setup SMSF, comm. prop., family trust, etc.

Hi all, first post, can I pick your brains?

For a while now my accountant has suggested I setup a SMSF to access dollars tied up in a commercial property to ease cashflow headaches.

Bit of background info. Back in 2001 I bought a business, in my name, and the freehold in the name of our family trust (which has a company trustee of which I am sole director/secretary). I'm 40 y.o., married, kids, etc. I have about $85k in an industry super fund. Wife has around $30k in super.

Accountant suggested make my company the trustee of the SMSF, me and my wife the beneficiaries. Roll our existing super into new SMSF. Get our friendly realestate agent to value the property at say $200k. The property goes into the super fund as business real property, and somehow magically (this is the bit I don't understand) we get a ?loan/cash back of $100k. I can then trade shares using my super money, and my cash flow problems ride off into the sunset.

My questions are:
1. Does this scenario sound reasonable? legal? doable?
2. Is there another (better) way to set this up?
3. Is this something I could DIY, or better to get account to setup and administer? (I like to be hands on, but don't want to stuff it up)

Thanks for your time, and any suggestions/information you may like to share.

 

Hi Rippa,

It'll be interesting to see what our resident SMSF specialists will say about your questions.

Cheers,

Dan

 

It sounds doable.

The SMSF will have an accounting fee plus an auditing fee each year
but you'll have control of your $100K to invest on behalf of your super fund.

This does not mean that you can go out spending it but you'll be able to pay for building maintenance, accounting fees etc and can invest the balance as per your SMSF's investment strategy.

The rent will become income to your super fund so it will be taxed at 15% and if the property is currently negatively geared the -ve component will reduce your SMSF's overall tax for the year.

The building depreciation will also help reduce your SMSF's tax.

Edit: Don't forget to check with your accountant about stamp duty and CGT liability

 

Stamp will be unavoidable in NSW.

A few more questions:

1. How much did you purchase the property for?
2. How much is it worth now (not the real estate agents valuation - actual market value)
3. Is it still used by your business?
4. Is there a loan secured against the property? Is yes how much? If no has the bank removed its registered mortgage against it?
5. Do you have cash flow issues? Please explain.

I believe what you accountant is talking about is a combination purchase / in-specie* contribution. This means you will partially pay the purchase price to the vendor (your family trust) using the cash in the fund which would mean the cash would end up outside super in your family trust.

*In-specie = property rather than ca$h

The remainder you would then actually be considered as contributions (likely non-concessional contributions).

You shouldn't run into too many issues with CGT as the business real property is an active asset used by your business (even though it is owned by a separate entity) - so you get the normal 12 month+ 50% general discount and another 50% active asset discount making the CGT only on 25% of the gross capital gain.

Furthermore as you are putting it into super you can utilise the small business retirement exemption to pick up the rest = 0% CGT

Alternatively you can claim some of the transfer as being concessional (deductible) super contributions on you and your wife's behalf in the family trust (up to the $25k annual limit assuming you are both under age 50). Not sure if you would even need the deduction in the family trust as your business income is being generated in your own name.

You are going to need a lawyer to do the conveyance. It makes it easier and hassle free.

Your accountant will have to work out all the details of the capital gain and how much if any you would claim as the small business retirement exemption etc


Advanced strategy:
If the property is actually worth a significant amount more than the $200k, you have another few options which may be worth looking into - such as creating a loan [SIS Sec 67(4A)] back to the family trust and have the family trust drip feed deductible contributions over a number of years.

You would need to re-structure your business to have the income flowing into the family trust rather than into your name as a sole trader and you would have to weigh up the additional and ongoing extra costs vs the ongoing tax benefit.

Just throwing it out there - impossible to know whether it is worthwhile doing it without the additional information
End advanced strategy

A SMSF can also trade shares as part of its investment strategy. Not sure what you are trying to achieve with this comment.

I hope this answers some of your questions and created a few more.

Good luck
SM

 

Also, if you are planning on getting rid of the family trust, you can make the company which currently acts as trustee of the family trust the trustee if the super fund.

However, the trustee company of your super fund should be a special purpose company that ONLY acts as trustee of the SMSF and nothing else. This also gives you the benefit of paying ASIC $40 per year rather than $212.

You may need to change the constitution of the current company to enable that to happen.

Otherwise pay a little extra and get a brand new company (no real excuse now since the cost to register has dropped from $800 to $400 with ASIC).

Question from me:
I wonder what the NSW titles office does when you try to transfer from one PTY LTD (as trustee for the family trust) to the same PTY LTD (as trustee for the SMSF)?

It is a dutiable transaction for stamp duty purposes as there is a beneficial change in ownership (unless you are in Victoria - lucky *******s) - but I wonder if the titles office freak out?

Maybe they sought it out based on the changes to the caveats? Need to ask a NSW conveyancer I guess.


SM

 

Thanks for the replies, what a good forum this is.

Some questions answered, and some more background info.
(I'm actually in a small country town in W.A. I know, I don't have my profile correctly set up.)

>1. How much did you purchase the property for?
>2. How much is it worth now (not the real estate agents valuation - actual >market value)
>3. Is it still used by your business?
>4. Is there a loan secured against the property? Is yes how much? If no has the bank removed its registered mortgage against it?
>5. Do you have cash flow issues? Please explain.

1. Property purchased for $20k, lol.
2. Unknown, I wouldn't really expect anyone to pay more than ~$150k for it though...
3. Yes, it's a chemist shop (or pharmacy, if you prefer).
4. No loan, the bank has the title in their vault for safekeeping.
5. Cash is always tight, the business has grown at such a rate (~10% p.a.) that stock purchases, increased wages, other investment activities, beer, kids, etc. gobble up any available cash.

The family trust owns the property, employs the staff, and purchases non-drug stock (vitamins, gifts, beauty stuff, etc.). It has the sales of those non-drug items as income, as well as monthly rent paid by me. As only a pharmacist can own a pharmacy (in W.A.), and as I'm the one licensed to sell drugs to the public, I (trading as *** Pharmacy) buy medicines, sell them and that is my income (with some share trading, investment property rents).

>A SMSF can also trade shares as part of its investment strategy. Not sure what you are trying to achieve with this comment.

The share trading is something I do now, with varying success, in my own name, with a margin loan. So that's something I'd like to do in the super fund, perhaps using instalment warrants rather than direct shares. I'm trying to diversify my other investments away from residential property as we have 4 i.p.'s, but only about $160k in share investments (including the existing industry super fund).

>However, the trustee company of your super fund should be a special purpose company that ONLY acts as trustee of the SMSF and nothing else.

Sounds like a new company will be the go then ... Also sounds like the experts are needed, not DIY.

The reason this has all 'come to a head' now is that I want to do a shop refit so need some extra $$$'s, and the banks in their infinite wisdom have stated they "cannot demonstrate my serviceability" of a new loan. Makes me wonder what's the point of having equity if you can't spend it.

Thanks once again. It's good to learn new stuff, and good to have options. Much nicer to choose a course of action than be forced to do something.

 

Multiple Investment properies

As you mention you have multiple investment properties it maybe you should look at your new SMSF in a more wholistic light. Depending on the CGT status of each of the exisiting properties, loans on them and who manages them (i.e real estate agent or not) etc. It may be worthwhile that you get a ruling form the tax office on whether you can claim to be in the business of property investment (recent rulings indicate 3 IPs is enough if you can prove you manage them yourself). This would potentially allow you to transfer 1 or more of your investment properites to your fund (as a loan /contribution or combination) and potentially freeze future capital gains tax liabilities if the properties are sold after you reach pension age. This may also help you get more cash flow into your personal name to help your business.

Make sure you get a good Trust deed that allows all these options however including the special rules that allow borrowing via an installment warrant.

Regards
Jason

 

Bearing in mind Rippa's age and the likelihood of the government irrespective of its party continuing to make changes to super, in Rippa's situation I would not want to transfer other properties from myself to the superannuation fund unless the fund made payment. Selling business property in is a different issue.