Self-Managed Superannuation

[kierank]

geoffw,

I believe I might have confused myself in my previous post. So I will try again.

Our smsf owns 40% of our IP. At purchase, its share was $50,000 (that is 40% of $125,000); now its share is $92,000 (that is 40% of $230,000). Hence, the smsf's capital gain is $42,000. As the CGT for smsf is 10% if the asset is held for more than 12 months, the smsf would pay CGT of $4,200 if it was sold now.

While our smsf owns its 40% share of the IP, we CANNOT use the IP for security (even though we have $140,000 equity in the IP). To unlock this equity, either my wife and/or myself need to buy out the smsf's 40% share. If we bought the smsf's share ($90,000) today, then we would pay Stamp Duty (Qld) of $2,075.

So the cost of restructure to free up this $140,000 equity is $6,275+ (in my haste in the previous post, I forgot to add the Stamp Duty). In reality, the restructure is changing nothing - we own 100% of the IP now (albeit through 3 entities); after restructure, we still own 100%.

So why involve a smsf in a co-purchase of an IP when it is going to cost money later to unlock the equity. In our case, we are burning $6,275 for nothing. That is why I was recommending that one should not involve oneself and one's smsf in the purchase of the same IP. It locks up your equity!!!

In our case, if the Government hadn't change the rules, our IP would now be completely owned by our smsf. Okay, we couldn't boroow against the IP - I can accept that because you can't borrow against any assets owned by a smsf. Once the Government changed the rules, they left us in "no man land". These same rules still apply today - that is why I said "No Way" to the strategy.

As it turns out, I do want to unlock the equity in our IP. I am currently seeking (paying) for professional advice (two independent accountants) and it appears it will be as I outlined above.

As I said in my previous post, I would love someone (Dale??) to prove me wrong. If anyone can suggest a better (cheaper) way out of my mess, I would welcome it.

 

[geoffw]

Kieran,

It's a fair amount of money. But the benefits of unlocking the equity may well be worth that cost.

It does not have to come out of pocket. If you can get a loan of some sort as a temporary measure, you could pay those costs using the loan- then get a LOC secured by the house to buy your IP and to pay associated expenses- including that temporary loan (which is presumably at a higher interest rate than your LOC).

It's good you're getting preofessional advice.

 

[kierank]

geoffw,

Thanks for your reply. It is most likely that we will be going ahead with the restructure so we can unlock the equity.

I was really trying to warn others not to put themselves in this situation. When we did it, the rules supported this approach, and there were good reasons for us doing it. Today, the rules are different, and IMHO I don't believe there are any good reasons to others to use this strategy.

No one has come forward with a better suggestion for my plight.

 

[geoffw]

Thanks Kieran,

I believe it's no longer possible to relicate the structure you set up anyway. I have colleagues whohave also been caught up with similar problems.

Thanks for the warning.

 

[TheBacon]

Another SMSF strategy

The previous example was one of buying out the SMSF share to use the equity.

Can the process go in the other direction? That is, can the SMSF buy out the equity from the other parties?

In this way one can use superannuation funds from another source, say a different super fund and roll it into the SMSF.

This achieves 3 outcomes;
1. Release equity for use now - ie SMSF pays you a percentage in cash for an increased share of the property (or entire property), which you can use in another venture.

2. Increases the cash returns to the SMSF from rent etc. Whie this may not be exciting for someone not close to reitrment it may be attractive to someone who is only a few years from retirement age.

3. It puts super money (YOUR super money, remember this belongs to YOU, not the govt) in your control through the SMSF.


In essence a SMSF invested in property will generate returns of ~5% (net rental yeild) in most cicumstances plus capital gains. This is not spectacular, but one can safely assume 3-5% capital growth over 5 or more years so one ends up with a 8-10% overall growth. Still not spectacular but many financial planners would call this High Yield !!!!


Complex? Yes. But there may be benefits for some, depending on your circumstances.

Any thoughts?

TheBacon.

 

[kierank]

Re: Another SMSF strategy

Originally posted by TheBacon
The previous example was one of buying out the SMSF share to use the equity.

Can the process go in the other direction? That is, can the SMSF buy out the equity from the other parties?

As I understand it, NOT if the other parties are the beneficiaries of the smsf as was the situation in my case.

 

[l00kin4]

kierank is correct although the restriction is now even broader. From the ATO ( http://www.ato.gov.au/content.asp?doc=/content/Professionals/super/19109.htm ) "Trustees are prohibited from acquiring assets from a ‘related party’ of the superannuation fund." "A ‘related party’ of a superannuation fund covers all members of the superannuation fund and their associates and all employer sponsors of the superannuation fund and their associates.

Associates of members would include their relatives, business partners and any companies or trusts that they control (either alone or with their other associates)."

There are a couple of exceptions, the primary one which is business real estate but I won't go into that here.

The only way out for kierank is to sell and cop the costs I think- hopefully a professional can come up with a better strategy. I'll be glad to hear of it if one comes up.
Quite a stupid rule really - you'd think the smsf purchasing the remaining share would be no issue, provided you could prove the transaction was at market value.

I'm still looking at it but now considering NOT entangling personal IP funds with the smsf to avoid this problem. i.e. outright purchase of the IP with my smsf

For me this will mean finding a lower priced property (~$150k)with probably lower capital gain potential but higher yield, probably in a regional area. I'm still tossing the pros and cons of this approach versus other investment types with perhaps a higher return and less complications. The usual gearing advantages aren't available with the smsf investment in property.