Not enough talk of SMSFs

The SCT "cannot" poke its nose into a SMSF deed or more importantly the actions of the trustee. The Federal Court can...and does. Aggrieved members have many avenues. Look at the Morris decision. Hell hath no fury as a member denied a death benefit :)

IMO a SMSF has more clout than another form of fund. The SCT is cheaper but slow. Its probably not suitable for SMSFs in most cases.

The Morris decision (or should I say decisions? There were at least 4 cases I've seen from that unfortunate not-so-blended family) is at least a good example of a BDBN being upheld despite the surviving trustee having acted contrary to it, albeit having done so after arming herself with some legal advice. It is also a good reminder that estate planning needs to involve all family members even when the relationships are strained and that trustee succession generally needs to be considered in the trust deed. In the Morris situation the deceased did not tell his then wife that he had executed a BDBN in favour of the children from his former marriage. Presumably he hoped it would all work out but that moment of weakness must have caused a lot of misery to the people he would have cared most about.

The SCT is clearly a benefit to someone in a regulated fund other than a SMSF when they are not themselves the trustee, especially given that it's potentially completely free to use. For an SMSF I'm pretty confident that a well written deed with informed and capable and fairly-treated beneficiaries will mean, in my case at least, a rational outcome.
 
... and our understanding is that whilst there is a loan on the property within the SMSF you cannot do any improvements to the property

On thought - I will correct myself.

Can undertake improvements on property within the SMSF, even if there is a loan ... but ... cannot use loan proceeds to do such improvements.
 
Lizzie

Hope you ended up getting legal advice - from a lawyer - as this is a legal minefield in terms of the SIS Act, and asset protection.
 
On thought - I will correct myself.

Can undertake improvements on property within the SMSF, even if there is a loan ... but ... cannot use loan proceeds to do such improvements.

Hey Lizzie, 80% of our clients invest in property and ask us the same question - can I improve an asset under a LRBA, answer lies in using cash to be safe in meeting the defn of repair v improvement, some examples stick out like dogs b$%ls, like adding a garage is an improvement.

So read SMSFR2012/1 http://law.ato.gov.au/atolaw/view.htm?Docid=SFR/SMSFR20121/NAT/ATO/00001

Clear examples within the ruling on what is a repair/improvement/ maintenance.

Otherwise head to the Redwood website under blogs and there is a detailed article on the topic.

Where its not covered by the ruling please seek advice.

Cheers, Ivan
 
The physical property need to be kept completely separate from the trading side of the business. The SMSF cannot "own" the business side. We have solved that by the SMSF lending the small purchase cost of the trading entity to an outside P/L - and the SMSF is the sole shareholder in the trading P/L. This means that "all" income from the trading entity returns solely to the SMSF - with the SMSF then distributing to us.

Hi Lizzie. Alarm bells ringing loudly with the idea of your SMSF owning all the shares in the trading company running this business. Tread very carefully here. Even if the investment survives the in-house 5% of fund assets test, any dividends being returned to your SMSF will need to be considered 'special income' and taxed at 45%. The fact that the fund is in pension phase does not trump this high rate applied to private company dividends. I'd seek professional advice on this very point as there may be a smarter way to structure the business operation entity. Free tip from the fox.
 
Hi Lizzie. Alarm bells ringing loudly with the idea of your SMSF owning all the shares in the trading company running this business. Tread very carefully here. Even if the investment survives the in-house 5% of fund assets test, any dividends being returned to your SMSF will need to be considered 'special income' and taxed at 45%. The fact that the fund is in pension phase does not trump this high rate applied to private company dividends. I'd seek professional advice on this very point as there may be a smarter way to structure the business operation entity. Free tip from the fox.

And a good tip.
s 295-550 ITAA97 could be easily breached.
 
And a good tip.
s 295-550 ITAA97 could be easily breached.

Far out - why do they make it so difficult to fund your own retirement?

Anyhow, from what I understand a breach would only occur if the income was not considered "arms length" from the beneficiaries of the income and earned via a trust.

We have been very careful to keep everything above board and run the business side of the operation (a P/L) at complete arms length from ourselves - outsourcing and not paying ourselves any income from the P/L.

We are not using a trust to operate the business arm, but rather a P/L with a sole shareholder of the SMSF. With ourselves not receiving any benefit until the disbursements from the SMSF are issued (10% value of SMSF).

From my understanding - this is no different than the SMSF holding shares in a publically listed P/L.
 
Far out - why do they make it so difficult to fund your own retirement?

Probably to stop the rorting. If these sorts of rules were not in place people would be diverting all sorts of income into their SMSF - which are tax havens.

As long as you have received competetant advice you should be ok.
 
Thanks for this Terry, for any else interested I also followed the below questions up with a meeting with my smsf accountant (who is also an smsf auditor) I will try and paraphrase his answers.

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.

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.

I would have concerns that there is a potential for non-arms length acquisition from a member here. I imagine you are going the reno yourself as its cheaper...Perhaps that's a acquisition ? Prohibited ??


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?

see above, no travel expenses cannot be incorporated into a total reno budget and paid by smsf

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?

The Trustee cannot be "remunerated". And the fnd cannot acquire from a member / trustee. Might be a serious issue here and a breach of the sole purpose test too.

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?

Still in the lead for me but NAB seem more flexible on the property type

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.

One of the most simple ways to overcome the personal expenses issue is to personally incur those costs and treat them as a deemed non-concessional (or concessional if you meet the 10% test) contribution provided its all arms length. NO MARK UPs !! I would avoid reimbursements and use of the fund for what may be contentious outgoings.

Use of a external tradies may circumvent all these issues.

s66 of SIS Act is very simple...It prohibits acquisitions from a member, associate, relative etc.... There is no minimum threshold either.
 
We are not using a trust to operate the business arm, but rather a P/L with a sole shareholder of the SMSF. With ourselves not receiving any benefit until the disbursements from the SMSF are issued (10% value of SMSF).

From my understanding - this is no different than the SMSF holding shares in a publically listed P/L.

Very different....And sometimes shares in a ASX listed company are prohibited... Read SIS Reg 13.22C.- It describes just such a problem. Worse still is if the unit trust (or company) that owns just one Telstra share breaches 13.22C then 13.22D FORCES sale of the trust interest within a year.

If the value of the company comprises 10% of the SMSF value then a in house asset concern exists. Non-arms length income a very likely concern. Breach of the 5% in house asset rules has one solution. And its also now a matter the ATO will review. 100% of audit contraventions are now checked by ATO. Breach of in-house assets is a reportable contravention.

I hope you have written advice.
 
The value of the SMSF share holding in the P/L is 1.25% of the total value of the SMSF.

The SMSF monies put into the physical property is around 50% of the value of the SMSF with a mortgage LVR of 45%.

The other 48-odd% is held in ASX blue chip shares and high interest cash.

I have had advice, considered many possibilities as the ATO scares me more than the Federal Police - and believe we are all above board and compliant.

You guys are scaring me! :eek:
 
The value of the SMSF share holding in the P/L is 1.25% of the total value of the SMSF.

So the in house asset issue (s71) is OK. However if the shares produce income it could be non-arms length and be taxed at 49% and means the fund is non-complying. The consequences of that are far worse. I cant follow your description and happy for a private discussion to set your mind at rest - See my email below.

The SMSF monies put into the physical property is around 50% of the value of the SMSF with a mortgage LVR of 45%.

Mortgage over SMSF owned property ?? If its a compliant Limited Recourse Borrowing Facility its OK. Otherwise a problem. One problem issue I have seen is a jointly owned IP with a SMSF arguing its share isn't encumbered when the other half has a charge. ATO doesn't consider that a charge can be confined to a portion of title. Its a charge upon the whole title.

The other 48-odd% is held in ASX blue chip shares and high interest cash.

No problem

I have had advice, considered many possibilities as the ATO scares me more than the Federal Police - and believe we are all above board and compliant.

They aren't that bad. In many instances if there is a problem they want to correct it. The big stick is for serious non-compliant taxpayers. The ATO really don't like private companies, hybrid or disc trusts and related party scheme in any SMSF

You guys are scaring me! :eek:

See comments above
 
The purchase of the physical property by the SMSF and the operating side of the business P/L are completely separate. Two purchasing contracts ... just so there can be no misunderstanding.

The physical property will be held within, and by, the SMSF with a SMSF loan with the bank.

The operating business is being purchased as a completely separate entity by the P/L outside the SMSF, which then leases the physical property (with a legal and lodge-able and justifiable $$ lease) from the SMSF.

We could have bought the operating business P/L ourselves, but the intention is for the income to go direct into the SMSF and pay off the property loan - and then partially fund the retirement.

No intention of ripping off the tax office ... just an genuine self funded retirement plan so not a burden on the taxpayer.
 
Use of a external tradies may circumvent all these issues.

s66 of SIS Act is very simple...It prohibits acquisitions from a member, associate, relative etc.... There is no minimum threshold either.
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Yep. Thats my simple conclusion. (despite the fact I like diy and wanted to make it work)

= Don't bother trying creative self reno/travel type plans on a SMSF property.
= Keep it simple stupid - buy something in good enough condition to hold long term.
= If it needs any work, pay someone else (not yourself or your cousin's dog.) Have them invoice the SMSF directly (not yourself or your cc).
 
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