Self-Managed Superannuation - what is involved in owning your own business premises in superannuation, what are your options, how to borrow, how to transfer your commercial property into superannuation

1. @business_DEPOT businessdepot businessdepot.com.au

2. Head of Tax & Super
- Building & Construction
- Property
- Small to medium business
m.garrone@businessdepot.com.au
(07) 3193 3002
0404 869 255
@mgarrone

3. • Owning your own premises
• What is involved if you are borrowing
• Can you transfer a property into super
• What types of property can you own
• Current ATO positions

4. • Specific
• General
• Ask as we go

6. • South East Qld property market stronger
• Owner occupier growth
• Super borrowing growth

11. • Currently underway [2nd round of hearings]
• First in 16 years
• What to expect
• Borrowing changes?
• 0% pension, > 60’s 0% tax on withdrawals, 30% franking credits?

14. • Business cycle
• Availability of equity – growth
• Business = Super?

15. • Dead rent proposition?
• Stability & tenure of premises
• Guaranteed rental income?
• Business deduction 30% - 46.5%
• All eggs aren’t in the one basket with business due to separate investment

16. • Deposit – use SMSF cash
• SMSF income 0% - 15%
• SMSF capital gain 0% - 10%
• Free up SMSF cash – transfer property into SMSF or buy property

17. • Gearing – market exposure
• Contribution limitations:
• $30,000 & $35,000 [concessional]
• $180,000 [non-concessional]
• $540,000 ($180,000 x 3) [non-concessional]
• Long term benefits of having a larger super fund

18. Investment decision:
• Impartial – rents, location & yield
• Will the premises always be suitable?
• What is your business plan?

19. If no longer suitable consider:
1. saleability
2. ability to find a new tenant
3. lease terms with SMSF – 3 x 3 or 5 x 5 or other?

20. What else?
• Funding improvements and fit-out
• Cashflow [can you afford the rent, and what if you cannot?
NOTE: SMSF vs outside SMSF present very different issues!

21. • Does age matter [40, 50 or 60 years of age?]
Note: 1 July 1964 aged 50, no access until 60
• Availability of equity
• Is your home paid off

22. • Cashflow
• Pre-GFC vs Post-GFC Considerations

26. • Individuals, Trust or Company
• Maximum flexibility
• No SMSF restrictions
• Availability of long term equity
• Cheapest (unless SMSF benefits outweigh costs)

28. • < costs [up-front & on-going]
• less restrictions
1. no single asset restrictions
2. change of asset allowed – res to commercial or more
• less complications / complexity

31. • Outside Super [no restrictions]
• SMSF [no borrowing, some restrictions]
• SMSF Borrowing [more restrictions]

32. • Must have – a SMSF with corporate trustee
• Must have - Instalment trust with corporate trustee

33. SMSF
Rent
Expenses
TRUST
Tenant
Lease
Limited
recourse
Loan
Repayments
LENDER

34. Instalment Trust
• Name on contract, eg: “Corporate Trustee Pty Ltd atf Instalment Trust”
• The Corporate trustee of the instalment trust purchases the asset

35. SMSF
• SMSF pays the deposit [stamp duty exemption]
• Bank lends to SMSF

36. LOAN
• Must be “limited recourse” – SMSF assets not at risk
• Security only over asset being purchased
• Personal guarantees allowed

37. • Accounting [SMSF accounts only]
• Use SMSF ABN & TFN
• SMSF collects rent & pays expenses
• SMSF GST & BAS

38. WHAT HAPPENS WHEN THE LOAN IS PAID OUT?
• No stamp duty on transfer from Instalment Trust to SMSF?
• No CGT on transfer from Instalment Trust to SMSF?

39. THE SET UP COSTS
• Instalment Trust
• Corporate Trustee
• Bank Review Costs
• SMSF Review Costs
• Advice and assistance

40. • More restrictive than SMSF with no borrowing
“Single acquirable asset” - one title?
• Can’t use existing super assets.
• Other SIS & related party issues still apply.
• Will the bank provide finance?

41. RESIDENTIAL * COMMERCIAL SPECIAL PURPOSE
House Retail Farmland
Townhouses Industrial Swimming Complex
Apartment Commercial Theme Park

43. • Borrowing - buy on completion of build – income tax/stamp duty
• Remove borrowing
• SMSF - pay out borrowing and transfer to fund
• SMSF – buy vacant land and build

45. • Farm? Yes [subject to title restrictions, use multiple borrowing arrangements]
• Building spanning two titles? Yes and No
• Sub divide or strata title? No
• Convert commercial to residential, or residential to commercial? Yes and No

46. • Strata title two units – identical? – No [use multiple borrowing arrangements]
• Rezoning?
• Commercial – separate car park – Yes / No?
• Can’t include furnishings or plant – single asset issues nor business real property

47. • What about renovations or improvements?[SMSF cash only]
BUT not if it changes the asset
• What about repairs? [lend if the bank allows, or SMSF cash]

51. • LVR’s and Term
• Commercial: 60%-70% for 10 – 15 years
• Residential: 70%-80% for 25-30 years
• Servicing capacity – net rental income plus member contributions
• Niche lenders may allow higher LVR’s [eg: Investec or Macquarie]
• Use other security
• Ongoing liquidity requirements/buffer?

56. • For younger business people transfer property later
• Home paid out / Equity freed up
• Technical, practical & investment issues to consider
• Often the only practical solution
• Tax benefit – long term (must outweigh the costs?)

58. • Market valuation
• Business real property definition
• Commercial & Industry only
• Residential [is it used as a business premises?]
• Commercial and residential?
• Vacant Lot?

59. • Cash going in or out
• Property as contribution [in-specie]

60. • CGT – normally need to get to $nil to make the maths work
• CGT small business concessions
• Number of rules
• Capital gain to $nil using:
• 50% discount
• 50% active asset
• Retirement exemption
• 15 year exemption

61. General Active Retirement
$ $ $
Property market value 1,000,000 1,000,000 1,000,000
less:
Property purchase price 200,000 200,000 200,000
Capital gain 800,000 800,000 800,000
less:
50% General CGT Discount > 12 months 400,000 400,000 400,000
400,000 400,000 400,000
less:
50% Active asset discount 200,000 200,000
400,000 200,000 200,000
less:
Retirement exemption 200,000
"Taxable Income" 400,000 200,000 -
Tax Paid @ 46.5% 186,000 93,000 -
Cash in hand 814,000 907,000 1,000,000 *
* Assuming no debt on property

62. With $200,000 property purchase price Active asset
discount
No active asset
discount
$ $
Cash in hand Retirement exemption 1,000,000 1,000,000
less:
Retirement exemption 200,000 400,000
Balance to be contributed within caps 800,000 600,000
less:
Non-concessional caps 540,000 540,000 *
260,000 60,000
less:
Borrowing or Non-concessional cap 2 people 260,000 60,000
Contribution remaining - -
* Maximum 3 x $180,000 non-concessional cap for 1 person

63. What if $800,000 property purchase price Active asset No active
$ $
Cash in hand Retirement exemption 1,000,000 1,000,000
less:
Retirement exemption 50,000 100,000
Balance to be contributed within caps 950,000 900,000
less:
Non-concessional caps 540,000 540,000 *
410,000 360,000
less:
Borrowing or Non-concessional cap 2 people 410,000 360,000
Contribution remaining - -
* Maximum 3 x $180,000 non-concessional cap for 1 person

64. 1. Asset or Turnover Test?
• $2m group turnover, or
• $6m net mkt value of assets
2. Active Assets?
• Is the property active, ie, used in business now or in the past?
• Active for 7.5 years or ½ ownership
3. Are you a CGT Concessional Stakeholder?
• 20% test [individual with 20% or more entitlement to income and capital or spouse of]
• 90% test [if interposed entity 90% of that entities income must flow to CGT concessional
stakeholders]

65. [15 year exemption] Capital gain $nil
• Property owned for > 15 years
• > 55 years old
• Sale is in connection with retirement
• Only $1,355,000 (2014/2015) can be contributed to super per individual
[Active Asset discount]
Reduce capital gain by 50% [in addition to 50% general discount] = 25% of
capital gain

66. [Retirement exemption] Reduce any remaining capital gain to $Nil if the exempt
amount can be contributed to super. Remember:
• $500,000 life time limit per individual
• If < 55, must pay into superannuation

67. • Different rules if individuals, trust or company own
• Elections required
• Timing – capital gain, contributions
• Great benefits

68. • Costly if you get it wrong
• ATO audits not unusual – compile your audit file now
• Need expert:
• CGT advice
• Super advice
• Super borrowing advice

70. • GST-free going concern on transfer?
• Stamp duty on GST component
• SMSF registers for GST
• SMSF cannot de-register for GST later

72. • Sole Purpose Test
• Investment Strategy [Diversification]
• Related party acquisitions
• Related party tenants
• Breaches of lending rules

73. • Cash flow of SMSF & Members
• Member ages
• Ability to contribute to super
• Retirement plans
• Diversification within SMSF
• Contingency plans for loss of a tenant , eg, Death
• Insurance Funding

74. • Those with equity outside super
• Mid 40’s to 50’s
• Businesses wanting to own bus property
• Retirement strategy to boost super

80. • Self managed Super
• Property
• Structuring
• Strategic Advice
• Retirement planning
• Estate Planning

82. @business_DEPOT
businessdepot
businessdepot.com.au
m.kelly@businessdepot.com.au
(07) 3193 3020
on maternity leave to Jan15
k.wilkinson@businessdepot.com.au
(07) 3193 3052
a.neuendorff@businessdepot.com.au
(07) 3193 3021

83. @business_DEPOT
businessdepot
businessdepot.com.au
m.garrone@businessdepot.com.au
(07) 3193 3002
www.businessdepot.com.au/self-managed-superannuation