by Alicia Thomson
Recently, one of our readers contacted us with an interesting scenario, which is likely to become increasingly common. With many SMSF’s having been set up predominantly to purchase a single residential property, the dynamics of the fund change considerably once the members move into the pension phase.
As the SMSF will be required to pay out minimum pensions, having only the sole income deriving from a property (i.e. rent) can create liquidity issues. It is possible that at some point in the future the rental income may not be sufficient to cover the pension payments. The situation can be further exacerbated if there is a loan attached to the property, putting a severe strain on the SMSF liquidity.
A short-term solution may be to liquidate all other assets, but eventually a decision will need to be made by the trustees.
So what options does the SMSF have?
Please note that pension payments cannot be made in-specie, so a partial transfer of ownership of the property to meet minimum pension requirements is not possible.
If you have clients that could potentially end up in this situation, it may be worthwhile having a proactive meeting with them to discuss their options so they have plenty of time to implement any changes.
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