Not enough talk of SMSFs

[Redwood]

In a previous post I covered the minimum balance myth.

Just now 4-5pm, a SMSF guy came to my office.

These are the facts:
1. Super balance $80k
2. Purchase price of property say $470k

Deposit paid already just about to settle and of course there seems to be an issue with finance (oh deeerrrrrr)

Anyone see the issue here?

Was 'sold' the property at a Park Trent seminar (ye guys, see you in court) and were 'recommended' the SMSF property by a Park Trent advisor. Unlicensed. Spruiker!

Ivans question: Dear XXX, do you have a AFSL, or are you a authorised rep of an AFSL holder? They **** themselves, more to come.....

Cheers, Ivan

 

[Gateway]

We have not explored this area for property. Would 200k suffice for setting up Smsf to invest in property. Cheers

 

[Redwood]

We have not explored this area for property. Would 200k suffice for setting up Smsf to invest in property. Cheers

Yes and "it depends" refer to the example I used in page 1 of the thread. Depends on your SMSF strategy and purchase price. I would not use it all on a property, ensure you have a clear goal and strategy (due diligence - price location yield) - leave a cash buffer and seek advice on risks and benefits of smsf to ensure an SMSF is right for you.

Cheers, Ivan

 

[Ed Barton]

However, there is typically a feathering of new restrictions. ie Grandfathering from a date, aged based tests etc.

I wouldn't expect any changes to be harsh or swift, more likely incremental.

With tax concessions on super forecast to exceed the state aged pension within a few years I see that future govts will so some reigning in.

Not sure what that will be :

• Higher contributions tax for high contributions?
• Higher tax for 'wealthy' funds?
• Exit taxes?
• Limiting the ability to take lump sums on retirement - highly likely?
• Higher preservation age - almost certain.
• ????

However, the foundation of superannuation law and practice is supported by principles based around the concept of "retirement". The gradual elevation of the retirement age is likely for social security pensions but given the incentive to assist growth in super balances using transition to retirement pensions and compulsory contributions etc I wouldn't expect a sudden age leap leaving balances stuck in super. It would be a lead balloon to re-election. Its why nobody mentions taxing over 60 super pensions. In our ageing population this would be certain defeat and trigger a revolt. Even the MPs would be affected !

 

[Richard Feynman]

Curious for those who own property in super.

- Did you borrow/offset enough to be cashflow neutral from day one?
- If not, how negative?
- Anyone renovated a property in super?

 

[speary]

Just out of curiosity, does any of the more experienced folk know why the tax rate in a super fund is only 15%. Was this to align it with the low marginal tax rate of years gone by?

If so, surely it would not be unreasonable to increase this to 19%. Sure it reduces the benefit of reportable super contributions etc but gives a bit of consistency.

 

[HomePage]

+1.

Probably a warning sign that they didn't get financial advice. I reckon I wind up as many SMSFs as I setup for that reason. I argue that very few people possess the skills to determine whether a SMSF is suitable for them. Sadly in many cases its hubby pushing wifey along. Its easy to argue you can do better in a year of declining returns but the issue is one the industry and retail funds hide. The issue is their strategy is designed to lose investor money.

Whhhhaaaatttt....That right. See most industry funds have strategy choices. Each ranges in % for various classes - ASX shares, Intl shares, fixed int, cash, property etc. And the PDS refers to risk as being short term, medium term and long term....But the key failure of some funds is that very strategy.

eg : Lets look at Sunsuper. They offer 4 strategies. The class mix is shown on the link provided.

So if the Dow / ASX etc crash 40% what happens is most of the classes lose 40%... ASX shares, international, private capital, infrastructure all follow. So around 30-70% of the fund loses 40%. The weighting towards risk classes determines that effect. And what does the strategy mandate ???? It mandates the same % as it did before it crashed. So there isnt a reason to sell early. So the balance suffers a loss. Now the $1m balance is worth $600K...The $600K must earn 66.7% to match the 40% loss....Just to break even. Perhaps then the investor considers a higher risk profile to chase that outcome...In the pre-retirement years.

Perhaps more people should consider strategies that limit losses in the first place. I suspect that limited choices available to avoid this "mandated investment" problem drives many towards a SMSF and property.

What utter codswallop! It's when people tinker with their share holdings after a "crash" that they compound the issue, not the strategy itself. My share-heavy super is doing just fine and dandy, having recovered beautifully and then some post-GFC, simply because I didn't mess with it.

 

[Paul@PFI]

Hubby and I have been talking about this for a while but haven't done anything. The pessimist in me thinks the rules will change and the benefit for us having the SMSF will be long gone by the time we retire.

Guess I'm still bitter about the changes to hybrid trusts since we created one...

But you did amend the hybrid trust so the problem was fixed....Didnt you.

A lot of people get this wrong idea about SMSFs. They operate under the EXACT same rules as industry & retail funds. I can assure you that the "benefits" wont end. They may become more restricted (ie no lump sum, changes to preservation age). There is a possibility of borrowing rules reverting. There is next to no possibility of tax rates on super being equivalent to ordinary income. If they did that the concept of super would end then and there and fall onto Treasury.

 

[Paul@PFI]

Just out of curiosity, does any of the more experienced folk know why the tax rate in a super fund is only 15%. Was this to align it with the low marginal tax rate of years gone by?

If so, surely it would not be unreasonable to increase this to 19%. Sure it reduces the benefit of reportable super contributions etc but gives a bit of consistency.

15% goes back a bit. Back in early days Super funds were called Occupational Super Schemes and most were defined benefit. Defined benefit came with some issues - Employers would "vest" benefits and employees who left would leave and get nothing. Keating ended that and made it all vested. The tax concept was the money coming out would be tax free. So they taxed it going in 30%. Just like a company.

Around 1990 Paul Keating was searching for cash and saw opportunity. Tax super in, tax earning and tax it going out all at the same rate. ie 15% + 15% + 15%....Only one group seemed affected. Those that die early so they agreed to allow an anti-detriment tax benefit to fix that problem...Its still there. Its one of the reasons why all the rates are 15% and yes it aligns with the low tax scale rate. But its not based on that. Remember too the low rate has vastly increased when the tax free thold was raised to $18k from $6k. This base 15% tax rate has continued until 2007 when Costello made the exit rate 0% for over 60s and also the earning rate for pension accounts.

15% is just historical. There is nothing that stops it becoming 19%, 20% or even 25% other than the social impact and the arbitrage issues. There would be a super savings reduction associated with any punitive tax increase. Thus a higher demand imposed on Centrelink. That's not what Govt wants in a ageing population.

I would bet $ on the Govt ending the tax free earnings on pensions accounts and Hockeys books alluded to this. Its too generous. Combined with no exit tax its madness. If tax free pensions were still subject to income tax it wouldn't actually be felt by the members. They wont want to take the over 60s exemption away. They cant tax contributions more either. It makes sense to tax earnings and would raise huge revenue since there is 1837 BILLION in super assets. If 30% was in pensions that could raise $4b pa in extra tax if the funds earned just 5%.

I don't expect a rate change. That's just personal opinion and based on Treasury papers and modelling.

 

[knightm]

Great thread Terry!

If I can somewhat hijack it - how about a current case study?

I am currently researching my next smsf purchase.

My wife and I are the only members at this stage, corporate trustee (to access St George 80% lend)

Funds available approx 100k

I haven't done a reno inside super before (Im well across the basics but this bit is new for me)

Looking to purchase a unit that requires a minor cosmetic reno (thats what I do best so Im sticking to the formula) - I often buy houses outside smsf but a unit this time for location. No major renos that would fundamentally alter the asset and I know I have to use funds for the reno, no borrowings as its likely to be deemed an improvement upfront not maintenance.

Property will not be in the area where we live.

My questions:

1 When I reno the unit (looking to take approx 2 weeks shortly after it settles) can i spend smsf funds to pay for accommodation close the the property and flights? My reading thus far tells me it could be a breach to stay in the unit, so I was thinking something down the road like a van park or motel.

2 I am also interested in using smsf funds for flights but mostly concerned about accommodation cost as I might drive to fit more tools and the car is already salary packaged so the petrol is already gone cash flow wise in my mind and at least tax effective - so flights as a separate question - can they be done with smsf funds?

3 While I am there are other costs also able to be spent from smsf funds? (like food, reno supplies, tools etc) I am not looking to claim any salary, claim time or pay myself for this job (i am not a builder) but if this were possible then Im listening.

4 When I visit it once every 1-2 yrs after this to inspect or conduct maintenance what are the rules around using smsf funds to do this?

5 My current understanding and contacts in mortgage lending indicate St George 80% lend with corp trustee and offset is one of the best smsf loan products on the market - should I be considering any others for this property?

My overarching goal is that I don't want to spend more (or any if possible) of my own private funds than required for this property and I am happy to buy well under my buffer zone (price bracket) to ensure adequate funds are available for the reno including travel then also leave a comfy buffer for servicing etc.


PS I should say if people want to keep this thread general/theoretical and mods want to start a new thread with this question I am fine with that too. THANKS!

PPS If there is a major section of an act that contains all this just reference it I will read and share, not looking for specific legal or financial advice here, just learning what I can as I spent a fair bit of time googling this stuff but I found I was getting sent to sales pitch pages of accounting firms all the time.

 

[Paul@PFI]

I wouldn't expect any changes to be harsh or swift, more likely incremental.

With tax concessions on super forecast to exceed the state aged pension within a few years I see that future govts will so some reigning in.

Not sure what that will be :

• Higher contributions tax for high contributions? Already 30% on $300K+
• Higher tax for 'wealthy' funds? Too hard. Member based ? Difficult as could be challenged in High Court. All funds taxed on pension fund earnings far simpler.
• Exit taxes? Already have them (eg death to non-beneficiary). Lump sums likely to be imposed soon.
• Limiting the ability to take lump sums on retirement - highly likely? I would argue that is certain subject to some limits - eg mortgage ?
• Higher preservation age - almost certain. But TTR pensions already assist to build balances. That may contradict.
• ????

My reply above

 

[Paul@PFI]

Great thread Terry!

If I can somewhat hijack it - how about a current case study?

I am currently researching my next smsf purchase.

My wife and I are the only members at this stage, corporate trustee (to access St George 80% lend)

Funds available approx 100k

I haven't done a reno inside super before (Im well across the basics but this bit is new for me)

Looking to purchase a unit that requires a minor cosmetic reno (thats what I do best so Im sticking to the formula) - I often buy houses outside smsf but a unit this time for location. No major renos that would fundamentally alter the asset and I know I have to use funds for the reno, no borrowings as its likely to be deemed an improvement upfront not maintenance.

Property will not be in the area where we live.

My questions:

1 When I reno the unit (looking to take approx 2 weeks shortly after it settles) can i spend smsf funds to pay for accommodation close the the property and flights? My reading thus far tells me it could be a breach to stay in the unit, so I was thinking something down the road like a van park or motel.

2 I am also interested in using smsf funds for flights but mostly concerned about accommodation cost as I might drive to fit more tools and the car is already salary packaged so the petrol is already gone cash flow wise in my mind and at least tax effective - so flights as a separate question - can they be done with smsf funds?

3 While I am there are other costs also able to be spent from smsf funds? (like food, reno supplies, tools etc) I am not looking to claim any salary, claim time or pay myself for this job (i am not a builder) but if this were possible then Im listening.

4 When I visit it once every 1-2 yrs after this to inspect or conduct maintenance what are the rules around using smsf funds to do this?

5 My current understanding and contacts in mortgage lending indicate St George 80% lend with corp trustee and offset is one of the best smsf loan products on the market - should I be considering any others for this property?

My overarching goal is that I don't want to spend more (or any if possible) of my own private funds than required for this property and I am happy to buy well under my buffer zone (price bracket) to ensure adequate funds are available for the reno including travel then also leave a comfy buffer for servicing etc.


PS I should say if people want to keep this thread general/theoretical and mods want to start a new thread with this question I am fine with that too. THANKS!

PPS If there is a major section of an act that contains all this just reference it I will read and share, not looking for specific legal or financial advice here, just learning what I can as I spent a fair bit of time googling this stuff but I found I was getting sent to sales pitch pages of accounting firms all the time.

I would have concerns that if you do the reno you could trigger a breach of s66 of SISA which prohibits an acquisition from a member. Non-arms length acquisition. After all would you reno my place for just the cost of materials ? The tax ruling on contributions (TR 2010/1) may consider it a contribution instead ? The use of SMSF funds for accom and travel may pose a sole purpose concern. You would argue that it is saving the fund money but that's where the contribution and non-arms length cross-over occurs. It may be prudent to engage a builder to do the initial repairs to bring it to a rentable state.

I would seek advice and perhaps a private ruling to avoid serious consequences.

 

[srini]

Great thread.

Wife and I have around $250k in super and are considering an SMSF with a corporate trustee. Goal will be to purchase 1 commercial property to start with, park some of the funds in a high interest account. We also plan to buy some residential in super as well and some shares for diversification.

We are meeting the accountant in a couple of weeks. Based on reading the forum and other sources, this is my understanding. Is this right?

Limitations:
1. Can not release equity and use that to leverage
2. Super fund can not make a loss so have to put cash in each year to make it neutral (not too sure about this one)
3. Limited recourse borrowing so 60% or 65% LVR for commercial or 80% for residential

Thanks
Srini

 

[alexlee]

Can a SMSF make a tax loss (including non-cash tax losses such as depreciation)?

If not, can that loss be made up by member's contributions? Will the contributions have to 'make up' tax loss on non-cash items?

If yes, are member's contributions limited by the usual contribution limits?

 

[Redwood]

Great thread.

Wife and I have around $250k in super and are considering an SMSF with a corporate trustee. Goal will be to purchase 1 commercial property to start with, park some of the funds in a high interest account. We also plan to buy some residential in super as well and some shares for diversification.

We are meeting the accountant in a couple of weeks. Based on reading the forum and other sources, this is my understanding. Is this right?

Limitations:
1. Can not release equity and use that to leverage
2. Super fund can not make a loss so have to put cash in each year to make it neutral (not too sure about this one)
3. Limited recourse borrowing so 60% or 65% LVR for commercial or 80% for residential

Thanks
Srini

Hi Srini - up to 70% LVR for commercial and lenders offer different loan terms.

Cheers, Ivan

 

[srini]

Thanks Ivan.

Just checked your website and found this structure. Could you talk a little bit about the reason why you suggest this structure.

Thanks

 

[Paul@PFI]

Great thread.

Wife and I have around $250k in super and are considering an SMSF with a corporate trustee. Goal will be to purchase 1 commercial property to start with, park some of the funds in a high interest account. We also plan to buy some residential in super as well and some shares for diversification.

We are meeting the accountant in a couple of weeks. Based on reading the forum and other sources, this is my understanding. Is this right?

Limitations:
1. Can not release equity and use that to leverage
2. Super fund can not make a loss so have to put cash in each year to make it neutral (not too sure about this one)
3. Limited recourse borrowing so 60% or 65% LVR for commercial or 80% for residential

Thanks
Srini

Of course the decision to establish a SMSF is financial advice - Something not all accountants can give. Some accountants have little knowledge of super, some don't get SMSFs and some aren't AFSL licensed.

SMSFs can make a loss. Its best avoided as it just will erode earnings. So contributions will be burned keeping the cash burn stable. That makes no sense for a fund that is meant to grow. A heavily geared IP in super that burns cash isn't a good investment. A good +ve geared one can be. Commercial has an advantage that resi doesn't have. The tenant usually pays all outgoings.

There can be very serious problems with a SMSF that goes "all in" to property too. It cant pay pensions. Especially if the yield is say 4.5% and the min pension is 5%. These are all considerations requiring advice under AFSL.

 

[Paul@PFI]

Thanks Ivan.

Just checked your website and found this structure. Could you talk a little bit about the reason why you suggest this structure.

Thanks

Its no magic diagram. Its one of two general ways a SMSF can borrow funds to buy property. The rules of a limited recourse borrowing facility are determined by s67 of the Superannuation Industry (Supervision) Act 1993.

The non-bank lend can also be used and can be far cheaper than a SMSF loan. The fees and compliance issues for the bank generally mean the cost for a SMSF loan is somewhat higher than a normal IP loan. (Rates, fees and legals)

There is also another way that allows the members (or others) to co-invest with a SMSF provided OTHER non-super property is used as loan security. The members can negative gear their share and the SMSF share is +ve geared. A strategy to shift ownership over time so its 100% SMSF without stamp duty can often be considered in some states.

SMSFs are all about three things : strategy, strategy and strategy. There isn't one way. Just tread carefully. There are a load of spruikers happy to flog any dump to anyone thinking a SMSF is they way. I would be cautious of anyone in the SMSF space that assists with property sales. They aren't all bad - Just a small number who are really bad. If they are in QLD thats further caution. QLD is the bandit state for property scams.

 

[knightm]

I would have concerns that if you do the reno you could trigger a breach of s66 of SISA which prohibits an acquisition from a member. Non-arms length acquisition. After all would you reno my place for just the cost of materials ? The tax ruling on contributions (TR 2010/1) may consider it a contribution instead ? The use of SMSF funds for accom and travel may pose a sole purpose concern. You would argue that it is saving the fund money but that's where the contribution and non-arms length cross-over occurs. It may be prudent to engage a builder to do the initial repairs to bring it to a rentable state.

I would seek advice and perhaps a private ruling to avoid serious consequences.

Ok I need to work this through before I put a contract or offer on anything as the rules will determine the property I buy (won't buy a dog if its too hard to fix up - legality wise i mean not the effort of fixing)

Can anyone comment on this short article? Its old (2012) and in lay terms but made it seem a bit more doable to me. Perhaps Im mistaten.

http://www.apimagazine.com.au/api-online/newsletter/12/11/renovating-your-smsf-property-what-you-can-and-cant-do

 

[knightm]

This one talks more about contributions but seems to be for qualified trade offering their service ?

http://www.smsfessentials.com.au/strategies/smsf-related-party-property-improve-contribution

Still hasn't addressed the other possible breach of related party...