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Superannuation Technical Update: Property and the Next Generation – March 2016

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Australia’s love affair with property can’t be denied. But holding property in Super can pose some difficulties when fund members approach retirement, and inevitably pass away.

     Property and Pensions

Clients should be aware of the liquidity issues that present themselves when their main SMSF asset is a property. They will need to ensure they have sufficient income generating assets to enable them, to meet their annual minimum pension obligations in retirement. Further, as they age, the pension minimum increases, placing further strain on the Fund’s liquidity.

Re-contribution of pensions (subject to age, annual contribution limits and satisfying the work test) or contribution of cash or acquirable assets held outside of Super will help preserve cash flow inside of the Fund, but may bring CGT consequences and/or stamp duty implications. SMSF members will need to make a choice as to:

  • Bringing another member into the Fund to create more liquidity (e.g. an adult child);
  • Sale of the property itself to create liquidity; or
  • Transfer of the property out of the Fund and wind-up the SMSF.

SMSF Property and Death

On death, a member’s benefit must be paid out as soon as practical. This could be paid to a spouse (or child under 25) as a death benefit pension and allow the asset to remain in Super. However, death benefits to adult beneficiaries (most commonly adult children) generally must be paid as a lump sum, requiring the sale of the asset or its transfer direct to the beneficiaries.

     Consideration and planning needs to occur – for example, how do you pay out a death benefit below?

    Members – SMSF balance  SMSF Assets
    Paul (deceased) – $1,000,000  Property – $1,300,000
    Chris (son) – $500,000  Cash – $200,000

Further complexity arises where the SMSF has acquired the property under an LRBA – the property debt will need to be paid off prior to the payout of a death benefit which may limit your client’s options.

In the situation above, Chris would have a few choices:

  • Own the property as Tenant in Common with the SMSF
  • Contribute liquid assets to the fund of $800,000 to enable a payout and retain the property
    – Beware contribution limits
    – How would Chris fund this? Potentially insurance (or other inherited assets) outside of super.
  • Have the SMSF sell the property to create sufficient liquid assets to pay the death benefit lump sum
  • Roll-in new members to create additional liquid assets to pay the death benefit

Tax and cash flow of the fund and the beneficiaries would need to be considered with any of these options and explored fully before final conclusions are made.

Proactive planning may have allowed Chris to regularly contribute additional funds (as non-concessional contributions) and over time help to build his entitlements to provide an effective solution.

Practical Implementation – tips and traps

  • Advisers should hold proactive discussions to help create an effective and practical solution to these potential pitfalls
  • Ensure your clients consider the Fund’s investment strategy when making these decisions
  • Be clear as to the transaction costs (such as CGT, stamp duty, professional fees) when determining a solution
  • Advisers should ensure they discuss superannuation assets as part of a complete Estate Plan to help ensure that generational wealth transfer occurs in the manner clients intend.

More Information

If you need assistance with generational planning strategies, please do not hesitate to email us or phone (03) 9886 0800.

 

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