Transfer of Farm Land to Self Managed Super Fund

Can Farm Land be transferred from the farm business?

Can be contributed to the fund as an in-specie contribution, limited by the relevant contributions caps

° Age under 65 – non-concessional cap of $150K per annum, can bring forward two years of entitlements to

make a non-concessional contribution of up to $450K over a 3 year period

° Age 65-74 – non concessional cap of $150K per annum (no bring forward arrangement)

° Age 75+ - super fund cannot accept personal contributions

Contributions arising from the small business CGT concessions within the member’s CGT cap are excluded from being non-

concessional contributions

° CGT cap currently $1,205,000

° Contributions covered by CGT cap are

CGT exempt amount (up to $500K) under the retirement exemption

Capital proceeds from the disposal of active assets that qualify for the 15 year asset exemption (even if

asset was pre-CGT)

Exemption for business real property is available from the asset acquisition from related party rules SISA sec 66

Must be at arm’s length (ie. Market value) SISA sec 109

Fund must have fewer than five members

Private dwelling on property must not exceed 2 hectares

Can SMSF engage in property development?

° Must be in accordance with the Investment Strategy of the fund

° Must satisfy the sole purpose test (ie. Carried out to provide retirement benefits) SISA sec 62

° ATO’s previous interpretation was that the sole purpose test has been contravened is where a fund is running a

business as part of its investment strategy. The general view was that if a superannuation fund is conducting a

business, it is not administered for the sole purpose of providing benefits for the members and beneficiaries of the

fund.

° However, the current ATO view is that the fact that activities undertaken by an SMSF trustee are considered

business activities for income tax purposes does not necessarily mean that the trustee contravenes the regulatory

provisions. However, trustees should be aware that those activities may breach the sole purpose test or other

regulatory provisions.

° If the trustee of an SMSF carries on a business, the ATO has advised that they would examine the activities closely

to ensure that the sole purpose test is not breached. Cases that would attract the ATO’s attention include those

where:

° the trustee employs a family member (we would look at, among other things, the stated rationale for employing

the family member and the level of salary or wages paid)

° the trustee carries on a business that relates to an activity that is commonly carried out as a hobby or pastime

° the business carried on by the fund has links to associated trading entities

° there are indications that super fund assets are available for the private use and benefit of the trustee or related

parties.

The trust deed must be reviewed to ensure that it allows the SMSF to carry on a business

Transfer of Farm Land to SMSF

Will property development be considered to be carrying on a business?

Question of fact including reference to several factors outlined in paragraph 13 of TR92/3

Private Ruling, Farmland – subdivision – income or capital gain (attached), found that subdivision and development

of farmland was considered to be carrying on a business primarily due to the large scale of the development and

the limited time that the farm was used for carrying on a primary production business before the sale and

subdivision activities took place.

Conversely, ATO ID 2002/700 (attached) found that the subdivision and sale of rural land was a mere realization

of a capital asset. This was influenced by the length of time that the property was used as a primary production

asset and the limited involvement that the owner had with the subdivision.

If deemed to be carrying on a business

Land that was originally acquired and used for farming purposes and later ventured into a business of subdivision,

development and sale, becomes trading stock of the taxpayer, for the purposes of Division 70 of the ITAA 1997,

when it is ventured into a business of development, subdivision and sale.

Taxation Determination TD 92/124A clarifies that land will be treated as trading stock for income tax purposes if

it is held for the purpose of resale and a business activity which involves dealing in land has commenced.

As the taxpayer is regarded as being in the business of subdivision, development and sale of land, the proceeds

from the sale of the subdivided land will be assessable under section 6-5 of the ITAA 1997. The taxpayer's land

will be treated as trading stock when the land is ventured into the business of development, subdivision and sale.

When an asset is ventured into the business of development, subdivision and sale is a matter of fact.

Per section 70-30 of ITAA 1997, for income tax purposes ,you would treat as if sold the land at cost or market

value (per election)

If not deemed to be carrying on a business

Property will maintain cost base and CGT profile

Sale of property will attract capital gains tax, subject to the mode of the SMSF at the time of the sale.

Can SMSF lease land to related farm business?

In general, self managed super funds cannot lend, invest in, or lease to a related party of the fund more than 5%

of the fund's total assets. Remember, if the related party is a member or a relative to a member loans are not

allowed at all. (ATO see above)

If the fund has fewer than 5 members, real property subject to a lease to a related party is not an in-house asset

so long as the property is “business real property” of the fund

Can the SMSF invest in a related Unit Trust which owns the property

and engages in property development?

A regulated superannuation fund is generally restricted from having more than 5% of the total market value

of its assets invested in in-house assets. An "in-house asset" is defined in s 71 of the SIS Act to include

(unless an exception applies):

° a loan to, or investment in, a "related party" of the fund;

° an investment in a "related trust" of the fund; and

° an asset of the fund subject to a lease or lease arrangement with a "related party" of the fund.

Effective from 28 June 2000, an exception to the in-house assets rule also applies under s 71(1)(j)(ii) of the

SIS Act and Div 13.3A of the SIS Regs. This in-house asset exception allows a small superannuation fund

with fewer than 5 members to jointly invest with members in a company or trust that owns real property

used for business purposes and also allows the business real property to be leased to members. While the

assets that may be owned by the company or trust are not restricted to business real property, certain condi-

tions apply to the company or trust so that the objectives of the investment rules that apply to regulated

superannuation funds are maintained. The key conditions under regs 13.22C and 13.22D are:

° the company or trust does not borrow;

° there is no charge over an asset of the entity;

° the entity does not invest in or lend money to individuals or other entities (other than normal depos-

its with financial institutions but shares or units in other companies or trusts are not permitted);

° the entity has not acquired an asset from a related party of the fund after 11 August 1999 other

than business real property;

° the entity does not acquire an asset, other than business real property, that has been owned by a

related party of the fund in the previous 3 years (not including any period of ownership prior to 11

August 1999);

° the entity does not directly or indirectly lease assets to related parties, other than business real prop-

erty;

° the entity does not conduct a business; and

° the entity conducts all transactions on an arm's length basis.

If one of the requirements is breached, the exception ceases to apply to existing investments by the fund in

the entity (the investment will then be an in-house asset) and is unavailable to future investments in that

entity.