Tag Archive: property

Land Tax – What is it?

Posted on July 22, 2019
by Maria Ackroyd

Land tax is a state tax and is one of several charges you may be required to pay when you buy property. This tax generally applies to those who own, or jointly own, a property in NSW that is not their primary place of residence, or that is not exempt and is above a certain land value threshold.

We go through all the details below.

Land Tax Exemptions

You are generally not required to pay land tax on:

  • your home (primary place of residence)
  • your farm (primary production land)
  • land you own with a total taxable value below the land tax threshold (listed below)

Land Tax Key Points

  • Land Tax is payable on property you own with a total taxable value above the land tax threshold and can apply to vacant land, commercial premises, investment properties or holiday homes
  • Land tax is assessed on 31 December each year on unimproved land you own
  • Land owners need to self-assess and register for Land Tax if required

Land Tax Thresholds

Land Tax is a state tax where thresholds change every year so you need to be aware of the rates and limits in each state where you hold property.

  • 2019 General land tax threshold is $692,000
  • 2019 Premium land threshold is $4,231,000
  • Individuals, most partnerships, companies and superannuation funds are generally entitled to the threshold
  • ‘Special Trusts’, including most discretionary trusts, are NOT entitled to the threshold and taxed on the total value of their property
  • If the combined value of your land does not exceed the threshold, no land tax is payable
  • Land tax is calculated on the total value of all your taxable land above the land tax threshold
  • Land Tax for general land is calculated at $100 plus 1.6% in excess of the land value threshold, where the premium land attracts a higher charge of 2%

If you are registered for Land Tax you will receive your Land Tax Assessment in January, outlining properties that are liable and whether they qualify as general or premium land. If you disagree with any land values used in your assessment, you can submit an objection within 60 days from the date of issue.

Find out more about NSW Land Tax here, and if you would like to discuss your property situation our team is happy to assist you. Get in touch with BLG Business Advisers online or by calling (02) 4229 2211.

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Main Residence Exemption for Capital Gains Tax

Posted on July 15, 2019
by Anthony Vardareff

For many of us, the decision to sell a property is an important one, especially if it’s our main residence. Accordingly, it is vital to be aware of the relevant Capital Gains Tax (CGT) implications and exemptions when selling your main residence.

What is considered a Main Residence?

A property is generally considered to be your main residence if:

  • you and your family reside in it
  • your personal belongings are in it
  • it’s the address your mail is delivered to
  • it’s your address on the electoral roll
  • services such as gas and power are connected

CGT Total Exemptions

As an Australian tax resident, if you sell a property that you live in and have elected to be your main residence, generally the entire sale of that property is exempt from capital gains tax. In addition to this, the dwelling is required to be on a property size of two hectares or less.

In a situation where you have moved out of the property, (for instance, to go and work in a different state or to move back in with family members) generally you can continue to treat the dwelling as your main residence for:

  • up to six years if it is used to produce income or
  • indefinitely if it is not used to produce income.

This is provided you are not treating any other dwelling as your main residence. If this criteria has been met, the full exemption applies and your capital gain or loss is disregarded – you don’t pay tax on any capital gain, but nor can you use any capital loss to reduce your assessable income.

Note: The main residence exemption is not available for vacant blocks of land.

It is also important to consider that the main residence exemption rules for those who are ‘non residents for tax purposes’ are proposed to change – Tammy Tieu has addressed this in her blog ‘Selling your Property as a Foreign Resident’. In a situation where the criteria for a full main residence exemption have not been met, a partial exemption may still be available.

CGT Partial Exemptions

It is common to see homeowners acquire a new property prior to disposing of their existing one. In this instance, both dwellings are treated as your main residence for up to six months if:

  • you lived in your old home and it was your main residence for a continuous period of at least three months in the 12 months before you disposed of it
  • you did not use it to produce assessable income (such as rent) in any part of that 12 months when it was not your main residence
  • the new dwelling becomes your main residence

If you sell your old home within six months of acquiring the new one, the main residence exemption applies and entire capital gain is exempt. If it takes longer than six months to dispose of your old home, the period not covered by the six month main residence classification (above) forms the assessable portion of your capital gain. Accordingly, this means the capital gain is only partially exempt.

A partial main residence exemption is also available where a dwelling stops being your main residence and is used to produce income for more than six years during a ‘single period of absence’. In this instance, the partial main residence exemption is calculated by determining the number of days the property was your main residence over the entire ownership period of the property. This is considered the exempt portion of the capital gain. The remaining portion of the capital gain is assessable, and can be further reduced via the indexation method or discount method for calculating taxable capital gains (subject to meeting certain criteria).

There are also special rules to consider when working out the cost base of your main residence at the time it is first used to produce income (commonly referred to as the ‘first income producing rule’).

All in all, capital gains tax laws are complex; therefore it is recommended that you seek advice before selling to ensure that you are making the right decision for you. We have an experienced team at BLG Business Advisers who are happy to assist you. Take this opportunity to get in touch with us online or by calling (02) 4229 2211.

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Tax Reforms Impacting Property Ownership

Posted on July 8, 2019
by Glen Bower

There has recently been significant media coverage on potential tax reforms impacting property ownership in Australia. Although the Australian Labor Party’s proposed changes to negative gearing and capital gains tax (CGT) are now off the political agenda for at least the next three years following the recent federal election, there have already been some significant changes to taxation laws pertaining to real property in recent years, both at a state and federal level. These changes impact on all types of real property (i.e. residential, commercial and industrial) and property owners (i.e. home owners, investors and developers).

Below is a summary of some of the key changes to property-related taxation laws along with further reforms recently announced by the federal government that are now expected to be finalised and implemented within the short-term:

NSW Surcharge Purchaser Duty & Surcharge Land Tax

Commencement Date:    21 June 2016

Change:

Foreign purchasers of residential land in NSW are liable for Surcharge Purchaser Duty of 8% on the dutiable value (the price you paid or market value, whichever is higher) of the property, in addition to any transfer duty (increased from 4% for agreements entered into on or after 1 July 2017). Further, foreign owners of residential land in NSW are liable for Surcharge Land Tax of 2% on the taxable value of all NSW residential land held as at 31 December each year, in addition to any general land tax (increased from 0.75% from the 2018 land tax year).

The definition of a ‘foreign person’ for the purpose of these surcharges can be complicated, in particular in respect to entities such as companies and trusts.

Similar surcharges have recently been introduced by most other Australian states.

Foreign Resident Capital Gains Withholding

Commencement Date:    1 July 2016

Change:

Foreign resident capital gains withholding (FRCGW) of 12.5% (non-final) applies to foreign resident vendors disposing of the below assets:

  • Taxable Australian real property with a market value of $750,000 or more (residential and commercial);
  • Indirect Australian real property interests (i.e. shares / units); or
  • Options or rights to acquire any of the above asset types.

From 1 July 2017, the withholding rate increased from 10% and the market value threshold decreased from $2 million.

Capital Allowances

 Commencement Date:    1 July 2017

Change:

Limit on deductions for the decline in value (depreciation) of certain second hand depreciating assets in residential investment properties (i.e. furniture, hot water systems, floor coverings, whitegoods etc) acquired after the 9 May 2017 or used for any private purposes prior to the 2018 financial year.

Travel Expenses

 Commencement Date:    1 July 2017

Change:

Travel expenses relating to residential investment properties are not deductible and cannot be included within the cost base of the property for CGT purposes (even when incurred to inspect or maintain rental properties or to collect rental income).

Purchaser GST Withholding

Commencement Date:    1 July 2018

Change:

Purchasers of new residential premises, and potential residential land, are required to withhold and remit the GST component of the purchase price directly to the Australian Taxation Office (ATO) on or before settlement. Transitional arrangements apply to contracts entered into prior to 1 July 2018 where any consideration, other than the deposit, is provided prior to 1 July 2020.

Main Residence Exemption for Foreign Residents

This change is not yet law (legislation was introduced into federal parliament in February 2018)

Commencement Date:    9 May 2017 (refer below for transitional arrangements)

Change:

Foreign residents no longer entitled to claim the main residence exemption when they dispose of residential property in Australia. For properties held prior to the 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from the 1 July 2019, foreign residents will no longer be entitled to the exemption.

For properties acquired after 9 May 2017, the exemption will no longer apply to disposals from that date.

Vacant Land

This change is not yet law (exposure draft legislation was released for consultation in October 2018)

Commencement Date:    1 July 2019

Change:

Tax deductions denied for expenses associated with holding vacant land (i.e. interest, rates), even if the intention is to construct a building / dwelling to derive assessable income. Non-deductible expenses are unable to be deducted in later years but can be included within the cost base of the property.

Other Changes / Developments

  • First Home Loan Deposit Scheme: Recently announced initiative from the Liberal Party to support eligible first home buyers to purchase a house with a deposit of at least 5%.
  • Additional CGT discount for ‘Affordable Housing’: Additional CGT discount of up to 10% for dwellings, used to provide affordable housing for at least 3 years.
  • First Home Super Saver Scheme: Saving mechanism via superannuation to support the acquisition of first homes.
  • Superannuation ‘Downsizer’ Contributions: Individuals aged 65 years or over can make a one-off contribution of up to $300k from the proceeds of selling a home, subject to satisfying applicable eligibility criteria.

As highlighted above, property ownership in Australia can be impacted by many complicated and evolving taxation laws. Further, the recent royal commission into the banking industry has had a noticeable impact on the ability to obtain finance. It is increasingly important to seek specialist advice from a qualified tax professional when considering property acquisitions or disposals.

Take this opportunity to get in touch with our experienced team at BLG Business Advisers to arrange an appointment online or by calling (02) 4229 2211.

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Owning Your Business Premises – Considerations & Buying Options

Posted on May 7, 2019

Have you established a new business and you are on the hunt for a business premises? Is your business growing too big for its current space?

The decision of whether to lease a business premises or buy your own can be a difficult one to make. It depends on your current situation and the long-term goals for your business.

Being the owner of your business premises can offer a number of benefits in the right circumstances. Below we take you through what to consider, the potential benefits and the options for buying.

Buying Considerations

  • Upfront costs – when purchasing a property, the upfront costs are significantly higher than the upfront costs of leasing a property. Ensuring you have the appropriate amount of capital available to invest in a property and run your business is key. You will need to budget for a deposit, appraisal costs and potentially renovation/fit-out expenses depending on the needs of your business.
  • Cashflow – owning your own business premises requires you to have the cashflow for the ongoing associated expenses, including (but not limited to) loan repayments, rates, strata, repairs & maintenance and property insurance.
  • The right size – If your business is in a growth phase then you need to consider the size of the premises you want to buy. In this case, the flexibility of a lease might be more appropriate for you.
  • Start-up business – If you are just starting up then you need to consider whether leasing a small space alongside like-minded businesses, or being able to obtain a more desirable location while you are establishing your image, are more appropriate options than committing to a property purchase and loan.
  • Commercial property loan – As a general guide, banks will only loan up to 70% of the market value of the commercial property that you are looking to purchase, which is known as a 70% loan-to-value ratio (LVR). Plan ahead to understand the deposit required for your intended purchase, plus on-costs such as stamp duty and legal fees.

Benefits of Owning Your Premises

  • Asset & equity – a business premises is an asset that generally appreciates over time. The equity growth in the property gives you an opportunity to seek additional finance for business growth and can lead to long-term capital gains.
  • Flexibility & control – owning your own premises gives you the flexibility to fit-out and make changes to the property at your own leisure – you can make the space exactly what you need.
  • Tax – the costs associated with owning your business premises are generally tax deductible. This includes the interest on your property loan, repairs and maintenance, rates, electricity and any other ownership costs incurred. You may also be able to claim depreciation on the building itself.
  • Security – owning your own premises secures your location. The right location can have a huge impact on the success of your business.

Buying Options

So you have decided that buying a premises is the right direction for you? Here are ways to move forward.

Generally you should try to hold passive assets such as a commercial property in a separate structure to your business, so that the asset is protected if the business faces financial difficulties for any reason.

Some of the options that you could consider when buying a business premises include:

  1. Personally – buying a premises in your name is the cheapest option as there are no fees to set up or maintain a structure. However, property should only be held personally if the individual has a low risk of being litigated. Sole traders and company directors generally do not fall into this category.
  2. Trust – holding property in a Trust offers asset protection. A trust also gives you the flexibility to distribute the rental income earned across your family group. The disadvantage of owning property in a trust is that trusts do not receive a Land Tax threshold. This means that more land tax could be payable compared to holding the property in another structure.
  3. Self-Managed Superannuation Fund (SMSF) – Your SMSF may be able to purchase your business premises, subject to the Deed and Investment Strategy of the SMSF.

A business property purchase in an SMSF may be funded by cash or via a Limited Recourse Borrowing Arrange (LRBA) i.e. a loan to the SMSF. Obtaining an LRBA is becoming increasingly difficult with many banks opting to not offer an LRBA product. LRBA’s generally require higher deposits and shorter loan terms than other loans.

Investing in a commercial property and weighing up your options can be a complex process, so it’s important to seek advice from a trusted business adviser. We have an experienced team available to assist you, whether during or after business hours, depending on your availability. Make your purchase work for you. Get in touch with BLG Business Advisers online or by calling (02) 4229 2211.

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What Does the State of the Property Market Mean to You?

Posted on December 3, 2018
by Angela Bernardi

Every newspaper article you read says Sydney and Melbourne housing prices have fallen. The amount they have fallen by varies on the day and the paper you read but most hang around 5 to 10%. With the cost of borrowings higher, most analysts expect further falls in property prices of our two big cities of 10% or more.

The tightened lending policy restrictions and recent rate rises from ANZ, Commonwealth Bank, Westpac and a number of small lenders have contributed to the fall.  In saying that, no one is expecting the RBA to lift the cash rate this year. The call on when the cash rates will be lifted continues to be extended. The estimated time frame depends on which bank you look at. Macquarie Bank are suggesting that falling house prices, and uncertainty about the outlook for housing activity and credit availability, give rise to the RBA to sit tight on the cash rate until early 2020.

What does this mean?

If you aren’t looking to sell and your property is a long term investment, it doesn’t mean too much, sit tight and ride the next wave.

For first time property buyers, saving a deposit may be easier if house prices drop, but the cost of funding will be higher.

For those looking to upgrade, as lending standards are becoming tighter, you might want to do your homework before applying for a loan on a more expensive property. However if you are jumping in and out of the market at the same point in time you will be no worse off. If you decide to sell and wait for the market to fall you are taking a bet on the market movement.

For investors, the cost of funding will be higher and the credit restrictions mean it will be harder to obtain a loan. Again if you are waiting for the property market to fall you are taking a risk. Will it decrease slightly? Probably. Will it remain stable? Possibly. If you find the right property at the right time and it’s a long term investment you will be right to ride the wave.

We can’t say with certainty what will happen, only time will tell, but we can advise you on the best direction for your situation.

Are you looking to enter the property market or would like to discuss your current properties? Take this opportunity to get in touch with BLG Business Advisers online or by calling (02) 4229 2211 today.

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Selling your Property as a Foreign Resident

Posted on November 19, 2018
by Tammy Tieu

Are you currently working overseas indefinitely? Or are you considering taking the leap and working overseas permanently? Depending on your situation, either of these scenarios could render you a foreign resident for tax purposes. Additionally if you are in this situation and thinking of selling your residential property in Australia, there are a few things you need to consider before you sell.

Selling your Main Residence and Capital Gains Tax (CGT) Exemptions

As an Australian tax resident, if you sell a property that you consider, and have elected, to be your main residence, generally the entire sale of that property is exempt from capital gains tax (CGT) so long as you have not used that property to produce assessable income.

Specifically, a property is considered your main residence and is generally exempt from CGT if:

  • you and your family reside in it
  • your personal belongings are in it
  • it’s the address your mail is delivered to
  • it’s your address on the electoral roll,
  • services such as gas and power are connected

Unfortunately, as of the 9th May 2017, as part of the crack down on foreign residents, the Federal Government restricted the utilisation of the main residence exemption for foreign residents. From this date, the main residence exemption is no longer available to someone who is a foreign resident at the time of the CGT event, subject to a transitional period.

The budget changes will apply to foreign residents as follows:

  • for property held prior to 7:30pm (AEST) on 9 May 2017, the exemption will only be able to be claimed for disposals that happen up until 30 June 2019 and only if they meet the requirements for the exemption. For disposals that happen from 1 July 2019 they will no longer be entitled to the exemption
  • for property acquired at or after 7:30pm (AEST) 9 May 2017, the exemption will no longer apply to property sales from that date.

Considering the above, if you are a foreign tax resident and not eligible to claim the main residence exemption, you will need to include the full capital gain in your income tax return to be assessed at foreign resident tax rates.

Foreign Resident Capital Gain Withholding (FRCGW)

In addition, foreign residents are also subject to foreign resident capital gain withholding (FRCGW) when selling property. Specifically, when a foreign resident sells their property, the purchaser is now required to withhold an amount from the purchase price and pay that amount to the Australian Taxation Office (ATO).

The changes the government have implemented will apply to contracts entered into on or after 1 July 2017 and are as follows:

  • Applies to real property sales where the contract price is $750,000 or more (previously $2 million)
  • The purchaser must withhold 12.5% from the purchase price and pay that amount to the ATO (previously the FRCGW rate was 10%)

So, if you are thinking about or are currently working overseas permanently and want to sell your property while you are overseas to free up some cash, it is recommended you seek advice before selling to ensure that you are making the right decision for you. We have an experienced team at BLG Business Advisers who are happy to assist you. Take this opportunity to get in touch with us online or by calling (02) 4229 2211.

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Commercial Leasing – Know what you are signing up for!

Posted on August 13, 2018
by Tim O’Brien
Finding a suitable location for operating your business can be a time-consuming and stressful exercise, particularly if you are a start-up.
We make the process easier for you by sharing the most important details – so you know what you are signing up for!

What types of commercial property is available for lease?

The leasing of commercial property includes office space, retail shops (including those within a shopping centre), industrial units, workshops, warehouses, and other non-residential property.

What is involved in leasing a commercial property?

Committing to a commercial lease is not only a potentially significant long term financial commitment but a legal agreement that contains detailed and onerous clauses binding all parties to its terms and conditions.

As leases often run for many years it is crucial the appropriate documentation is prepared and reviewed from the very beginning. It is prudent to obtain the appropriate legal advice before signing a lease so you understand your rights and obligations.

Before you sign the lease

Here are just a few points for you to consider before signing up to a lease;

  • Before you get too caught up in the excitement of securing new business premises make sure the landlord has the necessary council approvals to conduct your type of business. You don’t want to be caught paying for space you can’t utilise as intended!
  • Limitations on the permitted use of the premises may also be problematic if, as the tenant, you want to sell your business and assign the lease to another person, or vacate the premises before the lease expiration date. By negotiating a broader permitted use you may be able to protect your future business interests.
  • If you are a start-up business you may prefer a shorter initial term of stay of perhaps 12 months rather than locking yourself into a long term contract. This will provide a level of security in the knowledge that if your business is not successful you can exit without continuing financial commitment.
    An option to renew the lease for a further 2-3 years after the first 12 months gives the flexibility of securing the premises should business growth be strong.
    In any case you want to ensure the duration of the lease is long enough that you can recoup your investment
  • Ensure to take note of not only how much rent is payable but also how increases in rent are to be calculated
  • In addition to the rental cost there may be other operating expenses of the premises (outgoings) that are required to be paid by the tenant. These may include council and water rates, repairs and maintenance, security costs and land tax. It is important to be aware of what you are liable for as a tenant. Don’t be afraid to negotiate where possible!
  • As part of the lease you may be required to take out insurance to cover things like damage to the building and public liability. Care should be taken to avoid any indemnity clauses that require you to compensate the landlord in the event of any loss, damage or unlawful act as these may be in breach of your actual insurance policy.
  • As a tenant you may want or need to prepare the premises before occupation or make improvements through-out your tenancy. These ‘fit-out’ costs can be quite significant so it’s important to know what is permitted and who is going to foot the bill. Such costs can include installation of a shop front, wall and floor coverings, and general fixtures and fittings. Again don’t be afraid to negotiate to try have such items remain your property at the end of the lease where practical.
  • If you are leasing retail space in a shopping centre or precinct ideally the neighbouring businesses should compliment rather than compete with your own. It might be worth inquiring about an ‘exclusivity of trade’ clause in your lease prohibiting direct competition in the space controlled by the same landlord.
  • If you are attracted to particular premises because there is a significant tenant in the area (such as a supermarket) you may be able to negotiate a right to terminate clause or receive a rent reduction if that tenant leaves.
  • You could be in default or breach of your lease if you don’t pay your rent on time or do not undertake certain requirements like repairing or maintaining the premises. This could allow the landlord to pursue rent recovery action or lock-out measures. Be sure to review any clauses on this front so you are provided with written notice and given sufficient time to rectify any default or breach before any action is taken against you.

Do you have questions involving the leasing of commercial premises? Our team at BLG Business Advisers can assist you. Get in touch with us online or by calling (02) 4229 2211.

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Property Prices in Sydney and Wollongong

Posted on January 28, 2018
by Phil Grant

With a new year comes new opinions on the property market. Everybody has different ideas on what the property market is going to do in the upcoming year and I’m no different. I don’t have a crystal ball but am willing to put my new year prediction up for debate and review.

I will stick to the Sydney market and Wollongong market, being relevant to our immediate business area, and because I think the Sydney market has an impact on Wollongong, so here goes…

Property prices in Sydney and Wollongong will continue to grow in 2018 however not at the levels we have seen in the past few years.

Why property prices will continue to rise:

  • Infrastructure work in Sydney – if you have been to Sydney lately you will have experienced first hand the infrastructure work currently being undertaken. The government is spending billions of dollars on much needed infrastructure projects. This will mean plenty of employment opportunities for people in Sydney and for people from Wollongong who will commute to Sydney for this work;
  • People continue to move to Sydney for economic opportunities – people from outside the area continually move to Sydney for a variety of reasons, and that can include people from Wollongong, interstate or from overseas which continues to drive demand for property;
  • People moving from Sydney to Wollongong will continue – a short time ago one of my real estate clients told me 75% of sales they made in Wollongong were to people from Sydney. This will continue to happen (though maybe at lower levels) as people look for more in a house for their dollar, in particular young families;
  • Supply in Wollongong remaining relatively low – as the area of Wollongong is ‘locked’ between the ocean and the mountain, there is limited amount of land available, in particular close to the ocean. The basic concept of supply vs demand ie. strong demand and low supply, means that prices will continue to rise.

Why property prices won’t rise at previously high levels:

  • Wage increases are lower – employers at various levels whether it be large business or government are putting caps on wage increases, and in some cases are putting a wage freeze on employee wages. This leads to inflation rising faster than wages which creates uncertainty for people looking to move house or purchase property;
  • Banks tightening lending – banks are nervous about the property market and the ‘bubble’ bursting therefore they are less willing to lend as much as they have previously. This tightening of lending is also attributable to the increased capital holding requirements the regulators have imposed on banks.
  • Uncertainty over government – the unpopularity over the Federal Government (and State Government for that matter) continues amongst the population so a change in government is always likely. This creates uncertainty over existing legislation which in turn creates uncertainty in the property market.
  • Uncertainty over economy – uncertainty over the economy on a federal and, to a degree, an overseas level, creates caution among would-be property purchasers who would prefer to wait to see what happens in the property market before taking the plunge to buy. There is also talk that some believe the property boom is over and there might actually be a downturn, so confidence is lower in the property market.
  • Acquisition costs and holding costs remain high – acquisition costs, such as stamp duty, continue to be a barrier to people buying property. Further, holding costs such as rates and land tax continue to rise which again creates uncertainty in the market.
  • High levels of construction activity, especially high rise apartment blocks, will create more supply – people will have seen plenty of construction of multi-story and high-rise apartment blocks both in Wollongong and Sydney in the last couple of years. As these buildings are completed, more and more properties go on the market, increasing the supply and thus having an impact of the price of properties in those areas.

So there you have it, my prediction for property prices in 2018!

Other (maybe of more interest than the above) predictions for 2018 are:

  • 2018 World Cup Winners: Germany
  • NRL grand final winners – Roosters
  • AFL grand final winners – Richmond
  • A-League winners – Sydney FC

Let the arguments begin!!!

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Buying a Commercial Property in a SMSF

Posted on June 26, 2017
by Luke Bland
A common question I get asked is “can I buy a commercial property in my self-managed superannuation fund?”
This is usually followed by a number of other questions about whether the property purchase can be financed, and if the property can be leased to a related party. So below we answer this question, along with more common questions about commercial properties.
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SMSF Investment Rules – What is Business Real Property?

Posted on January 30, 2017
by Adam Birrer

While one of the main attractions for current and prospective Self Managed Superannuation Fund (SMSF) Trustees is the ability to manage their own investments and thus gain greater flexibility and control over their retirement funds, a number of rules apply to limit the nature and type of investment that an SMSF is permitted to make.  As a general principle, SMSFs must make their investments on a commercial, arms length basis.

One of these rules is Section 66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which imposes a general prohibition on SMSF Trustees acquiring assets from related parties of the SMSF – including fund members and associates.

A specific exception to this rule applies to assets which meet the definition of Business Real Property (noting there are other exceptions that I will not cover here today) – assets which qualify as Business Real Property (BRP) may be purchased from related parties.

Business Real Property Definition

BRP is property used ‘wholly and exclusively in the running of a business’ and the definition is explained further in ATO ruling SMSFR 2009/1. The definition generally precludes any part of the property being used for any other purpose (such as private dwelling) unless that other use is ‘minor, insignificant or trifling’.

It is important to be certain that the asset being acquired meets the definition, as failing to do so will mean it is considered an ‘in-house asset’ which will have detrimental consequences if the 5% in-house asset cap is exceeded.

Common Strategies Utilising BRP Exception

A common and popular strategy for small business owners involves using their SMSF to purchase their business premises (where the premises are BRP) at market value, and for the business to then lease the premises from the SMSF.  The SMSF’s acquisition may be funded with cash/contributions, or by entering into a Limited Recourse Borrowing Arrangement (LRBA) to help fund the purchase.

In such an arrangement it is important that the lease is formally documented on arms length terms, with a market rate of rent charged, and that the terms of the lease are complied with on an ongoing basis.

Assuming the acquisition fits in with the investment strategy of the fund, some of the potential benefits of such a structure may include –

  • Asset protection – the SMSF environment may help protect the business premises, which are often a significant asset, in the event the business or its owners experience financial difficulties.
  • Taxation – earnings on SMSF investments are generally subject to a maximum 15% tax rate (can be lower where fund members are in pension phase). SMSFs are also able to access the CGT discount where an asset is disposed of after being held for a minimum of 12 months. The business can claim a tax deduction for rent paid to the SMSF.
  • Capital – by having the SMSF own the property, the business may use its capital to invest in growth and operations instead.

The SIS Act and ATO rules around SMSF investments are complex and the above is only a very general introduction.  BLG Business Advisers provide high quality taxation and technical advice in relation to SMSF matters – get in touch with us online or call (02) 4229 2211 today to discuss your circumstances!

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