SMSF clients not considering how to dispose of property
Self-managed super fund (SMSF) trustees in a rush to purchase property assets are often not considering how those assets will need to be disposed of should they die, according to Topdocs national manager, training and advice, Michael Harkin.
This can result in the property having to be sold well below its true value or beneficiaries being liable for death benefits and capital gains liabilities - potentially as much as 20 per cent of the property's profit, according to Harkin.
"According to the feedback we're receiving from the industry, trustees purchasing real estate with borrowings are quick to calculate what their potential investment gains will be and how to manage loan repayments, but they give scant regard to what will happen to the asset should a fund member die," he said.
One of the best ways to deal with the problem is to retain the property within the SMSF where possible and build liquidity to cover benefit payments and lower the tax impact, Harkin said.
This can be done by operating a reserve in the SMSF, having adequate member life insurance in place, using cash held in the SMSF to reduce potential death benefits tax and encouraging adult children to join the fund, he said.
These strategies all help improve the liquidity in the fund and reduce the likely need for a fire sale of the property, he said.
"The property could then be sold later, ideally when the SMSF is paying a pension. At this time, capital gains tax would be reduced because income and capital gains from assets supporting a pension are no longer taxed," Harkin said.
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