Complete Guide to SMSFs & Property

The phrase "super funds" refers to a kind of savings account for retirement known as a superannuation fund. Typically, they are comprised of a diverse selection of investments, one of which is real estate. It is vital that you have a firm grasp of the landscape of superannuation funds and how it relates to real estate investing if you are interested in owning real estate. This information is necessary in order for you to be able to purchase real estate.

In this video, we will cover all you need to know about self-managed super funds (SMSFs) as well as investing in real estate. If you have been wondering whether or not to take the leap, continue reading because we will examine both alternatives' benefits and drawbacks, as well as some essential points to keep in mind. If you have been debating whether or not to take the plunge, continue reading.

Therefore, regardless of whether you are just starting out with self-managed super funds (SMSFs) and investing in real estate or if you already have some expertise in these spheres, you will find something valuable in this post!

Paying Super Benefits Through Asset Transfer

It's possible that a member of a self-managed super fund (SMSF) would desire to transfer fund investments into their own name rather than contributing cash to the fund in order to meet a benefit, and they might be curious about whether or not this is even permitted.

The correct response to this question is "it depends" since there is the possibility that this will occur in the event that the benefit is paid out in a single amount. If, on the other hand, you enquire about a pension, you can rest assured that the answer you receive will be "no," despite the fact that "yes" is a potential answer in some circumstances.

A member of an SMSF is prohibited from selling or transferring investments that are held in their own name, as this is a fundamental regulation of the organisation. There are, however, certain extremely particular cases in which this rule is not applicable. These consist of assets such as those that are traded on a stock market, investments such as commercial property, and investments such as those that related parties manage.

On the other hand, if a fund member or beneficiary qualifies for a lump sum benefit from the fund, the member may elect to receive the benefit in cash or by transferring any investment in the fund in order to get the benefit. The benefit will be given to the member in cash if they choose to receive it that way.

In this context, the term "transfer of the benefit" refers to the act of transferring a benefit "in specie," which designates the transfer of an asset without any exchange of monetary value. Any investment that the fund is making available to members may likewise be purchased by them, provided that the purchase is undertaken on an impartial, unrelated commercial basis. One conceivable situation is this one.

In the event that a member passes away while receiving benefits from their super fund, the benefits are often dispersed to the individual's beneficiaries in the form of cash payments.

It is possible to transfer an equivalent value of the fund's investments in order to satisfy all or part of a lump-sum benefit, including when a pension is commuted (converted) in full or in part to a lump sum. This is the case because transferring an equivalent value of the fund's investments is possible. This is due to the fact that the value of the benefits received is comparable to the value of the investments made by the fund. The law that regulates pensions, on the other hand, stipulates that cash must be used for any and all regular pension payments.

There are no restrictions placed on the many different kinds of investments that can be moved into a member's account in order to help reduce the cost of benefit payments, and this is because there are no such restrictions. The fact that investments can be moved from the fund to a member or beneficiary, which indicates a change in ownership, is, however, the single most crucial element to keep in mind at all times. This transfer signifies a change in ownership.

The majority of the time, the ownership will be changed from being held in the name of the trustee of the fund to being held in the name of a member of the fund or a beneficiary of the fund. This change may occur at any moment throughout the life of the fund. Once more, this is due to the fact that trustees are compelled to comply with the requirements of regulatory agencies.

However, the participant or receiver has the opportunity to transfer the investment to someone else if they so choose. The member or beneficiary of the transfer will continue to be responsible for any possible tax obligations that may have arisen as a consequence of the transfer.

Example 1

Because Arthur, Camilla's spouse, passed away, she is now qualified to receive a one-time payment of $600,000 from Arthur's growing amount in the fund. This payment will come from the accumulation that Arthur had in the fund.

Due to the fact that the fund's investments include both cash and listed shares, she makes the decision to have the lump sum paid out using a combination of some of the cash balance (which is $100,000) and by transferring some of the shares (which is $500,000). Again, this is because the fund's investments include both cash and listed shares.

In the form of a one-time cash payout, Camilla will be entitled to a death benefit that is exempt from taxation. However, a capital gains tax event has occurred due to the fact that the shares have been withdrawn from the fund. This indicates that the fund is now liable for paying taxes on any taxable capital gains that may have occurred over the course of time.

Example 2

Due to the fact that Marcia is now in her retirement years, she will have access to a revenue stream that is dependent on accounts that she has previously established. This is being taken care of for Marcia by her self-managed super fund (SMSF), which has a current balance of $900,000. Despite this, there is no money in the accumulation account of the fund where she is a participant. Despite this, there is no money in the accumulation account.

In order to be ready for her vacation abroad, she took a lump sum of one hundred thousand dollars, of which sixty thousand dollars were invested in listed shares and forty thousand dollars were taken out in cash. This withdrawal accounted for the entire sum that was taken out. Her was made feasible as a direct result of her recently gained capacity to travel on a worldwide scale, which made it possible for her to achieve this objective. This ability directly contributed to her success in achieving this objective. Marcia is now in the position where she is compelled to partially commute the account-based pension that she had initially established for herself in the past as a result of this circumstance. This is an immediate repercussion of the situation that we are in.

Because the fund is exempt from paying taxes on assets that are used to maintain the income stream, the sale of the listed shares to her will not have any implications for capital gains. This is due to the fact that the fund does not have to pay taxes on the assets that are utilised in the process of supporting the revenue stream. On the other hand, for the purposes of determining tax liability, the income stream is regarded as having terminated if she completely commutated it.

Given the aforementioned set of circumstances, it is probable that Marcia may be held accountable for paying taxes on any increases in value that accrue from fund investments that are subsequently transferred to her. This is because they will be considered a transfer of assets from the accumulation period of the fund, which means that they will be treated as a transfer of assets from the accumulation period of the fund. Again, the reason for this is because they will be considered a transfer of assets from the accumulation period of the fund.

Maintaining Records

It is essential in a scenario such as this to keep accurate records of the fund at all times, particularly to comply with various tax and regulatory requirements.

• It is strongly recommended that the following records be kept in order to fulfil the legal criteria that must be met whenever a benefit is given out of the fund:
• A request for the benefit payment can be submitted in the form of a lump sum, a pension, or a combination of the two by the member, a beneficiary, or the executor of the member's estate. The member themselves can also make the request.
• A review of the application's supporting documents is conducted by the organisation responsible for validating the applicant's eligibility for the benefit. For example, documents such as a death certificate, a proof of age, a proof of identification, a nomination for a binding death benefit, a nomination for a reversionary pension, and other documents of a similar kind might be included in this category.
• A resolution that the trustees pass verifies the disbursement of the benefit, which may take the form of a one-time payment or a pension, as well as the recipient's identity and the amount of money that is potentially at risk.
• Getting ready to pass out either a cash distribution, a transfer of investments from the fund, or any mix of the two to the member of the fund, the beneficiary of the fund, or the executor of the member's estate, depending on who is suitable.
• When dealing with circumstances in which it is necessary to transfer fund investments in order to satisfy a benefit, making investments in trusts or shares of publicly traded companies is a straightforward process. It is vital to maintain open lines of communication with both the registrar and the trustees in order to complete an off-market transfer of shares successfully. When private companies or unit trusts are involved, it may be sufficient for the trustees to merely contact the business or trust to have the transfer documented. This is the case when the trustees contact the business or trust to have the transfer documented.

Even though circumstances like these are extremely unusual, there are instances when it might be to the fund's benefit to transfer ownership of one of the real estate properties it now possesses. In order to accomplish this, the property's title will need to be transferred to the member or beneficiary, any applicable taxes will need to be paid, and the property will need to be appraised at its true market worth.

Suppose both parties do not retain an equal negotiating position for the entirety of the transaction. In that case, the fund may be liable to potential tax implications in accordance with the non-length arm's length criterion.

The fund could occasionally hold more specialised investments like collectibles or works of art, although this is not typically the case. The fund's primary focus is on monetary assets. In order to demonstrate that the transfer was made to the member or beneficiary on an equal basis with other transactions, such as those involving shares of stock or real estate, the transfer will need to be supported by the necessary documentation and valuations. Additionally, the transfer will need to be valued.

Anyone who is a member of the fund, a beneficiary of the fund, or the legal personal representative of a member has the right to request that a portion of the fund's investments be transferred to their name so that they can receive a lump sum payment. Getting in touch with the administrator of the fund will allow you to accomplish this goal. If it worked out better for them, they may even elect to buy the investment directly from the fund if that's where it's being offered.

It is of the utmost importance to provide evidence that the transfer of the asset to the receiver was carried out in accordance with the law and that the parties engaged in the transaction had not had any previous professional or personal dealings with one another.

Tax And Benefit Issues

Tax Advantages

People typically strive towards getting real estate (or any investment) into SMSFs or superannuation funds in general since, clearly, doing so may provide them favourable tax treatment. This is because of the fact that doing so can give them favourable tax treatment. However, the benefits of investing in real estate are on par with the benefits that come with investing in any other asset.

Let's say that rather than the member or the member's employer transferring the property personally, a contribution to an SMSF is made in the form of physical assets. When this occurs, the donor will often be eligible to claim a tax deduction for the amount of money contributed (subject to age-based limits and restrictions on deductibility for self-employed persons).

Nevertheless, let's assume that a company makes a contribution of some kind. Then, it would appear that the only contributions that are free from the FBT are those that are made in cash; in this scenario, the employer will be responsible for covering the cost of the FBT.

As a result, it is possible that it would be preferable to have the employer make a cash contribution rather than one made in this manner and then to have the SMSF acquire the property through a standard sale and purchase arrangement. This is because having an employer contribution structured in this manner might be perceived by both parties as unclear.

The lessee will be able to claim a tax deduction equal to the total amount of rent that was paid on the premises (say at 30 percent ). Obviously, the SMSF will have to report this to the relevant authorities because it will be deemed income. However, taxes on these types of income will be leaner than those on other types of income (15 percent maximum - possibly less if imputation credits are available).

If the property is eventually sold, any capital gains will be subject to tax at preferential rates, which are 15% for standard capital gains and 10% if the SMSF has owned the property for more than a year. If the property is sold, the SMSF will have owned it for more than a year, so it will qualify for the lower rate. These rates apply to any profit derived from the sale of capital assets associated with the property.

I'll repeat it once more: the utilisation of imputation credits have the potential to bring that rate down. In addition, if the SMSF has progressed to the stage where it is providing pensions to its members, any capital gains may not be subject to taxation. This is because pensions are exempt from taxation.

Investing Through Unit Trust

Since the middle of the 1990s, superannuation funds have turned increasingly to unit trusts as a vehicle for their investments. This trend is likely to continue. In addition, other investment structures include unit trusts, which, among other things, made it possible for pension funds to increase their asset-buying capacity through gearing.

Both then and now, pension funds could participate in commercial real estate transactions because of the in-house asset requirements. However, as of the 12th of August in the year 1999, super funds have been granted permission to invest all of their money in commercial real estate (subject, of course, to their investment strategy).

As a consequence of this, many company owners in Australia who own small to medium-sized enterprises (SMEs) have used their retirement savings to acquire, either directly or indirectly, the real estate on which their companies were located.

In the arrangements that these firms utilise, the ownership of the business would normally be held by a single entity, while the ownership of the business space would typically be held by a unit trust that was governed by the authority of a self-managed superannuation fund.

In articles that have been written regarding the tax repercussions of super funds investing in unit trusts up until this point, the Retirement Exemption and the CGT Discount have garnered the majority of the focus (for example, whether it is possible for the discount to travel through the unit trust to the super fund unharmed).

In the event that the sale of the company premises results in a capital gain, the taxpayer may be qualified for a number of different tax advantages, including the CGT reduction, the 50 percent Active Asset Exemption, the Retirement Exemption, and others.

It is essential to examine the likelihood that unit trusts may be categorised as public trading trusts and will, as a result, be subject to the taxes of corporations. Unitholders in the funds managed by unit trusts will incur significant losses as a direct result of this.

As a result of the numerous capital gains tax benefits that are now available to small businesses, investors are increasingly opting to conduct their investments through trusts as the vehicle through which they will carry out their investments. This is due to the fact that trusts are becoming more popular. Trusts have been recognised for a very long time as being enormously important legal and financial vehicles.

And despite the continuous hubbub and media frenzy over trusts being the vehicle of severe tax evaders, the government-appointed Board of Taxation has openly ruled that they are acceptable.

In addition to this, the fact that they are "flow-through" enterprises, which enables them to claim a sizeable number of CGT discounts and then pass on the benefits of those concessions to beneficiaries, is also a contributing factor in this phenomenon.

On the other hand, the operation of the CGT event E4 enables a separate capital gain to be generated through the transfer of non-assessable funds by a unit trust, such as the CGT concessions.

(a) What is CGT event E4?

CGT event E4 has taken the place of the old section 160ZM of the Income Tax Assessment Act of 1936. Information pertaining to it may be found in the sections 104 to 70 of the Income Tax Assessment Act of 1997.

This item was included in the tax code in order to stop the fabrication of false losses that may occur when a fixed trust made distributions of non-assessable monies at a time other than when the fixed interests were being sold. This particular tax disaster was the one that the insertion of this provision was attempting to prevent.

As a consequence, the economic worth of any fixed interests retained in the trust will be diminished. But on the other hand, the recipients would not be responsible for paying taxes related to their value.

Example

A taxpayer can contribute $100 to the establishment of a brand-new unit trust simply by purchasing one of the trust's units. At the most fundamental level, the taxpayer is given a payment from the unit trust in the amount of $40 as a type of partial distribution from the corpus. The unit trust makes this payment.

This amount is handed out to the taxpayer as a tax-free return on their investment in the business. After that, the taxpayer decides to sell the unit for an amount equivalent to its current market worth of $60. As a result, the taxpayer reports a capital loss of $40. This figure is arrived at by taking the basic cost of $100 and removing the revenues of $60 from that total.

CGT event E4 is designed to lower the cost base of the taxpayer's units by the total amount of the $40 non-assessable dividend if the arrangement is of the kind indicated above and meets the criteria. This prevents the taxpayer from incurring a loss on the sale of their units that would have been fictional if it hadn't been because this provision is in place.

(b) What if the non-assessable distribution exceeds the cost base of units?

In the preceding illustration, the CGT event E4 does not result in a capital gain; rather, it only lowers the cost base of the trust's units, which prevents a gain from being formed. On the other hand, the realisation of a capital gain is possible if the cost basis of the non-assessable dividend is smaller than the cost basis of the units themselves.

Example

A unit trust receives a new $100 investment from a superannuation fund, which is used to acquire fresh units in the trust. After that, the trust invests those monies in the purchase of the commercial property so that its members can set up shop there and conduct their own enterprises.

Assume that the property owned by the business has a value of $100 and that the unit trust is associated with the corporation that owns the business.

After some time, the house is ultimately sold by the unit trust for the price of $350, resulting in a profit of $250. Therefore, it is permissible for the unit trust to reduce such a gain by 50 percent using the active asset exemption stated in subdivision 152-C of the 1997 Act (commonly known as the 50 percent CGT Reduction), which will result in a taxable gain of $125 and a gain that is not subject to assessment in the same amount.

(It is very important to note that the possibility of obtaining a CGT reduction of fifty percent, which may be found in Division 115 of the Act of 1997, is not included in this example.)

When capital gains tax event E4 occurs, which occurs when the trustee of the unit trust distributes the portion of the gain that is not subject to taxation, the cost base of the units of the super fund drops from $100 to $0. This is because the distribution of the tax-exempt portion of the gain triggers the event. Therefore, the super fund unitholder will be considered to have made a capital gain for the amount of $25 in additional non-assessable dividends.

Because the initial $100 of subscribed funds was acquired as a consequence of selling the super fund unitholder's units, the super fund unitholder will be eligible to realise an additional capital gain of $100. This is as a result of the fact that the units owned by the unitholder of the super fund have no-cost basis.

After all, is said and done, the pension fund is in the black by the sum of $250, thanks to an investment of $100 that generated a return of $350. As a result, the super fund is subject to an assessment for tax purposes in the amount of $250. This amount takes into account the capital gain of $100 that resulted from the sale of its units, the CGT event E4 assessment of $25, and the taxable dividend in the amount of $125.

If the super fund had owned the units for at least a year, this $25 capital gain would have been entitled for a reduction of 33 1/3 percent, which would result in a savings of $8.33.

If the same circumstances were met, then the $100 capital gain that resulted from the later sale of the units would likewise be eligible for the 33 1/3 percent reduction that is offered on the tax that is applied to capital gains. Following the application of the discount, the capital gains in question will be subject to an effective tax rate of 10%.

A pension fund can potentially receive capital gains that are taxed at a rate lower than the standard rate. This is due to the fact that a unit trust exempts fifty percent of the fund's active assets from taxation. This is an advantage for pension funds. However, advisers must never forget to take into consideration any cost base adjustments that may have been made to the units.

(c)    The CGT Discount

Before the 30th of June in the year 2001, the tax-free portion of a capital gain that had been subject to the discount in Division 115 of the 1997 Act, which is more commonly referred to as the CGT Discount, was included in the definition of non-assessable distributions for the CGT event E4. This provision was removed on the 30th of June in 2001. This remained the case even after the 30th of June that year (2001) after that year had passed.

As a consequence of this, the cost base of the units that a unit trust held reduced each time the trust disbursed a sum of money of this sort. There would be a gain in the form of capitalisation if the discount amount was higher than the cost base of the units.

Since July 1, 2001, the CGT Discount has been excluded from the concept of "non-assessable amount" that is used in the context of the CGT event E4. Instead, it evolved into something new. As a consequence of this, unit trusts that produce discount capital gains are given permission to pay the non-assessable portion of such profits to the unitholders of super funds. This can be done without causing a CGT event E4 to occur.

TIP

The fact that these investors do not incur a capital gain when they receive distributions of the CGT Discount is a significant perk they can enjoy as a result of their investment in super fund unitholders. Because of this, they are put in the same position as someone who has made an investment under their name.

Retirement Exemption – Access All Areas

We have shown that the CGT Discount can readily move through the unit trust and reach the unitholder of the superfund up to this point. Although you will need to do some arithmetic to calculate how much value has been lost owing to the cost base adjustment, the unit trust can also be utilised to transfer assets that have lost 50% of their value.

When a unit trust holds active assets that a super fund owns, it is extremely unlikely that the Retirement Exemption mentioned in section 152-D of the 1997 Act will be available to claim.

A unit trust trustee may elect to treat a part of the gain as tax-exempt by completing a Retirement Exemption application when the trustee sells an active asset and realises a capital gain. This is typically the situation.

However, in order to qualify for the Retirement Exemption, a unit trust must have at least one controlling member. Usually, this will be a shareholder who holds at least 50% of the trust's units.

The trust can be eligible for the Retirement Exemption if it transfers any of the capital gain into a superannuation account for either the controlling individual or their spouse who is under the age of 55. (provided that the spouse is also a unitholder).

Remember that the person in authority, or their spouse, is at least 55 years old. In this situation, the unit trust could be able to invoke the Retirement Exemption by making a qualified and CGT-exempt termination payment to the managing person or spouse. However, it is essential to remember that each person's lifetime eligibility for the Retirement Exemption is limited to $500,000 and that only one application may be made.

Suppose the unit trust sells the business space under the same conditions that an associate sells the company. In that case, it could be able to satisfy the necessary requirements for eligibility for the Division 152 small business active asset reductions.

Most of the time, this should make it possible to use the section 152-C active asset exemption; however, as mentioned in paragraph 6.3, the benefit of this exemption will be substantially reduced as a result of the operation of CGT event E4.

Of However, some individuals could decide to utilise the retirement exemption provided by section 152-D in its place. However, the retirement exemption will not be an option if there is no controlling person in the unit trust.

Is a superannuation fund a controlling individual for the purposes of claiming the retirement exemption? The answer is probably not, notwithstanding the likelihood that it is run with a certain person's ultimate benefit in mind.

However, determining whether a fund investor is the person in charge of the unit trust is more important. The term "controlling individual" refers to a person who has a beneficial interest in at least 50% of the capital and income of a unit trust. This part should be at least 50% of the total.

With a fund your parents established for you, or even better, with a fund with only one member, you might be able to pass the exam. The fact that the benefit a member receives is subject to preservation and cashing limitations is the sole difference between it and an interest in a unit in a unit trust.

The members may be entitled to beneficial interests in at least 50% of the capital and revenue of the underlying unit trust in situations like these.

Given that the active asset concessions' stated policy goal was to help small company owners finance their superannuation, the result appears to be satisfactory.

Public Trading Trusts – Natural Enemy of the Super Fund

Another natural threat to superannuation funds is posed by Division 6C of Part III of the Income Tax Assessment Act of 1936 (more commonly referred to as "the 1936 Act"), which has the potential to transform unit trusts into public trading trusts and tax them as though they were businesses. This provision is contained in the 1936 Act. Therefore, in addition to the possibility that the funds will no longer comply with the law, there is also the possibility that they may violate this hazard.

What’s a public trading trust?

According to subsection 102R(1)(b) of the 1936 Act, a unit trust is considered to be a public trading trust if, at any point during the income year, it qualifies as both a public unit trust and a trading trust. This criterion determines whether or not the trust is treated as a public trading trust. This presumption applies in every situation where the unit trust meets both conditions. This includes all possible scenarios.

One of the provisions of the 1936 Act, section 102P(2), stipulates that a unit trust is presumed to be a public unit trust. This takes happen when an exempt entity, such as a compliant superannuation fund, has more than 20 percent of the beneficial interest in the income or property of the unit trust.

A trading trust is defined as a unit trust in which the trustee either engages in the business of trading themselves or controlled or was able to control, directly or indirectly, the affairs or operations of another person who engaged in the business of trading. This definition can be found in section 102N of the 1936 Act. A trading trust is defined as a unit trust. Either the straight or indirect route might have been taken to achieve this goal.

It is presumed that a firm meets the requirements of the definition of "trading business" in section 102M of the Act if the company does not participate only in activities that qualify as a qualified investment business. As a consequence of this, a unit trust is not considered to be a public trading trust if the activities that it engages in are limited to any of the following two categories:

(a) buying land to generate rental income; or

(b) trading or investing in any one or more of the following:

• deposit with a bank, building society, or other financial organisation, as well as an unsecured loan;
• securities such as shares, bonds, or debentures;
• shares of a corporation;
• a unit trust's shares;
• futures agreements;
• forwards agreements;
• contracts for interest rate swaps;
• currency exchange agreements
• contracts for forwards exchange rates;
• contracts for future interest rates;
• life insurance contracts;
• a privilege or choice relating to such a loan, security, stock, unit, contract, or policy;
• any comparable financial products.

As a consequence of this, the unit trust would not be eligible for status as a public trading trust if the location from which an associate conducted business was its only asset and a super fund held at least twenty percent of the units in the trust. Even purchasing the land and constructing the new commercial structure might be an acceptable use of the unit trust's funds.

In addition to corporate property, the unit trust might also legally own listed shares. But, again, this would not be a problem.

Consider the scenario in which the activities of a unit trust do not wholly consist of qualified investment business. In such a scenario, it will be a public trading trust. Accordingly, according to subsection 102S of the Act of 1936, the government would levy taxes on its revenue at the same rate as is applicable to corporations.

Because corporate trust estates and current corporate trusts, including public trading trusts, are presumed to be subject to the same imputation statute as corporations, distributions made to super fund unitholders are treated as frankable dividends. Again, this is because the imputation statute applies to corporations.

According to the laws governing dividends, all payments, including credits, that are provided to a unitholder super fund are considered dividends when the payments are made.

The super fund is eligible to receive franking rebates for income from franked dividends, which can be applied to the fund's overall tax burden to reduce the amount of tax the fund must pay. In addition, since super funds are eligible for a return, the fund will not be required to hand up any unused franking credits that it accumulated during the franking year, even if those credits would have been considered surplus.

TIP

Unit trusts that qualify as public trading trusts will still be able to take advantage of the CGT Discount even if their parent companies do not qualify for it. This explains why unit trusts are considered to be public trading trusts in the first place.

Tax Disadvantages

When determining whether or not it would be in the beneficiary's best financial interest to transfer real estate into an SMSF, it is vital to take into account the possibility of unfavourable tax effects. Consider, for example, proposition (a): when a member or employer makes a contribution to or sells property to an SMSF, the transferor typically disposes of the asset for the purposes of capital gains tax, which has the potential to result in the production of taxable capital gain. This is the case regardless of whether the employer sold the property or whether a member of the organisation donated it. The fact that there is a discount of fifty percent, on the other hand, gives the impression that even if it occurs, the problem might not be insurmountable.

Suppose the member is the owner of the property and the SMSF to which it is transferred is a sole member fund. In that case, there is an argument that can be made that there hasn't been a change in beneficial ownership, and as a result, there hasn't been a disposal for the purposes of capital gains taxation. This is the case if the member transfers the property.

Even though the reviewed circumstances revealed that a husband and wife owned the property jointly and were both members of the SMSF, the ATO first evaluated this issue in identification number 2001/326. This was the case even though the facts showed that a husband and wife owned the property jointly.

Despite the fact that the transferors were the sole members of the SMSF, the ATO came to the conclusion that CGT Event E2 would occur when the property was transferred to the SMSF.

According to the findings of the ATO, the Event E2 did not take place in two distinct occurrences. To begin, in contrast to the trustee, the individuals or organisations to whom the property is passed under the terms of the trust are considered to have "full entitlement" to the asset. This is correct, given that the trustee transferred ownership of the assets to the trust.

In the second possible case, there is essentially just one trustee change; hence, both the transferor and transferee trust do not undergo any modifications.

The Australian Taxation Office (ATO) cancelled Identification Document 2001/326 in April 2003, citing a change in policy and the imminent issue of a Tax Determination on the topic as the reasons for their decision. It is important to take notice of this fact. The authorisation for that TD has not yet been obtained.

Even if the transaction results in a capital gains tax liability, which must be considered a possibility while waiting for the new tax directive to be issued, it may still be preferable to leaving an appreciating property outside of the tax-concessional environment of a superannuation account. But, again, this is something that must be considered while waiting for the new tax directive to be issued.

(b) If a property is transferred to the SMSF through a deductible contribution, the amount of the contribution that the SMSF receives will be regarded as ordinary income of the fund, and the fund would be taxed appropriately – once more, at a rate of up to 15 percent 6. If a property is transferred to the SMSF through a nondeductible contribution, the contribution will not be regarded as ordinary income of the fund.

(c) The superannuation surcharge may also be imposed if the contribution is made in accordance with the conditions established in the law.

(d) The SMSF will be responsible for the continuing upkeep and care of the property in its entirety. However, the tax deduction for these charges will naturally be computed using the super funds' particular reduced tax rate. The SMSF will be entitled to deduct any costs associated with upkeep, repairs, and similar expenses.

After the donation, if the property is the only asset that remains in the fund, the fund needs to figure out how it will pay any tax liabilities that may arise from the contribution. if the sole asset that the fund has is its real estate. Will it be possible to support them using solely the money that will be earned in the future?

Using the "drip-feed" method, which I have already explained, it may be able to lessen the impact of any prospective tax disadvantages by spreading out the payment of such disadvantages over a longer period of time. I previously detailed this method.

Benefit issues

When looking at the big picture, an SMSF that makes long-term investments in real estate will either be required to start providing benefits to its members or will choose to start doing so. Depending on the circumstances, such benefits might be distributed in the form of a single payment, a pension allocated to a certain amount, or a complying pension.

It is conceivable to provide the member with a one-time benefit in the form of a lump sum payment if the property in question is given to the member in its unaltered state.

Because such a transfer of property in kind can very well have CGT ramifications for the SMSF, it is essential to take into consideration the possibility of having to pay any additional taxes that might become due as a result of this scenario. In addition, there is a chance that the member may be unable to satisfy any tax obligations that may arise in the future.

If keeping the property was no longer essential, it would seem to reason that it might be put up for sale; the money from the sale could then be put towards the payment of the member's benefit in the same manner as before.

• It is a little bit more difficult to find a solution to the problem of how to pay the member's benefit through a pension plan. This is because both of the following, or some combination of the two, must be able to be used by the SMSF in order to meet the requirement that it be able to finance the pension payments: putting the rental income from the property to use; utilising parts of the property whose value is equal to the amount that is required for the benefit payment in order to make distributions in the form of the actual property.

Valuation of SMSF assets and member benefits

According to the Australian Accounting Standard AAS 25, reporting entities, such as super funds, must value their assets in line with their current nett market value as of the day the report is due.

SMSFs are free from the need that they appraise their assets at fair market value since they are not required to disclose their financial information. A large body of research supports this general consensus among industry professionals.

Determining the value of a member's benefits enables the trustees and their advisers to apply some creative accounting methods. To give just one example, it is now possible to assess benefits for a member who, under normal circumstances, would be in danger of exceeding their RBLs by employing novel and creative methods.

It is one thing to claim that the assets do not have to be valued in line with market standards, but it is an entirely different ballgame than the possibility that self-managed super funds (SMSFs) are free from Australian Accounting Standard 25.

The Australian Taxation Office (ATO) issued Superannuation Circular 2003/1, stating that assets and benefits should be assessed at their fair market value at the time of the valuation. The numerous advantages that come from SMSFs valuing their assets at market value are outlined in more detail here. 

• The following are some of the things that trustees are able to do as a direct result of market valuations:
•  ensure that benefits provided to members, as described in annual statements, will appropriately reflect changes in market value during the period covered by the statements; 
• analyse the differences between the financial statements of various super funds and the upcoming quarters; 
• determine whether or not the fund's investment strategy is compatible with the investment mix; 
• and determine whether or not the fund's investment strategy is compatible with the investment mix.

According to the ATO, the APRA's Superannuation Circular No. IV.A.4 purports to provide evidence that bolsters the agency's view. However, you will need to make an effort to find some support for this.

To tell you the truth, the arguments provided by the ATO aren't all that compelling. Citing Taxation Determination TD 2000/29's method for calculating the capital value of acquired pensions that aren't paying for life is about all you have to hang your head-on. There isn't much more you can hang your hat on (like allocated pensions, for example). Using this strategy, the fund's trustee is responsible for determining the current value of the fund's underlying assets.

It is reasonable to expect the trustees to evaluate each member's benefits and the fund's underlying assets in line with the conditions of the market. This is because the trustees have a fiduciary obligation to always act in the best interests of the members of the fund. This refers to what would be most beneficial for their current financial status. In light of this, violating this fiduciary responsibility would consist of undervaluing the benefits or assets that are in dispute.

Investing In Unlisted Companies: Avoiding Surprised Traps For SMSFs

Technically speaking, SMSFs that invest in unlisted firms usually run the risk of becoming stuck in traps that are more challenging to get out of than with ordinary investments, the expert claims. Therefore, these funds must be able to pass through hurdle checks to ensure that they comply with current superannuation requirements.

When investing in relatively common assets like cash, term deposits, listed shares, managed funds, and real estate, SMSFs may often easily fulfil the criteria of super legislation, according to Lyn Formica, head of technical services and education at Heffron.

However, some SMSF trustees want to keep less conventional investments in their funds, such as stock in closely held companies. She claimed that it can be more difficult to identify the locations of likely issue regions in the circumstances like these.

Checking the internal asset rules should be one of your first priorities. The maximum percentage of assets that a fund may have in its own holdings at any given time is 5%. If any of the fund's members or anyone related to them control the firm, the shares of that company will be seen by the fund as an internal asset.

After that, "the fund will be prohibited from acquiring the shares if the shares are currently owned by the members of the fund or related parties of the fund members unless the company is controlled by the members of the fund or their related parties, in which case the shares will be an in-house asset," she said.

She added that the fund will then be prohibited from purchasing the shares if they are already owned by the fund's members or affiliated third parties.

Additionally, if the organisation complies with SIS Regulations 13.22C and D, this is true (i.e. it is exempt from the in-house asset rules).

Additionally, funds must justify why they believe their investment in the firm is a wise one.

According to Ms. Formica, the sole purpose test "is the cornerstone of the super legislation." With the use of this test, it is ensured that the fund is only maintained active to provide benefits to participants once they reach retirement age.

Does the "sole purpose test" apply to the trustee's stake in the company? Or is there another reason why the investment was chosen? Consider the following question, which is similar to the previous one: "Is the proposed investment in the members' best financial interests?"

It must be disclosed if the trustee of the fund receives a lesser fee. For instance, the price that was paid was not thought to be "at arm's length."

The fund's whole share-related income, including any capital gains, may thereafter be considered non-length arm's income and liable to a 45 percent tax rate. Additionally, if the fund purchases the shares from a related party, the transaction will be viewed as illegitimate.

When members or affiliated parties provide services to the company must be compensated at arm's length, and the trustee must have supporting documents, according to Ms. Formica.

It can be challenging for the fund to earn income on an arm's-length basis if there is too little. But on the other hand, going overboard could make it difficult to comply with super laws.

SMSFs must also make sure that they can align with the investment plan and provide the right reasoning within the strategy for any concerns regarding liquidity or diversification.

When creating their yearly financial statements, "SMSF trustees are also obligated to appraise the fund's assets at market value," she noted.

"In the best-case situation, the unlisted shares should be evaluated annually. It is doubtful that the shares would be viewed as a sensible investment if the trustee lacked the information necessary to appraise them periodically.