Unit trust and SMSF strategy question please

Hello

Can anyone please tell me if this is how it's normally done or if this will work. I am trying to get my head around how to set this up.

My thinking is as follows:-

Set up a unit trust with X units each worth about $25K. The number X is not yet fixed as I first need to work out how much I can afford to pay for a commercial property. The $25K is also an arbitrary figure so if you think it should be lower/higher please let me know.

Contribute the maximum I’m allowed into a SMSF. Since I am a baby boomer I have this 4 year window of opportunity to contribute quite large sums.

Buy a commercial property in this unit trust paying with cash from the SMSF and a loan that I will take out personally. The amount of cash that the SMSF contributes to the property will determine how many units are held within the super fund. The interest on the loan that I take out will be tax deductible for me I assume?.

The income from the property will be apportioned between me personally and my SMSF. From the income that I receive personally, I will service the loan. I think I will probably have to use other income for this purpose as well. The income in the SMSF is only taxed at 10% so that’s an advantage and when I have $25K saved in my super fund I will sell it another "personally held" unit and use the money to reduce my loan.

I will also use any money that I am able to contribute into my SMSF to buy more units. The idea being to get as much of the property into the SMSF to take advantage of the friendly tax environment within the super fund. When I start drawing a pension from the fund all this income becomes tax free.

Even when I become ineligible to contribute to my SMSF I will be able to buy more "personally held" units from the income in the super fund. Is this true?

Have I made any mistakes? I would really appreciate all comments and suggestions.

Thank you in advance
Elka

 

Hi Elkam,

As long as you are under 65 you can contribute to super, if your over 65 you have to meet the working test. 40 hours in any 30 day period during that financial year.

You can do this and unitise the property to split the ownership between you and your SMSF.

Super pays tax on income and capital gains (held for less than 12 months) at 15%, Capital Gains held for more than 12 months is concessionally taxed at 10%.

Rather than bugger about you might want to read about Transitioning to Retirement which is more strategy based and you could incorporate your property purchase with it as well...If you are over 55 you can start a pension account. The maximum you can draw while you have not met a condition of release is 10% of the balance and the minimum is 4%.

http://www.invested.com.au/2/best-garunteed-investment-strategy-ever-18915/index2.html

Cheers,

Dan

This is general information. Speak to an FPA registered Financial Planner, Accountant or Tax Adviser before making an investment decision.

 

Yes it will be tax deductible (as its incurred with respect to gaining assessable income), however you can not have a mortgage on the property. This means that you must get your borrowings else where (ie other equity) and this may be a tough ask. It can also be done with residential property, i had a thread going about it but i think someone shot down the idea due to in house asset rule???

Also why make the units 25k each? Why not just make each unit a $? At time of transfer remember you will have to pay market value and not just the $ so you will be liable for CGT, additionally the super fund will have to pay 0.6% stamp duty on the value of transfered units (this is nsw only, i havent researched other states).....

Alternatively to the $1 unit, why not estimate how much your employer contributes to your super every 3 months. And then (factoring stamp duty) you could organise to transfer that amount of units over each 3 months.

For the CGT issue, you could also write an option from the super fund to purchase units in the trust. You could pay a premium on option and then just execute your right to buy the units at a pre determined price when you have the cash.... Althought this may require legal help and this can get quite expensive

As always get your own advice from professionals etc...

 

Hi Elka,

Transfer of non-listed securities to your SMSF will breach the in-house assets rule. Either way there is a CGT event with arm's length issues.

As Trustee, making your SMSF solely invest in your joint investment must be allowed by the deed, also by the SMSF investment strategy and also must not breach the sole purpose test which is to provide benefits for retirement or death.

A lot of slack is given to business owners giving their SMSF an interest in their business real property. I don't know how far this goes for passive investment.

Make absolutely sure that the investment unit trust has absolutely no discretion whatsoever in distributions or shifting rights, otherwise distributions to the SMSF might be deemed special income and taxed at the top rate in the SMSF.

The devil is in the detail. You are trying to reconcile Taxation Law, Trust Law and SIS.

Cheers,

Rob

 

Originally Posted by MattR
A common form of "leveraging" your super is using it in combination with an SMSF and a Unit Trust to purchase commercial property. No security can be held on the property in question, but for many investors who've been in the property market for a long time, they can secure any debt against another property.



Thank you for all your replies. I hadn't realised there were so many problems in "my strategy". Didn't even think about stamp duty, CGT or breaking the in house rule by buying units from myself. Just shows you how great such a forum is. What I was trying to do was apply the strategy as outlined by you above Matt.

I have no problem borrowing on another of my propertis so that parts OK. The problem is that I have nothing in Super currently as I have been living OS for the last 20 years.

With the above method I was trying to buy a property now and progressively hand over the ownership to my SMSF. If I have understood your answers correctly, this is the only real problem in my method, right?

The answer would be then to either hold off buying the property for a couple of years while I madly shove every bit of cash into my super fund to finance a bigger portion of the property or buy soon and settle for a smaller amount of tax free income on retirement.

Dan, where can I read more about the bring forward rule in a simple fashion.
I understand that you can put in $450K this tax year and then another $450K in 3 years time. The problem is I don't have $450K in my pocket at the moment. If I put in for example $300K this year do I still have to wait the 3 years before I can contribute more undeducted funds again? In the mean time can I continue to contribute deducted funds of up to $100K per year?

The other option would be to forget property and go for managed funds/shares but besides my being a property buff this would limit the gearing I could get.
No, not trying to start another property V shares debate.

Oh, what to do.?

Elka

 

Hi Elka,

Note MattR was referring to business real property. Transfer of active business assets into your SMSF gets concessions from in-house assets problems and in some cases CGT as well.

This is good for small business owners who may have foregone super contributions previously in order to reinvest profits in their business.

If you think you may fit that profile then I am sure he can elaborate at great length the possible advantages.

Cheers,

Rob

 

No, the rule is $150k pa...you could utilise bringing forward $300k over two years (ie, this year and next year). If you put in $160k you would effectively bringing forward $10k for the next financial year, in that financial year you would still be able to put in another $140k ($10k + $140k).

Yes.

Someone who had no taxable income (in the ATOs eyes) would possibly lean towards non-deductible/non-concessional contributions.

Someone who had a taxable income (in the ATOs eyes) would possibly lean towards deductible/concessional contributions.

Once your over 60 happy days anyway because then you might start recycling the taxable components into non-taxable via non-concessional contributions (this is for estate planning, there is another thread somewhere...)

Cheers,

Dan

The above is general information. You should always discuss your personal situation with an FPA registered Financial Planner, Accountant or Tax Adviser.

 

Thank you all for generously taking the time to answer so comprehensively. I've learned heaps from you and will now try and work out how I can use all this new information.

I think I have just earned the “dummy of the year award” as I had not understood, up until your post Rob, that this strategy was not available unless you were a small business owner, which unfortunately I’m not.

Thank you again
Elka

 

Sorry Elkam,

I missed that question

Live within your limits - Superannuation - Money - Business - Home - smh.com.au has a bit of information.

Also "Bring forward" contributions - AMP but is quite brief...

MLC - The latest on the new super rules has a table which makes it easier to read

All the changes are summarised briefly here though it explains the NCCs well here at QantasSuper http://www.qantassuper.com.au/downloads/newsletters/QAN_SOS2007.pdf

The ATOs explanation http://www.qantassuper.com.au/downloads/newsletters/QAN_SOS2007.pdf is ok, more a slide show...

If you have anymore questions feel free to ask

Don't forget to look into the transition to retirement as it might help you.

Cheers,

Dan

PS This is not an inducement to invest in any superannuation fund. Before making an investment decision speak to your registered FPA financial planner, accountant or tax adviser.

 

Purchasing a commercial property via a SMSF utilizing a related unit trust structure can be tricky.

Another option I have come across is an installment warrant type structure. Such a structure is offered by a company called Calliva, and the product is called super access.

The product basically works the same as an installment warrant attached to a listed share, whereby the loan built into the warrant is paid off over a number of years.

The major obvious downside are the fees taken by Calliva, however, it probably works out about the same if you had to pay fees to your accountant to run a unit trust for that many years.

I am in no way personally or professional associated with Calliva, I have simply seen their product advertised at seminars etc. It is not unique - there are others doing it. As always seek professional advice.

 

I looked into Calliva about 3 months ago and I thought at the time that you'd need to be pretty desperate to go that route. To me it looked very exxy in fees and option costs etc., and ALSO if you eventually wanted to hold the property yourself/fund etc and not in their Trust, then stamp duty gets levied again - ouch.

 

To have even more fun once you have your property within a unit trust with the units owned by a SMSF is to have both capital and income units.

These are useful when you have multiple accounts, i.e. the husband who is older and drawing a pension (income units) and the capital units can be segregated to the younger wife who is still in the accumulation phase.

This strategy can also be used where even the minimum drawdown (e.g. 4% or 5%) provides too much income for the pension member, so some capital growth only assets can be allocated across to the members accumulation account.

Too much money / too much income - that is a problem I would like to have!

None of this stuff is new.