Using your SMSF to plan now for a future downsize and a seachange


Living in Sydney and I have many clients who dream of retiring up or down the coast or inland to more suitable and often slower paced areas of Australia.  SMSF Property Investment

Many plan to downsize and sell their Sydney home in retirement and purchase a place on the coast. The issue that arises is that they often feel they have identified the area or actual property they want to live in during retirement and want to secure it now. Others are afraid that the selected area will be priced out of their budget in future years with so many baby boomers retiring over the coming decades.

So here is a solution we used for a few of our clients wanting to plan ahead and reduce that risk.

Jeff & Joan (of course it’s not their real names!) came to see me in 2006 and they had a lovely house in Hills District of Sydney but it was 2 storeys and with Jeff’s knees playing up they knew that they would need a single level property later. Also they planned to move to Lake Macquarie to be nearer their children and hopefully future grandchildren in Newcastle in retirement.

They could not borrow to buy a property in their own names as they had business and family commitments that reduced their borrowing capacity.

They had a decent sized SMSF and could afford to buy a property as part of their diversified strategy so we put this strategy to them.

They identified a property they would like in Lake Macquarie that ticked all the boxes and was currently tenanted. We revised the SMSF Investment strategy and put the trustees reasoning for investing in residential property and the projected returns and maintained a diversified investment portfolio with the other funds. We also looked at options and exit strategies as part of the analysis and the investment stood up as a sound one for their portfolio.

There SMSF purchased the property in early 2007 for $400,000 and it was a sound investment over the following 5 years providing a reasonable rental income and about 3% capital growth per year over that time which was decent for a single level property just one street back from the water.

In 2012 Jeff decided to retire and Joan agreed to reduce her hours. They put their house in Castle Hill on the market and gave the Lake Macquarie Tenants 4 months notice which they felt was fair. Their Sydney property sold a few months later for $850,000.

We got a professional valuation on the Lake Macquarie property and it was valued between $480,000-$500,000, so we agreed a market value of $490,000. The couple elected for a lump sum pension commutation from their SMSF paid “in-specie” as the Lake Macquarie property from their Self Managed Super fund and because it was in NSW they did have to pay Stamp Duty on the transfer. I believe on Victoria and WA there  are exemptions that apply on such transfers as long as it is the same Beneficial Owners after the transaction. We sought legal advice here in NSW and were unable to get this concession.

The couple then used $150,000 to renovate the property and kept $150,000 in Term Deposits in their own name. This left approximately $500,000 which they contributed as Non-Concessional contributions equally to the SMSF.

What were the benefits?

  1. Secured their choice of future retirement home earlier.  The relief of having this certainty should not be underestimated by advisers.
  2. They did not over extend their personal debt which would have left them very exposed during a downturn in their business from 2008-2010
  3. Rental income from 2007 to 2012 was taxed at only 15% rather than their higher marginal rates.
  4. Secured a $90,000 tax-free gain on the investment property as they were in pension phase.
  5. Turned their superannuation accounts from mostly a Taxable component to accounts with more than $250,000 each of non-concessional components and Tax Free to their adult children as part of their Estate Planning.
  6. Oh and they missed the GFC effect on this portion of their investments!

Downside:

  1. Yes we had to pay Stamp duty but that was highlighted from the start as a possibility
  2. The house prices did not run away from them in Lake Macquarie but at least they were not worried.

I must also mention a comment the clients made in their latest review and that was that in the 12 months since they moved they have not seen an alternative property, that would have suited their needs so well, come on the market so the advanced planning worked in their favour. Oh and they now have 2 grandchildren that they look after 2 days per week while enjoying the Lake Macquarie lifestyle they wanted.

Why not checkout my article “ What can my SMSF invest in?” as a good place to start.

As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button. Happy to take comments in the section below.

Bye for now.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Verante Financial Planning

SMSF Specialist Adviser Follow SMSFCoach on Twitter  Liam Shorte on Linkedin  SMSFCoach on Facebook  

Top 50 Logo 12%Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Owning your business property in a SMSF


Business Premises

Business Premises owned by SMSF

Interested in property and also running a business? Then one popular strategy used by many small business owners is to own their business premises in their self managed superannuation fund (SMSF).

Before we start let me emphasise, this is not a strategy to prop up a failing business.

There are a number of benefits in adopting this strategy:

  • As superannuation is generally more tax-effective than other investment entities you can have one of your major assets owned by a separate entity to yourself or your business thereby offering a greater degree of diversification of risk and ;
  • some asset protection as in the event of severe financial difficulty or even bankruptcy, creditors find it more difficult to get access to or create caveats over super fund investments as long as the premises were bought or transferred to the SMSF in good times, for clearly documented reasons and not deliberately to prevent creditors efforts to seek redress.
  • By having the premises owned by the fund rather than a third-party landlord you have more freedom to add fixtures and fittings, additional capacity and make changes to the layout without having to seek someone else’s approval and have surety of tenure that the costs can be recouped over time rather than worrying about ability to renew a lease at the landlords whim.
  • By accessing the capital held in a self managed super fund, your business can have more flexibility to make better use of its own capital to build or maintain the business.
  • It can often make it easier to sell a business later or pass it to family if they are not burdened with the capital requirements of funding a property purchase as part of the deal. This can also be a very stable income source in retirement as commercial / industrial property rents are often 7% or more.

When a SMSF owns real estate and you want to lease it back to your business which is seen as a related party of the fund the property must meet the definition of business real property (BRP).

Related parties of your fund include all its members, all their relatives and entities that those members and relatives control, or are deemed to control.

The definition of business real property is in subsection 66(5) of the SIS Act:

business real property , in relation to an entity, means:

a)    any freehold or leasehold interest of the entity in real property; or

b)    any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or

c)    if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph – any interest belonging to that class that is held by the entity;

where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.

Accordingly, two basic conditions must be satisfied before an SMSF, or any other entity related to or dealing with an SMSF, can be said to hold business real property :

  • the SMSF or the other entity must hold an eligible interest in real property; that is an interest identified in paragraph (a), (b) or (c) of the business real property definition; and
  • the underlying land must satisfy the business use test in the definition, which requires the real property to be ‘used wholly and exclusively in one or more businesses’ carried on by an entity.

For more detail and numerous examples of Business Real Property you should see Self Managed Superannuation Funds Ruling SMSFR 2009/1

If the property does not easily fit the definition of a BRP, then the asset will be considered an in-house asset and my advice is to not to push the limits of the ATO’s patience. Seek good legal and tax advice to ensure you understand all the implications and requirements of having or transferring a property into a a SMSF

SMSFs with in-house assets need to make sure that their fund’s total in-house assets do not exceed 5 per cent of the market value of all the fund’s assets. The 5% test is measured at acquisition and at the end of each financial year. If there is a breach, then corrective action must be taken.

Document the Lease

To keep the relationship on an arm’s length basis do not take short cuts, treat the lease like it was between 2 unrelated parties out and  formal lease between the SMSF and the tenant (your or any other business). The terms of the lease should be clear and easily identified by an auditor reviewing the actions and paper trail of the trustees.

As trustee’s you are dealing with this property on behalf of the SMSF so you must be prepared to enforce the terms of the lease with the tenants. Lease payments must be paid on time and I recommend a direct debit be set up to ensure the temptation to delay or miss payments is avoided. If the business fails to meet its rental payment schedule the default penalty clauses must be enforced as they would for a third-party lease.

TIPS

For an online source to a flexible comprehensive lease agreement that ticks all the boxes  you can visit DIY Legal Kits – Lease Agreements

Example

Peter the Physiotherapist is specialising in rehabilitation and water therapy and needs a property where he can install heavy equipment bolted to the floors and a hydrotherapy pool.

A suitable property is available locally for $750,000. The problem is that the business doesn’t have the capital to purchase the property or the capacity to borrow that amount.

Peter and his wife Margaret have their own SMSF which has $450,000 in the fund.

Peter & Margaret decide that SMSF should purchase the property using a Limited Recourse Borrowing Arrangement to borrow the other $400,000 plus costs leaving $100,000 liquid cash in the fund.

They must use a Holding trust arrangement to hold the property under this type of scenario.

A lease must be put in place between the SMSF and the Business

A commercially comparable rent needs to be agreed and paid from the business to the SMSF.

The SMSF is a very tax effective investment vehicle in the long-term as once the members enter pension phase, the CGT and tax on rental income can be minimised.

For more details on how borrowing to buy a property in an SMSF works please see the following 3 part series of articles from earlier this year:

Property through super in a SMSF – Part 1: Background

Property through super in a SMSF – Part 2: The Process

Property through super in a SMSF – Part 3: 20 most common mistakes

Before contemplating this type of transaction is contemplated, it’s essential to consider the member’s long term retirement needs and the super fund’s investment strategy. Consider what are the impacts on the super fund in terms of liquidity, diversification, returns on the investment and what if the business fails and the  property remains vacant unable to find a suitable tenant.

Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button. Happy to take comments in the section below.

To discuss your needs you can contact me at my Castle Hill or Windsor offices or I am happy to use Skype, phone or email as suits your needs.

Bye for now.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Make sure you do not leave SMSF money idle in savings accounts


Have you put aside some money in a savings account or high interest savings account that you have put aside and are not making transactions on? Well beware of you could find the funds get nabbed by the Government when after 3 years they qualify as a “Dormant Account“.  Missing Money

I was alerted to this by an Accountant friend who held some of their SMSF money in an online high interest savings account and had parked a fixed amount there for more than 3 years as it was earmarked for a specific future use. Low and behold the Government nabbed it as it qualified as a Dormant Account. It was not some minor amount either as it was over $10K!

So if you have such an account look after your interests and make a small transaction yearly to ensure it remains “Active”. As little as 1 cent being transferred in or out will keep the account as on Active status. As a Trustee it’s your duty to look after the money of the Self Managed Super Fund and to take reasonable care to protect it..

Unforeseen Outcomes

The action of the government raises an issue for fund administrators and auditors:

The client has not met a condition of release so the money is restricted and should not leave the fund so the question is has this money left the superannuation system or not?

Further, if the funds are to be claimed back with this good online provider is arranging asap, as the funds will be coming from outside of the SMSF fund will they be considered a form of contribution?

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF_Specialist_Logo_RGB Follow SMSFCoach on Twitter Liam Shorte on Linkedin Follow Liam on Google+ NextGen Wealth on Facebook

 

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

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