Transition to retirement requirements

[Mr. Fabulous]

if wanted to improve (ie, change a window to French doors) can we do this out of SMSF cashflow?

My understanding is no, you couldn't. That would be considered an improvement. My understanding of repairs is that you upgrade/replace items to something akin to the original. You can repaint the walls and whatnot, for instance.

Note that this is only when an LRBA is in place. Once the loan is repaid, you can do whatever you want. I would recommend you read the link I posted from DBA Lawyers. I would also recommend you forget the ATO site and read Super Guide instead. SG and DBA are my go-to for super related stuff, although DBA may be a bit too technical (I work in the industry).

You are also correct, re: CGT. SMSF's (all super funds actually) have a concessional tax rate of 15% and a CGT of 10% for assets held longer than 12 months. Assuming they are compliant of course.

Also, I hope you have absolute confidence in your SMSF advisers (whoever they are). Especially going into something like you have proposed here. You need to be aware that as trustees, you are solely responsible for ensuring the fund remains compliant at all times. Pleading ignorance or saying 'But our adviser told us to do that' doesn't fly with the ATO. So be really careful who you get advice from and make sure they absolutely know what they are doing.

If in doubt, get specialist legal advice. It might cost you a fair bit up front, but could potentially save you significantly more in the long run.

 

[geoffw]

If you're wanting to do renos, you would still be able to do it outside the SMSF- hubby should be getting a good payout from his redundancy, with a hunk of that being tax free and therefore possibly not worth putting into super.

It will be too late for this property but it may be something to bear in mind for later- obviously with good financial advice.

 

[sash]

Sound advice....the question remains why would anyone want to go down this path fraught with all this risk.....???

My understanding is no, you couldn't. That would be considered an improvement. My understanding of repairs is that you upgrade/replace items to something akin to the original. You can repaint the walls and whatnot, for instance.

Note that this is only when an LRBA is in place. Once the loan is repaid, you can do whatever you want. I would recommend you read the link I posted from DBA Lawyers. I would also recommend you forget the ATO site and read Super Guide instead. SG and DBA are my go-to for super related stuff, although DBA may be a bit too technical (I work in the industry).

You are also correct, re: CGT. SMSF's (all super funds actually) have a concessional tax rate of 15% and a CGT of 10% for assets held longer than 12 months. Assuming they are compliant of course.

Also, I hope you have absolute confidence in your SMSF advisers (whoever they are). Especially going into something like you have proposed here. You need to be aware that as trustees, you are solely responsible for ensuring the fund remains compliant at all times. Pleading ignorance or saying 'But our adviser told us to do that' doesn't fly with the ATO. So be really careful who you get advice from and make sure they absolutely know what they are doing.

If in doubt, get specialist legal advice. It might cost you a fair bit up front, but could potentially save you significantly more in the long run.

 

[geoffw]

Sound advice....the question remains why would anyone want to go down this path fraught with all this risk.....???

The risk is in this type of investment within an SMSF. Making use of an SMSF as well as borrowing for an asset which does not require improvement is a far lower risk, especially at age 55.

 

[sash]

Yep and a lot people jump in without knowing the ramifications...

The risk is in this type of investment within an SMSF. Making use of an SMSF as well as borrowing for an asset which does not require improvement is a far lower risk, especially at age 55.

 

[kum yin lau]

Hi, those near 55 will know that the tax savings are substantial.

Of course, doesn't come without pain. The paperwork is a hazard.

KY

 

[lizzie]

Sound advice....the question remains why would anyone want to go down this path fraught with all this risk.....???

Our SMSF accountant does nothing but SMSF's and is a specialist - our other tax in done by another accountant.

Asides from wanting to know there is total "compliance" I don't understand why you think there is risk. (p.s. the current holding in the SMSF are completely compliant)

On the readings - which are rather vague - it appears we can buy the property, assuming the initial deeds allow so, as the purchase would be made in the best interests of the SMSF and provision of increasing self funded retirement monies in the future.

Hubby can take out maximum 10% of the SMSF holdings once he turns 55 - by which stage the small borrowing for the balance of purchase debt has been paid off.

This 10% drawing is less than the net (after tax) return from the asset - with the balance of the return remaining in the SMSF - so therefore the SMSF is increasing in value each year ... this money can then be used to purchase shares, or keep in a high interest account within the SMSF ... it also means that each year the SMSF is increasing in value and he is able to draw out more $$ as 10%.

This appears to be compliant with the ATO requirements of preserving, and increasing, the value of the SMSF.

We also understand that we can pay ourselves a wage - such as for cleaning -
but it has to be a justifiable amount - so therefore if an independent cleaner would cost $30k a year, we cannot pay ourselves any more than $30k ... but the return is such that I would hire a cleaner and keep it all obviously above board.

I cannot seem to find anything relating to "what is an associated trading entity" in reference to the SMSF. One of the items frowned upon by the ATO is:

"- The business carried on by the fund has links to associated trading entities;"

The business we are looking at would be totally stand alone - with no links to any other activity we undertake, all funds would be held in the SMSF and drawn down only as a permitted (no more than 10%pa until 60).

 

[lizzie]

Note that this is only when an LRBA is in place. Once the loan is repaid, you can do whatever you want. I would recommend you read the link I posted from DBA Lawyers. I would also recommend you forget the ATO site and read Super Guide instead. SG and DBA are my go-to for super related stuff, although DBA may be a bit too technical (I work in the industry).

Okay - that's cool - so basically while there is a debt/loan in place the SMSF cannot do any improvements to assets, only repairs.

That's fair as prevents speculation - such a property development or fix/flipping.

I have been reading the Super Guide at length. This is the line that seems to define that "we can" buy this property:

"Assessing whether a retirement purpose exists rather than a current benefit being sought for the benefit of trustees or related parties will determine whether the sole purpose test has been met."

http://www.smsfessentials.com.au/strategies/smsfs-and-business-like-activities

There would be no immediate benefit to us as the trustees as wouldn't be able to access or gain from the purchase for 2 years ... and then even after the two years ... would only be able to draw the 10%pa max, whilst the holding within the SMSF would be increasing by at least 5%pa even with the drawings (15% return overall).

The sole purpose of the purchase is to fund retirement, while increasing the value and return of the underlying asset.

So - now it comes down to whether the statute of the SMSF agrees

 

[speary]

I'm not sure I agree with Mr Fabulous. My understanding is that you cannot borrow to make improvements. I.e if you wanted to put on a pergola it would have to be paid in cash not from a Loc or borrowing.

As always seek you own advice

 

[Rickardo]

Have you considered asking your SMSF specialist to apply for an ATO private binding ruling? If they ask the right questions, you will get all the answers you're looking for.

 

[Mr. Fabulous]

I'm not sure I agree with Mr Fabulous. My understanding is that you cannot borrow to make improvements.

What don't you agree with? That's exactly what I said.

 

[Terry_w]

What don't you agree with? That's exactly what I said.

Don't start an argument. Lets just agree to agree!

 

[geoffw]

What don't you agree with? That's exactly what I said.

I've misunderstood you. Dd you say that you couldn't pay for an improvement out of cash flow? (Post #21)

 

[sash]

I am not sure if you are saying that the business owned by the SMSF would pay you for cleaning? If that is the case then it is not an arm's length transaction.

The point I was trying to raise is that from a personal opionion understanding the compliance requirements for a SMSF is far more taxing than just property. It seems to be a lot more complex. As Warren Buffett says don't invest in things you don't understand.

The other point is if you buy a Commercial property...my understanding is that there are reviews by the banks at 1-3 year intervals...are you prepared for cover off any any eventuality including the banks recalling their funds upon review?

Residential property is covered by Credit Code so less likely to happen. Also the banks will also do more due diligene up front whe extending funds.

I recall some years ago you got into issues with trusts...so do you due diligence.

The best advice I got from an accounting firm was this. There are people who structure finance well under the deductions and other structuring from a Tax, then there are people who claim every deduction which are tested and available, and then there are people who like to set-up structures and test the system at every level. I prefer to be in the middle...this prevents me from having unnessary and costly debates with the ATO.

Hope this helps...and gives context to y view.

Our SMSF accountant does nothing but SMSF's and is a specialist - our other tax in done by another accountant.

Asides from wanting to know there is total "compliance" I don't understand why you think there is risk. (p.s. the current holding in the SMSF are completely compliant)

On the readings - which are rather vague - it appears we can buy the property, assuming the initial deeds allow so, as the purchase would be made in the best interests of the SMSF and provision of increasing self funded retirement monies in the future.

Hubby can take out maximum 10% of the SMSF holdings once he turns 55 - by which stage the small borrowing for the balance of purchase debt has been paid off.

This 10% drawing is less than the net (after tax) return from the asset - with the balance of the return remaining in the SMSF - so therefore the SMSF is increasing in value each year ... this money can then be used to purchase shares, or keep in a high interest account within the SMSF ... it also means that each year the SMSF is increasing in value and he is able to draw out more $$ as 10%.

This appears to be compliant with the ATO requirements of preserving, and increasing, the value of the SMSF.

We also understand that we can pay ourselves a wage - such as for cleaning -
but it has to be a justifiable amount - so therefore if an independent cleaner would cost $30k a year, we cannot pay ourselves any more than $30k ... but the return is such that I would hire a cleaner and keep it all obviously above board.

I cannot seem to find anything relating to "what is an associated trading entity" in reference to the SMSF. One of the items frowned upon by the ATO is:

"- The business carried on by the fund has links to associated trading entities;"

The business we are looking at would be totally stand alone - with no links to any other activity we undertake, all funds would be held in the SMSF and drawn down only as a permitted (no more than 10%pa until 60).

 

[lizzie]

I've misunderstood you. Dd you say that you couldn't pay for an improvement out of cash flow? (Post #21)

From what I understand - you cannot pay for improvements out of cashflow "if" there is an outstanding debt (ie, mortgage). You can only pay for repairs.

You can pay for improvements out of cashflow "if" there is no outstanding debt.

As said - this prevents many levels of reno/develop speculations

 

[lizzie]

I am not sure if you are saying that the business owned by the SMSF would pay you for cleaning? If that is the case then it is not an arm's length transaction.

...

The other point is if you buy a Commercial property...my understanding is that there are reviews by the banks at 1-3 year intervals...are you prepared for cover off any any eventuality including the banks recalling their funds upon review?

The business owned by the SMSF "can" pay us for work such as cleaning or maintenance "but" it needs to be a justifiable amount to the ATO ... so ... if the ATO determined that the cleaning job would cost $1,000/wk if outsourced ... and we did the job ... we could pay ourselves $1,000/wk ... if we paid ourselves $2,000/wk then we'd be in deep trouble.

Easiest thing is to outsource items such as cleaning and maintenance to non-related contractors and have it all above board and clearly definable ... as I said earlier today.

We would be borrowing less than 20% of the purchase price - so don't think lending from banks or reviews will be a major issue ... with intention of paying it off in full within 2 years from income - so the debt and income are both held within the SMSF, and will be paid out within the SMSF - nothing externally from us personally in relation to debt or repayments.

We could lend the SMSF the 20% - but that again causes a whole pickle - better to keep everything completely separate.

Any ideas on what

"I cannot seem to find anything relating to "what is an associated trading entity" in reference to the SMSF. One of the items frowned upon by the ATO is:

"- The business carried on by the fund has links to associated trading entities;" "

means?

**The trust issue, years ago, was a massive lesson ... that's why I'm asking so many questions now - and doing lots or reading - and trying to get things clarified - instead of just trusting

 

[sash]

Okay looks like you are leaving no stone unturned.

What I was worried about was that the govt has sent signals that the Super once the sacred cow...will be touched for future revenue. Labor started with taxing income over $100k from funds with more than $2m in super.

I think SMSF is one of the areas which will also be looked at closely. The change maybe that they might start taxing tax free super from 60. So this may not affect you.

It is up to you....but surely taking some part-time consutancy jobs would be easier and less fraugth with uncertainty thay SMSF. Add to that the 1-2 renos ...you can have a much less stressful life? Something to ponder...

The business owned by the SMSF "can" pay us for work such as cleaning or maintenance "but" it needs to be a justifiable amount to the ATO ... so ... if the ATO determined that the cleaning job would cost $1,000/wk if outsourced ... and we did the job ... we could pay ourselves $1,000/wk ... if we paid ourselves $2,000/wk then we'd be in deep trouble.

Easiest thing is to outsource items such as cleaning and maintenance to non-related contractors and have it all above board and clearly definable ... as I said earlier today.

We would be borrowing less than 20% of the purchase price - so don't think lending from banks or reviews will be a major issue ... with intention of paying it off in full within 2 years from income - so the debt and income are both held within the SMSF, and will be paid out within the SMSF - nothing externally from us personally in relation to debt or repayments.

We could lend the SMSF the 20% - but that again causes a whole pickle - better to keep everything completely separate.

Any ideas on what

"I cannot seem to find anything relating to "what is an associated trading entity" in reference to the SMSF. One of the items frowned upon by the ATO is:

"- The business carried on by the fund has links to associated trading entities;" "

means?

**The trust issue, years ago, was a massive lesson ... that's why I'm asking so many questions now - and doing lots or reading - and trying to get things clarified - instead of just trusting

 

[Terry_w]

Residential property is covered by Credit Code so less likely to happen. Also the banks will also do more due diligene up front whe extending funds.

I beleive residential property or loans to purchase are not covered by the NCCP where a SMSF with corporate trustee is involved..

 

[geoffw]

From what I understand - you cannot pay for improvements out of cashflow "if" there is an outstanding debt (ie, mortgage). You can only pay for repairs.

Ok thanks.

So does that mean that if you have enough cash flow to pay interest plus repayments you can't use any surplus whatsoever to make improvements? Sorry to be so dense here, I'm just trying to get my head around the rules.

Lizzie has said she will be borrowing 20% of the purchase price- so with her anticipated return there will be a big surplus of available funds.

 

[Mr. Fabulous]

So does that mean that if you have enough cash flow to pay interest plus repayments you can't use any surplus whatsoever to make improvements?

That's correct. If an LRBA is in place, you cannot make improvements to the property, only repairs. Repairs means bringing the property back to it's original state.

Once the LRBA has been repaid, you can make improvements to your hearts content.