Many Australians opt to set up a self-managed superannuation fund as a way of taking control of the investment decisions over their superannuation funds and securing their retirement.
The Superannuation Industry (Supervision) Act 1993 (SIS), allows for purchase of ‘real business property’ within a SMSF.
A common approach taken is to purchase commercial premises in a SMSF and then lease it back to a related party for business use. There are various advantages in purchasing commercial premises in a SMSF such as:
- capital gains on realised assets held for over 12 months is only taxed at 10%, which is generally lower than individual and company tax rates;
- the rent paid is generally tax-deductible by the business;
- if the commercial premise is negatively geared, this can be offset against any tax payable on other income generated in the SMSF.
While there are tax advantages, trustees of SMSF’s must also consider how the purchase of a commercial premise will affect the payment of a death benefit upon the death of a member of the SMSF.
As an example, say a SMSF has two members, Fred and Melissa. Fred has made contributions of $700,000 to the fund and Melissa has made contributions of $200,000, totalling $900,000. Fred and Melissa, as directors of the corporate trustee of the SMSF, resolve to purchase a commercial premise in the SMSF using the bulk of their pooled $900,000. The commercial premise is leased to a related party, Fred and Melissa’s medical clinic.
Fred unexpectedly passes away. Melissa, as the director of the corporate trustee, must pay out his death benefit. Fred left a Binding Death Benefit Nomination (BDBN) directing the trustee to pay his entire death benefit to Melissa.
If the death benefit is to be paid as a lump sum, there is likely to be a liquidity issue. The SMSF funds are tied up in the commercial premise. This results in insufficient funds available outside of the commercial asset for the trustee to pay the death benefit as a lump sum to Melissa.
The SIS requires that the death benefit be paid “as soon as practicable”. If Melissa is to take the death benefit as a lump sum, she must liquidate the commercial premise by placing it on the market for sale. As there is an ongoing lease on the commercial property, she must place it on the market for sale subject to the tenancy. If she is unable to purchase the property herself, the landlord of the medical clinic will no longer be a related party.
It is important to obtain careful tax and estate planning advice when you establish and make investment decisions in your SMSF.
For advice in relation to estate planning when you have a SMSF, please contact Kimi Shah.