Selling commercial property tax free

Welcome to the March newsletter. In this newsletter we will discuss:

Selling commercial property tax-free

Death tax and planning for your family

Spouse contribution splitting Reducing tax in your SMSF

Selling commercial property tax free

You may have read about that you can sell a property tax free in your SMSF. Its also possible to sell the property tax free under any other entity and have the added benefit of having the extra flexibility of owing the property outside of your SMSF because having the property in your SMSF has its limitations.

The CGT small business legislation allows you to sell a property tax free if it’s used as part of your business. This means that it’s possible to have the property owned by another entity for asset protection. Owning the property outside of super means that you can borrow against it and also develop it to grow your wealth.

We can assist in structuring the property investment. Another hidden benefit of owing the property outside of super is that you can also rent out part of the property so that the tenant can assist you in repaying the loan and you can still sell it tax-free. You only have to use the property for your business for half your ownership period or 7.5 years if you own the property for 15 years or more.

One important consideration is that if your super balance is more than 1.6 million then the property cannot be sold entirely tax-free due to the tax laws. However, a property can be sold entirely tax free outside of super as long as:

Your business turnover is under 2 million

Or

Your net assets are under 6 million (the net asset test excludes your home, holiday home and super balance)

The property can also be transferred into your SMSF one day tax free and with minimal stamp duty in order to grow your retirement wealth.

These rules may change in the future as the Government is reviewing the legislation Please contact us so we can discuss your personal situation and assist you in structuring you accordingly.

Death tax and planning opportunities for your family

When you pass away and leave your money to your adult children and/or your grandchildren then they will have to pay 15% tax on the taxable balance of your super that they will receive. This can be very costly to your family and the strategies we can assist in reducing this tax are shown below:

1. Reduce your super balance over time so that your family will not have to pay any tax

2. Recontribution strategies over time in order to reduce the taxable balance of your SMSF and increase your tax-free balances to mitigate this issue

3. Ensure a family member has a Power of Attorney so that they can reduce your SMSF balance if required when you become incapacitated. 

Please note that if the taxable balance of your super is to be paid to individuals then they will have to pay the 2% medicare levy as well. If the taxable balance goes to a testamentary trust then there is no medicare levy to pay, this is a reason to setup a testamentary trust and it will also provides extra asset protection benefits. Another benefit of having a testamentary trust is that children under 18 can receive trust distributions and are taxed at adult tax rates rather than at 46.5%.

Spouse contribution splitting

One of the most important tax planning strategies is to ensure that you and your spouse have similar super balances. It is possible to even out super balances even if you and your spouse do not have a SMSF. The benefits of doing this are:

Pension planning opportunities- You can draw out tax free pension once you turn 60 but if a spouse has a low balance then the amount that can be withdrawn is limited so we can assist in increasing your spouse’s balance.

Minimising tax in super-Once you turn 60 and basically retire then your investment earnings inside super become tax free. This is especially advantageous if your SMSF makes large capital gains. By planning for this then if we can increase your spouse’s super balance then your SMSF can pay less tax especially if they plan to retire at 60. If you don’t retire then the investment earnings only become tax free at 65.

Transfer balance cap- This limits what your super fund can earn tax-free, if your super balance is over 1.6 million then the balance over 1.6 million is no longer tax-free. By ensuring that you and your spouse have a similar balance then you can reduce the possibility of being over the 1.6 million balance cap and this will assist your SMSF in paying less tax. Please note that from 1 July 2021 the cap becomes 1.7 million which means that it may be better to hold off on starting a pension until 1 July 2021.

Pension planning to reduce Capital Gains

Please contact us if you plan on selling an asset with a large capital gain inside your SMSF, this is especially relevant if you sell a property with a large capital gain. If you are in Pension phase then this will reduce any tax liability to pay but it is important to ensure that your entire SMSF has been in Pension phase since the beginning of the financial year to ensure there is no tax to pay on the asset sale. It is also important to ensure that your SMSF has also paid the minimum pension for the entire year. If it is not possible to be entirely in Pension phase for the year then we can provide to you an estimate of your tax liability for the year for cash flow planning.

Please contact us if you would like any further assistance