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QUESTION 1
Can an smsf sell a residential property to a member on the basis that is has obtained independent expert third party valuation? For purpose of this exercise Stamp Duty is not a factor / not applicable for consideration.
EXAMPLE 1
Brown Super Fund owns a residential property, sole member of the fund is Jim Brown. The smsf gets a property valuation to provide a value for the house of $2,600,000. This value is also supported by two local restate agents who value the property between $2,5000,000 and $2,750,000. Jim as an individual signs standard real estate contract to purchase the property. My view is that there is no problem in this arrangement. Please confirm.
EXAMPLE 2
Following on from example 1. Jim is the sole member of the fund and he is 100% in phase. You ask why would he not do an In Specie transfer of the property from Brown Super Fund to himself. I believe the problem lies in the fact for an In Specie transfer you must commute the pension. Roll back into accumulation phase thus being subject to Lump Sum payment Rules. In Particular losing the CGT exemption that existed while in pension phase. That capital gain goes back to the date the asset was acquired at cost base. Consider in July 2015 the property was bought for $1,500,000, that In August 2022 the property via In Specie transfer is $2,600,000. I believe that the fund now being in accumulation ( commutation / rollback) now has a Capital Gain of $1,100,000 to report in tax return and pay tax on.
Your opinion please.
EXAMPLE 3
Following a combination of 1 & 2 above. Brown sells the residential property to Jim sole member for $2,600,000 and the fund is 100% in pension phase. On the basis of this the perceived gain of $1,100,000 it is not subject to CGT or Income Tax to the smsf. Jim is 100% in pension phase and as such he is subject to pension payment rules of minimum drawdown rules and no maximum amount limit. Jim requests the smsf to pay him a pension of $1,100,000 in the 2023 year and no tax is to paid by either Jim or smsf on this amount.
My view is that the following is acceptable and permitted under smsf rules due to:
No issue in selling residential property to related/ member as long as done on arms length basis using independent industry expert valuation.
While the fund is in 100% pension phase, the underlying asset is converted to cash via sale with a documented contract. CGT exemption would apply due to being 100% in pension phase.
As the fund now has the cash from the sale of the residential property. Under pension rules it is allowed to make a pension payment to Jim up to 100% of his pension member balance.
Your assistance will be appreciated with above.
Hi Campbell
Re Question 1:
Yes a SMSF can sell a residential property to a member (or related party) if it has obtained a proper independent valuation for the property (a sworn valuation would be best in this case). The property needs to be sold the member at "market value" to meet the requirements of section 109 of SIS being the "arms-length" requirements.
Section 66 of SIS only prohibits an SMSF from acquiring certain assets from related parties, including residential property. There is no prohibition on a SMSF selling assets to a related party (including a member) though, as long as (as stated above) the SMSF has obtained a proper valuation and the property is sold to the related party at "market value".
Re example 1:
Yes I agree if an appropriate valuation has been obtained then the SMSF can sell the property to the member using the value obtained.
Re example 2:
I assume the Fund is 100% in retirement pension mode. I assume Jim was 100% within the Transfer Balance Cap when he started his pension or on 1 July 2017 (whichever is the later) and the property appreciated to $2.6 million entirely in the pension phase.
A pension can only be paid in cash, so when an asset is transferred out of a fund "in-specie" it is treated as a "pension commutation" ie. the value of the asset being transferred constitutes the commuted pension. I assume that what is being proposed is a partial pension commutation and not a full pension commutation.
If the property was transferred to Jim in-specie then the general accepted practice would see the partial pension commutation and transfer happen on the same day, and therefore there would be no period where the commuted amount was in accumulation phase, and in turn there would be no tax liability to the fund on the capital gain on the property transferred
.
However, the in-specie transfer is a partial pension commutation and not a pension payment and Jim would still have to meet his minimum pension for the year from cash, in addition to the withdrawal of the value of the transferred property.
This can be a complicated tax area so advice must be obtained from a tax expert to ensure the transfer is correctly done from a tax perspective. In the above example it is essential that there has not been a full commutation of the pension and that the pension has not ended.
Re example 3:
If Jim was to purchase the property from the fund, at market value after getting a proper independent valuation, then he could request a pension payment of $1,100,000 from his SMSF providing he has met a full condition of release and there is no limit on the amount of pension he can take, just a limit on the minimum pension he must draw each year (that is he has a normal retirement account based pension).
Yes if the Fund is 100% in retirement pension mode then any capital gain is received tax free if the pension requirements have been met.
Thanks
SMSF AAA