How can Fiona get her $1.2 million business premises into an SMSF after divorce?

The couple are now finalising their divorce and under the property settlement, Fiona keeps their $1.4 million investment property and will move into it, unencumbered, as her new home. Her husband keeps the $2.5 million family home and takes on the couple's $1 million of debt. Fiona will have $750,000 in superannuation through a super split as part of the settlement.

Her son is in his last year at private school, with fees of $17,500, and her living costs currently run to about $110,000 a year. Her father, Leonard, is a 73-year-old retired accountant and has offered to roll $250,000 of his super into a new SMSF with Fiona and handle most of its administration. He likes the idea of earning steady income from the fixed interest allocation in the fund while helping his daughter keep her business.

Helping answer whether it stacks up is SMSF specialist Liam Shorte, Director of Sonas Wealth and a Fellow SMSF Specialist Adviser (FSSA).

The situation

• Fiona, 52, business owner, income of $235,000
• Business premises worth $1.2 million (cost base $750,000), owned 50/50 with her husband
• $750,000 in super coming to Fiona under the divorce property settlement
• Father Leonard, 78, retired accountant, willing to roll in $250,000 to be kept in fixed interest and draw a pension
• Fiona moving into the couple's $1.4 million investment property, with no debt
• Husband keeps the $2.5 million family home and the $1 million debt
• Husband wants his share of the business premises value
• Son in Year 12, fees of $17,500
• Living expenses of $110,000 a year

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Making the cost base work

Shorte starts with Fiona's own half of the building. Business real property is one of the few assets an SMSF can acquire from a related party, so she can transfer her share into the fund in specie, at market value. Her half ownership has a cost base of $375,000 and is worth $600,000, so Fiona has a $225,000 capital gain.

Because she has owned the property for more than 12 months, the 50 per cent CGT discount cuts her taxable gain to $112,500. She could then apply the 50 per cent active asset reduction, but Shorte would consider skipping it. 

Yes, you read that correctly: she may be better off not utilising a concession. If Fiona doesn't use it, Shorte explains, she can apply the small business retirement exemption to the full $112,500. Because she is under 55, that amount must go into super, and it counts against the CGT cap (about $1.935 million) rather than her normal contribution caps. Her taxable gain drops to nil.

"Skipping a concession sounds backwards, but here it lets more of the building into super without eating into her normal caps."

On top of that, Fiona can use the three-year non-concessional bring-forward of $390,000 and make a personal deductible contribution of up to $32,500. Together, those three amounts cover about $535,000 of her $600,000 half. The fund pays her the remaining $65,000 in cash and pays her husband $600,000 for his half.

On her own, that would leave the fund with about $85,000 to cover stamp duty and costs. That's not enough, and borrowing would normally be the likely fix.

Bringing Dad on board

Leonard's $250,000 changes the picture. The fund after the property settlement sits with about $335,000 in cash instead of $85,000, before duty and costs, and it doesn't need to borrow. After the purchase, the fund holds the $1.2 million building plus a meaningful amount in fixed interest and cash. The property drops to roughly 80 per cent of the fund, which is still concentrated but much easier to defend in the investment strategy.

"Bringing Dad in turns a fund that's all building and no cash into one that can absorb a vacancy, a repair bill or a bad year in the shop," Shorte says.

Leonard's money goes into pension phase. If it's already paying him a pension in a retail fund, he would usually stop (commute) that pension, roll the money over and start a new account-based pension in the SMSF. That process creates matching debit and credit entries against his transfer balance cap, which the funds must report to the ATO. 

At 72, his minimum drawdown is 5 per cent, or about $12,500 a year. Because the property had to be segregated in the fund for Fiona’s benefit only to avoid stamp duty, the Trustees then have to decide how Leonard's money is invested. As his account is segregated into the fixed interest and cash, the tax is simple, but he receives none of the rent as that has to be segregated to Fiona’s interest in the SMSF.

"Leonard could also lend the money to the fund instead of joining it," Shorte adds.

"A related-party loan on the ATO's safe harbour terms would pay him 9.35% interest, but that interest would be taxed in his hands. As a pension-phase member, his share of the fund's earnings is tax-free, and the fund has no debt to repay."

Get the order right in the settlement

A super splitting order combines a total of $750,000 into Fiona's name, and she can then roll it into the new SMSF, which has a corporate trustee with Fiona and Leonard as directors, and a trust deed and investment strategy written for two members at very different life stages.

Stamp duty depends on the state. Family law duty exemptions usually cover transfers between spouses, and a transfer to a super fund may not qualify. Fiona is relying on the ability to transfer a Business Real Property into the fund for a $750 reduced duty in NSW.

Three hats, one set of rules

Fiona's business will pay market rent to the fund under a written commercial lease, backed by an independent rental valuation. The rent is tax-deductible for the business and adds to the diversification over time. But it does have it's fair share of idiosyncrasies.

"Fiona’s business is the tenant, The SMSF Trustee Company is the landlord, and Dad's pension depends on the interest income from the cash and fixed interest allocation. The paperwork has to look like strangers did the deal (Commercial Arms- Length terms), because one day it might need to."

That may put Leonard and Fiona in an awkward spot. If the shop falls behind on rent, they are legally obliged as a trustee to enforce the lease on commercial terms against Fiona’s business. Discounted rent or informal rent holidays can trigger non-arm's length income rules, which tax the fund's income at the top rate. Having an accountant in the family helps, but both directors are equally responsible for the fund, no matter who does the paperwork.

Freeing up cash flow outside super

After tax, Fiona's income is roughly $155,000 to $160,000. After living costs and school fees, that leaves a surplus of about $55,000 this year, and more once school finishes.

"Concessional contributions, capped at an expected $32,500 for 2026–27, are still worthwhile even if Division 293 tax applies. Her income plus contributions will probably exceed the $250,000 threshold, but the combined rate is still below her 45 per cent marginal rate," Shorte explains.

"Using the bring-forward rule limits further non-concessional contributions for three years, so Fiona's surplus should go first into an emergency fund of her own and investments outside super."

Her new home needs attention, too. Because the investment property passes to her under the marriage breakdown rollover, she inherits the original cost base and purchase date. Because the property earned rent first, she will get only a partial main residence exemption if and when she eventually sells.

Tying up loose ends

Leonard's estate: If Leonard dies, his share has to be paid out as soon as practicable. If he has other children, they will rightly expect that money. Shorte's rule of thumb is to keep the fixed interest and cash at least equal to Leonard's balance, so the fund never has to sell the building to pay him out. Leonard also needs a binding death benefit nomination that treats the whole family fairly.

Capacity: Leonard needs an enduring power of attorney so that someone can step in as director if he loses capacity. Fiona needs the same.

Fiona's estate: In most states, divorce revokes gifts to a former spouse in a will, but it doesn't put a new will in place. Fiona needs a new will and her own new binding nomination. Once her son turns 18, he will usually be a non-dependant for tax purposes, so the taxable part of any super death benefit paid to him will be taxed.

Insurance: Fiona is now in a single-income household. Life, TPD and income protection cover, along with business expenses cover, should reflect that.

"A family fund works best when everyone agrees in writing what happens when things go wrong. That conversation is much easier before the money goes in."

The bottom line

Fiona can keep the premises her business relies on, and her super and her father's can do most of the heavy lifting. The $750,000 cost base makes tax planning a priority in dealing with the property, and the order of the CGT concessions decides how much of the building goes into super. 

Leonard's $250,000 solves the liquidity and diversification problem and gives him a tax-free pension backed by safer fixed interest returns. Agreeing in writing on the lease, the cash buffer and both estate plans before the fund buys the property is what makes it work for the whole family.

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Editor's note: In Livewire's Ask an Adviser series, we take the real-world financial questions facing Australian investors and ask a financial adviser how they would approach them.

Please note that names and identifying details have been changed for privacy, and some case studies may be representative of similar client situations rather than the circumstances of a single individual. This article contains general information only and does not consider your personal circumstances.