SMSF Property and the Transfer Balance Cap

Hi PropertyChat,

Background:
Myself 48: Salary $140k + super
Wife: 48: Salary $80k + super
No kids.

Both love our work and happy to keep going for the foreseeable future.

Assets:
PPOR (Sydney house): Valued at $1.9M, fully paid off
Shares: $1.5M
Cash: $50k (emergency fund)
Super (SMSF - company trustee with both of as directors): $1M cash (recently converted due to below plans)

Goal:
We want to buy an investment property to store our wealth and trying to figure out the best vehicle to do this in (i.e. inside vs outside of super)

Current Thoughts:
We are considering selling $500k of our shares and contributing it into the SMSF over the next couple of years to buy an IP in Sydney outright in the SMSF around the $1.5M mark. The appeal of the Super environment is that ideally we can roll this property into the pension phase when we turn 60 and have the option to sell it with no CGT implications down the track.

Concerns and questions:
I can't quite however get my head around this works with the transfer balance cap.

Let's say the property is worth $2.2m in 12 year's time and the transfer balance cap is still $1.7M per person. Since we will have an equal share in the property, does that mean that only $1.1M of the property value will be considered under each of our $1.7M transfer balance cap and that we won't need to sell the property and pay 10% CGT before rolling into the pension phase? Or would we be forced to leave the entire asset in the Accumulation phase due to it's value?

Any links to information/strategies on how to get the best outcomes on high value SMSF property would be appreciated.

Thanks

Fred

 

I would think the value of the asset when contributed to the fund at each members share so would have cap x 2. Not sure impact if it had leverage of 80% of entering smsf.

 

A transfer balance cap is a notional sum that limits the maximum new pensions that can be commenced and be tax free in a persons lifetime. It is supported by the net assets of the funds applicable to each member. The best way to consider a TBC is to think of the NET assets of the fund held by each member. So if a fund sells $500K of shares it may get $500K of cash but if tax on the share sale was $25K the net assets are reduced by $25K. . If it then buys a property using a limited recourse borrowing facility only the NET assets (property + acquisition costs less debt) will enhance a member account. This may even be unchanged. Or reduced.

eg New property is worth $1m but the fund also had acqusition costs of $35K and borrowed $650,000. The member net asset REDUCTION may be $35k. Cash has reduced $385K and the net asset is +1m less $650K borrowed. Generally speaking buying a property using limited recourse borrowing may not increase the available pension account. It may often reduce itfor a period of time. This is because acquiistions costs are borne by all members as a reduced net asset position.

TBC are measured at defined points of time.
1. When a pension is started and then
2. When it is commuted by the value on the date commuted; and
3. If the pension recommences the value on the date it starts.

Changes in asset value, the amount drawn as a pension, fund income, taxes and the impacts of costs doesnt affect a TBC however it may lead to a lesser or greater member account entitlemnet on the day the pension commences. This may use more, or less, TBC. Contributions also dont directly affect a TBC unless a new pension is commenced with some or all that contribution. And then if its does contribution tax will reduce the TBC impact. Each member maintains a personal account balance that receives THEIR contributions. In the example above it is necessary to consider which member/s contributed the $500K. IF the member does not commence a pension using the whole $500K then there is no TBC impact. eg a member aged under 60. However where a LRBF may assist a higher pension is after time has elapsed. Unrealised gain in the value of the property and reduced debt add net assets to the fund.

As $500K exceeds the 3 year bring fwd non-concessional cap of $330K some of the contribution must be concessional. 15% min tax will reduce the member account on the concessional sum. Exess conribution smay also need to be repaid by the fund exposing the fund liquidity to loss. And this reduces the TBC amount. . Its would be improbable that the person will be able to contribute $500K without a breach of caps and a excess contributions concern.