Tax status key to property retention

tax SMSF property

The tax-free status of an SMSF may be the key to deciding whether to retain a property asset inside the fund when a member dies.

SMSFs holding property need to determine if the tax status of a fund will favour retaining that asset on the death of a member or using it as part of a death benefit payment, according to an SMSF expert.

SuperGuardian education manager Tim Miller said SMSFs in retirement phase received 100 per cent tax-exempt pension income and this was useful in dealing with death benefits when a member died.

“The beauty of that exempt pension income is when we get to the issue of paying a benefit out it is quite difficult to retain that property if the deceased member is the one with a greater proportion in the fund,” Miller observed during a recent online presentation.

“If there are other family members who want to retain the asset, then it may be appropriate to do an in-specie transfer if the fund is 100 per cent in exempt pension income mode.”

He noted this was a consideration where a surviving spouse was in the fund and looking at whether they want to receive a pension and retain the asset.

Retaining the property in the SMSF may also create tax issues for its beneficiaries after the death of the surviving spouse, Miller added.

“We know the surviving spouse will at some point in time also pass away. When they do, or even prior to that point, have we had to restructure the fund to be part pension, part accumulation to deal with the property asset and will that create a further tax liability for the fund on the second death?” he asked.

“Is it better to look at transferring the property out at a point when there were zero capital gains tax events to occur because the entire fund is under exempt pension income deductions?

“Alternately, do the other members have the capacity to make contributions to be able to offset the amount that you need to pay out as a benefit to the deceased beneficiaries knowing that we can’t [record] a journal entry to [execute] a death benefit and a contribution back in from that asset, which would actually have to leave the fund?

“We do need to give far greater scope to the way the transfer balance cap operates these days and look at not retaining money in superannuation if it is going to create a future tax liability versus a zero tax liability at the point that a member passes away.”

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