Introduction
For small business owners looking to secure their financial future, contributing business real property into a self-managed superannuation fund (SMSF) can be a strategic move. When structured correctly, this approach allows individuals to leverage the small business CGT 15-year exemption to eliminate capital gains tax (CGT) and contribute large amounts to super beyond standard caps. However, careful planning is required to ensure compliance with contribution limits and SMSF rules.
What is an In-Specie Contribution?
An in-specie contribution is a transfer of a physical asset, rather than cash, into a superannuation fund. In this case, it involves transferring business real property directly into an SMSF. This can be beneficial for business owners who want to move their commercial premises into their SMSF for long-term retirement benefits.
Benefits of This Strategy
- Tax-effective superannuation growth: The SMSF environment offers lower tax rates compared to holding the property personally or within a company/trust.
- CGT exemption: Qualifying for the 15-year exemption means the capital gain on the transfer can be completely eliminated.
- Maximised super contributions: The small business lifetime CGT cap ($1.705 million in 2023) allows contributions beyond the usual non-concessional cap ($110,000 or $330,000 under the bring-forward rule).
- Retirement planning: Holding business premises in an SMSF provides a stable, long-term asset that can generate rental income for retirement.
Who Can Use This Strategy?
- Own business real property and wish to transfer it into their SMSF.
- Qualify for the 15-year exemption under the small business CGT concessions.
- Want to make in-specie contributions that exceed standard caps but remain within the CGT cap.
Key Considerations & Risks
- SMSF Rules: An SMSF can only acquire business real property from a related party if it meets the definition of business real property (i.e. used wholly and exclusively in a business).
- Tax Advice is Essential: This is a complex tax strategy, and individuals should seek professional advice before proceeding.
- Stamp Duty & GST: These costs may apply and must be factored into the decision.
Case Study – A Practical Example
Scenario:
Barney (64) and Betty (63) own a commercial property valued at $3.1 million, purchased in 1990, which they used for their sporting goods business. As they prepare for retirement, they want to transfer the property into their SMSF rather than sell it.
How It Works:
- The property qualifies as business real property.
- Their capital gain of $2 million ($1 million each) qualifies for the 15-year exemption, meaning no CGT is payable.
- Each can contribute up to $1.705 million under the CGT cap, allowing them to move the property into their SMSF without exceeding contribution limits.
Conclusion
Using in-specie contributions to transfer business real property into an SMSF leverages tax exemptions and maximises super contributions, making it a powerful retirement strategy for eligible small business owners. However, professional tax and legal advice is essential to ensure compliance with SMSF regulations, contribution limits, and tax rules.