Q My wife’s SMSF and unit trust have existed since 1995, when a studio apartment was purchased. Seventy-five per cent of its cost was raised by a joint bank loan to us as private investors, while 25 per cent was paid by the SMSF via the trust, for which my wife and I are trustees. The deed for the trust states that each of the unit-holders has three ”income”-type units and three ”capital”-type units, with the initial sum being $12. The studio is now worth about $300,000. We have been asking our accountant to terminate the trust, but he says it’s impossible because of the ”type” of the deed etc. He says the studio belongs to the trust, despite the fact the certificate of title is in our names and no transfer has ever occurred. My two visits to the Tax Office’s offices did not help, as I was advised to close the ABN. Our accountant said the issue was more complex than an ABN closure. Is it possible for us to buy out the 25 per cent component of the studio from the SMSF? We do not want to sell the studio because it provides some income. My wife is 72, I am 78. I.W.
A SMSF trustees have long used Section 13.22C unit trusts to buy a property. The trust, which must not borrow, issues units and your SMSF had enough money to buy 25 per cent of them, while you borrowed to buy 75 per cent in your name, possibly with your home as security.
Usually, such trusts buy ”business real property” as the law then allows the SMSF, as it receives rent and further contributions, to buy more units off the individuals, who then use the money to gradually pay off the loan. Since this is a residential property, the SMSF cannot do this.
All assets in a trust (including a super fund, which is a form of trust) must be held in the name of the trustees, which is why the certificate of title of the property is in your names, even though it is actually owned by the unit trust.
Your approach should be to get the 25 per cent of units out of the SMSF and then wind up the trust. Now that you are over 65, all your super benefits are classified as ”non-preserved and unrestricted”, which means the SMSF can pay benefits, either as a pension or a lump sum.
One approach, therefore, is to convert your SMSF to a pension fund, which is untaxed and can sell assets without a capital gains tax liability. However, a pension fund cannot pay a pension ”in specie”, that is, in trust units, only in cash, and thus cannot transfer its trust units to you as part of a pension payment.
So one answer might be to start a pension, get a professional valuation, pay your SMSF $75,000, and undertake a standard transfer of securities. The fund then has the money to pay you an untaxed pension and you can wind it up, if you wish – but only after paying yourself a series of pension payments to avoid ATO queries.
A second option is to keep the SMSF in the accumulation phase, in which case it remains subject to tax but would be able to pay out the trust units as an ”in specie” lump-sum benefit, although it would then be taxed 10 per cent on its capital gain. If we assume the studio has risen $200,000 in value, the fund would pay 10 per cent of $50,000, about $5000, in CGT.
The problem comes when you want to wind up the unit trust and transfer the studio into your names as joint owners, assuming there is no difficulty with your trust deed.
In NSW and Queensland, you will be liable for stamp duty on the value of the 25 per cent owned by the trust, which I estimate to be about $1200 and $1050, respectively. In Victoria, you would be exempt as there is no change in beneficial ownership, provided you meet the legal requirements.
Your eventual decision will be based on balancing these one-off tax costs against the ongoing annual costs of running an SMSF and a unit trust.
If you have a question for George Cochrane, send it to Sunday Money, PO Box 3001, Tamarama, NSW, 2026. Help lines: Financial ombudsman, 1300 78 08 08; Centrelink pensions, 13 23 00.
The original release of this article first appeared on the website of Hangzhou Night Net.