Not enough talk of SMSFs

Thanks Ivan.

Just checked your website and found this structure. Could you talk a little bit about the reason why you suggest this structure.

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Thanks

Srini

My understanding is that is the standard structure when buying in an SMSF ( assuming you have borrowings ) .

We have four IP's in our SMSF , and not much else at the moment ... However we've had good capital gain on the first two we bought so our return on our fund underinvestment have been around 40 % since we started in property in the super ( around 2 1/2 years )

Aim is too pay them off and then live off the rent . I haven't looked at all the in's and out's of distributions later on as there are minimum and maximum amounts you can or have too distribute which vary according to age but at the moment the aim is too maximise the amount in super and the gearing with property is the way we chose to do that . Maybe that's something the experts can discuss .

I'm not planing on retiring for a long time as I can work part time relatively easily and like the mental stimulation . There's only so much time you can spend on holiday . I know a few people who retired early and all but one started back working after a year or so off work . The one who didn't has aged faster than I would have expected . Doesn't like going out doing anything or making decisions and has missed out on a lot of involvement with friends and family .

Cliff
 
Thanks for all the responses. I'll post back here after meeting with our accountant.

I understand that this is financial advise and that not all accountants are qualified to provide advise.
 
Great thread Terry!

If I can somewhat hijack it - how about a current case study?

I am currently researching my next smsf purchase.

My wife and I are the only members at this stage, corporate trustee (to access St George 80% lend)

Funds available approx 100k

I haven't done a reno inside super before (Im well across the basics but this bit is new for me)

Looking to purchase a unit that requires a minor cosmetic reno (thats what I do best so Im sticking to the formula) - I often buy houses outside smsf but a unit this time for location. No major renos that would fundamentally alter the asset and I know I have to use funds for the reno, no borrowings as its likely to be deemed an improvement upfront not maintenance.

Property will not be in the area where we live.

My questions:

1 When I reno the unit (looking to take approx 2 weeks shortly after it settles) can i spend smsf funds to pay for accommodation close the the property and flights? My reading thus far tells me it could be a breach to stay in the unit, so I was thinking something down the road like a van park or motel.

2 I am also interested in using smsf funds for flights but mostly concerned about accommodation cost as I might drive to fit more tools and the car is already salary packaged so the petrol is already gone cash flow wise in my mind and at least tax effective - so flights as a separate question - can they be done with smsf funds?

3 While I am there are other costs also able to be spent from smsf funds? (like food, reno supplies, tools etc) I am not looking to claim any salary, claim time or pay myself for this job (i am not a builder) but if this were possible then Im listening.

4 When I visit it once every 1-2 yrs after this to inspect or conduct maintenance what are the rules around using smsf funds to do this?

5 My current understanding and contacts in mortgage lending indicate St George 80% lend with corp trustee and offset is one of the best smsf loan products on the market - should I be considering any others for this property?

My overarching goal is that I don't want to spend more (or any if possible) of my own private funds than required for this property and I am happy to buy well under my buffer zone (price bracket) to ensure adequate funds are available for the reno including travel then also leave a comfy buffer for servicing etc.


PS I should say if people want to keep this thread general/theoretical and mods want to start a new thread with this question I am fine with that too. THANKS!

PPS If there is a major section of an act that contains all this just reference it I will read and share, not looking for specific legal or financial advice here, just learning what I can as I spent a fair bit of time googling this stuff but I found I was getting sent to sales pitch pages of accounting firms all the time.

I would say no to all of these questions.
 
I wouldn't expect any changes to be harsh or swift, more likely incremental.

With tax concessions on super forecast to exceed the state aged pension within a few years I see that future govts will so some reigning in.

Not sure what that will be :
  • Higher contributions tax for high contributions?
  • Higher tax for 'wealthy' funds?
  • Exit taxes?
  • Limiting the ability to take lump sums on retirement - highly likely?
  • Higher preservation age - almost certain.
  • ????


However, the foundation of superannuation law and practice is supported by principles based around the concept of "retirement". The gradual elevation of the retirement age is likely for social security pensions but given the incentive to assist growth in super balances using transition to retirement pensions and compulsory contributions etc I wouldn't expect a sudden age leap leaving balances stuck in super. It would be a lead balloon to re-election. Its why nobody mentions taxing over 60 super pensions. In our ageing population this would be certain defeat and trigger a revolt. Even the MPs would be affected !

Thompson Reuters ....
"The Government today [Mon 21.7.2014] release a discussion paper, Review of retirement income stream regulation, to investigate the regulatory barriers for retirement income stream products. The discussion paper also considers extending concessional tax treatment to facilitate deferred lifetime annuities (DLA) and the minimum annual payment amounts for account-based pensions.

The Acting Assistant Treasurer said that the Government remains committed to providing self-funded retirees with confidence that their retirement savings will not run out because of inappropriate forced withdrawals. To this end, the Government is reviewing the minimum annual payment amounts for account-based pensions to assess their appropriateness in light of financial market conditions.

SUBMISSIONS are due by 5 September 2014."

So it does seem inevitable that pension and lump sum maximum withdrawal limits may be coming......Presently TTR pensions have a 10% max. Other pensions after age 60 have no limit.
 
Thanks Ivan.

Just checked your website and found this structure. Could you talk a little bit about the reason why you suggest this structure.

image-flow.jpg


Thanks

Hi Srini,

Give me a call and i'll talk you through it.

Its rather simple when it is explained properly.

Over the phone I use the left/right hand example. That is SMSF with Corporate trustee on the left and Bare Trust with Corporate Trustee on the right. Bare Trust: sole purpose is title of the asset (i.e title of property) with all income and expenses running through the SMSF. The SMSF lodges the annual return with Financial Statements, Audit and Tax Return. Deposit must be paid from SMSF. Check out the blog section of our site for a heap of articles to assist the education of SMSFs.


Be sure to set up your SMSF before your sign a contract of sale and depending on state the Bare Trust (with corporate trustee) will need to be set up and executed before the contract of sale. Also, the name on the contract of sale is important for stamp duty purposes, its different in each state.


Cheers, Ivan
 
Redwing...These days the value of a SMSF for non-property investment and investing in marketable securities doesn't always wash. More and more funds are offering direct control and low costs if you want to self-direct your own super. You don't need a SMSF. The SMSF peddlers will tell you can get admin for nicks but that's just a small part of the picture.

Even some low cost funds offer share trading and at very low cost. ING is one. This avoids almost all admin costs, SMSF levies ($389 this year!), ASIC fee, audit, tax costs and doesn't mean you lose the APRA insurance protection. Or the access to the Super Complaints Tribunal.

Our firm just encountered a super member defrauded by a sophisticated long term scam. They hijacked client email and hijacked the client super + bank accounts and changed acct numbers etc. Took almost all the super - Around $500K plus. However its 100% insured by an APRA managed scheme. Its the only 100% guarantee for investments against fraud. A sovereign guarantee. It cost each member around $2.50 a year and they don't know its there. The rate of superannuation fraud on a scale looks like a cliff....In 2003 the scheme had never been used for a claim. In the past five years it exceeds $100m.

Your SMSF comes with costs AND loss of that benefit.

Read about it in the attached file.

Why don't we hear about the benefit ?? Cause its not administered by ASIC or APRA. APRA just collect the levy. The scheme is actually direct between the fund trustee and the Treasurer. Like a private bail out fund of Messrs Hockey / Cormann
 

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  • EM SFAF Levy Act 1993.pdf
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  • FISL Collection Act 1998.pdf
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In nsw I believe the bare trust deed should not be executed until after the contract has been signed. You do need the corporate trustee of the Bare a Trust to be set up though to go on the contact of sale and title.

Bit of a stamp duty mindfield..be careful.
 
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Yes Marty, in NSW the bare trust should be executed between the date of the contract of sale and settlement. The purchaser on the contract should be the "Bare Trustee" in NSW. The above will ensure there is no double stamp duty on transfer/ sale in the future and corporate trustee is a must for property purchases in a SMSF using a LRBA.

Hope that helps

Cheers, Ivan
 
I would say no to all of these questions.

Thanks for this Terry, for any else interested I also followed the below questions up with a meeting with my smsf accountant (who is also an smsf auditor) I will try and paraphrase his answers.

Looking to purchase a unit that requires a minor cosmetic reno (thats what I do best so Im sticking to the formula) - I often buy houses outside smsf but a unit this time for location. No major renos that would fundamentally alter the asset and I know I have to use funds for the reno, no borrowings as its likely to be deemed an improvement upfront not maintenance.

Strategy is ok

Property will not be in the area where we live.

Location flexibility is fine

My questions:

1 When I reno the unit (looking to take approx 2 weeks shortly after it settles) can i spend smsf funds to pay for accommodation close the the property and flights? My reading thus far tells me it could be a breach to stay in the unit, so I was thinking something down the road like a van park or motel.

No definitely not. This is because it is not the super fund getting accommodation but me. Therefore I am getting benefits that have nothing to do with retirement savings. If I want to go stay near my smsf property accommodation and travel are at my own expense


2 I am also interested in using smsf funds for flights but mostly concerned about accommodation cost as I might drive to fit more tools and the car is already salary packaged so the petrol is already gone cash flow wise in my mind and at least tax effective - so flights as a separate question - can they be done with smsf funds?

see above, no travel expenses cannot be incorporated into a total reno budget and paid by smsf

3 While I am there are other costs also able to be spent from smsf funds? (like food, reno supplies, tools etc) I am not looking to claim any salary, claim time or pay myself for this job (i am not a builder) but if this were possible then Im listening.

generally no. Food, no, same reason above as accommodation. Any specific reno items that can be paid by invoice direct from the fund (not my bank acc or my cc) are ok. He advised if purchase cheap kitchen from buntings, setting up a buntings trade account using ABN of superfund, so bills are direct and I am never a middle man in the transaction. This is because renos cannot be paid by borrowings. If I buy a sink and then the smsf pays me back, then the smsf had borrowings (to me) this disallows the reno rule re borrowings

4 When I visit it once every 1-2 yrs after this to inspect or conduct maintenance what are the rules around using smsf funds to do this?

Forgot to ask, maybe next time but travel rules will be the same I think

5 My current understanding and contacts in mortgage lending indicate St George 80% lend with corp trustee and offset is one of the best smsf loan products on the market - should I be considering any others for this property?

Still in the lead for me but NAB seem more flexible on the property type

My overarching goal is that I don't want to spend more (or any if possible) of my own private funds than required for this property and I am happy to buy well under my buffer zone (price bracket) to ensure adequate funds are available for the reno including travel then also leave a comfy buffer for servicing etc.

My conclusion is if I am going to buy a renovator in super, I am more likely to engage a contractor (or several) to just do the work, I can't see how its worth traveling, painting, installing things yourself when there is no ability to be repaid for any of these costs (even just actuals, was never looking at paying myself a wage anyway) so more likely to buy a set and forget type place, or else just find a building service to quote the whole job, or have a PM organise it all and bill the smsf directly.

Anyway, thought this was interesting feedback to get as my accountant is quite aggressive generally re what can be claimed but was pretty clear about his "no" answers when it came to smsf compliance. Good to know.
 
Thanks for starting this thread, its interesting.

I am currently developing property and my accountant touched on the idea of selling a finished villa to our SMSF, we did not discuss the pros and cons??? Need to look into this further, just wondering if this is a strategy that developers use frequently... benefits??.

We have 2 properties in our SMSF they were cash purchases we do not currently take income from our SMSF.

Any info on this would be appreciated.

Cheers
MTR:)
 
Thanks for starting this thread, its interesting.

I am currently developing property and my accountant touched on the idea of selling a finished villa to our SMSF, we did not discuss the pros and cons??? Need to look into this further, just wondering if this is a strategy that developers use frequently... benefits??.

We have 2 properties in our SMSF they were cash purchases we do not currently take income from our SMSF.

Any info on this would be appreciated.

Cheers
MTR:)

A few issues here as a SMSF is prohibited from acquiring a residential property from a member. One exception is for 'business real property' which you may be able to qualify for.
 
Hi Terry
OK, got that.
I think I really need to look at this closely this year as I need to look at ways of reducing tax somehow, don't we all??
Thanks
MTR:)
 
I would have concerns that if you do the reno you could trigger a breach of s66 of SISA which prohibits an acquisition from a member. Non-arms length acquisition. After all would you reno my place for just the cost of materials ? The tax ruling on contributions (TR 2010/1) may consider it a contribution instead ? The use of SMSF funds for accom and travel may pose a sole purpose concern. You would argue that it is saving the fund money but that's where the contribution and non-arms length cross-over occurs. It may be prudent to engage a builder to do the initial repairs to bring it to a rentable state.

I would seek advice and perhaps a private ruling to avoid serious consequences.

We are currently purchasing a significant commercial property and business through our SMSF ... and our understanding is that whilst there is a loan on the property within the SMSF you cannot do any improvements to the property - you can only undertake repairs. Although "repairs" can be a lose term if done correctly.

I assume this is to prevent flipping and speculation.

One thing I have learnt on this journey is to be over cautious. There is a lot of grey area - and grey only suits the ATO.
 
Terry, what do you think of the DIY SMSFs? Does anyone have any opinions or experiences with any?

All SMSFs are DIY...The members are the trustees and they take personal accountability for all outcomes. This is the "self managed" principle. The key issue is loss of prudential protection.

All other super is insured against fraud and misappropriation. Its govt guaranteed. No limit.

SMSFs are often hijacked and mismanaged during a matrimonial spat. You cannot go to the Super Complaints Tribunal and if ex-hubby rips all the cash from the fund and flies to Malta to his GF (Yes there is a case) and leaves you with nothing ... you are uninsured. You may actually get thumped with the non-compliance tax penalties for allowing him to rip your fund off !!

I would start with asking "why" do I want a SMSF.
- Control ?? What sort of control do you want. Choice of investments. If so what type ?
- What other types of fund may allow that same control....Funds have changed.
- Borrowing to buy property ? OK only a SMSF can do that. Happy with the leveraged illiquid risks ? Are you both ? Whats the cashflow projection ??
- What makes you think you can do better than a professional outfit ?

That said a SMSF can be a excellent vehicle for some. Personal advice including all your circumstances is a definite "must".. The decision to use a SMSF is financial advice and only a AFSL licensee must give that guidance. No REA, No brokers, probably not your accountant etc. There will some legal things involved in the SMSF - eg estate planning so it has to be approached very seriously and slowly.

I setup a load of funds. I also am happy to say no. Beware not everyone is same. Happy to talk.
 
To clarify in my own mind - as much as sharing - I thought I'd put our story down.

We have had a SMSF for around 3 years now. Invested only in high interest cash and a selection of 8 blue chip shares. The shares are on reinvestment.

Come have gone up (WBC RIO BHP) - some have gone down (COH QBE). All in all we've made a very good return - although we don't believe this return is necessarily sustainable with solely shares and cash.

Hubby has the ability to "transition to retirement" next year, and can then draw down 10% of the value of the SMSF ... with the reduced tax rate this would affectively replace his net wage ... so we started looking at way to increase the cashflow return of the fund so that it could continue to grow at the same time we drew monies out.

We are in the process of buying a multi unit tourist accommodation - property and business - in a consistent tourist location. We have looked over the last 5 years of figures - right up until the March BAS statement, and returns are consistent.

Our criteria for the business/property was that it had to be the type of accommodation people would upgrade to when times were good - and downgrade to when times were not so good. After researching, we learnt that people won't forgo their holiday - they just change their budget.

Then the learning curve started.

It needed to be a property we would not live on. SMSF will not allow personal residences to be purchased.

The physical property need to be kept completely separate from the trading side of the business. The SMSF cannot "own" the business side. We have solved that by the SMSF lending the small purchase cost of the trading entity to an outside P/L - and the SMSF is the sole shareholder in the trading P/L. This means that "all" income from the trading entity returns solely to the SMSF - with the SMSF then distributing to us.

We could nearly purchase outright, but our broker has suggested we borrow as much as we feel comfortable doing, and keeping much of our cash "dry" for the unexpected, diversity and repairs.

The property requires some maintenance work - but we know we cannot undertake any improvements until after the loan is paid off. Such as - we can replace a dodgy window with another window but we cannot turn it into French doors.

We do need to convert one of the units into a disability accessible unit to satisfy council regs to bring it into the rental fold (vendors lived in this unit) - have to clarify if this comes under repairs or improvements as, if not, the unit would have to remain vacant to the detriment of the SMSF.

The property is being subdivided prior to settlement - with the vendors carving off a couple of acres to keep. This means the premises and business are "not" a going concern and hence GST is payable on purchase.

We have to employ an external manager to run the property, and all work on the premises (unless unpaid) needs to be outsourced, ie, linen, cleaning, yard/pool maintenance. This prevents rorting by paying my 11yr old $15,000/yr for emptying garbage bins.

You can pay yourself a wage for doing the above, but the amount needs to be justified to the ATO ... the ATO scares me so I'd rather outsource. We also don't have the excess time, or ability, at this stage. Once hubby does retire then we may revisit this using the current managers figures as a guide.

I am sure there are a dozen other tidbits we've picked up over the last several months ... but hope this helps
 
You cannot go to the Super Complaints Tribunal and if ex-hubby rips all the cash from the fund and flies to Malta to his GF (Yes there is a case) and leaves you with nothing ... you are uninsured. You may actually get thumped with the non-compliance tax penalties for allowing him to rip your fund off !!

Actually I see the lack of access to the SCT as a benefit of a SMSF. I can lock down the estate planning outcomes with a SMSF using a carefully constructed trust deed and the SCT won't poke its nose in.

When you say about an ex-hubby who flies to Malta to his GF you're not meaning the Shail case are you? Shail fled back home to Cyprus as did his wife. Shail was a tax agent whom the Commonwealth DPP suspected of creating 58 false identities to claim tax returns and family benefits dishonestly. Faced with charges the husband fled the jurisdiction. The wife, by then in Cyprus as well, tried to prevent losing the remaining money in their SMSF. There was no mention in the court proceedings that I read of a GF complicating their new lives in Cyprus out of reach of Australian justice.

Read the CDPP's annual report 2009-10 for more details about Mustafa Shail if that is the case you are thinking of.
 
Actually I see the lack of access to the SCT as a benefit of a SMSF. I can lock down the estate planning outcomes with a SMSF using a carefully constructed trust deed and the SCT won't poke its nose in.

Shail - No? As you said Shail is more (tax) fraud than super and a different country. The client was eventually released from liabilities once the Commr was happy it was a genuine trustee fraud and not a release scheme. It wasn't easy. The client lost her $500K and wasn't insured.

SMSFs are a trust. Trust law underpins a SMSF. So does equality and unanimous decisions (whatever that means is sometimes a puzzle) A carefully crafted trust deed may not be supported by common law. The scheme to alter voting rights isn't consistent with Fiduciary obligations of a Director for example or perhaps trust law sometimes. What a smart (expensive?) solicitor says works to deny benefits etc may count for jack when its in the Federal Court as a attempt to deny benefits etc. I have seen some clever clauses in SMSF deed by some smart lawyers but in the end the smarter they are the more obvious the intent. Best one I saw denied ATO from being paid a garnishee...Even ATO agreed in the Federal Court that such a clause may work so they bypassed it rather than testing it and seized asset anyway and placed a charge over the asset pending settlement. Trustee "permission" not needed. Not bad from the Regulator of SMSFs. Breach of the SIS Act ?

The SCT "cannot" poke its nose into a SMSF deed or more importantly the actions of the trustee. The Federal Court can...and does. Aggrieved members have many avenues. Look at the Morris decision. Hell hath no fury as a member denied a death benefit :)

IMO a SMSF has more clout than another form of fund. The SCT is cheaper but slow. Its probably not suitable for SMSFs in most cases.

I come back to the concern that SMSFs can be used to bypass member rights and ill informed or less powerful members may be surrendering their prudential rights by involving themselves in a SMSF. Sadly many are women who follow their spouse and aren't equally involved. The intent of SMSF law and its delivery have a huge gap.
 
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