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

 

Shares in personal name?

Not interested in borrowing inside SMSF?

TBC is to do with pension accounts and the value is determined "at that time"

Light reading: Definitive guide to the Transfer Balance Cap

 

Yes Shares are across both our names.

I am open to borrowing inside the SMSF, absolutely.

My question is around how a high value SMSF owned property is treated once I hit preservation aged and want to start a pension. I don't want to be forced to sell in the Accumulation phase.

 

If the property is worth 2.2m and you transfer balance cap is $1.7m (assuming no indexation) you will both have a combined cap of $3.4m so the property can go into pension phase and enjoy tax free income.

If the property was worth 5.1m and the cap was 3.4m the fund would enjoy 2/3rds of its income tax free. If the property was 6.8m the fund would be 50% tax free.

It is more complex than that but it is a real rough start. Lots of different things to consider - legal, finance, actuarial, accounting, tax and insurance.

 

Thanks for this Ross. So the $6.8m example, the Pension fund would own a 50% interest in the property and the Accumulation fund would own a 50% interest in the property. And any income/gain on sale would be split between the funds? (generally speaking of course)

 

You calculate the taxable income of the fund and the fund will enjoy the % of the tax free income for the pensions amounts at commencement.

in your case 50%
Once the pensions starts the % is set.

A complex area with lots of opportunity for those prepared to take the time and walk through the issues.

 

I don't think you'll have to sell. There are also issues around segregation vs proportioning if the TSB is more $1.6m so you may have to follow % rules

 

Transfer balance caps are impacted by limited recourse borrowings. Its VERY complex an dthe link here explains it from the ATO perspective

Answered: Transfer balance cap impact by a limited recourse ... - ATO Community

Also consider this. If property produced GROSS yield of say 4% and a smsf is paying pensions of 4% - How will it sustain cashflow ?? Its a matter to carefully consider as part of the choice to buy geared property. It may mean pensions limits are imposed by cashflow. There can be strategies with non-pension family members etc too. VERY complex strategy and planning.

 

Ok so the TBC increases by the principal repayments under LRBA

 

The two are not directly related. Its like arguing a borrowing increases wealth. Loan repaymnets are a matter for the lender based on loan term, rate etc and are typically P&I and wont change if a pension is started or commuted. If additional repaymnets are made it doesnt change the TBC. If a pension is commuted and restarted the TBC impacts based on equity would be trivial eg 2-4% of the principal repaid . It may also be reduced if the market value of the property has fallen since pension rules require all assets be revalued at that point. . Very trivial stuff. Unlikley to affect anyone with indexed TBCs also.

A limited recourse borrowing facility is asset acquisition using a debt arrangement. A TBC is a notional super pension account limit for each member who is drawing a pension