Can you buy your retirement home now in your SMSF and use it when you retire? It may be tempting but is it possible?
Let's look at Garry and Betty who are the directors of the corporate trustee of their SMSF. They are contemplating acquiring a property through their SMSF, which they plan to lease to an unrelated third party at market value until both of them reach their preservation age and retire as a condition of release.
They want to know whether it is possible for them to reside in the property as their principal place of residence once both of them have reached this condition of release.
There are a few things that Garry and Betty will need to consider to ensure that the transaction complies with superannuation laws.
Issue 1: the sole purpose test
Is purchasing the property now with the intent to reside in it in the future once the members of the SMSF have met a condition of release a breach of the sole purpose test?
SMSF Ruling 2008/2 provides that an SMSF may only be maintained for the sole purpose of providing retirement benefits to the members, or to their dependants if a member dies before retirement. It also provides that in determining whether an SMSF has satisfied the ‘sole purpose’ test, one must consider all the facts and circumstances surrounding the trustee’s behaviour in relation to the acquisition of the property.
For example, if the trustee invests in a property where there is a significant likelihood that the investment in the property will not increase any return for the SMSF and the trustee simply purchased the property because the members always dreamed of retiring to a lovely coastal home, then the ATO may take a sceptical view and rule the transaction a breach of the sole purpose test.
If, on the other hand the trustee has supporting documentation such as valuation reports which shows that the investment property is likely to provide an increase in return for the SMSF, then the sole purpose test may be satisfied, notwithstanding the ancillary purpose.
Issue 2: the property remaining in the SMSF
An SMSF will fail to meet the ‘sole purpose’ test if the SMSF provides a pre-retirement benefit to a member of the SMSF.
If Garry and Betty decide to reside in the property once they have both met a condition of release, they should transfer the property from the SMSF to the members in their personal capacity.
This is to avoid potentially breaching the ‘sole purpose’ test in the event that Garry and Betty residing in the property is treated as a present-day benefit or personal use of an SMSF asset.
Issue 3: capital gains tax and land tax
As a general principle, there is no capital gains tax on a transfer of property between an SMSF and the members of an SMSF in their personal capacity if the property is solely supporting the payment of one or more pensions for the members (i.e. if the property is a segregated current pension asset under the segregation method or under the proportional method if all members interest are in pensions).
If an SMSF sells a property before the members retire, the SMSF is charged 10% capital gains tax.
If an SMSF property is sold whilst all members of the fund are solely in retirement phases, any capital loss realised would be disregarded for tax purposes and cannot be carried forward to offset future capital gains.
In most states and territories, a principal place of residence will not be subject to land tax. As the property will be Garry and Betty’s principal place of residence when acquired, they will not have to pay land tax.
Transfer duty on the transfer from the SMSF to Garry and Betty in their personal capacity will result in transfer duty or nominal duty being paid except in Victoria, the ACT, and Soth Australia where transfer duty on this type of transaction is exempt.
Full ad valorem (‘according to value’) transfer duty is likely to be charged in NSW, Queensland and the NT. In Western Australia, nominal transfer duty of $20 applies in respect of a transfer of, or an agreement for the transfer of, dutiable property from the trustee of an SMSF to a member of the SMSF.
The trustee must still ensure that the in-specie transfer is permitted under the trust deed. If the trust deed is silent on any in-specie transfer, then the trust deed will need to be updated to allow the in-specie transfer to occur.
In summary, while it may seem advantageous to acquire a retirement property through your SMSF with the hope of residing in the property once you retire, there are issues to consider with this type of transaction, particularly ensuring that the SMSF satisfies the sole purpose test.
Elizabeth Wang is a Solicitor at Townsends Business & Corporate Lawyers. This article is for general information only as it does not consider the individual circumstances of any investor. Consult with a legal or financial adviser before acting on any information in this article.