercial property, to fund their retirement. Generally this has been outside of superannuation with the use of negative gearing – direct ownership or ownership through a family trust are common structures. With the advent of tax-free super after the age of 60, the smarter baby boomers or those with SMSF advisers are looking to switch their property portfolio into their SMSF tax and stamp duty effectively.
The first and most important area to be considered is whether the property in question fits the business real property exemption in section 66(1) of the Superannuation Industry (Supervision) Act 1993. For a complete discussion on what is business real property see the detailed Australian Taxation Office (ATO) ruling: SMSFR 2009/1. If the property passes the test – as is the case here – the next step is how to achieve the best result. In this case the use of non-concessional contributions, with the addition of a non-concessional contributions reserve, has been considered.
This specific strategy was discussed at the June 2012 National Tax Liaison Group (NTLG) meeting and documented via the superannuation technical sub-group minutes. By way of background, section 292-90 of the Income Tax Assessment Act 1997 defines what a non-concessional contribution is for the relevant financial year. Subsection 292-90(2) further states that the contribution is made in ‘respect of you’. So a $150,000 direct cash contribution to a fund would meet this condition, provided it is not a concessional contribution.
Subsection 292-90(4)(a) also includes in non-concessional contributions an amount ‘allocated’ to a member in accordance with regulation 292-90.01 of the Income Tax Assessment Regulations 1997 (ITAR). This is generally an amount allocated from a reserve, including a contributions reserve.
An amount will be allocated in line with regulation 292-90.01 where it is allocated under division 7.2 of the Superannuation Industry (Supervision) Regulations 1994 (SISR). Division 7.2 of the SISR stipulates that if a trustee receives a contribution in a month, the trustee must allocate the contribution to a member of the fund within 28 days after the end of the month.
Sub-regulation 7.08(2) then comes into effect. As long as the full amount is allocated within the time period specified, the requirements of this sub-regulation will be satisfied.
Based on the above, industry comment at the NTLG meeting was that it would “appear possible for the trustees to allocate a portion of the contribution value to a member’s account with the balance of the contribution value retained in a fund reserve/unallocated contributions account. The legislativeprovisions will be satisfied as long as the portion retained in the fund reserve/suspense account is subsequently transferred to the member’s account (as a non-concessional contribution in our example) within 28 days after the end of the month in which the contribution was received (assuming the other requirements of subsection 292-90(4) are also satisfied).”
However, the ATO was of a different opinion.
The ATO states “that under the definition of sub-regulation 7.04(7) of SISR, the property is a ‘fund-capped’ contribution. Sub-regulation 7.04(3) prohibits a fund from accepting a fund-capped contribution in excess of $450,000 (in the case of a member aged 64 or less on 1 July of the financial year) or $150,000 (if the member is 65 but less than 75 on 1 July) in a financial year in respect of a member.”
It then goes on to state that an intention of the trustee to allocate part of the value of the property to the member’s account at different times (across financial years) within the time limits set by regulation 7.08 of the SISR does not override the prohibition in sub-regulation 7.04(3) on the fund accepting the property as a contribution.
The regulator has previously discussed this issue in ATO ID 2008/90. The result of this interpretive decision was that if a contribution is above a member’s fund-capped contribution limit, the excess must be refunded to the contributor.
Therefore, care must be taken with the contribution rules when transferring business real property into an SMSF to ensure a member does not go above the fund-capped contribution rules – even with the use of a contributions reserve. An alternative option is to transfer the property with a limited recourse borrowing arrangement where the member contributes $150,000 of the property as equity with the remaining $425,000 to be treated as a related-party loan. This can be forgiven after 1 July 2013 by the related-party lender where it would be considered a contribution pursuant to the tax commissioner’s contributions ruling: SMSFR 2010/1.