Not enough talk of SMSFs

Discussion in 'Legal Issues' started by Terry_w, 22nd Jul, 2014.

  1. brucea

    brucea Member

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    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.
     
  2. lizzie

    lizzie when i grow up ...

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    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.
     
  3. Terry_w

    Terry_w Member

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    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.
     
  4. Redwood

    Redwood Member

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    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
     
  5. Foxy Moron

    Foxy Moron Member

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    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.
     
  6. Terry_w

    Terry_w Member

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

    lizzie when i grow up ...

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    Yep - contacted Peter as you suggested.
     
  8. lizzie

    lizzie when i grow up ...

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    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.
     
  9. Terry_w

    Terry_w Member

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    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.
     
  10. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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  11. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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    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.
     
  12. lizzie

    lizzie when i grow up ...

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    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:
     
  13. Paul@PFI

    Paul@PFI Tax, SMSF & Planning

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    See comments above
     
  14. lizzie

    lizzie when i grow up ...

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    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.
     
  15. Terry_w

    Terry_w Member

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    Don't worry if you have had advice, especially by Peter.

    Just shows others what a potential minefield it is with something like this.
     
  16. knightm

    knightm Member

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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).
     
    Last edited: 13th Aug, 2014