Can I sell my SMSF property to myself?
Yes, you can sell a property owned by your SMSF to yourself but there are many pitfalls to be considered before you make any plans. Let’s examine what they may be.
1.0 Am I a Related Party?
A related party of an SMSF can get very complex when it involves a Part 8 associate or a standard employer sponsor of the fund. However, the superannuation laws (SIS) define a member of an SMSF as being a related party of the fund which makes it very easy to identify myself as being a related party to my SMSF.
There are a lot of SIS rules around transactions with related parties which can prevent an SMSF from acquiring residential property from a member or leasing residential property such as a holiday house to a member.
However, selling an SMSF property to a member is not prohibited.
2.0 Why is it important to understand the implications of being a related party?
The SMSF property can only be sold to myself if it is at market value. As I am also the director of my SMSF corporate trustee I need independent verification of what that should be.
The fund’s SMSF auditor will look at the transaction under a microscope to ensure the evidence I have can be objectively verified.
Property transactions involve significant financial value; therefore, it is essential that valuations are robust and able to withstand scrutiny. The most reliable evidence is a formal valuation conducted by a qualified valuer, which may be performed as a desktop valuation where comparable properties in the same area are analysed without an on-site visit. For unique or complex properties, a more comprehensive assessment may be required, potentially increasing the cost compared to a straightforward desktop valuation.
3.0 What happens if I pay less than the market price?
The SIS rules under s 109 require transactions to be made at arm’s length which cannot be more favourable to the other party. If my SMSF sells me a holiday home which is valued at $450,000 for $420,000 in my favour it breaches the arm’s length rules. The sole purpose test is also breached in these circumstances as the sale of the property was not made for the sole purpose of providing retirement benefits to its members. Penalties can include rectification, education directions, monetary administrative penalties and civil and criminal penalties before other actions such as making a fund non-complying or removing the trustee.
4.0 What happens if I pay more than the market price?
Paying more to your SMSF than its market value can be considered non-arm’s length income (NALI) under the Income Tax Assessment Act 1997 (ITAA 1997) s 295-550 (1)(a) and s 116-30 (2C). If I purchase property from my SMSF with a market value of $500,000 for $550,000 the capital gain arising from that transaction is considered to be NALI. The fund’s taxable income is split between non-arm’s length component (NALC) and low tax component (LTC). Tax at 45% is applied to NALC and 15% to LTC.
The split is complicated, and advice should be sought from your SMSF specialist or tax agent.
Tip–capital gains in relation to exempt current pension income (ECPI) or segregated assets are not excluded from being NALI.
A simple example of calculating tax on NALC
John’s SMSF made $150,000 of ordinary income or the low tax component-assume no deductions – and made the following capital gains:
- $750,000 of arm’s length capital gain in relation to listed shares in 2023/24 year
- The SMSF sold a property with a cost base of $1,000,000 purchased in 2019/20 and received consideration from John of $3,000,000 in 2023/24 year. The market value of that property was $2,000,000- The capital gain was $2,000,000
- The capital gain would have been $1,000,000 if the transaction had been made at arm’s length using the market value
- The SMSF made a capital loss of $200,000 on managed funds in the 2023/24 year
- When calculating the net capital gain the market value substitution rules do not apply as the capital proceeds of $3,000,000 exceeded the market value of $2,000,000
NALC is calculated as follows:
| $ | |
| Arm’s length capital gain | 750,000 |
| Non-Arm’s length consideration | 3,000,000 |
| Less: Cost base | (1,000,000) |
| Capital gains total | 2,750,000 |
| Less: capital loss | (200,000) |
| Capital gain before discount | 2,550,000 |
| 1/3 discount applied | (850,000) |
| NALC | 1,700,000 |
Taxation of SMSF
| $ | |
| 45% of NALC | 765,000 |
| 15% on LTC | 22,500 |
| Total tax | 787,500 |
5.0 Other Considerations
If the property was subject to a limited recourse borrowing arrangement (LRBA) the loan is required to be repaid in full. Consider if the property can be transferred directly from the bare trust to myself. Engage the services of a legal advisor or conveyancer to transfer the property and discharge the mortgage.
Consider the effect of stamp duty which may be significantly higher when paying above the market value of the property.