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      Commercial Property in SMSF using Property Warrants

On the 25^th of September 2007 the Superannuation Laws changed to allow SMSF's to invest in geared property. The gearing is required to be in a specific form known as an Instalment Warrant and it creates some tantalizing opportunities for those people who own business real property or are thinking about purchasing business real property.  

Firstly a SMSF is allowed to purchase business real property off a related party whereas the Fund can only purchase residential property off an arms length third party. In particular for those running small businesses if a business real property is owned by a related party and is used in the business then that property could meet the small business Capital Gains Tax relief tests. If those tests can be met the property can potentially be transferred to the SMSF Tax Free. 

I'll illustrate with an example. John and Mary Smith run the local bakery and they are paying the freehold premises off with a Bank Loan. The premises is in their Individual Names. The market value of the property is $580,000 and the loan is $200,000. John and Mary's Net Assets (apart from their Principal Place Of Residence) is $1.8 Million well under the $6 Million threshold for the small business Capital Gains Tax concessions. Also as the Premises is being used in the business it is an active asset for compliance with the small business Capital Gains Tax concessions. 

John and Mary are advised that they could rollover their existing industry super of $130,000 combined into a SMSF and then transfer the business premises into the fund. They have $900,000 between them as a limit for non-concessional contributions for a twelve month period (assuming no other contributions for the ensuing 2 years after that) so the transfer of the bakery freehold will be well under this limit. 

John and Mary carefully assess their situation and decide to setup the SMSF and transfer the bakery into the new fund. They purchased the freehold for $280,000 10 years ago so they have a $300,000 nominal Capital Gain in their own names as a result of the transfer of the property into their SMSF at it's market value of $580,000. That Capital Gain receives a 50% discount because it has been held longer than twelve months and is in individuals names. The Gain has now been reduced to $150,000. The small business Capital Gains tax concessions give another 50% discount so the taxable capital gain is $75,000. 

The Small Business Capital Gains Tax laws allow the final taxable amount of $75,000 to be rolled into Superannuation tax free so this is what John and Mary do. If John and Mary's bakery is in Victoria and their SMSF's trustees are John and Mary Smith then they would not pay any stamp duty (the stamp duty exemption will vary state to state). 

The property still requires $200,000 in loan monies to complete the transfer transaction so they go back to their advisors for this final piece. They are told that the loan monies to payout John and Mary by the SMSF can be provided via an Instalment Warrant and so this is what they implement. 

The result is that they have a geared property in their SMSF that has a 15% income tax rate on the net rent of the property. The property is completely protected inside the SMSF from potential creditors or lawsuits. They also intend to pay down a lot of the loan principal over the next couple of years and they are advised that if the pay down amounts are coming from concessional contributions made from their business then they will have a further tax saving of 25% which is not possible outside of Super. 

Finally if John and Mary originally used another property as security for the purchase of the bakery in their own names then this mortgage can be released freeing up Equity for other financial investments that they may want to make. 

This is a tremendous result for John and Mary and shows the power of business real property being transferred into a SMSF in the right circumstances. 

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Last modified: 29 January 2008