Accountants and advisers who have clients with real business premises in their SMSFs should consider restructuring the premises before the death of members to ensure a smooth SMSF exit plan, according to an industry consultant.
SMSF Design founder Tracey Besters told the recent Class Connect 2018 conference in Sydney that providing clients with strategy options around their real business premises within their SMSFs should form part of the conversation on exit plans, something she calls a sleeper issue in every SMSF.
While SMSFs may not have to pay a lump sum to members upon the death of the first member in a husband and wife fund, they will have to pay a lump sum if the second member/spouse dies, Besters noted.
“If we don’t need to pay out a lump sum, that’s quite simple isn’t it? We can pay an income stream and therefore we can retain the assets as they are in the fund,” she said.
“But if we can’t retain the assets as they are in the fund, we’ve got to think about our exit plan. What does that strategy look like?”
One option is to pay a lump sum in specie of the business premises in order to pay out the death benefit, while another option is to do a lump sum in specie of some other asset, but this strategy throws up obstacles as well, she said.
“Think about your clients with business premises in their SMSF. What percentage does that make up of the total assets of the SMSF? More than 50 per cent? More than 75 per cent? So we may not have the ability just to do a lump sum in specie of some other asset,” she said.
“How are we going to manage this process? And this is the whole point of exit planning.”
She suggested one option is to consider a restructure of the business premises before death.
If the business premises are directly owned in the SMSF, and assuming there are no limited recourse borrowing arrangements as that should be dealt with separately, advisers could consider a related unit trust as stipulated in section 1322C of the Superannuation Industry (Supervision) Regulations, she said.
“So on death of the member we’re no longer having to deal with the actual business premises themselves, we’re actually going to have to deal with the units in the unit trust,” she noted.
“If an income stream has to be paid out and we’ve got units in the unit trust, we could pay out an in specie lump sum of the units themselves. We don’t have to actually physically pay out a lump sum of the business premises itself.”
While there could be stamp duty on the units being transferred, the member will only have to deal with small chunks, she said.
Furthermore, the tax outcome will remain the same whether the property is owned directly by the SMSF or indirectly by the unit trust as long as the dealings are at arm’s length, she added.
