#SMSF Alert : ATO guidance on related party SMSF loans (LRBAs) – Update


ATO guideline LRBAs

The ATO have issued long-awaited guidelines providing SMSF trustees with suggested ‘Safe Harbour’ loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm’s length with that related party.

By implementing these “Safe Harbour” loan terms, SMSF trustees are assured by the ATO Commissioner that

..for income tax purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purely because of the terms of the borrowing arrangement.

It is absolutely essential that all non-bank SMSF borrowing arrangements (LRBAs)  be reviewed prior now extended to 1 Jan 2017

 Where has this come from?

The ATO first released and then re-issued ATO Interpretative Decisions in 2015 (ATO ID 2015/27 and ATO ID 2015/28), dealing with Non-Arm’s Length Income(NALI) derived from listed shares and real property purchased by an SMSF under an LRBA involving a related party lender – where the terms of the loan were not deemed to be on commercial terms.

These ATOIDs state that the use of a non-arm’s length LRBA gives rise to NALI in the SMSF. Broadly, the rationale for this view is that the income derived from an investment that was purchased using a related party LRBA, where the terms of the loan are more favorable to the SMSF, is more than the income the fund would have derived if it had otherwise being dealing on an arm’s length basis.

NALI is taxed at the top marginal tax rate, currently 47% – regardless of whether the income is derived while the fund is in accumulation phase where tax is normally 15%  or in pension phase when the income would usually be tax exempt.

After that bombshell, the ATO announced that it would not take proactive compliance action from a NALI perspective against an SMSF trustee where an existing non-commercial related party LRBA was already in place, as long as such an LRBA was brought onto commercial terms or wound up by 30 June 2016.

The Nitty Gritty Details of the Safe Harbour Steps

The ATO has issued Practical Compliance Guideline PCG 2016/5. As a result, provided an SMSF trustee follows these guidelines in good faith, they can be assured that (for income tax compliance purposes) their arrangement will be taken to be consistent with an arm’s length dealing.

The ‘Safe Harbour’ provisions are for any non-bank LRBA entered into before 30 June 2016, and also those that will be entered into after 30 June 2016.

Broadly, this PCG outlines two ‘Safe Harbours’. These Safe Harbours provide the terms on which SMSF trustees may structure their LRBAs. An LRBA structured in accordance with the relevant Safe Harbour will be deemed to be consistent with an arm’s length dealing and the NALI provisions will not apply due merely to of the terms of the borrowing arrangement.

The terms of the borrowing under the LRBA must be established and maintained throughout the duration of the LRBA in accordance with the guidelines provided.

Safe Harbour 1 Safe Harbour 2
Asset Type Investment in Real Property Investment in a collection of Listed Shares or Units
Interest Rate RBA Indicator Lending Rates for banks providing standard variable housing loans for investors. Use the May rate immediately preceding the tax year.
(2015-16 year = 5.75%)(2016-17 year = 5.65%)(2017-18 year = 5.8%)
Same as Real Property + a margin of 2%
Fixed / Variable Interest rate may be fixed or variable. Interest rate may be fixed or variable.
Term of Loan Variable interest rate loans:

Original loan – 15 year maximum loan term (both residential and commercial).

 

Re-financing – maximum loan term is 15 years less the duration(s) of any previous loan(s) in respect of the asset (for both residential and commercial).

 

Fixed interest rate loan:

Rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

 

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.

Variable interest rate loans:

Original loan – 7 year maximum loan term.

 

Re-financing – maximum loan term is 7 years less the duration(s) of any previous loan(s) in respect of the collection of assets.

 

Fixed interest rate loan:

Rate may be fixed up to for a maximum period of 3 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years.

 

For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.

Loan-Value –Ratio

LVR

Maximum 70% LVR for both commercial & residential property.
Total LVR of 70% if more than one loan.
Maximum 50% LVR.

Total LVR of 50% if more than one loan.

Security A registered mortgage over the property. A registered charge/mortgage or similar security (that provides security for loans for such assets).
Personal Guarantee Not required Not required
Nature & frequency of repayments Each repayment is to be both principal and interest.

Repayments to be made monthly.

Each repayment is to be both principal and interest.

Repayments to be made monthly.

Loan Agreement A written and executed loan agreement is required. A written and executed loan agreement is required.
Information sourced from Practical Compliance Guidelines PCG 2016/5.

Potential Trap to be aware of: Importantly, as part of this announcement, the ATO also indicated that the amount of principal and interest payments actually made with respect to a borrowing under an LRBA for the year ended 30 June 2016 must be in accordance with terms that are consistent with an arm’s length dealing.Information sourced from Practical Compliance Guidelines PCG 2016/5.

Where to find the Indicator Rate in future year:

The PGS referred to: Reserve Bank of Australia Indicator Lending Rates for banks providing standard variable housing loans for investors. Applicable rates:
– For the 2015-16 year, the rate is 5.75%
– For the 2016-17 year the rate is 5.65%

  • For the 2017-18 and 2018-19 years the rate is 5.8%

For 2019-20 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year)

It is the applicable rate under Column N of the above spreadsheet (click on link). The rate seems to have started in August 2015 but I assume we must use the May rate from now on.

In referencing the Indicator Rate you can use:
Ref: Title: Lending rates; Housing loans; Banks; Variable; Standard; Investor
Lending rates; Housing loans; Banks; Variable; Standard; Investor
Frequency: Monthly
Units: Per cent per annum
Source RBA
Publication Date 04-Apr-2016
Series ID: FILRHLBVSI

Example – Real Property taken from Practical Compliance Guideline PCG 2016/5 Example 1

A complying SMSF borrowed money under an LRBA, using the funds to acquire commercial property valued at $500,000 on 1 July 2011.

  1. The borrower is the SMSF trustee.
  2. The lender is an SMSF member’s father (a related party).
  3. A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.

The loan has the following features:

  1. the total amount borrowed is $500,000
  2. the SMSF met all the costs associated with purchasing the property from existing fund assets.
  3. the loan is interest free
  4. the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so
  5. the term of the loan is 25 years
  6. the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and
  7. the loan agreement is in writing.

Consistent with ATO ID 2015/27 and ATO ID 2015/28, the LRBA is not considered to have been established or maintained on arm’s length terms. The income earned from the property, which is rented to an unrelated party, will give rise to NALI.

At 1 July 2015, the property was valued at $643,000, and the SMSF has not repaid any of the principal since the loan commenced.

To avoid having to report NALI for the 2015-16 year (and prior years) the Fund has a number of options.

Option 1 – Alter the terms of the loan to meet guidelines

The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 (for real property).

To bring the terms of the loan into line with this Safe Harbour, the trustees of the SMSF must ensure that:

  1. The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used).

Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of principal as soon as practical before 30 June 2016.

  1. The loan term cannot exceed 11 years from 1 July 2015.

The SMSF must recognise that the loan commenced 4 years earlier. An additional 11 years would not exceed the maximum 15 year term.

  1. The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed 5 years. The loan must convert to a variable interest rate loan at the end of the nominated period.

The interest rate of 5.75% applies for 2015-16 and 5.65% p.a. applies from 1 July 2016 to 30 June 2017. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take the opening balance of $500,000, the remaining term of 11 years, and the timing of the $49,900 capital repayment, into account.

  1. After 1 July 2016, the new LRBA must continue under terms complying with the ATO’s guidelines relating to real property at all times.

For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.

Option 2 – Refinance through a commercial lender

The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Option 3 – Payout the LRBA

The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 June 2016.

While the original loan remains in place during the 2015-16 income year, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and the relevant amounts of principal and interest are paid to the original lender.

The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.

Each option will have many advantages and disadvantages – so it is important to understand what the practical implications of each option are, and how physically you will approach each option. Seek specialised advice on this matter as it is not a strategy suitable for DIY implementation

Important Note to 13.22C or Unrelated Unit Trust Investors

The guidelines provided in this PCG are not applicable to an SMSF LRBA involving an investment in an unlisted company or unit trust (e.g. where a related party LRBA has been entered into to acquire a collection of units in an unrelated private trust or a 13.22C compliant trust). As such, trustees who have entered into such an arrangement will have no option but to benchmark their particular loan arrangement based on commercial loan terms, or to bring the LRBA to an end.

Please visit out SMSF Property page to get details on all available strategies for SMSF property investors.

UPDATE (Relief for those caught by Budget measures)

In a letter to an industry association, the Treasurer, Scott Morrison, has outlined transitional arrangements to allow additional non-concessional contributions above the proposed lifetime limit in certain limited circumstances. Contributions made in the following circumstances may be permitted without causing a breach of the lifetime cap:

  • where the trustees of a self managed superannuation fund (SMSF) have entered into a contract to purchase an asset prior to 3 May 2016 that completes after this date and non-concessional contributions were planned to be made to complete the contract of sale. Non-concessional contributions will be permitted only to allow the contract to complete provided they are within the relevant non-concessional cap that was applicable prior to Budget night, and
  • where additional contributions are made in order to comply with the Australian Taxation Office’s (ATO) Practical Compliance Guideline (PCG) 2016/5 related to limited recourse borrowing arrangements, provided they are made prior to 31 January 2017.

Additional non-concessional contributions made under these proposed transitional arrangements will count towards the lifetime cap, but will not result in an excess.

I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. 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 via Skype. Click here for appointment options.

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.

Benefits Of Transferring A Business Property In To Your SMSF – Superannuation Strategy


Years after the 2008 financial crisis and some people have been slow to regain confidence in the share markets and low cash and term deposit interest rates leave them cold. A growing number of people have considered shifting their superannuation to the more self- directed option of a self-managed superannuation fund (SMSF). Business Real Property

Small to Medium Business owners have always been at the forefront of adopting SMSFs and they have been particularly interested in this rapidly growing area for greater control of their superannuation savings and the flexibility of investments allowed in a SMSF structure. However the ability to either transfer their business premises into their SMSF via a contribution or sale, depending on their cash flow circumstances, has been attractive to many business owners.

Current legislation governing SMSFs, the SIS Act, allows a SMSF to acquire only three types of assets from the members or a related party. These assets are business real property, widely held managed funds and listed securities (shares).

Business real property is best defined as “any freehold or leasehold interest of the entity in real property where the real property is used wholly and exclusively in one or more businesses (whether carried on by the business or not).” This definition does not allow much leeway so you should seek professional advice to ensure that your property satisfies the requirements of the “wholly and exclusively” business use test and meets the definition of business real property prior to implementing this strategy

Benefits:

  1. Release equity to build the business – you can access superannuation funds to help fund business growth prior to retirement by way of a cash purchase by the SMSF.
  2. Tax minimisation – the property moves in to the concessionally taxed superannuation environment; 15% tax rate while members are in accumulation phase or exempt from tax when members are in pension phase.,
  3. Asset Protection – to protect the value of the business real property in the event of bankruptcy, litigation or changes to your industry destroying your market.
  4. Build funds for retirement – you have a bricks and mortar investment to boost your retirement funds earning market rent at concessional rates with the ability to avoid any CGT if sold later.
  5. If you are seeking new premises then buying in your super fund allows you the security of tenure that comes with being your own landlord.
  6. Helps in preparing a business for transfer or sale. If the new owner or family members cannot afford to buy the business and the property, you can sell the business premises and lease them the property.

Risks:

  1. You should always ensure the strategy meets the Sole Purpose test of providing for your retirement. It should stack up as a stand-alone investment in  its own right.
  2. If your business should fail and you can no longer lease the premises the you are hit with a double whammy with no income in your personal name and possibly an asset that is hard to lease to a new third-party
  3. While it may be a sound investment now, things may change and your company may outgrow the premises leaving you again with a commercial property that may be hard to sell to extract equity for your next move.
  4. Commercial, retail and industrial property is often a good income orientated investment with income well above that available from residential property but rarely sees the same degree of capital growth. You need to be aware of the trade-off and a diversified portfolio should be considered.
  5. Once you are in pension phase you will need to fund pensions so you need to ensure liquidity in the fund. This is fine while rented or you can make contributions but remember if not working after age 65 you cannot make further contributions to help with liquidity.

Transfers of business real property purchased from related parties must be transferred at current market value as if the transaction was to occur on an arm’s length basis. This requirement allows for very little manipulation of the market value and heavy penalties could apply if any transfer value didn’t stand up to audit and ATO scrutiny.

So you have three or more options when it comes to the strategy. Your SMSF can buy the property utilising cash currently within the SMSF as a normal purchase. If your fund does not have enough cash then you can look at using a Limited Recourse Borrowing Arrangement to borrow the shortfall. More details on that strategy can be found here.

Alternatively, you can structure the deal as an in-specie transfer (a contribution of an asset, in this case property, instead of cash). You are still subject to member contribution caps but we have moved properties worth up to $500,000 in for couples and $1,000,000 where the SMSF had 4 members using a combination of concessional contributions limits and the 3-year bring forward rule on non-concessional limits.

You may also be able to use the Small Business CGT concessions in conjunction with a short term LRBA to move a property of up to $1.445,000 in to the fund with careful planning.

The whole deal has been sweetened by the fact that a number of the State Revenue Offices including NSW OSR have allowed concessional stamp duty stamp ($500) on in-specie property transfers whereby no cash has changed hands. This stamp duty saving can make transferring the business premises into a SMSF much more attractive. It should be noted that stamp duty is a state tax with no uniformity between states. Please seek legal advice always when dealing with stamp duty on property transfers and tax advice when moving assets between entities.

Remember the core philosophy behind Superannuation is that they must adhere to the Sole Purpose Test. While a strategy may help your business currently, its primary goal should be to provide for your retirement so the investment should always stand up as a viable investment regardless of your internal lease arrangements.
Check out the most common mistakes people make when dealing with property, borrowing and a SMSF here:

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

SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.

Stamp Duty on Transfers of Property to an SMSF as at 01 Jan 2015

Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button. 

Are you looking for an advisor 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.

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.

Landlords Insurance – a must for your SMSF Property


I trained in General Insurance in the UK after my Graduation and much of that time was in the complaints, claims and product design departments. So I know how things go wrong when people take out unsuitable policies or under-insure their properties. 24 years later and  nothing has changed, so I have been recommending people use a General Insurance Broker if they are inexperienced,  lack confidence or want help and advice about insuring their business, liability or property assets.

That brings me to the title of this blog and I asked my preferred Insurance Broker here in the Hills District of Sydney, who operates countrywide, to explain the insurance requirements for an SMSF buying property

Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums.

If you have purchased property in your SMSF it is important for you to take the correct steps to insure your investment.

If you borrow against the assets in your SMSF the mortgagor will require you to have adequate cover for the asset and for the Liability obligations of the SMSF. If the assets of the fund cover the purchase in full however you are still required as Trustee of the fund to correctly insure the funds interests. The fund is not permitted to “self-insure” any assets or property. The ATO has strict guidelines regarding the duties and obligations of SMSF trustees so it is important to get your insurance program right.

The question arises: who takes out the property insurance and landlord’s protection insurance, the SMSF Trustee or the Holding Trustee? I refer to this content from Towsends Law on the matter

SMSF Trustee
The SMSF Trustee is entitled to take out insurances for the property as the Fund is liable under the loan and is also absolutely entitled to the benefit of the Property. 

As the Fund is ultimately the party that is detrimentally affected should anything happen to the Property, the SMSF Trustee should ensure that the Fund is able to claim for any damage that might occur.

Holding Trustee
The Holding Trustee is the legal owner of the land and is entitled to insure the property against damage, and likewise for landlord insurance.  Some lenders may also insist that the registered proprietor of the property holds an insurance policy for the property.

But it is important to keep in mind the nature of the arrangement between the SMSF Trustee and Holding Trustee should insurance be taken out by the Holding Trustee.  

As the Holding Trustee is a bare trustee it must make sure that it does not take any action unless it is directed to do so by the Fund Trustee, who is absolutely entitled to the Property.  This direction by the Fund Trustee should be done formally and in writing and confirmed by the Holding Trustee executing minutes to confirm this action.
 
Final Decision
The final answer is that both the Holding Trustee and the SMSF Trustee have an insurable interest in the land and that both are eligible to be the owner of the property insurance and landlord’s protection insurance over the property.  

In both instances all amounts payable in respect of the insurance should be paid by the Fund Trustee. Obviously the Holding Trustee must hold any policy proceeds on trust for the SMSF.

From a purely administrative position it would be easier for the SMSF to hold the insurances to avoid the constant but mandatory interplay between the SMSF and its bare trustee the Holding Trustee.  But the insurance company may have its own requirements as might the Fund’s Lender.

So our preference is to have all insurances for the SMSF in the name of the fund. You cannot have personal items or assets listed on a policy in your funds name, and likewise you cannot have your fund’s assets listed on a personal policy for some of your personal assets.

As with all insurances, you really do get what you pay for. The more optional extras you include in your policy the more protection you will have. Let’s go through a fairly standard Landlords Insurance policy and give some simple definitions of each section. Like your personal household insurance policy your landlord’s policy will have cover for both your Building and for your Contents. These are fairly standard; however it is important to read the definitions to determine which items come under which section of cover. You may be in for a surprise if you haven’t studied the wording properly.

Where a Landlords Insurance policy differs in comparison to your standard household insurance is in the additional covers offered.

  • Loss of Rent – This is to cover your lost income if you have a claim under your building and contents cover, and the property becomes uninhabitable as a result.
  • Strata Title Mortgagee’s Protection – This covers the mortgagee named in the Schedule as if they were “You” on the same terms as Section1 against physical loss or physical damage caused by any of the Defined Events (it does not include the Additional Benefits).
  • Deliberate Damage and/or Theft by Tenants – Cover for physical damage arising from deliberate, intentional or malicious acts and acts of theft to the Building or Contents by the Tenant.
  • Tenant Default – This cover if for loss of rent, payable by the Tenant, which arises from damage covered under the Deliberate Damage/Theft by Tenant section above or from breach of a written Lease agreement.

Chances are you’ve worked hard at acquiring your assets and building your Super for your retirement. Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums. Instead you will be hoping your insurance policy will respond to your claim.

If you’re at all unsure on what you need, talk to an Insurance Broker. If you don’t know an insurance broker, then speak to the people you trust with your Investments and your accounts because they should be able to put you in touch with an Insurance broker they trust.

For more information please don’t hesitate to contact me.

The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services from Insurance brokers, we just want the best professional advice for our clients.

For more detail on Investing in Property through an SMSF check out our previous articles

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

SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.

Can I borrow to buy a house and land package off the plan in my SMSF?

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™

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.

Buying a Property for your SMSF – Why Use a Buyers Agent


I openly admit that I am not an expert in choosing properties (indeed my own personal history with property investing is dismal to say the least!). I work on the structure and strategy with my clients and recommend they do their own in-depth property research or lately I have been recommending people use a Buyer’s Agent if they are inexperienced or lack confidence or want help and advice but need to know that person is working 100% on their behalf.

That brings me to the title of this blog and I asked a local Buyer’s Agent here in the Hills District of Sydney who operates countrywide to explain the role and benefits of a Buyer’s Agent.  So here is our first Guest Post from Louis Fourie of My Choice Properties – Property Investment Advice | Buyers Advocacy | Real Estate Consulting

“Empowering clients to make the right choices!” –

My Choice Properties

Louis Fourie Property Advisor & Buyers Agent

Searching or looking for a home to live in or investing in property, could at best be an intimidating experience. You wouldn’t invest half a million dollars in a business without a strategy or without a business plan, then why would you invest that, or even more, into a property without a plan or strategy? With a process of consultation we determine what clients really need to reach their own personal property goals. Through step by step professional guidance we determine a strategy suitable to our clients needs and finally implement that strategy, finding the home or investment property that credibly suits the designed and agreed personal property strategy.

Why use us as your Property Investment Advisor and Buyers Agent:

  1. We work exclusively for the Property Investor/Home Buyer. We have no alliances with any real estate agencies, selling agents or property developers and we fight for our buyers! There’s a clear distinction between our services and those of selling agents. We don’t sell property, have no ‘stock lists’ and as exclusive buyer’s agent, we only act for the buyer not the seller.
  2. We give our clients choice and by doing independent research and providing professional guidance, we empower our clients to make the right choice and purchase their ideal property at the right price. You don’t have to rich and famous to use our services. We will save you money, time and stress, whatever your budget.

  3. We save our clients heartache. No more the need to try to figure out if my friends ‘advice’ at the BBQ to invest in that ‘hot’ area is credible or not! Believe it or not, but 80% of mistakes that’s made in investing in real estate are made at the buying stage.

  4. We are a fee for service organization and any potential commissions, discounts or fees that we could get back for our clients from developers or vendors; we diligently negotiate back for our clients as far as its possible, often resulting in our clients getting much better return in dollars than what they paid us for our professional services in the first place! This saving could often run into the tens of thousands of dollars or much more. We absolutely do not accept any sales commission or incentives from vendors, builders or developers. We are truly independent.

  5. We will not refer our clients to service providers that don’t have their best interest at heart. We have created a safe environment for property buyers with like-minded people all focused not on: ‘What’s in it for me’, but on: ‘What’s in the best interest of my client’.

  6. We carry appropriate and adequate Professional Indemnity insurance for the services we provide and are fully licensed real estate agents.

Why not build your property portfolio on good foundations? Make your next property acquisition an informed one.

For more information please contact:

Louis Fourie 

Managing Director -My Choice Properties Pty Limited

Tel 1300 24 21 12 | Mobile 0488 907 421

louis@mychoiceproperties.com.au

www.mychoiceproperties.com.au

 

The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services like Louis’, we just want the best professional advice for our clients.

For more detail on Investing in Property through an SMSF check out our previous articles

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

SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.

Can I borrow to buy a house and land package off the plan in my SMSF?

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™

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.

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.

Can My SMSF Buy And Lease Plant And Equipment To My Business


ID-100210503

Plant or Equipment in an SMSF?

I get this question on Plant and Equipment financing regularly from business clients with an SMSF. The technical answer is yes subject to complying with the regulatory provisions of SIS Act. In reality for most businesses the answer is most likely NO as there are so many ways you can breach one or more of the rules governing this area. Let’s look at some of those rules.

Firstly it is a requirement that a SMSF and any assets it considers purchasing must meet the Sole Purpose Test.

Sole purpose test

• Section 62: trustee must ensure fund is maintained solely for core purposes, such as benefits to members upon retirement and ancillary purposes

Other relevant issues include:

Formulating Investment Strategy

Section 52: trustee must formulate and give effect to investment strategy that has regard to whole of circumstances including:

• risk involved in making, holding and realising, and likely return from investments having regard to objectives and expected cash flow requirements

Lending to members, relatives and financial assistance:

Section 65: A trustee must not lend fund money or provide financial assistance to:
• member of fund OR relative of a member

• ‘Financial assistance’ has no technical meaning and their frame of reference is language of ordinary commerce … one must examine commercial realities of transaction and decide whether it can properly be described as giving of financial assistance (Charterhouse Investment Trust Ltd v Tempest Diesels Ltd [1986] BCLC 1, 10)

In-house asset rules:

An In-house asset is:
• loan to ‘related party’
• investment in ‘related party’
• investment in a ‘related trust’
• asset subject to lease between trustee and a related party (this is the one that matters in your case)

However a SMSF can have up to 5% of fund’s assets in invested “in-house” assets without breaching the rule so if the equipment’s value were less than 5% of the funds total value then you would not be in breach of this rule….but remember the other rules hold equal importance. Also it is important that this rule is met on an ongoing basis so if stock markets drop or cash is taken out of the fund for pensions you need to revisit the value of the in-house asset.

Arm’s length requirements:

Section 109(1): A trustee must not invest unless:

• the trustee and the other party are dealing with each other at arm’s length OR
the terms and conditions are no more favourable to the other party than if they were at arm’s length
• Section 109(1A): If trustee invests and is required to deal with investment with another party not at arm’s length, must deal as if were at arm’s length

• The term ‘at arm’s length’ is not defined in the SIS Act so open to interpretation

• implies dealing that is carried out on commercial terms again subject to interpretation

• useful test to apply is whether prudent person, acting with due regard to own commercial interests, would have made the investment (APRA v Derstepanian (2005) 60 ATR 518, 524)

So example of how this works:

Let’s say you have $600,000 in your SMSF and you want to purchase an excavator for $25,000 to lease to your own business.

  1. The SMSF Trustees do their research and minuted how they calculate a lease rate that takes into account market return on their investments, allows for the depreciation of the asset and insists on the insurance of the vehicle with its interest noted on the policy to protect its investment. They are satisfied that this provides a decent return for the fund not correlated to the other assets of the funds invested in shares and term deposits. Sole Purpose, S62 and S52 satisfied.
  2. They amend the SMSF Investment Strategy to include this type of asset with the target allocation to “Other Assets” or specifically have an allocation to “Plant & Equipment”

  3. They ascertain that the business could be approved to obtain finance for the excavator from a third-party on similar terms. Section 65 met as clear finance available elsewhere and that this is not the reason why the arrangement is being entered into.

  4. As the value of the excavator ($25k) is less than 5% of the fund ($30K) it does not breach the In house asset rule. This needs to be monitored annually.

  5. They arrange for a written commercial lease agreement comparable with the standard lease available in the market to be entered into by all parties. S109(1) satisfied

So in summary, yes it can be done but in reality there are so many ways you can trip up that it is really not worth the hassle and raising the eye of the ATO or challenging your Auditor’s patience. Your first step is to engage your Accountant and a SMSF Specialist before considering these types of strategies. I would be interested to receive comments from people who have implemented these strategies.

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.

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.

Image courtesy of Supertrooper at FreeDigitalPhotos.net

ASIC Releases CHECKLIST for those giving SMSF Advice


The latest ASIC REPORT 337: SMSFs: Improving the quality of advice given to investors includes a useful checklist for those dealing with SMSF advice to the normal person in the street or in technical terms “retail clients”. It also includes some useful examples. Here is the Checklist and I would suggest all those  including Licensed Accountants, Financial Planners, Lawyers, Mortgage Brokers, Property Developers and Share Brokers be prepared to ensure your clients have considered all 32 issues raised or you leave yourself open for scrutiny and litigation if you have been involved in the recommendation of the structure.

Have you considered a SMSF and sought advice? Did your “adviser” mention these issues?

Appendix: Tips for advice providers

Table 6: Some tips for advice providers giving advice to retail clients on SMSFs

Issue: Role and obligations of SMSF trustees

What you should do or consider

C1      The ATO regulates SMSFs and provides a number of useful publications on its website about the obligations and duties of trustees in managing an SMSF. As good practice, you should:

(a)  direct investors to the relevant pages on the ATO website; or

(b)  provide investors with a copy of key ATO publications with their SOA to ensure investors understand their obligations.

C2      You should explain to investors that, by law, each trustee has duties and obligations to:

(a)    act honestly in all matters concerning the SMSF;

(b)    exercise skill, care and diligence in managing the SMSF;

(c)     act in the best interests of all SMSF members;

(d)    take appropriate action to protect SMSF assets and manage them separately from the trustee’s own affairs;

(e)    comply with the SMSF trust deed and review and update it as required;

(f)     be responsible for and control the SMSF, even where the trustees outsource the required expertise or one trustee is more actively involved in the day-to-day running of the SMSF;

(g)    have a documented investment strategy that considers all the circumstances of the fund, and review and update the investment strategy as the members’ financial situation, needs and objectives require;

(h)    consider insurance for fund members as part of the fund’s investment strategy;

(i)      understand which investments are restricted and that SMSF investments must be made solely to pay retirement benefits to members or the members’ dependants if a member dies;

(j)     accept and document contributions in accordance with the superannuation laws;

(k)    ensure the SMSF’s money is invested appropriately (even if the trustee outsources the investment to an advice provider);

(l)      keep proper and accurate tax and superannuation records (e.g. minutes of all investment decisions) and allow members to have access to such information and records;

(m)   comply with the superannuation and tax laws (and the Corporations Act for corporate trustees);

(n)    value the fund’s assets at market value for the purposes of preparing financial accounts and statements;

(o)    have the SMSF audited annually by an independently approved auditor;

(p)    comply with the reporting obligations to the ATO (e.g. report contributions from members, lodge annual returns, report on any changes to trustees, directors or members of the SMSF; lodge a business activity statement if the SMSF is registered for Goods and Services Tax (GST));

(q)   pay the supervisory levy and the SMSF’s income tax liability when due;

(r)    refrain from entering into contracts or behaving in a way that hinders trustees from performing or exercising functions or powers;

(s)   refrain from entering into transactions that circumvent restrictions on the payment of benefits; and

(t)    ensure that the money in the SMSF is only accessed by members when the trust deed and law allow it.

C3      You should explain to investors that, within 21 days of becoming an SMSF trustee, they will need to complete the ATO’s trustee declaration.

C4      You should walk investors through the ATO’s trustee declaration, explain each obligation and duty, and allow investors to ask any questions about their obligations.

C5      If you do not adequately understand the role and obligations of SMSF trustees, it is inappropriate for you to advise investors about SMSFs.

ISSUE: Suitability of an SMSF structure

What you should do or consider

 C6      You should discuss the investor’s fund balance size and whether it is likely to be cost-effective for the investor to set up an SMSF. Cost is just one factor to  consider and does not mean by itself that an SMSF will be appropriate or   inappropriate for the investor.

C7      You should discuss the likely costs associated with running an SMSF, including the costs of establishment, ongoing investment management, compliance and advice,

and explain these costs to the investor before making a recommendation to  establish an SMSF.

C8      Before recommending an SMSF, you should consider the investor’s ability and

willingness to manage the fund and meet their trustee obligations on an ongoing basis.

C9      Be aware of ‘red flag’ indicators that may suggest an SMSF will not be suitable for an investor, including, but not limited to:

(a) a low fund balance where the members have a limited ability to make future contributions;

(b) the investor wants a simple, low-touch superannuation solution;

(c) the investor wants to delegate decision-making to someone else;

(d) the investor does not have a lot of time to devote to managing their financial affairs;

(e) the investor has little investment decision-making experience;

(f) the investor, or suggested trustee, is an undischarged bankrupt or has been convicted of an offence involving dishonesty (as such, persons are prohibited from acting as a trustee); and

(g) the investor has a low level of financial literacy.

C10     You should explain to investors approaching the pension phase that there may be a point at which the SMSF may cease to be cost-effective because fixed costs will remain constant or increase while the balance of the fund diminishes.

C11     Where appropriate, you should discuss SMSF succession planning issues with investors (this will be more relevant for older investors). Some key questions to discuss include:

(a) For investors who are individual trustees, what will happen if one of the     trustees dies?

(b) If one trustee (the controlling trustee) is more actively involved in the day-to-day management of the SMSF, what will the less active trustee do if the  controlling trustee is unable to manage the SMSF?

ISSUE: Risks of an SMSF structure

What you should do or consider

 C12     You should warn investors looking to set up an SMSF about the lack of Government compensation available to SMSFs. This information will help investors properly weigh up whether an SMSF structure is right for them.

C13     You should warn investors that SMSF trustees and members do not have access to the Superannuation Complaints Tribunal (SCT) to resolve complaints.

C14     You should explain the advantages and disadvantages of establishing an SMSF with a corporate trustee versus individual trustees, and provide investors with relevant ATO publications via hard copy or web-links.

C15     If the investor’s proposed membership structure of an SMSF is unusual, you may need to spend more time discussing the duties and obligations of trustees, the risks associated with the membership structure, and the importance of having a    well documented, specific investment strategy and a trust deed that contains  dispute resolution clauses.

C16     You should reiterate the role and responsibilities of trustees, and explain that, even if one trustee is less actively involved, they are equally liable for the SMSF’s compliance with the superannuation and tax laws.

C17     When you recommend an SMSF to an investor, you will need to discuss their insurance needs. This will often involve discussing:

(a) their existing insurance coverage;

(b) the level of insurance coverage they will need in future;

(c) the cost and options for maintaining, increasing or decreasing (as appropriate)

their existing insurance coverage through an SMSF;

(d) whether the investor has any health issues that may affect their ability to get

insurance coverage;

(e) the advantages and disadvantages of retaining a portion of their APRA- regulated superannuation for insurance purposes (if considered appropriate); and

(f) the impact of the insurance recommendation on the investor’s SMSF balance.

C18     If you identify an investor needs advice on insurance, you must consider and   advise the investor on their insurance needs before recommending an SMSF be established. If you do not have the necessary expertise to provide insurance   advice, you should notify the investor and refer the investor to an advice provider who has the expertise to provide the advice.

Issue Investment strategy

What you should do or consider

C19     You should explain to investors the sole purpose test and the requirement for investments to be made and maintained on an arm’s length basis.

C20     When you are advising investors on their SMSF investment strategy, you should explain the benefits of asset diversification and investing across a number of   asset classes (e.g. shares, real property and fixed interest products) in a long-term investment strategy.

C21     You should explain to investors that some investments are restricted and that it is the trustee’s obligation to ensure that the SMSF does not make restricted Investments: see tip C2(i).

C22     You should explain to trustees that they are required to regularly review the    fund’s documented investment strategy to ensure that it suits the needs of fund members.

C23     If you are recommending that an SMSF be established to invest in a single asset, you should ensure that the SOA adequately documents the basis for the advice in

light of the investor’s financial situation, needs and objectives. In particular, you should set out why the investment is appropriate, rather than a diversified investment portfolio, and whether the investment will generate a sufficient return      to fund the investor’s retirement needs and, if not, what the exit strategy is and any costs or risks associated with this exit strategy.

C24     You should explain to investors that the SMSF investment strategy is likely to change as members approach the retirement phase and their needs and circumstances change.

C25     If an investor has a preference towards a real property investment, you should consider whether the real property investment is appropriate.

C26     If you are recommending a real property investment, you should discuss with the investor:

(a) the needs and circumstances of the fund members (e.g. their age and retirement needs);

(b) if the recommendation involves an investment loan, how long it will take for the investor to repay the loan;

(c) the investor’s ability to repay the loan if an unexpected event occurs (e.g. the investor becomes unemployed for a period);

(d) how the investor’s retirement will be funded by the real property investment (i.e. through the sale of property or through rental income);

(e) how likely the property can be sold quickly (i.e. whether it is in a high-demand area); and

(f) what the investor will do if the property is not rented for a period.

Note: If the investment property is not the SMSF’s sole asset, you may need to spend less time discussing the above issues.

Issue: Switching from an APRA-regulated superannuation fund

What you should do or consider

C27     When recommending an SMSF, you will need to explain the charges and significant consequences the investor will, or may, incur as a result of changing (fully or partially) from an APRA-regulated fund to an SMSF.

C28     When discussing the consequences of a switch, you will need to use language and concepts that the investor will understand.

C29     If you assess an investor has a low level of financial literacy; an SMSF will not be an appropriate retirement savings vehicle for the investor.

Issue: Alternatives to an SMSF structure

What you should do or consider

C30     Before recommending an SMSF to an investor, you should consider whether an APRA-regulated fund will meet the financial situation, needs and objectives of the investor. Many APRA-regulated funds now offer a DIY investment option.

C31     APRA-regulated funds may be more cost-effective for investors than an SMSF, depending on the size of the investor’s superannuation balance, and the extent to which the SMSF trustee(s) would engage external professionals to undertake administrative and other functions.

C32     Setting up an SMSF, which then invests through an investment platform, may not be as cost-effective for investors as becoming a member of a public offer investment

 Thoughts:

As a licensed Financial Planner and Accredited SMSF Specialist Advisor™ I can and do assess these 32 points with my clients and under my license I am required to put the recommendations in writing after considering and high lighting the above points.

There is therefore less chance of me recommending a SMSF to a person not suited to running one but if that should happen they may have recourse to my Professional Indemnity Insurance. However if they have received the advice to set up a SMSF from an unlicensed person then they may have no recourse to PI as that person’s cover would most likely exclude such claims.

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.

Liam Shorte B.Bus SSA™ AdvDipFS

Financial Planner & SMSF Specialist Advisor™

Verante Financial Planning

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

Tel: 02 8853 6833,  Mobile: 0413 936 299

liam@nextgenwealth.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216 • AFSL No.232686

Important information :

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

SMSF Borrowing: What Can I Do With An Investment Property Within The Rules.


We constantly have people contacting us with ideas of what they want to do with an investment property once they have borrowed to purchase one in their SMSF. Some are sensible but some show no grasp of the regulations at all and include moving the whole family in to save on their home mortgage or knocking it down to build a multi-storey unit development. If you run a self managed superannuation fund, you have the ability to invest in residential property or commercial property and under certain circumstances a farm. (Note: ability to do something does not mean you should).

Repairs v Improvements

Repairs v Improvements

Borrowing to purchase a property in an SMSF or in the industry jargon a “limited recourse borrowing arrangement (LRBA)” has been legal since 2007 and is becoming increasingly popular with SMSF owners seeking to leverage their funds.

In May 2012, the ATO released a ruling SMSFR 2012/1, “Self Managed Superannuation Funds: limited recourse borrowing arrangements – application of key concepts.” To clarify its understanding of the legislation.

It should be noted that the ATO focused on borrowing to invest in property as it saw this as the most likely area people would encounter problem scenarios. They key issues that the ruling addresses are:

–   defining a single acquirable asset

–   property development and off-the-plan purchases.

–   distinguishing between improvements vs repairs or maintenance.

–   improving an asset to the extent if becomes a replacement asset.

In this article I will concentrate on the latter 2 issues as it is ok to use borrowed funds for most repairs or maintenance but you can’t use borrowed money to finance improvements. You can use your other funds in your SMSF to fund improvements so it is a matter of getting the strategy right.

The ATO has given specific meanings to the following words:

‘Maintaining’ an asset typically involves work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense). For example, repainting a timber house to prevent deterioration is typically maintenance

‘Repair’ ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property.  A repair replaces a part of something or corrects something that is already there and that is damaged, has become worn out or dilapidated or has deteriorated. Repair may be necessitated through ordinary wear and tear, accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.

‘Improvement’ the guidance is that they mean work that:

  • provides something new
  • generally furthers the income-producing ability or expected life of the property
  • generally changes the character of the item you have improved
  • goes beyond just restoring the efficient functioning of the property

So what can you do and what can’t you do?

The following scenarios outline when an existing LRBA will continue to apply to an asset, based on the ATO’s SMSF ruling.

1. Using Borrowed Money : Repairs and Maintenance (Yes You Can) v Improvement (No You Can’t)

Work to be carried out Repair or maintenance (Yes you Can under an LRBA) Improvement (No you Can’t under an LRBA)
Residential property
A fire damages part of the kitchen (cooktop, benches, walls and ceiling). Restoring the damaged part of kitchen, including addition of a dishwasher, even if there wasn’t one there before (considered minor). Yes you can If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house the external kitchen would be an improvement. No you can’t
Replace guttering Yes you can
Replace fence Yes you can
Replace house destroyed by fire Rebuild comparable house. Yes you can Rebuild house not comparable (although if built from insurance proceeds does not affect LRBA) No you can’t
A pergola is built to create an outdoor entertaining area. No you can’t
The addition of a swimming pool or a garage. No you can’t
A house extension to add another bathroom. No you can’t
Cyclone damage to a roof Replace roof: Yes you can Add a second storey at the same time as replacing roof.  No you can’t

Source: ATO SMSFR 2012/1

 

2. Development while under a LRBA: Retains Same Attributes (Yes You Can) v Creates a different asset (No You Can’t)

Asset and Action Result
1.  Vacant block of land on single title. A vacant block of land is subsequently subdivided resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision.  Different asset created No You Can’t
2. Vacant block of land on single title. A residential house is built on vacant land which is on a single title. The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset. Different asset created No You Can’t
3. Residential house and land. A house is demolished following a fire and is replaced by three strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created three different assets. Different asset created No You Can’t
4. Residential house and land. A residential house is converted into a restaurant by renovations which include fitting out a fully functioning commercial kitchen. As a result of the renovation the character of the asset has fundamentally changed from residential premises to restaurant premises. This is a different asset. Different asset created No You Can’t
5. Residential house and land. One bedroom of a residential house is converted to a home office. This would not ordinarily result in a change in the overall character of the asset as a residential house. The conversion of the bedroom into an office does not result in a different asset.  Same asset – Yes You Can
6. Residential house and land. A fire destroys a four bedroom house and a new superior residential house is constructed on that land using both insurance proceeds and additional SMSF funds. Rebuilding another residential house (whether of the same size or larger) does not fundamentally change the character of the asset held under the LRBA. The addition of a garage, for example, would also not change the character of the asset. Same asset – Yes You Can
7. Residential house and land. While each of the following changes would be improvements each (or all) of the changes would not result in a different asset:

  • · an extension to add two bedrooms;
  • · the addition of a swimming pool;
  • · an extension consisting of an outdoor entertainment area;
  • · the addition of a garage shed and driveway;
  • · the addition of a garden shed.
Same asset – Yes You Can
8. Residential house and land. To allow a road to be widened, a local government authority undertakes the compulsory resumption of a minor portion of the frontage of a property which has a residence on it. While the resumption results in the existing property title being replaced, the minor extent of the resumption is such that the fundamental character of the asset, taking account of not only the proprietary rights but also the object of those proprietary rights, remains that of being the residential property. Same asset – Yes You Can
9. Residential house and land. A ‘granny flat’ is to be constructed in the backyard of a property which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage. The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset. Same asset – Yes You Can

Source: ATO SMSFR 2012/1

Conclusion

There is no doubt that this ATO ruling and the examples given are good news, and much appreciated by the SMSF industry who have to deal with enquiries every day. It provides a substantial amount of clarity around many issues that had previously been quite unclear. The common sense and commercial approach by the ATO has also been welcomed and was somewhat unexpected.

I always suggest that SMSF Trustees keep sufficient cash flow in the SMSF to finance repairs and maintenance or any expected improvements rather than using borrowed funds and risk running foul of the rules.

You should however carefully consider any strategy in the light of these rules and make sure you get a second opinion as often if you are too close to a project you can be blinded to its faults. That’s where a good team of advisors comes to the fore.

Checkout : Can I borrow to buy a house and land package off the plan in my SMSF?

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.

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 8853 6833,  Mobile: 0413 936 299

liam@verante.com.au

PO Box 6002 BHBC, Baulkham Hills NSW 2153

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.

Super changes will hit saving strategies


Please find a link below to an article on the Macro Business blog website about the expected and unexpected effects of the proposed Super changes.  No More Tax Free

http://www.macrobusiness.com.au/2013/04/super-changes-will-hit-saving-strategies/

Macro Business has an excellent engaged readership and as always the comments tend to be very valuable at exploring the details of any subject just that little bit further.

Are you looking for an advisor 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.

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.

New changes to Superannuation in summary for SMSF Trustees


Firstly nothing to scary but some stings in the tail.    Tax Reform

Mr Swan and Superannuation Minister Bill Shorten fronted announced a tax exemption on superannuation earnings supporting pensions and annuities will be capped at $100,000, and anything above that level taxed at a rate of 15 per cent from 01/07/2014.

Based on a 5% earnings rate that would only impact on those with super assets of more than $2 million. Remember this is per account so for a couple each of them could have $2,000,000 without paying tax on their pension

The $100,000 threshold will be indexed to the Consumer Price Index (CPI), and will increase in $10,000 increments.

Special Treatment for Capital gains on Assets purchased before 01/07/2014 ( Did not proceed)

-  For existing assets (such as property or shares) that were purchased before 5 April 2013, the reform will only apply to capital gains that accrue after 1 July 2024;

-  For new assets that are purchased from 5 April 2013 to 30 June 2014, individuals will have the choice of applying the reform to the entire capital gain, or only that part that accrues after 1 July 2014; and

-  For new assets that are purchased after 1 July 2014, the new limits will apply to the entire capital gain.

Higher concessional cap for people aged 60 and over brought forward

Accordingly, the government will bring forward the start date for the new higher concessional cap of $35,000  to July 1 for people aged 60 and over. Concessional includes employer SGC (9-12%) and Salary Sacrifice.

Individuals aged 50 and over will be able to access the higher concessional cap of $35,000 from the current planned start date of 1 July 2014.

The general concessional cap is expected to reach $35,000 from 1 July 2018 for those under 50.

Excess contributions tax to be reformed

Mr Shorten said the government will reform the system of excess contributions tax (ECT) that was introduced by the former government in 2007, to make it fairer and give individuals greater choice.

Under the current arrangements, concessional contributions that are in excess of the annual cap are effectively taxed at the top marginal tax rate (46.5 per cent) rather than the normal rate of 15 per cent.

Now you will pay tax on the excess contribution to match what you would have paid at your marginal tax rate. for example if you are on the 37% tax bracket you would pay ECT at 22% rather than 30% if you had to pay it on the top marginal rate of 45% (plus Medicare).

Income Streams will be Deemed like non-superannuation assets

Under the change announced today, standard pension deeming arrangements will apply to new superannuation account-based income streams assessed under the pension income test rules after 1 January 2015.

Instead of the concessional treatment of Account Based Pensions currently for those accessing an Aged Pension, they will be deemed like normal assets. This will affect those on the borderline of $55K income for a single person and $80K for a couple who previously benefited from deductible amounts on their account based or allocated pensions.

Extending concessional tax treatment to deferred lifetime annuities

The Government will encourage the take-up of deferred lifetime annuities (DLAs), by providing these products with the same concessional tax treatment that superannuation assets supporting income streams receive. This reform will apply from 1 July 2014.

Mr Swan also announced the Gillard government will establish a Council of Superannuation Custodians to ensure that any future changes are consistent with an agreed Charter of Superannuation Adequacy and Sustainability.

Here is the link to the full press release “A fairer superannuation system”

As always please contact me if you want to look at your own particular situation and we will break it down in plain English for you. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.

Liam Shorte B.Bus SSA™ AdvDipFS

Financial Planner & SMSF Specialist Advisor™

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

NextGen Wealth Solutions

Tel: 02 8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 • AFSL No.232686

Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information :

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

Can I borrow to buy a house and land package off the plan in my SMSF?


I have had a number of enquiries about this strategy in the last few weeks and I felt it was worth clarifying some details.

Off the Plan

Off the Plan

As with any strategy where you commit to a large future purchase in a moving market and also take a risk on the developer performing to contract, buying off the plan can be risky.  Especially because of the way these contracts shift the risk away from the developer.  With a Self Managed Super Fund purchase with a mortgage this can be even more of an issue if the proposed lender’s final valuation comes in lower than the contracted price which is more common recently. You may then be forced to come up with the shortfall in your SMSF which may be more difficult if you have exhausted your contribution limits.

Here are the basic essentials to getting this type of strategy right:

  • The “property purchase” should be subject to one contract which must be for the completed house and land. Do not purchase land and then look for an SMSF loan to construct a property on it. You will be too late to use the land as security.
  • It is often better to have the SMSF pay the deposit and only have the lending arranged as part of the settlement. In my opinion the Holding Trust should still be in place with the Custodian/Holding Trustee on the title of the contract from the outset.
  • Ensure that the bank/ lender’s only security is only over that land and completed house/unit;
  • The only payments made in respect to the purchase are for the deposit and settlement with no “progress payments”. You may breach the “single acquirable asset” rule which is a big no-no!.
  • Be prepared to move quickly at the time of settlement. LRBA loans do not go through lender’s quickly and you should have as much of the documentation prepared in advance and ready to go as is possible. Drum this into your Mortgage Broker and Solicitor.
  • Do not borrow to the limit of your SMSF. Make sure you have some liquidity to manage low valuations or the demand for a lower LVR from the lender. Alternatively have the capacity and ability to add funds to your SMSF without breaching a contribution cap.

Now there are some who feel that more than 2 payments are possible and that the law is silent on the matter but my philosophy is to KEEP IT SIMPLE! Why makes things difficult for yourself especially when there are developers out there redesigning their contracts to meet the basic 2 payment strategy.

For those looking for more detail I would recommend reading the  issues addressed by the ATO their Taxpayer Alert TA 2012/7 and in the minutes of discussion at the NTLG Super Technical sub-group (December 2012) (if you can find a copy as the ATO took down the page) with specific reference to  example 10 within SMSFR 2012/1.

My final tip is to use a SMSF Specialist Advisor who has dealt with SMSF property borrowing and look for references from client’s they successfully guided through the process. Use a conveyancer or solicitor with experience in the intricacies of these strategies. Use a Mortgage broker that knows how to place these specialised loans and is thinking ahead at all times. Oh and READ YOUR TRUST DEED!

Are you looking for an advisor 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.

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.

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