SMSF joint venture to help cashflow?

[Perp]

I confess, I've been a bit slow on the whole SMSF thing, primarily because most of our super is in unfunded Commonwealth government super mad, and thus we don't have enough in super for a deposit on a reasonable property.

However, the following has just occurred to me... We have an IP in a Trust that we're having to pump about $30K per year into, with no negative gearing benefit because it's a DT.

Hubby is contributing about $20K pa to super, and has about $50K sitting in the fund.

Could we set up a SMSF, and change the IP ownership to be a joint venture between the SMSF and DT?

If so, could we use the super fund's $50K balance plus $20K pa contributions, to cover the negative gearing of the IP, in exchange for the SMSF gaining ownership of an increasing proportion of the IP?

The main benefit of this approach, from my perspective, is for our cashflow. At the moment, hubby's having to find $20K pa for super, plus $30K (post-tax dollars) to sustain the IP, out of his salary. If we were able to do as I've described, $20K of the shortfall would be covered by his super contributions, and we'd only need to find another $10K from his cash. And if we used the $50K balance to cover that $10K for a few years, that'd be enough to get us to cashflow neutral/positive. Yay! So our cashflow would improve by $30K pa of post-tax dollars, equivalent to a $50K payrise.

Anxiously awaiting thoughts as to whether this is worth taking to my accountant and paying for advice on setting this up.

 

[MikeF]

Could we set up a SMSF, and change the IP ownership to be a joint venture between the SMSF and DT?

If IP is residential, then simple answer is no. This is due to SMSF legislation (SIS Act) which prohibits the acquisition of residential property from related parties.

 

[Perp]

If IP is residential, then simple answer is no. This is due to SMSF legislation (SIS Act) which prohibits the acquisition of residential property from related parties.

It's a student accommodation. Whilst it's residential (for our tenants), it's commercially financed and we have never lived there, and couldn't live there. Wonder if that changes things?

 

[Perp]

Further info: I just remembered that the accountant has previously proposed we put this property in a SMSF-DT joint venture, so I assume that it's appropriate in principle.

She did this for different reasons, though, which we didn't find compelling. Easing our cashflow is a much more compelling reason.

 

[MikeF]

Further info: I just remembered that the accountant has previously proposed we put this property in a SMSF-DT joint venture, so I assume that it's appropriate in principle.

She did this for different reasons, though, which we didn't find compelling. Easing our cashflow is a much more compelling reason.

Hi ozperp

Whilst there is no problem buying resi in an SMSF, the SMSF can not purchase it from yourselves after the initial purchase was completed.

This is covered under section 66 of the Act.

http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s66.html

 

[Pushka]

Hi OzPerp, unfortunately I agree with MikeF - your SMSF cant buy residential investment property from you. Even if you have never lived in it. And even if it is rented out through a commercial agency, it is still regarded as residential, I guess if people sleep there????? Ours was a holiday apartment leased out to Breakfree, but still not allowed to do this.

It used to be able to be done, and we looked at that pre-2000 but the laws have been changed.

 

[Perp]

I think that given that we own the whole building of 16 rooms, we could be seen as being in the student accommodation business, and the asset as being a business asset. It is not a residential property in any conventional sense; it's more analogous to a hotel or boarding house. (ie People sleep in it, but as a part of the business we're operating. It's not something that could be used as a family home.)

The accountant proposed changing it to a SMSF-DT joint venture only a year ago, after seeking legal advice, so I'm pretty sure that an argument can be mounted that it's a business asset.

So can we leave that issue aside, please, and assume that it's a factory or something. In that case, what's not clear to me is how you decide what %age of the property is owned by the SMSF... Let's say we put $50K from current super into SMSF, which pays it to the DT in exchange for a $50K/(market value) share of the property, only about 3%, say.

Can you set it up such that SMSF pays more than 3% of the expenses each year, and gains a larger %age ownership in return?

 

[Pushka]

One of the bottom lines of a Super Fund is that it cannot be seen to be running a business. It is entirely an Investment vehicle. (The same applies to shares - you cannot be seen as a share trader, just an investment that happens to be invested in shares) So, assuming the legal advice you received is correct, you would then need to make sure the SMSF is in no way associated with the running of the accommodation business, but just the part ownership of the building purchased for investment purposes only. So, the expenses you would me able to put through the super fund would relate purely to the Investment, and that would things like body corporate, repairs etc. But nothing to do with the running of the Business itself. In order to satisy arms length, I would think the accommodation business would also need to be paying rent to the Super Fund on a commercial basis.

Your SMSF also needs an Investment plan that is written down; it would need to be very clear that this purchase was a means to achieve growth for your retirement.

 

[Perp]

One of the bottom lines of a Super Fund is that it cannot be seen to be running a business. It is entirely an Investment vehicle. So, assuming the legal advice you received is correct, you would then need to make sure the SMSF is in no way associated with the running of the accommodation business, but just the part ownership of the building purchased for investment purposes only. So, the expenses you would me able to put through the super fund would relate purely to the Investment, and that would things like body corporate, repairs etc. But nothing to do with the running of the Business itself. In order to satisy arms length, I would think the accommodation business would also need to be paying rent to the Super Fund on a commercial basis.

Your SMSF also needs an Investment plan that is written down; it would need to be very clear that this purchase was a means to achieve growth for your retirement.

Thanks, Pushka. Will talk to my accountant today.

 

[josko]

Hi Ozperp,

Legal advice....I paid over $8000 for Legal Advice in regards to a JV with my SMSF which has come back to bite me heavily in the pocket. My trust must now purchase my proeprty back from my SMSF.

It is non-compliant as;

SMSFR 2009/4 - Self Managed Superannuation Funds: the meaning of 'asset', 'loan', 'investment in', 'lease' and 'lease arrangement' in the definition of an 'in-house asset' in the Superannuation Industry (Supervision) Act 1993

Example 3 - Contractual funding arrangement

91. Under a contract, Joe as trustee for the Venture SMSF has contributed money towards the acquisition of an asset that is acquired by JJ Pty Ltd. JJ Pty Ltd is a company controlled by Joe's family and is therefore a related party of the SMSF.

The ATO has a nice little way of changing it's policy...regardless of what rules may apply now.

Regards JO

 

[Perp]

Jo, I think you're talking about a change in definition of related parties, right? But my understanding is that related parties is OK if we're talking about a business asset.

Forgive me if I've misunderstood, or if you were simply making the point that the government can change the rules, rendering your legal advice redundant.

 

[josko]

Jo, I think you're talking about a change in definition of related parties, right? But my understanding is that related parties is OK if we're talking about a business asset.

Forgive me if I've misunderstood, or if you were simply making the point that the government can change the rules, rendering your legal advice redundant.

Sorry Ozperp,

Yes to the change in definition and yes to the change in rules. To be honest I have not researched the Compliance issues in detail in regards to Business Assets.

I am a little nervy now in reference to SMSF Compliance.


Regards JO

 

[Kenster]

I am no expert in superannuation, but my understanding is, in the small business space, the super fund can own the property where the business is running from.

Can the trust be structured in such a way that the super can buy a share of the business property (not the business itself), say, by acquiring units in the trust or shares?

 

[MikeF]

Ozperp

Question for you....do you have debt on the property at present, if so is the trust the borrower? PM me if you like.