I am planning to set up an SMSF. I am transferring my industry fund to an SMSF after receiving a redundancy in 2019. The current balance in the Super account is $350,000.
It will be a joint SMSF with my partner, who has an old super fund with just a few hundred dollars in it. I am aged 64 (65 in November). My partner is aged 58.
We want to buy a small farm we have found, using the SMSF funds and a small amount of savings. We do not need to borrow. The farm is 100 acres. It runs a few head of cattle (and has done so for many years). It has a very small liveable shed on it, but we would need to build a new house. We plan to keep the cattle but also do a small amount of cropping and diversify into AirBnB and glamping accommodation.
Questions – these are related to the same issue
1. Would this be considered a “business real property” under SMSF laws?
2. Can we buy the property in our SMSF, live there, and lease it back from the SMSF to work in the business? [We would obviously set up a separate company for this and keep separate accounts.]
3. Would SMSF rules allow us to build a new house on the property? I ask because I did not think you could build a new house on any property under SMSF rules, but reading some info on your website, it looks like you can. (Council has already approved plans for a second dwelling and we would occupy less than two hectares.)
4. Currently the farm just runs cattle and the farmer grows a small crop of garlic annually, but we want to add cabins and tents to develop an accommodation business as well. The cabins would involve a council DA and building, so again, I am just asking if building and expansion is permissible under the SMSF legislation.
5. Do you have to show you are making a profit in your business? We would hope we did quite quickly, but it may take time to see results.
6. What happens if our circumstances should change, and we could no longer run the business? Would we have to sell it then?
7. If the business makes a profit, is it tax-free if I have started a pension?
You need to be very careful if you go down this path. So many traps that don’t apply if the farm is in your name. For example if you buy in a SMSF you will never be able to borrow against the property going forward, this includes to build the house. The only time you are allowed to borrow is when you originally purchase the farm and the loans are very expensive. So let’s first consider why you want to hold it in a SMSF. I have to admit that the tax concessions are so good inside super that a SMSF is usually the first structure I consider but in your case I am not sure there is much profit/tax to be saved.
A SMSF is very limited in its ability to run a business so the business would be held outside of the SMSF therefore the SMSF would only have the market rent for the farm, as income. Each year an auditor will be checking to make sure market rent is paid. I have seen situations where, in poor seasons, this having to pay market rent into the SMSF is a huge financial burden.
So why are you choosing to buy in a SMSF? If you are not working you are entitled to cash in your super tax free so it is not as if you need to use the SMSF to get your hands on the cash that is already in there. The SMSF might seem like a good place to protect the capital gain but there are small business concessions that could produce the same result though they do all have their own peculiarities. You would need a specialist consultation, a clear understanding of what your future plans are and a crystal ball to consider whether the CGT concessions can give you as good a capital gains tax outcome as holding in a SMSF. There is the consideration that holding in a SMSF provides asset protection. So even if you are happy to accept the conditions of holding it in a SMSF I would like you to seriously consider whether there is ever likely to be an upside.
Now to those conditions:
No borrowing to build the house SMSF 2012/1 https://www.ato.gov.au/law/view/document?Docid=SFR/SMSFR20121/NAT/ATO/00001&PiT=99991231235958 paragraph 78-80. The SMSF must be the one to pay for the building of the house so you need to make sure you can pass the contribution restrictions to get into the SMSF any extra money you need.
It is important that the farm is solely used in a business though a house is considered a minor part so ok, besides practically speaking the farmer needs to live somewhere. The majority of the farm needs to be being actively used in the business (the whole time it is in the SMSF) and the house and surrounds must not be more that 2 acres. SMSFR 2009/1 paragraph 223 https://www.ato.gov.au/law/view/document?LocID=%22SFR%2FSMSFR20091%2FNAT%2FATO%22&PiT=99991231235958 Also read examples 1 and 3 in the Appendix.
Please do not buy the farm in a SMSF without further consultation, the best I can do here is make you aware of the issues, you need to seek advice of someone who knows all your circumstances.