Self Managed Superfund

[Georges]

Hi all

Does anyone here have a self managed sf?

1)What kind of investments do you have in there - properties or shares or both?


2)What's the tax rate of a SMSF? Eg, if i buy a property in a Unit Trust, and then transfer to SMSF in future, I suppose the tax rate is 10% (is that on the transfer, or 10% on the future income of the SMSF)?

[Qlds007]

1) Yes. Shares / properties / wraps / secured personal loans / instalment warrants / Investment in a real estate agency.

2) The rate of interest on a SMSF is 15%. 10% on a Capital Gain where the Asset is held for 366 days or more. You will not be able to transfer a residential property into your SMSF.

[Pushka]

Yes, have had our SMSF for over 10 years. It has assets in shares (60%), cash in deposit notes, property (a marine berth!) and collectables. I love having the 'freedom' of working out the investments, not having to pay the fees to others who dont do any better than we can (average around 20% growth) and just watching it grow.

Tax rates have already been explained above, if you hold shares that pay imputation tax at 30% then that covers all the taxation needs.

I think Unit Trusts have now been banned from Super Funds.

[LynnH]

Yes - have just recently (2 months ago) set up an SMSF. Hubby also retains a small investment in the company super fund to take advantage of life insurance and income protection benefits (which are crippling to access outside super due to his occupation).

Investments within the SMSF include shares, managed funds, property trusts (for commercial and overseas property) and cash (of various types). Basically, our idea is to keep shares/etc in SMSF and properties as personal investments. We are contributing as much as possible via salary sacrifice to superannuation, and use equity/borrowings to fund property purchases. All investments are analysed w.r.t. applicable tax rates (hubby highest rate, me lowest) and best holding entity. I also have an individual share portfolio with emphasis on yield and franking to take advantage of imputation and lower personal tax rates. Seems to be working a treat to date.

Cheers
LynnH

[Georges]

does the regulations & tax rates always change regarding SMSF? I was told that the laws change very frequently re it.

[MattR]

does the regulations & tax rates always change regarding SMSF? I was told that the laws change very frequently re it.

The laws are constantly changing with respect to just about any aspect of taxation, not just superannuation. However there has been a significant amount of change to super in the last two federal budgets, which you may or may not recall went along the lines of the catchphrase - "simplified super".

Where will super end up in the future, I can't chrystal ball that for you! However, I would suggest that any federal government who tampers with it in a negative manner, ie increase tax rates, will be in for a huge fight - there is sooooooo much money under funds in superannuation, be that in SMSF's or public funds.

With respect to Unit Trusts - yes, super funds can still invest in (private) Unit Trusts but care must be taken in the establishing and maintenance of the investment.

As to what you can invest in when using your SMSF, I have a number of clients whose investments include diverse items such as;
- vintage wine
- works of art
- stamps
- vintage coins and bank notes

...however the general investments would be;
- publicly listed shares or managed funds
- property, both directly and also via unit trusts
- insurance policies, and
- cash

[davewill]

Hi, first post for me!
I have had a smsf for about 8mths now and did some research before setting it up and seem to remember that a smsf can invest in unit trusts held solely or widely.
If the trust is held solely then there can be no monies borrowed by the trust but if held widely then the trust can borrow money.
Thats why you can invest in geared managed funds/listed property trusts as they constitute as being widely held.
dave

[MattR]

Good onya davewill.

Yep, some old funds pre 1999 may still be invested in (private) Unit Trusts with borrowings but they have until 2009 to have that fixed - I think!! None of my current clients are in that scenario so I haven't looked into it for a while,( may have the dates wrong).

[Georges]

Hi Davewill and MattR

YOu said the unit trust cant borrow money. Meaning, If i buy a property under my own unit trust, then in order for my SMSF to invest in my unit trust, i have to pay back the loan for that property before. Is that correct?

Seems like a very strange law

[Pushka]

My accountant said that any current Unit Trusts involving Super Funds had to be wound up in 2009.

[alexlee]

Georges, I know you didn't ask this question but I'll throw it out anyway. How old are you? As others have said, super rules are changing constantly, and if you're young a SMSF, especially one where you put extra above the 9% SGC into it, may not be the best choice. You have to wait until you're at least 60 to access it without penalties, and who knows what will change until then.

For example, if you want to invest in shares and unit trusts, a family trust structure might be better? Of course it depends on your age, whether you have a family, etc. But IMHO a SMSF isn't the best structure in all cases.
Alex

[Georges]

alexlee,

hi thanks for the info. Im 30 years old. I just want to structure my investment properties properly, as some people have said using a Unit Trust now allows it to be transfered to SMSF later, while using a Hybrid Trust doesnt.

:confused:

[alexlee]

hi thanks for the info. Im 30 years old. I just want to structure my investment properties properly, as some people have said using a Unit Trust now allows it to be transfered to SMSF later, while using a Hybrid Trust doesnt.

Don't know about the UT transferred to a SMSF, but I would ask this: you're 30 (so am I, BTW), and you have a desire to invest. A SMSF isn’t the best structure for direct investment property, IMHO, simply because it can’t gear easily. Certainly it’s very difficult to do the standard buy-refinance-buy more thing if the properties are owned by a superfund.

The biggest issue I see with SMSF is that the earliest you can draw money out of your super fund without penalties is at age 60. I would argue if you gear by a reasonable amount and just buy residential property, you won’t need 30 years to get rich.

We also run the risk that the govt raises the minimum drawing age before we hit 60. Who knows what’s going to happen in 30 years, especially with a fairly new vehicle such as super? On the other hand, family trusts (and your own name, of course) are tried and true vehicles with tons of precedent and tacit political support. I’m seeing a future when retirees exhaust their retirement funds because they live longer than expected, government pension costs increase and the govt decides to make people work longer by changing the super rules (e.g. bumping that minimum drawing age to 65, for example).

Obviously I have no idea what the govt is going to do. However, at age 30 I would seriously consider using your own name or a family trust to buy IPs. Much more flexibility, and since the IPs will probably be negatively geared to start with, by the time it becomes positively geared you might have a spouse and kids to distribute to? This is my own situation: I am getting married and my fiancé isn’t going to work. So she’s one big tax shelter.

IMHO a super fund is best for older people (say 45+, at least) with businesses to sell. For younger people like us, you have to ask whether you might be better off with a more flexible structure.
Alex

[Mry]

Here is an excerpt from a presentation I did in February to the Better Investing Group in Brisbane.
Unit Trust advantages
Buying an investment property in a unit trust allows you to sell it to your super fund later on in return for the super fund’s cash! There are restrictions though (The property must be purchased to begin with in the trust - no transfers from related parties. The unit trust must have no debt and the property can not be used as security for another loan. The unit trust cannot invest in anything else (eg shares on the stock exchange). The unit trust cannot run a business (so starting a property development would fail). Break any of these rules and the investment is an in-house asset – which means 46.5% tax if it exceeds 5% of the net assets of your super fund – and you can’t go back.)
A lot of people later on in their lives start looking at their super and saying ‘How can I get that money into my own name while holding on to my assets?’ If you own non-business property eg residential houses, you can’t sell them to your fund without breaching the in-house asset rule. But you can sell units in a unit trust that you or a discretionary trust owns. There is a capital gain element involved but now all future capital gains are taxed concessionally or free and you have the money out of the super fund to do with as you wish.

Of course you can sell commercial properties to a super fund without these restrictions, except for the debt ones. You can always contribute a residential property in specie but you won't get the super fund's cash in return for it.

[alexlee]

Very interesting, Mry. Though I'm concerned about that "The unit trust must have no debt and the property can not be used as security for another loan" bit.

One could, of course, just buy IPs and refinance and buy more (as per the normal strategy) in the unit trust. Then at some point sell down enough IPs to pay out all debts, then move the trust under the super fund.

Would I be right in thinking that this is basically one way to ‘exchange’ money in the super fund for residential property, and that it would involve CGT on the transfer of unit trust units?

For a young investor, would there be any advantage in doing this compared to, say, just keep growing IPs in a family trust?
Alex

[davewill]

From the research i did last October on the ATO website it stated that SMSF may invest in unit trusts with a list of conditions.
One of them being that the trust does not aquire an asset from a related party other than business real property.
I thought this would mean that you cannot transfer units in a trust that had residential property.
Dave

[Mry]

davewill, it means that the trust cannot acquire a residential property from you and then sell the units to the super fund.

Example -
Max has an unencumbered rental property and wants to trade it to his super fund for cash. Max finds that he can't do that because a super fund has restrictions on what it can trade for. Max finds that there is an exclusion on units in a unit trust so he sells it to his unit trust, pays stamp duty in the unit trust and capital gains in his own name, and then transfers the units to the super fund in return for cash. Max thinks he is clever.
Unfortunately, since the unit trust is not allowed to acquire assets from a related party, his super fund breaches the in house asset rule and pays a load of tax next year.

[davewill]

Mry, thats seems to make sense. Why cant the smsf purchase units if the trust owns shares and property?

[agent007]

Here is an excerpt from a presentation I did in February to the Better Investing Group in Brisbane.


Of course you can sell commercial properties to a super fund without these restrictions, except for the debt ones. You can always contribute a residential property in specie but you won't get the super fund's cash in return for it.

I read that a Unit trust can borrow money if the SMSFs that hold units in the Unit trust are not controlling entities. Is that still the case?

Thanks,
James.

[Mry]

Mry, thats seems to make sense. Why cant the smsf purchase units if the trust owns shares and property?

The rules state that the unit trust can't own an interest in something else. Its rather a strict law to prevent people doing silly things to circumvent it.

agent007, I don't know the answer to that question. Super law is pretty deep. Someone else may know.

[redwing]

As to what you can invest in when using your SMSF, I have a number of clients whose investments include diverse items such as;
- vintage wine
- works of art
- stamps
- vintage coins and bank notes

...however the general investments would be;
- publicly listed shares or managed funds
- property, both directly and also via unit trusts
- insurance policies, and
- cash

Hi Matt,

Can a SMSF still do a JV with another entity to purchase residential property, where theother party is loaning money (the SMSf is not)?

If you had Stamps, Coins, Art etc could a SMSF purchase those in regards to "Related Parties"?

[MattR]

Hi Matt,

Can a SMSF still do a JV with another entity to purchase residential property, where theother party is loaning money (the SMSf is not)?

If you had Stamps, Coins, Art etc could a SMSF purchase those in regards to "Related Parties"?


SMSF's and JV's are up in the air at the moment. Two tax specialists I use for setting them up are no longer doing them - and I am kinda guided by them as it's beyond my kin.

I think in Melb the solicitor's Cleary Hoare are either still doing them or have warned against them.

As for the Stamps, coins, art etc the "Related Parties" rules apply for them also ~~ some would say, especially for them.