SMSF commercial property owners and Division 296 misconceptions

Nadine Connell, co-founder of Smart Business Plans, told SMSF Adviser that the most common misconception by a wide margin is that clients believe their SMSF will be under the $3 million threshold and are therefore safe from any tax impact. The other two misconceptions are that the cost-base election will take care of it, and that SMSF borrowing was almost banned.

"The 'I'm under $3 million so I don't need to do anything' response is the most common," she said. "But the TSB calculation routinely misses industry super from earlier employment, or doesn't account for what a planned commercial property purchase does to their position at the first assessment date."

"In regard to the cost base election response, clients assume it's automatic when it's not. It's a decision the trustees have to actively make. What they're often missing is the valuation behind it, which has to reflect conditions at 30 June 2026, and commercial valuations are already running four to six weeks in some areas."

"Finally, with the belief that SMSF borrowing was almost banned, a meaningful number of clients paused plans through 2025 on that belief. The Treasurer ruled it out, but the decision hasn't been revisited."

Connell said confusion is becoming more apparent as the deadline for the new legislation draws closer.

"Those are the clients making decisions now, or deliberately not making them, based on an incomplete picture. From an adviser perspective, those are the clients least likely to call you between now and 30 June."

Planning for clients approaching $3 million

For clients approaching $3 million, Connell said the backwards calculation method can be used: start with the target property price, work out the likely market rent, calculate loan repayments, and identify the gap.

"That gap is what needs to be closed with voluntary contributions, planned against the caps and documented. If the gap is too big for the caps, the property target comes down or the structure gets rethought," she said.

"The discipline matters for Division 296 reasons too. The bigger the contributions needed to make a property work, the faster the fund's balance grows, and the sooner the $3 million threshold becomes their problem."

Clients already above the threshold

For clients already above the $3 million and $10 million thresholds, Connell said the strategies shift.

"I see spouse balance splitting and re-contribution come up in conversations with their accountant. From our side, the question is liquidity. Does the fund have the cash flow to meet whatever assessment comes, without having to sell a property to fund it. That has to be planned in, not figured out when the bill arrives," she said.

The valuation timing problem

Although the decision whether to use the cost-base reset election sits with the accountant and trustees, Connell said timing is critical.

"Whatever they decide, they need a 30 June 2026 valuation, and commercial valuation lead times can be up to six weeks in some areas. The mistake we see is clients waiting for the accountant to tell them what to do, when by then the valuer's booked out," she said.

Property still popular despite Div 296

Despite the threat of a large Division 296 bill, property owners are not moving away from real estate in their SMSF portfolios. Connell said if anything, it's the opposite.

"Clients are directing their next investment toward commercial property in an SMSF rather than residential outside super. I think this trend will accelerate if the CGT and negative gearing changes expected in the upcoming May federal budget come to fruition," she said.

"The structure still stacks up for balances comfortably under $3 million, and for business owners buying their own premises the fundamentals haven't changed."

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