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There is nothing new here and you would be close to a MIS – Managed Investment Scheme. Do it twice (20 people) and you are in the sights of ASIC & Corporations Act 2001, S708(1). Get it wrong and you are automatically guilty of a criminal offence and jail beckons.
1. Use a trust, why ? it does not pay tax, and it has the 50% CGT discount., and its simple.
2. Because of depreciation there is unlikely to be any taxable distributions or very small and they will be non taxable as they are accounting profits.
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AnthonyHi Jason and All,
I think you should make a decision to do both.
How can you have a property which is a Home and an Investments Property ?.
By using a special structure which can accommodate both positions, and can also include your super balances and forward contributions.
The set up fee is around $5,000 plus Gst.
$5,000 set up cost is reduced by tax deductible portions. In any case $5,000 amortised over 5 years is just $20 per week.
The taxation treatment is supported by a tax case which the ATO lost and supplemented by an old Public Tax Ruling which is still in force
Some quick calcs.
The tax due on $110,000 gross income is a bit over $32,000 or 28.5% Average Tax rate.
$7,000 PCM = $84,000 p.a.
Tax due on $84,000 from 0 – $84,000 is $21,000
The tax differential is $32,000 – $21,000 = $11,000, that's an extra $900 PCM to go into debt reduction.
I estimate that this will pay off the debt during year 6 or 7.
When the debt is almost gone you can use the structure to buy the next property or use the equity to buy a home but why would you when you can use the structure again ?
Comments invited.Anthony K at A4companies
Hi Paullie & Mike
No, the SMSF Trustee is the boss (it is the only party with money) and negotiates and makes offers the Custodian is the slave and is directed by the SMSF to hold the asset until the debt can be cleared. Before you make any offers you should research your cash flow requirements in the SMSF to ensure that you purchase is financially viable and that the loan you need will meet the lenders criteria and is available to the SMSF. When the vendor has agreed to your offer you can then get the contract drawn with the Custodian as the legal title holder in trust for the SMSF Trustee. As your cash flow has been checked and your finance is under way you can then consider time needed to complete the loan and settle the purchase. It's not wise to exchange contracts until the SMSF has a Letter of Offer for the loan.
Anthony KHello again Paullie
There is an old saying on the "Golden Rule" which is "he who has the gold makes the rule".
There is a bit of mystique around this LRBA (Limited Recourse Borrowing Arrangement) but the essential points to understand are these:The SMSF Trustee is the financier in all transactions, and understanding the effect of this is critical because it creates the SMSF beneficial interest in any asset/s which the bare trust holds on the SMSF's behalf.
There are two separate interests in the asset to be acquired:1. The beneficial interest, the rights to enjoy, use and obtain benefits from the asset, are linked directly to the financial input which all comes from the SMSF.
2. The legal interest (title) which is held by the Custodian, but for the Trustee of the SMSF not for itself.
t cannot benefit from the asset for itself as it holds it on trust for another.So because the SMSF is the money provider and the ultimate asset owner it should be the negotiator, the Custodian is merely a passive servant of the SMSF and is directed by the SMSF trustee as to what and when it is requierd to do.
Hope this makes it easier to understand for you.
Anthony K
Hi Paullie,
You have most of it right.The Structure.
your SMSF Trustee must have all 4 members as Directors, this is what the SIS Act requires. However it says nothing about shareholders a critical omission as the company and the Directors have to follow the resolutions of the shareholders. This is a very strange anomaly. It would be normal and best practice for the shareholders to be the same as the members of the fund with each holding the same number and type of shares as to voting rights. This helps to provide equality between the persons involved. Notice I said "helps" not guarantees as it does not stop 3 members ganging up on No. 4 or stop a 2 against 2 deadlock. So you see it does not have to be a $2.00 company at all, the amount of capital subscribed by each could be $1.00 each (times 4) but just as easily can be $5.00 each as there is good reason to have more than a single share issued..
Your SMSF Trustee should be a Special Purpose company with a restrictive (Non Trading) Constitution as this guarantees the minimum ASIC Annual Fee cost will apply.The Custodian.
Should be formed before the contract is drawn to ensure the name is guaranteed to be available and owned by you before you commit the vendor to prepare a contract. You can reserve a company name for 2 months by lodging a Form 401 with ASIC and paying a $42.00 fee so that you control it till you want it. You can then get the vendor to ask his solicitor/conveyancer to provide a contract for you and make a formal offer. If you don't have the ability to have a contract drawn the vendor may lose interest in you in favour of some other buyer. Lastly, you can legally enter into a "pre-incorporation" contract including the company name before the company is formed which can them be ratified by a resolution of the company after it is registered. Also the loan application has to have the custodian name included as the legal title holder. For all these reasons it is in my view best to get all your structure complete with a bank account and the necessary ABN and TFc numbers so you are actually ready to do the deal. Remember it will take about a month for the SMSF ABN and TFN to come through and then another 3 – 4 weeks to get your existing funds rolled over so you can pay a deposit. The Custodian will only need an ABN and nothing else as all financial transactions will occur in the SMSF bank account.The Name on the Purchase Contract
The correct legal and beneficial ownership structure details are these:
"Custodian Name ATF (as trustee for) Bare Trust Name in trust for Trustee Name of SMSF Name" because this traces both aspects of the two parties as trustees.
The Land Titles Office will only ever show the legal title holder, that is the Bare Trust Custodian, but it's important for the security of the SMSF's beneficial interest to show it in full.
Some Solicitors do not agree with this but very few of them have much experience with SMSF as most have learned it since 2007 when SMSF borrowing was legislated. However my company geared many thousands of SMSF from 1992 onwards (after Forli Pty Ltd V the ATO in 1991) using attached Unit Trusts which are still viable if structured in the hands of a competent adviser. Since 2008 we have had the task of taking on several large law firms and correcting their mistakes over the past 2 to 3 years in circumstances where their predatory anti client activities were very obvious simply because they want to force our clients to use their own in house documents to generate income for themselves.
Also there is no need whatever for Bare Trust documents to be amended as the property details are not included anywhere in the those documents. The SMSF Trustee makes the purchase offer and how they finance it is no business of the vendor, this is strictly in the hands of the SMSF Trustee as they will own all the beneficial interest in the property.The Way Forward
My advice on these purchases is be better prepared than you would be for simple personal acquisitions. These SMSF loans involve more information, more work and more paper so I suggest that you prepare well and have the structure in place before you make your first purchase offer. Buying in a rush is not beneficial to you and doing business is best done at your pace with no external pressures.A short note about A4Companies: We have been establishing and advising on SMSF, various trusts and companies for small business and investors since 1978 that is 33 years so there are very few issues for which we do not have or cannot design a solution.
Regards to All.
Anthony
Hi Rory, Richard & All
Unfortunately there has been some loose talk on this subject.
let me please help you all, unless you explain in detail EXACTLY what you propose and HOW you intend it to be implemented you will fail if the ATO later decides to examine the transactions.
Example:
Richard, I take issue with you on a planned continual strategy whereby you regularly buy and sell properties within your SMSF. This is not an activity which I feel is concentrating on retirement but actually resembles a trading entity activity.
It also resembles share trading except the traded assets are different. Now I know we will have adherents who state that this can occur. The ATO is on the record in the Private Binding Ruling (PBR) area which clearly state that this is not an activity which a complying fund can follow without major risks of breach. I studied over 20 PBR's for research on a proposed client strategy and it is clear that the ATO will act against these sort of arrangements. This now brings me to the Investment Strategy, if a fund is investing and regularly trading in derivatives which is essentially what bare trust borrowing involves – it needs to have a Risk Management Strategy which is a very comprehensive technical document that the majority of SMSF trustees would not have the experience, education or knowledge to compile. I also put it to you that if you had a fully stated strategy of purchase and resale of any item as your strategy you would get a "please explain" from your Auditor or worse a Qualified Audit and perhaps an ATO incident report.
Yes you could have an acquisition period followed by a change of strategy and a sale process. However you would need to be cautious if this was a regular and continual process.
My tip is this – always review everything you propose carefully as seen through th eyes of an objective third party, or better – via the ATO's view as a collecter of your SMSF money if they can treat you as a transgressor of SISA/SISR.
Regards
Anthony
Hi Rory and All
Thanks for the info Rory,
so your SMSF puts up $100K and the vendor puts up the balance,
Then you share the profit 25% – 75% ?
What does the bank do ? its irrelevent if the vendor replaces the bank and the fund has not borrowed unless the title has been changed to the SMSM – Security Trust. ?
OR
Your SMSF has $100K deposit and the bank puts up $300K ?
The highest current bank LVR is 80% so thats fine
For you to make 10% on $100k someone has to pay 10% on your SMSF equity or loan.
I am still confused by your deal Rory.
Please respond.
Regards
AnthonyHi Rory and All
I have been establishing SMSF's and planning asset acquisitions mainly in real estate since the late 1970's but this description by you Rory has me baffled. You have $100K in capital which takes up a 25% interest in a property. Who supplies the other 75% – $300K ?. How does the SMSF gain a 40% return but only provide 25% of the capital ?. Is this gain gross or net of costs ?.
Your terminology of "opportunity cost" appears to be incorrectly applied and with such loose descriptions your SMSF planning would be ill founded. Setting out explicit detail is critical when financial relationships are planned to be made and which involve a SMSF.
Finally a SMSF investing in a venture capital company would usually happen via a shareholding and having read many dozens of ATO Rulings both Private Binding and Public determinations the risk of company dividends being deemed to be "special income" and taxed at the highest marginal tax rate is extremely high and probably cannot be avoided. If you are considering any plan of this nature it must be detailed in conception and execution as to how it is to be initiated and how it is to be finalised i.e. what is the exit strategy to be developed by the SMSF and other parties.
I would be interested in more precise details of the proposed arrangements.
Regards
AnthonyTerry
Try reading SMSF Ruling SMSFR 2009/1 its all about BRP, you may be surprised at what it includes.
However I cant see the point in putting a lease expense in a SMSF and it will probly breach S65 anyhow.
Another issue is that the above ruling states that property laws state that any appurtenances which are attached become part of the land title. So your friend has only a right to occupy under the lease terms and has no other rights. When the lease is up the building will stay with the property title holder.
Cant see any virtue in messing with it Terry.
Tell me if you can.
Regards
AnthonyHi Terry & All
You mean S66 (3) ?
Well I see this as a permitted act, as it does not result in a breach for the reasons stated before. If the ATO want to augue that a breach has been committed because of S65(3) then you have an "arguable case" in response and an AAT defence. This is one of the problems where the Regulator also collects the taxes and applies penalties. SMSF's need an independant regulator without an axe to grind as we had when the iSC was the regulator. Just always remember the ATO does not make the law although it tries to pretend it does.
Regards
Anthony
Hi Terry, Brett and All
This is possible but first correct your terminology.
There must be no "transfers" or "selling".
The correct terms are "issue" and "redemption" of units.
S 66 prohibits the "intentional acquisition" of assets by a SMSF Trustee from a member or related party.
Business Real property and some other itemised assets are excluded.
So heres the strategy based on my 33 years experience as a specialist SMSF practitioner advising on property and business acquisition planning.
1. You need the right unit trust deed with the necessary definitions and permissions,
2. The SMSF can apply for new units to be issued,
3. After they issued and unit price has been paid, certificates issued and transactions recorded, then
4. Units owned by related parties can be redeemed for cash in the trust,
Warning ! if some time has elapsed since the assets in the trust were acquired you will need to consider changes in value to establish unit prices on an arms length basis (S109 SISA) and CGT consequences. A market valuation may be necessary.
Why does this NOT breach S66 ?
Because the asset to be acqured (new units) is and has not ever been an asset owned by a related party. Why is the unit being issued by the trust (which is a related party) not an asset – because it is a liability of the unit trust and only has value to the owner – the SMSF which is obtaing a newly created asset.
Why is the issue and redemption not a "transfer" = because all the units exist at the same time and are owned by different parties. Thererfore they cannot have had ownership of the same assets,
We have developed many very useful and powerful strategies over the years that enable many "impossible" outcomes.
Regards
Anthony at A4Companies
Hi JacM & All
Yes JacM but if the parents can qualify to make super. contributions, they could proceed like this.
They have equity in the properties so they could sell some equity to the kids who can borrow and use parents property as security, It needs to be set up properly on an arms length basis. The kids can deduct the interest and the parents can use the cash to make either or both deductible and non deductible super. contributions and buy new properties in the SMSF using some super. gearing. All parties get benefits this way and risk can be minimised if it is properly planned and documented.Also a correction when I said: "The old pr 1999 unit trusts were always the best vehicles when you could put a business in the UT and guide all the profit into the UT." there were 2 typos.
It should have said: The old PRE 1999 unit trusts were always the best vehicles when you could put a business in the UT and guide all the EXCESS profit into the SMSF."
Regards to All.
Anthony KHi Swampy & All
New reduced contribution limit for 2011/12 tax year is now $25,000 for concessional (deductible) and $150,000 for non-conceesional(non deductible). The government has announced changes that, if passed by parliament, will permanently increase the concessional contributions cap to $50,000 for individuals who have total super balances below $500,000 and are 50 years old or over. Its not like the good old days any more when you could put in $100K at age 49+.
There is still the back door method using borrowing and leverage to increase the invetsment input, provided there is sufficient cash flow to manage the interest cost. Also there are options if you can amalgamate two SMSF and add an unrelated third party so that the SMSF dont have more that 49% control. The 3 parties can then use a geared unit trust to invest jointly, but this sort of strategy is not for older persons with limited financial muscle and shorter term time to retirement. The old pr 1999 unit trusts were always the best vehicles when you could put a business in the UT and guide all the profit into the UT. After 2009 it now requires a re-structure for them to be able to function like they did pre 2009 times. These old structurers can still movce around all the caps if used correctly.
Regards
Anthony K @ A4CompaniesHi JakM and All
Sorry JacM cant do: if the properties are: not commercial (Business Real Properrty) and title is in names of (parents) individuals, its prohibited by S66 of SISA.
The properties must qualify as Business real property to be transferable, there is a useful ATO Ruling issued in 2009 on this subject. Self Managed Superannuation Funds Ruling SMSFR 2009/1, but its a lot of reading and quite technical but has some good insights. I have been establishing, advising and working with SMSF daily since 1978, so for me I have developed with it as its changed, Nowadays there are many recent newcomers without sufficient depth of experience and SMSF is not something you should get wrong as the penalties can be very costly and include jail time.
Regards
Anthony K at A4CompaniesHi Johnosbourne & All
We all know that life has 2 penalties when you invest,
If your venture fails you can be bankrupt,
If it succeeds you pay tax, I think this is a better option, but pay the minium legally due.
A much cleverer guy than me said "Life is a cruel choice between work and daytine TV". so life is all about choice:
at least your parents have some choices.
Not enough detail to decide a way forward but xdrew is on the right track, to make changes use offset strategies for CGT, spread your divestments over time and persons where possible to minimise and THEN offset. deductible SMSF contributions over time can help.
Remember these key points:
1. There is a cost to do nothing and a cost to do something – do the study, measure the Benefits v Costs, and make a choice.
2. A problem well stated (defined) is a problem half solved.
3. There are 4 "D's" in tax planning, Deduct, Divide, Defer and Discount, a good balanced tax minimisation strategy uses them all.
4. Every time you decide to proceed with a new venture ALWAYS work out your exit strategy and plan your tax position – BEFORE you go forward.
.
Anthony K at A4CompaniesDear Ross and Jacqui
I attended a seminar in Port Macquarie a few years ago with Russ Dodson, Google him at http://www.familyfirst.net.au.
Russ is a very impressive guy who knows everything about the industry as he has sold many motels and owned and run a number as well.
He can put his fingers on any detail in the industry or knows where to get it.
Good Luck
If you want help to structure the purchase, let me know.Anthony at A4companies
Hi Raydenhead and All
Just thought I would throw in my 2 cent's worth.
Re: AFS licencing, I had one from 1991 to 2003, very boring occupation no wonder they all like jargon its the only way to make the time palatable.
OK Raydenhead, NO you are not setting up a Managed Investment Scheme (MIS) read S708 of the Corporations Act 2001.
To fit into an MIS there are 3 criteria, 1. people subscribe money, 2. the money is pooled and 3. the profits are shared.
But you can do an MIS under S708(1) without a prospecctus or a license, for up to 20 people, in < 12 months, and not > $2M. But its not a job for the faint hearted and it carries risks if it goes wrong..
What you are doing is a partnership or a joint venture, NO they are not the same. Your deal looks more like a JV.
I suggest you structure your relationship under a business structure somewhat like this, set up a company trustee and family trust each and do a JV with the trusts under a written agreement as to who does what and who gets what. Dont foreget the agreement may attract stamp duty.
Costs about $1,100.00 each plus 30 mins free advice. Any more and its $350ph.
Structure protects each party from the others risks if anything goes pearshaped and you can use and re-use your structure as many times as you like.
Financially its simple get a joint bank account for the project costs with both to sign. This structure gets the 50% CGT discount, its much cleaner than a partnership and much safer if things go wrong.
Have fun !
Anthony KHi Maccacha and All
This query highlights the way most people investing behave,
They take decisions and buy an investment and then try to work out the best way they might have done it !!I have seen this scenario replayed hundreds of times in the last 32 years and am constantly asked for example how to legally minimise a CGT cost when they are ready to sell. You need to make this decision BEFORE you buy.
The most important aspects to any investment is this:
1. Know what you are buying – do your research well,
2. Know HOW you make the investment – what investment structure is best for your circumstances, personal position and required outcomes ?
3. Research your gross and net after tax returns and cash flows, build safeguards into your financial position.
4. Debt can be a powerful ally if properly used, it can also be a very powerful destroyer of capital if used unwisely,Shakespeare said:
"Or doubt are traitors which make us lose the good we oft might win,
by fearing to attempt"
I believe that doubt can be useful if it makes you consider or re-consider how you should proceed with an investment or not, its a positive thing which can produce a better outcome.
So doubt and debt can be good for you if you add a third thing.
That thing is METHOD, develop a methodical approach to your investment habits.
Make a check list of all the good, bad aspects of the investment and anything that may affect it.
Check the list with other investors in case you missed something.
Look at the upside and the downside.
Do enough research to be sure exactly how you think the investment might play out.
Be prepared to recognise when you need to jump ship and get out to reduce a loss.
There's a lot more but I think the methodical process is a good way to make a surer start.
There is an old engineering adage that describes this way of thinking, its this:"a problem well stated (well described) – is a problem half solved"
Happy Investing !
Dear TerryW
Please explain in simple terms why "this is clearly incorrect".
Give a clear explanation and reasons supported by any third party basis.
I hav'nt got time for the next wek to go research again, my view is based on what I have done over 30+ years of study.
I recognise that I am not infallable.There are a number of elements in tax planning.
1. Is – what do you intend to do and what is the outcome you are looking to be derived ?
2.. Over what period ? and what kind of financial outcome ?, Production of net income ? or a Loss ? but maybe the sale of an asset which is not part of your business trading stock ? and is purchased for "investment".
reagrds
AKHi All
This is starting to look like Shakespears play – Much Ado About Nothing,
Facts:
You have traded as a company for "several months", your CGT assets (Goodwill + Business assets less stock is worth what ? Minus establsihment costs etecetara ad commissions on sale ?) This is a business Non Event guys.
You could'nt get $ 100 bucks for this shebang on the open market – people would laugh at you
I live in the real world – private family companies rarely have any market value – thats the truth,
I have had lots of clients over 30 years, how many sold their businesses for real money ? very few.
Most people who want to sell a business have a single motivation – its a failure or failing,
Please guys this is not what I believe this site is designed to deliver <moderator: delete language>.
But I still love you all
Anthony
