Why buy Negatively Geared Properties? I think the calculations are wrong

[darcy13]

Hi All

I would like to explore this further , so how do I find someone who has the knowledge and expertise to advise me on a SMSF ?

I'm in sydney

stuart

 

[willair]

BV

Say with $50 you buy one share of CBA
instead of that
you can buy IW of cba for $25 each
basically you put your $25 down as your own money and borrow another $25 - so with your $50 you own two shares worth $100 - but you owe $50 to the bank - same as property principle

since you have two shares - and not one - you get double the dividend and double the imputation credit.

That can work both ways and depending on the amount leverage you employ,CBAwent from just above $60,then back down too mid 20$,big difference from a piece of paper too a block of land..willair..

 

[bespoke]

Not all employers offer this, and different employers allow different things to be packaged, because there are a lot of complex rules about FBT and so on. Your employer would also have to pay you what it doesn't pay in super due to the lower 'salary'.
Alex

Not mine. I only get employer contributions on the lower amount! Didnt know that when I started and I don't have a choice on the salary sacrifice amount.

 

[BV]

BV
since you have two shares - and not one - you get double the dividend and double the imputation credit.

Thanks
I didn't think of gearing shares and doubling the quantity.
not a bad idea for those who can tolerate market volatility.

cheers

 

[BV]

Hi All

I would like to explore this further , so how do I find someone who has the knowledge and expertise to advise me on a SMSF ?

I'm in sydney

stuart

Manoj can help you structure your portfolio but from memory he's charging over $250/hour. Send him a PM and ask him, maybe he can take on the challenge for free

 

[bespoke]

few little add ons

SMSF will cruel your lending options big time, especially if u want a decent lvr, a moderate rate, or the flexiility to access the equity growth for external purposes.

Im not saying SMSFs dont have benefits for some, but this aribtary comparison isnt a reasonable one.

Just because a carrot and an orange are the same colour doesnt mean they are the same

ta
rolf

Rolf,
I have looked into SMSF, but alas dont have enough in my super (post defence force) and my defence force super (13 years of it) is unfunded and therefore I can not roll over into my own fund.... anyway I have been told that you CAN structure a SMSF loan so that your lendings outside of super are NOT affected by the SMSF lendings.

 

[darcy13]

put me down for about 6 hours worth then !!!!

what I might do is send a Pm to manoj with an out line of my situation , then he can just say yes or no to it being viable , and I can pursue it from there , that should only be about 6 minutes worth I hope

$250/60*6=


stuart

 

[manoj]

I have 6 free minutes for any one who understands that it costs $10K to own an Investment property and not $5850! But remember, i am NOT in practice and i can not do any accounting work for you..BTW the consulting fee is $440 Incl. GST

Stuart start your outline as below

"I understand that it costs $10K to own a property and not $5850 as per your example, my situation is .....give age / family income / assets / liabilities and current super balances....

 

[JIT]

The last thing you can do is put that $100K in your super fund - give that money to your dad or mum who is under 65 year old - and if you are 35 - dad and mum have to be at least 20 years older or about 55 years age - pick the parent who is not working - then mum or dad will contribute this $100K in a newly formed SMSF - as non-concessional contribution - this is called "Tax Free component" - the parent will sign a biding death nomination - which means on death - the money comes to you and not to other siblings etc - since the money is "Tax Free" component - when it is ultimately paid out to you - it will be tax free in your hands.

I think that for younger people eg. <40-45 y/o, this sort of strategy of effectively ''superannuating your parents'', is the main potential way that you could benefit financially from super before you're 55-60 y/o...

I believe that there's more scope to do this for business owners/self-employed individuals, with the potential to superannuate ''gainfully employed'' parents via additional 25k p.a. tax-deductible contributions, and even using gearing to do so.

(With caution to your intent and execution of such strategies to avoid part IVA)

It's something that I am considering at 30 y/o, but have not decided yet for sure. You do need your parents' co-operation in this of course, and need to be wary of things like this:

Once dad is 65 and is eligible for Govt. Pensions - check the asset test as account based pension are included in assets - up to $252,000 of assets do not reduce your Govt Pension.

But that's one for your accountants to consider...

This is a very complex issue and beyond the comprehension of your suburbia accountant - you will need a SMSF Specialist accountant who can be found on the website www.spaa.asn.au

I have to agree though that not all accountants are that switched on in this regard, and even those that are, may not be able to apply the strategies that are most appropriate to your age group and investment/lifestyle objectives and risk profile.

Dad contributes $300,000 to a SMSF - the SMSF pays $45K in contribution tax over the years - SMSF earns income - this income is not credited to any member account but to a "reserve account" - when dad dies - mum gets the balance of dads account + $45K from the reserve account as a Anti - detriment payment - this then creates a $300,000 deduction in the SMSF - this loss is carried forward - so when contribution are made by son in future years - no tax is paid by the fund. This loss in the fund can be carried forward for ever.

That's very interesting. I think SMSF is becoming more and more an ''inter-generational'' vehicle for wealth creation.

Once i am 60 years - i withdraw my super tax free and pay $530 to the bank and keep the balance - do a spreadsheet - you will find that your cost is half - the reason is simple - instead of paying 30% tax and then paying off the non-dedutible home loan (like my dinner example) - you are paying half the tax in super - then cumulating both - income in the fund and interest on line of credit - but at the end of the day - home loan is paid but you paid half the tax or in other words paid half the interest rate.

I would ask the same question as Rolf on this...

What about capitalising investment expenses and interest against an IP with a LOC, and using free income to reduce non-deductible PPOR debt this way... ??

I would argue that if you're say 20-40 y/o, then this would be much quicker and more effective than waiting till your 60 y/o to retire your non-deductible PPOR debt... ?

And it would still cost you 3% interest wouldn't it... ?

"Migrants Handbook : How to be a millionaire in less than 10 Years of landing" between phone calls

Great, let us know when it's written!

Rich people do not pay tax - they use the Cash-Box Strategy to hold their income

Sorry, what's the ''Cash-Box Strategy'' you talk about?

"Run your profitable business with a proper tax structure with your bank manager wife"

Not sure if that's P.C. though!

You are getting confused with the preservation age which is 55 years (when you can access your super) and pension age which is going to be moved from 65 to 67 (when Govt starts to pay you Govt. Pension).

I agree. People seem to be confusing the preservation age and goverment pension age. If you take 55 y/o as the more relevant age, then I would argue that if you're >45 y/o, you need to seriously consider super gearing strategies now.

Again, there is no one size fits all approach, but I think you'd be silly to dismiss some of the strategies Manoj is suggesting here.

I would advocate more of a hybrid approach though, largely influenced by your age and intended date of retirement.

Say with $50 you buy one share of CBA
instead of that
you can buy IW of cba for $25 each
basically you put your $25 down as your own money and borrow another $25 - so with your $50 you own two shares worth $100 - but you owe $50 to the bank - same as property principle

since you have two shares - and not one - you get double the dividend and double the imputation credit.

Share instalment warrants do seem to make a lot sense for SMSF.

And maybe I am missing something important I just cannot see any advantage in using an SMSF to purchase propert unless you are close to that retirement age anyway, and have significant funds in the super fund.

If by some miracle I had 100-150k in my super account (without having made any additional contributions), then I would definitely consider super gearing (with property), regardless of my age...

No because to get $100 cash you will need to earn $171 before tax.

So with Manoj's thinking we are better off borrowing the $100 to pay for the dinner (and pay 6% ongoing interest) and put our 171 pretax $ into our super instead.

If we are 50 years old by the time the borrowed $100 has increased to $171 we would have become 60 and would have access to our super so we can pay back the $100 loan.

I think that's a really good explanation that sums the approach up pretty well!

 

[manoj]

Cash box strategy is for those who do not have an employer
they have profit in a company and do not pay high salary to directors (owners) - perhaps $35K to Mr , Mrs , kids and parents the dog!
so that the maximum rate of tax is only 15% (The dog must do some work for the business - those in business will understand what i mean by this term)

Then maximize super for every one - after that if there is profit leave it in the company and pay tax @ 30% - the company is the cash box

the money after tax (70%) belongs to the company - if you touch that money it can be termed as deemed dividend - however the company can lend you the money at FBT rate of interest.

Now all this imputation credit sits in the company and all the profit sits in the company till retirement

when you retire - the company pays dividend to the directors to the limit that the income is tax free to the directors - say a dividend of $7K with $3K imputation credit = total income is $10K

When you are 65 you get SATO (Senior Australian Tax Offset) which means that incomes upto $28K each are tax free - higher dividends can be paid to get higher refunds ... till all the tax paid by the company is returned back
- since on $10K there is no tax - all the imputation credit is returned back - so this way whatever tax you have ever paid - you get it back

But if you pay salary to yourself at individual tax rate of $31.5% or higher - that tax has gone and can never come back to you .....

Now if your accountant has never told you this before - you need to replace him as there is plenty more which he has not told you - guess why - because he does know it himself.... get rid of him .... today....

And those who want to buy properties out of super - please come back to this forum to tell us how much CGT that they have paid and if they made any money from the whole transaction - ie from buying / paying stamp duty / losing money every year / at the time of selling paying agents commission and paying CGT = all those who can prove they made a profit after taking inflation into account will be treated with a "Dinner for Two" worth $100 with my compliments (Sydney members only) ....

I guess i have to back up my claims with some $ value! to prove that when you purchase outside super - it is very rare to make any money....


Manoj Abichandani

 

[wylie]

What is amazing is this thread has had 80 odd replies and about 1600 views in less than 2 days! like no other on this site...

You obviously have not seen some of the "hot" threads in the past. You aint seen nothing..... This thread doesn't compare really.

Which means there is still a lot of demand for knowledge on purchasing property with SMSF - like the good old days when very few had property NG'ed and then every one jumped on the band wagon - SG (super gearing) is even more sweeter - but it will take time to convert ...

I would not agree that "very few had property NG'ed" in the good old days. How old are you?

 

[wobbycarly]

all those who can prove they made a profit after taking inflation into account will be treated with a "Dinner for Two" worth $100 with my compliments (Sydney members only) ....

Shouldn't this be a dinner for 2 worth $171?

 

[manoj]

Wobbycarly

I admit my mistake - dinner for 2 worth $171!
Compliments from me

But I will be paying from the cash box strategy - I take it back
Dinner for 2 for $100


seriously i mean it....

 

[klublok]

BV & JIT



How to pay no income tax on rental income & pay no tax on contributions

Assume that you have a $100K from selling your investment property - or you can withdraw from your own home and say you are 35 years old and between yourself and wife have $50K in super - since the kids are young and the two of you earn only $80K (spouse works part time $20K and the other $60K) - 9% is $7200. (Since the two have been working on this wage for the past 10 years - you should have at least $50K in joint super)

Step 1 - create the fund

The last thing you can do is put that $100K in your super fund - give that money to your dad or mum who is under 65 year old - and if you are 35 - dad and mum have to be at least 20 years older or about 55 years age - pick the parent who is not working - then mum or dad will contribute this $100K in a newly formed SMSF - as non-concessional contribution - this is called "Tax Free component" - the parent will sign a biding death nomination - which means on death - the money comes to you and not to other siblings etc - since the money is "Tax Free" component - when it is ultimately paid out to you - it will be tax free in your hands.

Step 2 Roll over your super in your SMSF - balance $150K

Step 3 - Purchase IP with installment warrant

Step 4 - Put dad on pension

Step 5 - The negative will be about $7200 including depreciation - when contributions are made - 9% - no tax is paid

Step 6 - if there is more negative - salary sacrifice - dad can withdraw and give you the money to you tax free as his pension will be tax free.

This strategy assumes that dad does not have a tax problem and is under 65 years old and is not eligible for Govt. Pension

Once dad is 65 and is eligible for Govt. Pensions - check the asset test as account based pension are included in assets - up to $252,000 of assets do not reduce your Govt Pension.



Manoj

Would this be caught under the anti avoidance provisions of the tax act, given that you are essentially setting up an arrangement with the sole or dominant purpose of obtaining a tax benefit?

Just trying to think from an objective sense, why else would you:

1. give money to your dad,
2. have him invest in super,
3. sign a binding death nomination to you so that you get the asset back anyway
4. give you rental return from the investment that he purchased with YOUR money?

Assuming the ATO have no problems with this, not all the return from the property would be tax free? My dad's member balance only owns 66% (being $100,000/$150,000) of the property, so wouldn't it only be 66% tax free?

Also wouldn't a regular steam of money coming from my dad's account to my account be deemed as "taxable income" on my part by the ATO?

 

[battler]

And what does it do to dad's tax?

 

[skater]

I have 6 free minutes for any one who understands that it costs $10K to own an Investment property and not $5850! But remember, i am NOT in practice and i can not do any accounting work for you..BTW the consulting fee is $440 Incl. GST

Stuart start your outline as below

"I understand that it costs $10K to own a property and not $5850 as per your example, my situation is .....give age / family income / assets / liabilities and current super balances....

Man, this thread is doing my head in. I voted before I read anything, now I'm sorry I did. SMSF are not for everyone. Our super is negligible and since we will be retiring well before the age to use the funds anyway, there is no benefit whatsoever in looking at purchasing through a SMSF.

As for declaring that a property is going to cost X amount of dollars, well, that is just a generalisation. There are many properties that can be positively geared, so declaring that all investors are losing money each year is just totally ill informed. Let alone the other discrepancies.

Looks to me like someone is just trying to drum up business, but not succeeding.

 

[manoj]

Klublock

If you know so much about Part IVA anti avoidance provisions - I am sure you are aware of segregated investing rules in a SMSF - please check them out - the income in the fund will be tax free - if there will is income - with Super Gearing - the fund will be in Negative territory - which will shelter your taxable contribution in such a manner that when you contribute or salary sacrifice - you do not pay any tax on it....

I am sure that you do not have to tell ATO in your income tax return that dad has given you money (Gift) from his tax free pension withdrawal - somebody has to grow up here....

But sure, it sounds funny...

Hey! I am 40 years old and my dad is 60, guess what, he still gives me pocket money.... that would be really funny -

When you give your dad a gift of $100K from after tax $'s - if he contributes to SMSF - that is his choice... - I do not understand what the ATO has to do with this. His limit to deposit in his SMSF is $150K each year or $450K once in three years - I do not know which law he has broken...

Battler

When a pension is withdrawn from non-concessional contribution - or Tax Free component - that income stream is not included in your income tax return.... so dad's income is not affected at all....

As i said in my previous post - investing via SMSF is just too sweet ...
There is a book on SMSF by Trish Power - for some reason, she decided to write for the dummies series - no jokes - that is a very good starting point for some very basic questions....

 

[Edmond Dantes]

....

Looks to me like someone is just trying to drum up business, but not succeeding.

you read my mind. I started reading it thoroughly, but it's looking more and more as an advertising thread to me.....

 

[manoj]

I admit defeat - I was wrong ....
somethings you just cannot change.

This is my last post...

Good luck guys, hope you all get there....


PS: I have nothing to sell....

 

[JIT]

Cash box strategy is for those who do not have an employer...

Great, thanks for the clarification on this strategy.

And those who want to buy properties out of super - please come back to this forum to tell us how much CGT that they have paid and if they made any money from the whole transaction - ie from buying / paying stamp duty / losing money every year / at the time of selling paying agents commission and paying CGT = all those who can prove they made a profit after taking inflation into account will be treated with a "Dinner for Two" worth $100 with my compliments (Sydney members only) ....

Again, Manoj I think you're pushing a one-size fits all approach which doesn't really work for everyone, but does have merit for some (namely I feel for those 40-45+).

Like some here have mentioned, residential IPs don't all lose money every year, some become close to neutral within a few years.

And some people really don't have any plan to sell at all, using the equity instead to leverage into other assets classes eg. commercial property or shares (eg. using discretionary trusts with family member beneficiaries and companies)... or even to make geared deductible or large non-deductible contributions into a SMSF (perhaps even to then buy a SG property).

I don't think anyone here wants to pay any more tax than they have to, but I think it's also a balance between having enough assets (inside and outside of super) vs. paying too much tax.

You can't base your entire strategy on tax reduction can you... ??

In any case, in some cases I know it's possible to reduce CGT to effectively 7.5% with the sale of a property and with the subsequent transfer of sale proceeds to a super fund... so it's not always such a deal killer.

I'll see if I can dig up an old thread on this...

If you are willing to show me an actual spreadsheet which can prove your theory based on real numbers, that would be slightly more convincing and perhaps give your theory more credibility here...

I know a few here less than 30 y/o who have accumulated residential IPs with gross value close to $3M and in 5 or so years time... if they were following your super gearing strategy (had it been available a few years ago)... they'd probably now still be saving up for that first deposit (30-40%) on their first SG property... keeping in mind that property prices are increasing now far quicker than people can save...

Wouldn't you like a $3M head start?

What happens if you put that figure into a compound interest calculator and compare it with someone who has just purchased their first, say 500k, SG property?

What would you say to these people?

They did it all wrong?

They're paying too much tax?