Q&A: Can you transfer an investment property into an SMSF?

Q: Can you transfer an investment property currently in a discretionary family trust into your SMSF? How would you do that? What are the pros and cons for such a move?

A: The best answer I can give you is be careful.

Remember that it is not an asset that you own. It’s owned by the trust. Even if you’re a beneficiary of the family trust, the trustee can give you income, it can assign you income, but you don’t own the assets. The trust owns the assets. So if you move an investment property from the Garth discretionary trust to the Garth SMSF, Garth hasn’t made that contribution. The trust has. And it’s arguably going to be a concessional contribution taxed at 15%. So if it’s a million dollar investment property, you just hit $150,000 tax liability, arguably.

What could happen is that the family trust could distribute an asset. It could pay out an asset, distribute it to the individual, and then the individual could make a contribution, an in specie contribution. But if it’s an investment residential property, you can’t do it because SMSFs aren’t allowed to acquire from a related party residential property [that does not meet the requirements to be business real property]. Even if it’s from the trust, it’s a related trust. It’s controlled by you and your family.

So it would have to be an investment commercial property [or otherwise meet the requirements to be business real property], of course, for that to work. But if it was, let’s just jump to the conclusion that it is an allowed asset, it’s a commercial property, you would have to do a distribution to the members, stamp duty, capital gains tax, because you’ve changed beneficial ownership.

And then the individual will have to transfer it up to the SMSF. Again, stamp duty, capital gains tax. So it’s expensive to do it. Before you do that, please get some specific tax advice around that. Pros and cons are huge for both. If it’s a residential property, don’t take it any further because you won’t be allowed to do it.