SMSF tax relief on a commercial property

Australian Financial Review

13 December 2016

Sam Henderson

Resetting an asset’s cost base under new CGT relief rules can mean big tax savings but you’ll need careful documentation, writes Sam Henderson who answers your questions on super.

Q: I am 67, have a self-managed superannuation fund (SMSF) in pension mode and, as I am still working part-time, I am also in accumulation mode. My wife is 65. We both exceed the $1.6 million cap. We have a commercial property in our fund that has a purchase (book) value of $1.23 million and a declared value (through an apprail requested by the auditors) of $1.45 million. I suspect the market value is around $2.1 million. My impression is that getting a current valuation, before June 30, 2017, would mean no capital gains tax (CGT) for our investment. That’s unless it exceeded the valuation when it sold, in which case the fund would only have to pay CGT on the difference. Is this the case, or is the fund still liable for CGT on the difference between the original purchase price and the valuation done before June 30, 2017? John

A: John, in the first instance, my understanding is that you will need to be in pension phase or have up to $1.6 million in pension phase before June 30 to take advantage of the CGT relief provisions (that also need to be effected by June 30, 2017 via valuation on your property). The CGT relief provision may be applied in two different instances in your situation.

First, if your pension assets are set at $1.6 million or less and you can get a valuation on the property to incorporate it in the $1.6 million, then you’ll be fine. It is perfectly plausible for a valuation on a commercial property to be valued conservatively despite a potentially higher market value – usually a valuer will give you a valuation range providing some discretion on your part.

Alternatively, if your assets will exceed the $1.6 million cap as you suspect, then the valuation used will become the new cost base assuming you keep the property for another 12 months. It’s my understanding that the CGT reset value provisions will not apply to assets sold within 12 months of the revision of the cost base. For the proportionate percentage of the property in accumulation phase, it will attract CGT at a rate of 15 per cent less the CGT discount of 33 per cent, equating to 10 per cent CGT using the reset cost base at June 30, 2017. So yes, you will pay CGT only on a proportion of the property value, at a discounted rate and using the new CGT reset value as the cost base. Remember, you only pay CGT if you sell the asset. You will also pay earnings tax on the proportion of the net rent from the property. It’s really not that bad and probably a whole lot better than having the property in your own name!

W: Sam, I have a question relating to a reversionary pension from a defined benefit scheme. My wife and I have an SMSF. She has reached the $1.6 million cap in her pension account. I will be only allowed to keep $88,560 in my SMSF pension account after June 30, 2017 as I also receive a defined benefit pension from State Super of $94,465, which is equivalent to $1.5 million after multiplying up by 16. If I predecease my wife, she is entitled to receive 66 per cent of my defined pension amount or $63,000 a year, which is equivalent to just over $1 million when multiplied by 16. Can she transfer money from her SMSF pension account into her accumulation account to allow for the defined benefit reversionary pension she will receive? Brian

A: Brian, I’m hoping you get the tap on the shoulder from the big man upstairs long after June 30, 2017 and therefore I would imagine your lovely wife would have already had her $1.6 million pension balance cap set. This would exclude any further entrants to the asset or income pool that make up that cap. I’m thinking that the reversionary pension would therefore remain taxable to her when she eventually receives it and assuming you predecease her.

Alternatively, if you wanted to get cute about it, you could tip a large portion of her fund back into accumulation phase before June 30. In theory, she could potentially attain a higher pension cap if it’s in fact indexed between June 30 and your departure from the planet. It’s complicated enough to write such a suggestion, though, let alone implement it in any practical fashion.

The government made some positive amendments to the super legislation when it went through parliament a few weeks ago, allowing reversionary beneficiaries up to 12 months (it was going to be six months) before crediting the new income stream to the $1.6 million balance cap. Advantageously, this allows the beneficiary up to 12 months to get their affairs in order before being penalised.

These questions are answered without the full financial and lifestyle details of readers and must therefore be taken as general advice. We recommend you speak to a qualified financial adviser for complete and comprehensive advice.