Important SMSF Question

Hi Everyone,

I had an important SMSF question please for all the accountants who are knowledgeable about SMSF with pre 1999 unit trusts.

I have a SMSF with a unit trust, with a commercial property in the unit trust with $50,000 in borrowings still remaining. Now with 30 June 09 fast approaching, as far as my understanding I can't issue more units to my SMSF after 30 June and repay the borrowings which leaves me with a big problem.

What happens after 30 June? How do I repay the loan or does it stay forever since I cannot contribute more money (more than 5% anyway) into an in house asset?

My accountant is adamant that the only way around this is to make a concessional contribution to super pay the contributions tax, invest in more units in the unit trust and extinguish the loan. Only problem is I don't have a lazy $60k in my business to do this.

What are my options? I've heard some people say the loan doesn't need to be paid but I can pay it off later via deemed distributions, but what does this mean?

Any help please would be greatly appreciated as I'm panicking a bit now we're only 3 months away from the deadline.

PS - selling the commercial property to extinguish the loan is not an option the commercial property is my business premises.

Thanks for your time everyone.

 

Hi Bob

I'm not an accountant however I don't believe that the in house asset rule applies to commerial (real business property) assets. If there is sufficient equity in the property why not have the unit trust sell the property to your SMSF thus paying out the old debt.

Under the revised SIS Act legislation you can now gear commercial properties up to approx. 65% with a number of lenders using the new SMSF borrowing rules.

Suggest you run this by your accountant/advisor first before trying/considering.

MikeF

 

RE: Important tax question (pre-1999 unit trusts)

Directly from the ATO:
In-house assets and transitional rules (S-4)

In-house assets and transitional rules (S-4)
What will change after 30 June 2009?

After 30 June 2009, if your SMSF has investments with related parties or related trusts that you made on behalf of your SMSF before 11 August 1999, your SMSF will no longer be able to:

* reinvest any earnings
* pay up any partly paid shares or units, or
* make any additional investments.

If you continue to reinvest earnings or make additional investments or loans after 30 June 2009 on behalf of your SMSF, the additional investments or loans will be as in-house assets that count towards the 5% limit. This will apply even if there is an outstanding debt.

If you pay up partly paid shares or units after 30 June 2009 on behalf of your SMSF, a proportion of those shares or units (equivalent to the proportion of the payments made after 30 June 2009) will be treated as an in-house asset.

What will remain the same after 30 June 2009?

Assets won’t be treated as in-house assets if they are:

* investments you entered into on behalf of your SMSF before 11 August 1999, or
* additional investments or loans you made between 11 August 1999 and 30 June 2009, in line with the transitional provisions.

Also, any lease arrangements you entered into before 11 August 1999 on behalf of your SMSF that have not been interrupted won’t be considered in-house assets. Due to this:

* the arrangements don’t need to be unwound, and
* any related entities do not need to be wound up.

Geared investments

If your SMSF holds investments (the original investments) in a unit trust or company which is a related party of your SMSF, any additions you made on behalf of your SMSF to those original investments after 11 August 1999 are counted as in-house assets under the new in house asset definition if:

* you made the original investments on or before 11 August 1999, and
* the additional investments were not in-house assets under the old rules.

However, such additional investments are not counted as in-house asset if:

* the unit trust or company was geared on or before 11 August 1999, and
* a loan was owed by the unit trust or company to any entity other than the fund, and
* the sum of such additional investments does not exceed the amount of the loan in the unit trust or company at 11 August 1999, and
* such additional investments are made no later than 30 June 2009, and
* the trustee made a written election by 23 December 2000 that section 71E (Exceptions – Certain Geared Investments) of the SIS Act is to apply to such additional investments.

The relevant amount of the debt is the amount of the principal outstanding at 11 August 1999. If the sum of the additional investments exceeds the amount of the debt at 11 August 1999, the formula found in subsection 71E(4) of the SIS Act applies to work out the value of the increment that will be treated as an in-house asset.


You actually have a very short period of time to take up the opportunity for the unit trust to actually borrow more - provided it doesn't exceed the amount of borrowings at 11 August 1999. I have assumed you have gradually been paying off the principal on the loan over the last 10 years or so through re-investments etc to get it down to $50k.

To pay off the $50k, you have a few options post 30 June 2009:
- Introduce more capital by issuing units to another party (not your SMSF), this could be yourself, your wife, family trust etc
- Retire the debt when you sell the property in the future (when no longer needed for your business obviously)

Pre-1999 units trusts are not as relevant now due to the introduction of debt trusts.

If I was you, depending on your overall situation, I would be borrowing more in the unit trust (up to the 1999 limit), using the proceeds to invest in a share market* where there are a lot of bargains to be found and lock in a low interest rate at the same time. This would be a 5year plus strategy so definitely seek advice. You all ready have the structure in place so it wouldn't cost you too much more in fees.

*Note to self: need to double check whether SIS Reg 13.22 impacts on Trust's ability invest in shares.

Your accountant may not be knowledgeable in the SMSF area, so you will need to engage an SMSF specialist to review everything to give you peace of mind. Check with SPAA to find someone suitable in your area (http://spaa.asn.au/portal/portal/index.php?option=com_content&task=view&id=63&Itemid=99999999)

Good luck with it

 

Given that your Audit fee increases with complexity and risk, and penalties on the Auditor are severe ... you can expect an extra zero on your fees to cover their risk.

Cheers,

Rob

 

Yes, no doubt your audit fee will increase. Get an updated quote from your auditor and include it as part of your decision making.

I doubt there would be another zero on the end of it - that is a 1000% increase. Given the new auditor competency requirements any auditor of a SMSF should be competent in this area and only charge slightly more.