With the start of the new financial year, we wanted to revisit a common strategy, clarify a compliance issue and summarise the latest superannuation updates.
TRANSFERRING BUSINESS PREMISES INTO A SMSF
While Self Managed Super Funds (SMSFs) must not intentionally acquire assets from related parties, an exception to this rule is the acquisition of business real property.
Business real property is defined as land and any buildings permanently attached to the land, used wholly and exclusively in a business. It includes offices, shops, factories and farmland.
The fund can acquire the premises by paying in cash or entering into a limited recourse borrowing arrangement. Alternatively, the premises can be transferred in-specie as a contribution by the transferor, or by a combination of cash and an in-specie contribution.
- If the transfer is by way of cash, these funds can be well utilised in the business;
- The business receives a tax deduction for rent paid to the SMSF while rent received by the SMSF is concessionally taxed at 15% (or zero if in pension phase);
- Rent received by the SMSF is not subject to a cap like contributions are, resulting in a tax-effective means of building up retirement funds; and
- Potentially greater asset protection from creditors.
Points for consideration
Some issues to consider when transferring the business premises:
- Purchase must abide by the SMSF’s trust deed and be consistent with its investment strategy in relation to diversification, liquidity and risk profile;
- The transfer value must be determined by an independent professional valuer;
- The on-going lease arrangement must be at arm’s length; and
- Stamp duty and GST.
While capital gains tax is usually crystallised on the transfer of property, there may be some scope to take advantage of a number of small business concessions that could reduce or eliminate this exposure.
COMPLIANCE REGARDING UNDERPAID PENSIONS
There has been some confusion around underpaid pensions.
The ATO has now advised that a pension short paid in a particular financial year will be treated as no longer existing on 1 July of that financial year. Any benefit paid out during the year will be treated as a lump sum.
Further, the SMSF’s earnings from assets held to provide for the short paid pension will lose its tax-exemption.
As the pension ceases, it reverts to accumulation mode from the beginning of the financial year with the taxable and tax-free components of the member’s balance being recalculated from that date.
Although the fund member has not chosen to commute the pension, the trustees should prepare a minute to the effect that the minimum pension payment was not met resulting in the pension’s cessation from 1 July and that the pension amount supported an accumulation balance during the year.
In the following financial year, provided the rules have been met, a new pension can commence based on updated taxable and tax-free components. As it is a new pension, all of the usual pension establishment documents will be required.
PRESERVATION CHANGES FROM 1 JULY 2015
From 1 July 2015, the preservation age for those turning 55 after that date will increase to between the ages of 56 and 59 if born before 1 July 1964, and to the age of 60 if born after 30 June 1964.
If a potential retiree has not turned 55 before 1 July 2015, they will need to wait until at least 1 July 2016 to access their superannuation under the normal retirement (or transition-to-retirement) rules.
In the coming years, trustees of funds with members in the 55 to 60 age range will need to carefully monitor these transitional changes to avoid inadvertently breaching the SIS rules for early access to superannuation.
SUPER STREAM EXTENSION
Employers with 20 or more employees who are not yet ‘Super-Stream’ ready have been granted a four-month extension until 31 October 2015 to comply with the requirements.
An effective superannuation plan will ensure an optimistic future. Pilot advises clients across every aspect of superannuation relating to their business and personal wealth. We monitor to the ever-changing legislative and regulatory superannuation requirements and update our clients accordingly. For more information, please contact Simon Barry from our Business Advisory division on (07) 3023 1300.