Restructuring scenarios

[jrc]

For a number of reasons including preparation for retirement, crystallising a tax free capital gain on our PPOR before the 6 year absence expires, buying out another family member and starting to move assets into a superannuation fund, I am considering the following:

a. setting up a unit trust to acquire the PPOR.
i. Am I correct in thinking that under Division 13.3A Superannuation Industry Supervison Regulations in particular Reg 13.22C((e)(v)(B) that the trust needs to be operating for at least 3 years before a SMSF fund acquires units in it ( I think Paul@PFI alluded to this earlier this year)
ii. would it be preferable for the unit trust to issue redeemable units so that after the three years I would redeem a number of units and the SMSF would apply for new units to be issued

b. the asset owned with another family member is a GST asset. Although most of the rent comes from commercial and industrial infrastructure, there is a flat on the property which is leased out. The flat is about 60 square metres so about less than 10% of the buildings and around 12% of the income.
i. Would I be correct in thinking that as the property includes residential property it would not be able to be acquired directly by the SMSF
ii. Due to depreciation on the buildings over the past several years there will be a significant adjustment to the cost base. What would be the best way to consider getting this family member out of the property without crystallising my capital gain and avoiding any GST complications, ie the partnership is registered for GST, but the individual partners are not registered for GST -

c. Are there any other questions I should be asking or traps for young players?

 

[Terry_w]

a. no
trust needs to have acquired the property 3 years or more before a SMSF acquires units in the property. Trust can redeem units and reissue new ones.

b. You will have to consider whether the property will fall under the definition of 'business real property'. It may.

A SMSF can acquire business real property from a member or a related party. There may even be some stamp duty concessions on a transfer to a SMSF.

Consider
land tax
stamp duty now and futue
death
incapacity
bankruptcy
control of the trusts after your death - trust and trustee
control of the SMSF - company and trust
Binding death benefits nomination
insurance.
if a member dies how will fund pay out their death benefits

 

[Paul@PFI]

There is a min 3 year wait for the SMSF to acquire units provided the property is unencumbered that whole time. Your question is a very good one about redemption and reissue. Two reasons:
1. SIS s66 prohibits an acquisition from a member / assoc. So a transfer from you to a SMSF is always prohibited and also subject to inhouse asset rules if this occurs. If a reissue occurs the Reg 13.22 exemption may apply so the inhouse test is not considered.
2. Stamp Duty. A transfer of units may be dutiable in some states. No duty applies to newly issued units.

I would also be very wary that not all unit trusts are "fixed trusts" (according to Sch 2 and other requirements) and there could be problems if the trust rewrite occurs to define what a fixed trust really is. The Commr takes the view income AND capital. Many deeds allow choices. They may be a hybrid. Most fixed trusts sold online are rubbish and fail to comply with SIS. (ie allow discretions, allow decisions relating to income v's capital and valuation methodologies or discretions on redemption by an associate) As a start, the rules in a fixed trust used by OSR NSW for land tax are probably how all unit trusts should be written if there is a SMSF involved as a minimum.

The Commissioner has made mention of this and has indicated some concerns but so far not made a big issue. This could change. One major provider was flogging one that failed even the NSW land tax requirements when thats what it was bing marketed as. I would ensure that the unit trust you establish gives the SMSF an absolute and unfettered right of redemption on demand (ie no trustee discretions) and that the terms of trust ensure that market value is the price used to determine unit valuation at every instance.

You ask if there are any traps. Heaps. Here is a simple one but something few accountants even know....Dont form a trustee company and incorp it in NSW. (Its a long story but it involves duty). I would STRONGLY advise professional guidance. There is a stack of things you may get wrong. I have seen people establish a UT deed and end up paying double duty. Its an easy mistake to make - Just paperwork sure but costly. This area is one involving income taxes, CGT, super law etc. Your question about the resi / commercial is a good example....

I would ask what date the property was acquired. Not all property requires a cost base adjustment for cap allowances claimed ! Even the ATO is very quiet on this issue and likes to give the impression that it always occurs. Not true.

 

[jrc]

Thanks Terry and Paul. Property acquired in 2004 so it looks like the cost base adjustment applies.

 

[Paul@PFI]

Yes cost base adjustment applies. Only pre 1997 requires review.