Self-managed superannuation funds (Funds) frequently hold real property as part of their investment portfolio. Clients should be aware that there may be significant unexpected expenses incurred by your beneficiaries when real property assets are transferred out of the Fund upon your death.
Case Study
Adam, aged 72 years, is the sole member of a Fund. The sole asset of the Fund is commercial property in Victoria with a market value of $5 million (the taxable component of which within the Fund is $3 million). Pursuant to a binding death benefit nomination, Adam directed his member balance to be paid to his two financially independent adult children following his death. Both Adam and his children wish for the property to be kept within the family and not be sold after Adam’s death.
Following Adam’s death, his children were devasted to learn that the costs of the property being transferred from the Fund to them would include:
- income tax of $510,000 (being 17% of the taxable component of $3 million) AND
- stamp duty on the property transfer of $305,000 (refer ** below)
How Could These Costs of $815,000 Have Been Avoided?
Had Adam arranged for the property to be transferred from the Fund to himself before his death, then:
- no income tax would be payable; and
- the transfer may well be exempt from stamp duty pursuant to section 41A of the Duties Act 2000 (Vic).
Section 41A Duty Exemption
In Victoria, under section 41A of the Duties Act 2000, no duty is chargeable where property of a Fund is transferred to a beneficiary of a Fund if:
- duty was paid on acquisition of the property by the Fund;
- the beneficiary was a beneficiary when the property first became part of the Fund; and
- the value of the property transferred does not exceed the value of the beneficiary’s interest in the Fund.
Where the property is transferred to a member of a Fund in respect of the member’s interest in the Fund, the transfer will be exempt from duty if the above conditions of section 41A are met and the Fund deed is drafted appropriately.
** The section 41A exemption may possibly apply in respect of the transfer to Adam’s children in the case study above, but this is far more problematic than when the transfer is to the member himself. The application of the exemption upon transfer to Adam’s children will depend upon a number of factors, including:
- the terms of the Fund’s deed; and
- whether Adam’s children are deemed to be beneficiaries of the Fund and whether they were beneficiaries at the relevant time.
Conclusion
If your Fund owns real property, you should seek appropriate professional advice on the following issues:
- whether you should consider transferring the property out of the Fund before your death or leave it within your Fund – this will include calculations of likely income tax (including the potential impact of the proposed Division 296 tax), capital gains tax and stamp duty payable under both options; and
- whether your Fund deed should be amended to ensure that the section 41A exemption will apply if the property is transferred during your lifetime and/or to improve the prospect of a transfer to named beneficiaries after your death being eligible for the section 41A exemption.
THIS CASE STUDY IS A GOOD EXAMPLE OF WHY YOU SHOULD ENSURE THAT YOUR SUPERANNUATION TRUST DEED IS REGULARLY REVIEWED AND UPDATED TO KEEP UP WITH LEGISLATIVE AND REGULATORY CHANGES.
Please do not hesitate to contact us for further information or specific advice: cjr@riordanriordan.com.au | 03 9864 8444