No Images? Click here 2 August 2019 BUYING PREMISES IN SUPER FUNDS - BEST AVOIDEDOur advice is to think carefully as a variety of tax and superannuation changes mean that it is no longer a great idea. Prior to the legislation of 2001 which gave effect to the recommendations of the Ralph Review of business taxation, buying premises inside superannuation fund was a popular notion. However, the legislation of 2001 bought into being the small business capital gains tax concessions applying to the sale of “active business assets”. Active business assets included premises. Many dentists and veterinary practice owners have since qualified for these tax concessions on sale of their practice goodwill and their practice premises and avoided paying capital gains tax on their sale. – Be aware that for wealthier clients there are limits. At the same time they have loaded up their superannuation funds with other investments and effectively gained an extra helping of tax advantage. Thanks to the small business capital gains tax concessions many dentists and veterinary practice owners have been able to rollover a significant portion of their sale proceeds to their superannuation fund post sale even though their fund has already exceeded their transfer balance caps because this is allowed under separate legislation. Hence, practitioners with high taxable incomes in particular should avoid owning practice premises in their superannuation funds. In 2006 Treasurer Peter Costello introduced limits on the amount of non-concessional (after tax) contributions that could be made to superannuation funds per year for the first time. In many cases this effectively stopped those intending to contribute their premises to their superannuation fund on the eve of retirement but paradoxically made planning to access the small business capital gains tax concessions on sale of premises relatively more advantageous. The subsequent lowering of the amount of non-concessional contributions that can be contributed per year which came into effect from 1 July 2017 and the introduction of pension account limits further solidified the move away from putting premises into superannuation funds. This is an area where reality hasn’t quite caught up with folklore. A Comparative Check Since we have a number of clients who for a variety of reasons such as freeing up capital for a home upgrade or clients who placed their premises into superannuation funds many years ago under more favourable conditions, and hence, have superannuation funds with premises we were able to do a comparison of the outcomes of superannuation funds owning premises compared to superannuation funds not owning premises. The software system in which the superannuation funds we advise are administered enable us to check backdated returns over a number of years. Since premises owned in superannuation funds are obliged to be revalued each three years we did a look back over three years and compared the time weighted returns over the period of 29 July 2016 to 29 July 2019 of the funds with premises in the funds without premises in their current asset mixes. The results were that there was a modest advantage to funds which do not hold premises! That’s only part of the issue. For those who contemplated limited recourse borrowing facilities inside a superannuation fund they are gearing their practice acquisition at a tax rate of 15%. Most of those have higher personal marginal tax rates up to 47% including Medicare levy. Gearing works best at high tax rates, so hence, it is better to gear premises at a higher personal tax rate outside of a superannuation fund and invest superannuation contributions in quality shares inside their superannuation fund. That’s fairly elementary but is not widely understood. There is a reason why major companies choose to rent business premises rather than own them but employ shareholders’ funds in enhancing company operations. Opportunity Cost The argument that the superannuation fund is getting rent on the premises needs to take into account the economic concept of opportunity cost. If the superannuation fund wasn’t invested in the premises it should, if property invested, be getting franked and unfranked dividends and stapled security distributions from alternative investments. Long term these investments often do as well if not better than practice premises, and as stated above many practice owners get a chance to make an extra contribution taken from sale of active business assets even though they have exceeded their pension account transfer balance caps in their fund. In most cases we now advise against the practice of relatively high income earners acquiring business premises via their superannuation funds. It is best to buy them in their own names or via a trust and gear them against your higher marginal tax rate. Unit Trust Beware Please note that there are tricky issues when buying premises into a unit trust. The unit trust must be capitalized externally to the value of the acquisition prior to purchase otherwise there is a serious risk of creating a future capital gains tax trap ie. the cost base of the units of the unit trust must be the same as the cost base of the building owned by the trust. Best wishes to all clients, GRAHAM MIDDLETON Disclaimer: The information contained herein is of a general nature and no specific action should be taken without individual advice. Speak with Synstrat staff as appropriate. Prepared by Synstrat Management Pty Ltd for clients of the Synstrat Group. Synstrat Management Pty Ltd is the holder of Australian Financial Services Licence No. 227169. 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