Buying & Selling with a SMSF

[beachy]

I spoke to a very wealthy 70-year-old individual today who's said he's had a SMSF for about 20 years and has been buying and selling within his super fund and building it up over that time - only paying 15% each time he sells the property. He's also a builder, so mostly been buying land and building houses, selling for a profit - rinse and repeat. I have no doubt he is telling the truth as I've known him for about 5 years and owns a lot of property, but is a bit old school. Had the same accountant for 40 years he said.

I didn't think you could buy land and build and then make a profit within a self-managed super fund (yes, I know the profits are contained within the fund and you can't withdraw them), or buy a house, renovate and sell?

I tried to do some research on SS and Google but just couldn't locate the right info. I might ask this wealthy individual, but I know he's a bit private when it comes to these things.

 

[westminster]

I spoke to a very wealthy 70-year-old individual today who's said he's had a SMSF for about 20 years and has been buying and selling within his super fund and building it up over that time - only paying 15% each time he sells the property. He's also a builder, so mostly been buying land and building houses, selling for a profit - rinse and repeat. I have no doubt he is telling the truth as I've known him for about 5 years and owns a lot of property, but is a bit old school. Had the same accountant for 40 years he said.

I didn't think you could buy land and build and then make a profit within a self-managed super fund (yes, I know the profits are contained within the fund and you can't withdraw them), or buy a house, renovate and sell?

I tried to do some research on SS and Google but just couldn't locate the right info. I might ask this wealthy individual, but I know he's a bit private when it comes to these things.

Yes, no and maybe

If you aren't borrowing money to do this then you can 'improve the asset' BUT you also need to make sure you stay on the right side of 'not running a business within a SMSF'

I have a SMSF and as we are using all SMSF funds for a project we have been able to buy a site and will build 6 apartments on it. On completion we will sell 1 or 2 and put the funds back into the SMSF after paying 15% tax

 

[Redwood]

I spoke to a very wealthy 70-year-old individual today who's said he's had a SMSF for about 20 years and has been buying and selling within his super fund and building it up over that time - only paying 15% each time he sells the property. He's also a builder, so mostly been buying land and building houses, selling for a profit - rinse and repeat. I have no doubt he is telling the truth as I've known him for about 5 years and owns a lot of property, but is a bit old school. Had the same accountant for 40 years he said.

I didn't think you could buy land and build and then make a profit within a self-managed super fund (yes, I know the profits are contained within the fund and you can't withdraw them), or buy a house, renovate and sell?

I tried to do some research on SS and Google but just couldn't locate the right info. I might ask this wealthy individual, but I know he's a bit private when it comes to these things.

Hi Beachy,

Great SMSF success story and there are many out there - that person has a strategy and in the long term - that strategy has worked to his favour to build wealth and secure his retirement future.

There are many colourful SMSF strategies out there. The first thing you need is a bullet proof SMSF Trust Deed - which are the governing powers of the fund and also a investment strategy (which is regularly reviewed).

You can invest in most assets as long as it is income producing for the purpose of growing your retirement and the above strategy can be used. In terms of 'rinse and repeat' - an SMSF auditor will assess whether that person is carrying on a business - which is not allowed within an SMSF. In terms of profits - depending on age i.e accumulation or pension - the tax rate will differ, however the profit and proceeds will remain in the fund until a 'condition of release is met'.

That is a strategy is generally to purchase property within an SMSF (even using a borrowing) - buy and hold over a time period (say 20 years) and then sell in pension phase where you have no tax on the gain and the rent is exempt income.

For an old house you buy - you can renovate, generally using SMSF cash reserve - when you borrow, you cannot use the borrowed funds to 'improve the asset' so a reno to improve will be SMSF cash, its a grey area so be careful. SMSFR 2012/1 is the reference and there is a blog on our company site but I will not link due to self promotion.

Hope that helps and again - SMSF are great with the right strategy - in the long term!

Cheers Ivan

 

[Paul@PFI]

SMSFs are all about three things :
1. Strategy
2. Strategy and
3. Strategy

Buying and selling property isn't necessarily a development. Not all developments are a business either. SMSF rules are really only concerned where a business is conducted by a SMSF. There are many instances of SMSFs being party to improvement of property, development etc without a business being conducted. The SIS Act doesn't prohibit acquisition and sale of property for a profit. In fact specific CGT rules exist for super funds. ie the 1/3rd CGT discount include property. Large super funds like AMP do it all the time. The frequency needs some caution - Is the SMSF merely a scheme to avoid tax by conducting a property improvement business ?? Then perhaps its ordinary income from investment and not a CGT issue ?? (I get to that later) That's strategy.

If the SMSF Trustee is also a builder by trade and is undertaking some of the work himself he may actually be fully compliant with the ATO rules !! However if I did the same I may be in breach. The ATO has a bizarre ruling that allows this for a builder but not a non-builder. That said I would think the strategy a little unwise and some modern advice that confirms this investment strategy should be obtained. The penalties for non-arms length income and excessive contributions in breach of the aged based limits may be a concern in this strategy. What seemed smart a few years back is often now covered by recent rulings, determinations and other ATO public guidance. Strategy again.

I am also perplexed that the fund pays ANY tax at all. Where a member is aged 60 they should be drawing a pension. This then means that the tax rate is zero. Whether its ordinary income OR its capital gains. A zero tax rate is the best strategy !

I'm not so sure the precise wording of the trust deed is relevant. A deed could in theory say the member can punt the lot at the casino. Is it wise ? Is it in the investment strategy ?? It can also say the lot can be gifted too... However that may actually be prohibited in some cases. If its not in the investment strategy there is still a concern. And if the strategy isn't reviewed from time to time that may also fail compliance. A quality trust deed should be very accommodating and allow the trustee to do anything that is permitted by law to invest and administer the trust for the interests of the members.

That one italicised line would be a far smarter clause than a extensive itemised list of permissive acts. The deed cant contain a clause that departs from SIS, Trust or Tax law without a concern. Unfortunately many deeds (and providers) produce parrot deeds. These are easy to identify. They are very thick. Lots of A4 paper. These are ones that repeat tax law, SIS law etc word for word. These sorts of deeds are complex to read, understand and costly when a law change occurs.

 

[Terry_w]

The trustee needs specific permission to do certain things. e.g. to run a business in a trust. A trustee is not permitted at law to run a business in a trust. If this happened the trustee would be in breach of trust and personally liable for any loss relating to the business. However there is a exemption if the deed specifically allows for a business to be run. Therefore it may be wise to have such a clause in the deed in case the buying and selling could fall into the category of a 'businesss'.

 

[Paul@PFI]

I have never used a trust deed for a SMSF that doesn't permit it. Its the same view the ATO have. However just cause the deed OK's it doesn't make it an approved deal. Sole purpose, special income etc....

This business rule issue is more a concern where third parties are involved ie a disc trust etc. That doesn't normally happen in a SMSF. Where the trustee / members have already forfeited their prudential rights and protections by using a SMSF who is the aggrieved party that would take on the trustee ??
- A LPR waiting for a death benefit. Especially if the business interest can't be sold or cashed.
- A trustee without a member interest (no)
- A new member joining ?? Maybe.
That's it. Otherwise all members are trustee directors. Equally involved....

This is why the Trustee Declaration has the recent (2 yrs ago) acknowledgement relating to loss of prudential safeguards.... This was one of the (Law Council ??) concerns at that time.