I run a business as a sole trader presently and have some residential properties long term renting in my personal name (from the days when i knew nothing about tax).
I presently have a discretionary trust which I set up with me as trustee holding a share portfolio.
I have an impulse to purchase commerical properties and hold them as rentals and am looking to change from sole trader to a company. I may join a person as a partner in my business too in the next 12 months.
Is it worth making it a superfund or is that not possible?
is it better to have a unit trust?I am 30 but want to do a lot of planning for the future now.
Is there any benefit in having an accountant set this up, or should i do it myself?
You may have an issue in transferring more than $450k (over 3 years) into a smsf unless you already have that much in another superfund. An accountant should be able to help you sort out the right structures for your goals.
Daaussie,
First I shall congratulate you on the thought of converting from sole trader to company. This is a great move to protect your hard earned assets.
I would also like to make some comments regarding your queries above.
1) Existing IP held personally
From a purely asset protection perspective it would be preferable to transfer the personally held IP to a structure that provides better protection – although you have decided to trade under a company going forward I assume you are still subject to warranties personally for work done whilst a sole trader, not to mention other non-business related claims against you personally.
I shall note that albeit traditionally family trusts offered better asset protection than super funds did (particularly for those with unhappy wifes) following recent cases (such as the Westgate case) discretionary trusts can no longer be said bullet-proof. In light of the concessionally taxed status of SMSFs, I would usually recommend to transfer passive assets such as IP to SMSFs where possible.
From a tax perspective, however, things are more complicated!
First, if the IP is currently being negatively geared, transferring it out means your personal tax return could no longer have that nice rental property deduction…Hopefully you can generate enough income in your family trust/super fund (such as dividend income) can use these negative gearing losses.
Second, an immediate capital gain tax (CGT) would likely to arise if you transfer the IP to your family trust. However you should be able to get a 50% discount on the tax if you have owned the IP for more than 12 months and 2 days. In contrast, no CGT would arise if you transfer the IP as an in-specie contribution to your SMSF. If the value of your IP is below $450K, you could transfer the IP to your SMSF in one go NOW and do not have to wait for 3 years (provided you have not done similiar transfers before). If however the value of your IP is above $450K but below $900K and PROVIDED that you trust your wife, you can transfer 50% of the IP to your wife, and then each of you make a $450K contribution to the SMSF (it has to be your wife for stamp duty reasons below). If the value of your IP is above $900K – there are still very good strategies around but I would not try to explain them here for fear of confusing everyone reading this post.
Third, an immediate stamp duty (at least for NSW and VIC) would arise if you transfer the IP to your family trust. No stamp duty if transfer to SMSF or your wife.
2) Unit trust vs company as trading entity
Talk to your accountant. The optimal structure will vary depending on the nature of your business and your other plans. One key difference is that trust beneficiaries can have access to the 50% CGT discount whilst company shareholders cannot access the CGT discount for the company's assets. This is of course not a problem if the trading entity is not going to hold assets that would appreciate in value but it is almost inevitable that as the business grows the trading entity will own something valuable
3) A SMSF
As a self-employed it makes great sense to think about retirement strategy as early as possible. SMSF is easy to establish and operate and I think most accounting firms would provide SMSF services. The establishment cost of a SMSF is generally $500 -$1000, whilst the ongoing costs would vary depending on the activities of the SMSF.
A superannuation fund fits into the general definition of a trust. Assets are held in the fund for the future benefit of the named recipients of the fund. However, members of a superannuation fund do not have the same rights of entitlement as beneficiaries in a trust generally do.
The reason for that distinction is that members of a superannuation fund have a right to receive benefits from the fund but are not absolutely entitled to the assets themselves. Once they place assets into the fund (whether by sale or an in specie transfer) they give up their claim to those assets until the fund ceases to function.
The transferring of assets to a trust is a CGT event (E2) and CGT will be payable on the in-specie transfer. This is explained in Section 104-60 of the ITAA 1997 which deals with transfers of assets to trusts. http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1997240/s104.60.html and also on the ATO website http://www.ato.gov.au/super/content.asp?doc=/content/00094524.htm&page=1#P38_2180 which states "The transfer of an asset ‘in-specie’ is a CGT event as the transfer is a disposal. You may make a capital gain or loss from the CGT event according to the usual CGT provisions that apply to that asset."
You would be prohibited from transferring your residential property to an SMSF. This is confirmed by the ATO in the above link and which states "You cannot transfer a residential investment property to your SMSF. It is not covered by the above exceptions." It is to do with the fact you are a Part 8 associate holding residential property. This does not apply to commercial properties but CGT is still payable whether it is an in-specie transfer or a sale.
With unit trusts you need to be aware of CGT Event E4 and the impact on the small business tax concessions. With companies you need to consider Section 47 with respect to distribution by liquidators and Section 43 with respect to distributions from the company when analysing the impact of the small business tax concessions.
Selling the shares or units may give a different result but you need to consider both the 80% test (with respect to an active asset) and the 90% test for determining whether there is a significant individual.
Also need to consider CGT Event C2 when winding up the trust or company when considering the concessions.
Agree that you need to consider whether the company will hold appreciating assets, apart from goodwill, and the impact of the 50% CGT discount. It may be advisable to hold appreciating assets such as property in a different structure for these reasons.
An advisor can work through these issues with you.
Dont want to pick holes in someones else answer but to just to clarify a few points correctly:
Second, an immediate capital gain tax (CGT) would likely to arise if you transfer the IP to your family trust. However you should be able to get a 50% discount on the tax if you have owned the IP for more than 12 months and 2 days.
The date of ownership for CGT purposes is the contract date and not the settlement date and the requirement is > 366 days.
In contrast, no CGT would arise if you transfer the IP as an in-specie contribution to your SMSF. If the value of your IP is below $450K, you could transfer the IP to your SMSF in one go NOW and do not have to wait for 3 years (provided you have not done similiar transfers before). If however the value of your IP is above $450K but below $900K and PROVIDED that you trust your wife, you can transfer 50% of the IP to your wife, and then each of you make a $450K contribution to the SMSF (it has to be your wife for stamp duty reasons below). If the value of your IP is above $900K – there are still very good strategies around but I would not try to explain them here for fear of confusing everyone reading this post.
A) You are unable to transfer residential property into your SMSF full stop. The event is not covered by the in-specie rules.
Third, an immediate stamp duty (at least for NSW and VIC) would arise if you transfer the IP to your family trust. No stamp duty if transfer to SMSF or your wife.
A) As you are unable to transfer residential property into your SMSF this is not applicable however the transfer of business premises or commercial property into your SMSF does trigger stamp duty.
Richard Taylor | Australia's leading private lender
Dont want to pick holes in someones else answer but to just to clarify a few points correctly:
Second, an immediate capital gain tax (CGT) would likely to arise if you transfer the IP to your family trust. However you should be able to get a 50% discount on the tax if you have owned the IP for more than 12 months and 2 days.
The date of ownership for CGT purposes is the contract date and not the settlement date and the requirement is > 366 days.
In contrast, no CGT would arise if you transfer the IP as an in-specie contribution to your SMSF. If the value of your IP is below $450K, you could transfer the IP to your SMSF in one go NOW and do not have to wait for 3 years (provided you have not done similiar transfers before). If however the value of your IP is above $450K but below $900K and PROVIDED that you trust your wife, you can transfer 50% of the IP to your wife, and then each of you make a $450K contribution to the SMSF (it has to be your wife for stamp duty reasons below). If the value of your IP is above $900K – there are still very good strategies around but I would not try to explain them here for fear of confusing everyone reading this post.
A) You are unable to transfer residential property into your SMSF full stop. The event is not covered by the in-specie rules.
Third, an immediate stamp duty (at least for NSW and VIC) would arise if you transfer the IP to your family trust. No stamp duty if transfer to SMSF or your wife.
A) As you are unable to transfer residential property into your SMSF this is not applicable however the transfer of business premises or commercial property into your SMSF does trigger stamp duty.
Richard Taylor | Australia's leading private lender
I don't think it is picking holes because if you were to transfer the residential property then not only would you have a CGT event which you would need to pay tax on you would also have a non complying fund which would either need to rectify the situation or risk being taxed at 45% on the value of the funds assets.
Exactly Mike.
Richard Taylor | Australia's leading private lender
I just reread the post and saw the comment "no stamp duty if transfer to SMSF". In NSW this is not the case at all. The transfer would be a dutiable transaction and would be subject to stamp duty. Barca no disrespect but it is obvious you have a little knowledge but as they say a little knowledge can be dangerous.
The advice you have given is technically inaccurate and unfortunately many people read these forums. If you don't really know the answer you are better not to comment or refer them to someone who has the knowledge. Our accounting practice is generating a lot of income from answering questions where the advice has been given over the internet and it is incomplete or inaccurate. When you show the client sections of the act, cases and supporting ATO decisions they realise the complexities of tax law. Unfortunately a bill also comes with the advice.
Just a related question with regard to acquiring IPs in unit trust with SMSF and individuals as unitholders and the SMSF slowly acquire all the units lately. Is this allowed ? .
I was just reading a special report from Chris BAtten Investorone website – it seem that he is saying it is allowed.
But isnt when the SMSF acquire future units from related parties ( individuals ) that break SIS Act acquiring "assets" from related parties or am i missing sometime here.
Regards
Henry
So, I am in SA.
(1) Does this mean setting up a superfund and then transferring the assets to that? The thing is I owe about $280K and there is about $320K in free equity or capital there now.
(2) For my business I intend to convert to a company trustee with a unit trust (for partners) , and
(3) when i purchase future IPs I will set up a trust with the company as a trustee.anything i missed here?
recent changes the Super Legislation now allow you to essentially gear your SMSF to purchase both residential and commercial property using instalment warrants.
I have access to funds at 75% LVR for both if anyone interested.
This may be a solution but pleaseeeee make sure the Trust Deed is complying for this purpose as this really is the where most people come undone.
Phil
I thought the new legislation limited the gearing under a SMSF utilisjng Debt Instalment Trust to 70% for Commercial property ?
I have done one for my own SMSF but the was under the impression the recent SIS amendment lowered the LVR for Commercial securities. I appreciate however it is 80% for residential property.
Richard Taylor | Australia's leading private lender
Cant see that written in the ammendment anywhere (just checked)?
Do you know something I dont?
I know when we were looking to get our funds we were shooting for 80% on commercial as well as resi but only got 75% on both.
Taken straight from the new legislation:
Limited Recourse Finance – the funds are advanced on a limited recourse basis. This means the only amount you stand to lose is your original deposit, therefore protecting your other assets from creditors. Due to the increased risk to the lender, the Loan to Value ratio (calculate by dividing the loan amount by the property value) will be lower.
- Commercial Maximum LVR is 70%.
- Residential Maximum LVR is 80%.
Richard Taylor | Australia's leading private lender
Terry,
Still cant see it in the hard copy brief that I have but bmaybe I have the version pre downgrade of LVR.
Will be interesting as I know we have a number of 75% commercial deals in the pipe with Perpetual as the Trustee, maybe again before the downgrade, will keep you informed as to if or when they blow up.
Hi, Im back. Given that company directors are still liable and given that superfunds can be targeted if one is sued, then I guess these structures arent worth the money.
With superfunds, my parents split, and mum got half of dad's super. So i really dont want a company or superfund.
I think they do not provide any better protection than a sole trader.
Disretionary trusts may be better, but I am not sure, and do they have to be set up in a particular way?
Daaussie
Super is still, I beleive, not able to be touched by creditors, if you go bankrupt – unless you have been deliberately pouring money in to avoid having to pay creditors. Trusts and Super (which is a trust) may not be 100% safe, but much better than your own name. There are also tax benefits too.
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
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