My first post and I think this is the right forum but it could fit in a couple.
I'm hoping there may be a few knowledgeable people here who can give me some pointers in the right direction and some advice.
- My wife and I are close to 40 yrs of age (me on the wrong side and her on the right side).
- We have only been in Australia about 8 yrs and my wife has been on mat leave for a few of those so our Superannuation is not huge, around $140k between us.
- We don't own property in Australia although we are both citizens.
- My wife works. I own a small business which has been operating from a home office.
- Next year I want to move the business in to some office space.
- I am thinking of combining our superannuation and starting a SMSF
- I would use the cash in the SMSF to purchase a commercial property for around $300-400k. Looking at offices/suites around 50-70m
- The property would be rented to my business at market rent
Specifically with regard to the financial side;
- It looks like a no-brainer. If I can take $150k, buy a property for $400k, have the majority of the mortgage paid by the tenant (me) and assuming a capital growth of 5% p.a. over the next 20 yrs then just over $1mil tax free. Leaving the $150k in the super and allowing an average 5% return I'd not even have the price I paid for the property. Am I missing something?
- Correct that capital gains are tax free whilst it remains within the SMSF?
- I understand that the start up costs are high relative to the amount of super we have but would the ability to leverage the cash outweigh this over the long term?
With regard to property purchase;
- Rent returns seem to be hugely variable dependent on location etc. I'm not too bothered about rent returns but more interested in capital growth over the next 20 years. Should I be concerned about yield %?
- I'm flexible where the business is based and am considering Melbourne CBD, South Melbourne, Melbourne Docklands, South Yarra. Any areas that are considered better or worse for long term growth? Advice on good areas for commercial property of the type we need would be appreciated.
- Any other advice with regard to fees, buying off the plan etc. would be appreciated.
Thanks in advance for any advice.
You have missed something. you the tenant would be able to claim a deduction for the rent of the premises from your SMSF.
The income from the SMSF is taxable as is capital gains, but the tax rate is much lower than being held outside. CGT for eg is just 10% if the asset held more than 12 months. Income tax is generally 15%, but the fund will be able to offset the income from rent with deductions for expenses such as depreciation and interest etc.
Once you meet a few conditions the income from the SMSF can be received tax free and also any asset supporting this income stream, pension, can be sold CGT free as well.
Not to mention the asset protection benefits of a SMSF – better than a discretionary trust.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:You have missed something. you the tenant would be able to claim a deduction for the rent of the premises from your SMSF.The income from the SMSF is taxable as is capital gains, but the tax rate is much lower than being held outside. CGT for eg is just 10% if the asset held more than 12 months. Income tax is generally 15%, but the fund will be able to offset the income from rent with deductions for expenses such as depreciation and interest etc.
Once you meet a few conditions the income from the SMSF can be received tax free and also any asset supporting this income stream, pension, can be sold CGT free as well.
Not to mention the asset protection benefits of a SMSF – better than a discretionary trust.
I'm not sure I am with you. I know I can claim any rent my business pays as a tax deduction but this is true regardless of who owns the property. I'm trying to keep the SMSF and business issues seperate. The questions I have relate purely to the SMSF, financing the property through the SMSF and the property purchase.
Your second point on tax. You are referring to my personal from the SMSF in future years? The capital gain on the property is always tax free whilst it is held in the SMSF?
Ok, true about the claiming of the rent.
Income the SMSF makes is not tax free. The rate is 15% for most income. eg. rent received by the SMSF is taxed.
The SMSF also pays CGT. if it sells a building it pays CGT at the rate of 15% or 10% if held more than 12 months.Then there is the time when you are receiving a pension or a lump sum from the fund when you have met a condition of release.
If you are drawing a pension and the fund is fudning this by selling a property it can be sold CGT free. your pension should also be tax free to you too, generally.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:Income the SMSF makes is not tax free. The rate is 15% for most income. eg. rent received by the SMSF is taxed.
The SMSF also pays CGT. if it sells a building it pays CGT at the rate of 15% or 10% if held more than 12 months.OK, thanks Terry. I'm sitting down with someone early in the new year to work this out, just looking to go armed with as much info as I can.
I'm thinking the key will be ensuring the cashflow in the SMSF is workable, this will obviously depend on the income from rent and super contributions compared to the cost of financing the property loan and other costs associated with running the SMSF. I'm trying to kill too many birds with the one stone;- I don't want to burden the business with a massive rent and our super contributions are way down on what they were since starting the business (and drawing a smaller salary). I'm hopeful the leverage over the long term will still far outweigh these short term issues.
Any other advice on the other questions?
You need to carefully consider succession planning. Super doesn't form part of your estate. Although you can direct that it goes into your estate.
Make sure you have a company as trustee (90% don't apparently) and have binding death benefit nominations. Consider succession of the company as well as the trust and also consider the taxation implications of who the super proceeds goes to. Dependents are taxed differently from non dependants.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terry has wrapped it up quite elonquantly.
Remember an Asset sold in the SMSF whilst in Pension phase is actually Tax free so if you purchased the Commercial property kept until retirement, commenced an annuity and then decided to sell the asset all home and hosed.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:Terry has wrapped it up quite elonquantly.Remember an Asset sold in the SMSF whilst in Pension phase is actually Tax free so if you purchased the Commercial property kept until retirement, commenced an annuity and then decided to sell the asset all home and hosed.
Cheers
Yours in Finance
OK, this is where I was a little confused. I neglected to mention that the plan would be to retain the asset in my SMSF until retirement.
With super there are different stages or phases – the accumulation phase up until 'retirement' and then the 'pension phase' once you meet certain criteria – usually age of 55+ but rising to 60. Another is if you have a serious disability or illness.
The income of the fund is taxed differently in each phase.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
TicTok wrote:My first post and I think this is the right forum but it could fit in a couple.I'm hoping there may be a few knowledgeable people here who can give me some pointers in the right direction and some advice.
- My wife and I are close to 40 yrs of age (me on the wrong side and her on the right side).
- We have only been in Australia about 8 yrs and my wife has been on mat leave for a few of those so our Superannuation is not huge, around $140k between us.
- We don't own property in Australia although we are both citizens.
- My wife works. I own a small business which has been operating from a home office.
- Next year I want to move the business in to some office space.
- I am thinking of combining our superannuation and starting a SMSF
- I would use the cash in the SMSF to purchase a commercial property for around $300-400k. Looking at offices/suites around 50-70m
- The property would be rented to my business at market rent
Specifically with regard to the financial side;
- It looks like a no-brainer. If I can take $150k, buy a property for $400k, have the majority of the mortgage paid by the tenant (me) and assuming a capital growth of 5% p.a. over the next 20 yrs then just over $1mil tax free. Leaving the $150k in the super and allowing an average 5% return I'd not even have the price I paid for the property. Am I missing something?
- Correct that capital gains are tax free whilst it remains within the SMSF?
- I understand that the start up costs are high relative to the amount of super we have but would the ability to leverage the cash outweigh this over the long term?
With regard to property purchase;
- Rent returns seem to be hugely variable dependent on location etc. I'm not too bothered about rent returns but more interested in capital growth over the next 20 years. Should I be concerned about yield %?
- I'm flexible where the business is based and am considering Melbourne CBD, South Melbourne, Melbourne Docklands, South Yarra. Any areas that are considered better or worse for long term growth? Advice on good areas for commercial property of the type we need would be appreciated.
- Any other advice with regard to fees, buying off the plan etc. would be appreciated.
Thanks in advance for any advice.
Mike
Something happened to your post – it appears to be nothing but a quote of the opening post.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw wrote:MikeSomething happened to your post – it appears to be nothing but a quote of the opening post.
Mike is perhaps inspired by the Dao De Jing:
?????????
Those that know do not speak, those that speak do not knowTerryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Mike has sent me a PM saying there is a problem with the replies appearing with the quotes – which explains his silence.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I preferred your original explanation Terry.
But getting back to business. 5% annual growth may be bullish but returns offset cg. generally you would factor in vacancy however being the tenant you’re fine unless you outgrow/leave the property.
Location: you’d need a crystal ball to pick the best locations but none of those are bad areas. you should still do your due diligence, swat analysis etc for each site……. Review competition/alternatives Etc…….
Scott No Mates wrote:I preferred your original explanation Terry. But getting back to business. 5% annual growth may be bullish but returns offset cg. generally you would factor in vacancy however being the tenant you're fine unless you outgrow/leave the property. Location: you'd need a crystal ball to pick the best locations but none of those are bad areas. you should still do your due diligence, swat analysis etc for each site……. Review competition/alternatives Etc…….Thanks Scott and Terry. I've found somewhere in South Melbourne and put in an offer. Likely it will be funded through SMSF (it stacks up well with positive cash flow) but if not then I'll fund it directly.
I'm sure I could have done more research, looked at more property but from what I have seen we are talking about marginal differences. Like you say… no crystal ball. I think I have the answers to most of my questions. Frankly, I can earn more working on my business than spending time looking at property. I'm encouraged by the fact the property is new, mostly sold and leased and the area is entering a stage of regeneration.
I'll report back in twenty years and let you know how things turned out.
Cheers!
Tic
If you have put in an Offer i hope you have the SMSF Trust Deed all set up.
The Bare Trust will need to be noted on the Purchase Contract and finding a Solicitor open this time of year to prpeare the Trust is not going be to be easy especially if they want to accept your offer fairly quickly.
Lenders are still processing applications over Xmas but most are on skelton staff for the next couple of weeks.
We have a couple of settlements due on the 30th and not easy to get booked in.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Qlds007 wrote:TicIf you have put in an Offer i hope you have the SMSF Trust Deed all set up.
The Bare Trust will need to be noted on the Purchase Contract and finding a Solicitor open this time of year to prpeare the Trust is not going be to be easy especially if they want to accept your offer fairly quickly.
Lenders are still processing applications over Xmas but most are on skelton staff for the next couple of weeks.
We have a couple of settlements due on the 30th and not easy to get booked in.
Cheers
Yours in Finance
All in hand. Everything will be in place by the time it is needed. They cant do anything their end until the 16th. I have pre-approval on the loan. I have someone setting up the trusts and companies. Solicitors I have. Contracts won't be signed until at least the end of Jan. Anything prior is in my name or nominee. Of course nothing will go that smoothly but once the ball is rolling then at least I have some goal posts to kick it toward.
Thanks.
Guys can I ask a question from someone looking to do a similar thing, see “Help Needed” posting today. If TikTok is using SMSF to purchase the property is there not a criteria that states most lenders will not provide more than 60% of the LVR which means that TikTok needs a minimum of $150k which he does not have in the fund, plus I was led to believe you cannot use more than 80% of the fund at any one time. Apologies if I have missed something but I ma brand new to this and TikTok’s dilemma is right up our street. Thanks
Hi both
Depending on the type of Commercial security you might be able to go to 70% lvr.
Also there is no legislative requirement what percentage you can as long as the Investment strategy drawn up by the Trustees does not stipulate such.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
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