PORTFOLIO POINT: Should you sell your properties to get money into your SMSF? There’s plenty to weigh up. Here are the main points (Part I)
A recent survey suggested that 2011 is going to be the year of property in SMSFs. The suggestion was that – with the GFC slowly fading into history – that SMSFs would finally start to take advantage of 2007’s rule changes to venture into geared investment property.
Of that I have no doubt. At some stage, it will take off. SMSF trustees will begin to pile into property.
Some SMSF trustees will already have property inside their super funds. But that will be dwarfed by those who have considerable property holdings outside of their super funds.
If only you could get all that property into super …
If it’s commercial property, well, you might be able to do it over time. You can inspecie transfer it in. You can make it a “loan” to the super fund and forgive that loan over time. And there are some other options.
But the ATO, as regulator, has a blanket ban on residential investment property. No transfers allowed. (Virtually) no exceptions.
Obviously, with super fund pensions being tax-free from age 60, having your property inside your super fund would be handy. But when you bought it 5, 10, 20 or 30 years ago, it wasn’t feasible to do this inside super. You couldn’t gear back then and you didn’t have enough cash in your fund to purchase it outright.
So, if you’ve been thinking about selling the non-super property portfolio to contribute the money into super where you could buy more property, here are the main points that you would need to consider.
But when it comes down to it, the trade off will be this … are some increased costs now going to be worth it to potentially give me tax-free capital gains and a tax-free income stream in retirement?
A property you bought 13 years ago with a cost base of $150,000 could now be sold, net of sale costs, for $400,000. (Obviously, property gains can be far greater, or far smaller than that, depending on purchase price and length of time held.)
Capital gains tax
Selling the property in your personal name is obviously going to incur capital gains tax.
The maximum anyone will pay on a capital gain is 23.25% (property owned for more than a year, with half of the gain taxed at the highest marginal tax rate). But for the purposes of today’s column, let’s say the average amount of CGT that is going to be paid is 19% of the gain.
Based on the 19% marginal tax rate above, you are going to lose approximately $47,500 in tax in selling the above property.
That’s a great unpalatable whack of money to have to pay the tax office.
However … what if you hold on to that property for another 10, 20 or 30 years and then need to sell it? The level of CGT to be paid would be substantially higher.
By selling the property, then transferring the money into super to buy a similar property, you might never have to pay CGT on a similar asset in the future.
If you’ve owned a property for 10 or 15 years or more, it’s more than likely that the property is going to be positively geared. “Unearned” income is nice, but it can cause problems in that you have to pay tax on income. And it would be nicer not to have to pay tax on the income, wouldn’t it?
If the example property has a loan associated with it of just $50,000, it is likely to have a strongly positive income stream. Even if you’re at the stage of your life when you want to be receiving passive income, do you want to be paying tax on it?
However, the same positively geared property inside a super fund that is in pension phase would not have to pay tax on the positive income.
Cost of purchase – buy and sell
The cost of “trading” property in Australia is, very roughly, between 8 and 10%. Stamp duty is ridiculous high (but that’s a hobby horse to ride another day).
In regards to our example property, the cost of buying and selling is considerable. On average, the cost of selling our $400,000 property will be around 2.5% to 3.5%, taking in real estate agent fees and advertising costs.
Let’s say you were looking to purchase a similar property – perhaps even the near identical property next door – but inside your SMSF. Very roughly, and depending on what state you’re in, the cost of buying a property will be between 4 and 6 per cent in stamp duties and other legal costs (conveyancing, bank fees, etc).
That means selling a $400,000 property and then buying a similar $400,000 property inside your super fund will cost you around $35,000 in transaction fees.
(That makes transaction costs for shares, even if you are still paying a full-service broker, look good.)
Can you transfer money into super?
Don’t forget that there are restrictions on putting money into super. If you are selling a property and putting that money into super, then it would be going in as non-concessional contributions (NCC).
For those under age 65, the NCC limit is $150,000 a year (but don’t forget the $450,000 pull forward. If you are over 65, then you need to satisfy the “work test” in order to make NCCs).
If there are two under-65 members of your fund, then you have the ability to put in, potentially, up to $1,200,000 into super in a relatively short period of time.
If you put in $150,000 each prior to June 30, you would then be able to put in up to $900,000 in NCCS after June 30, which could max out your ability to make NCC contributions to super for the three following years.
Australians have a love affair with property. There are tens of thousands of Australians with residential property and there will be a disproportionate number of them who have DIY super funds.
Next week, we’ll look at a few other issues, including if you have a pre-CGT asset, if you never had any intention of selling and geared property turning from negative to positively geared.
The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.
Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.