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Presentation at SPAA2011

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  1. 1. SMSFs & Real Property Applications<br />Family trust model / super model<br />Business Real Property: acquisitions from related parties<br />Tax planning & Commercial Issues<br />In House Assets<br />Unit Trusts / Instalment Warrants<br />SMSFs: Real Property & Pensions<br />Land Speculation<br />
  2. 2. INTRODUCTION<br />Family Trust Model<br />Dump Company P/L<br />unpaid distributions<br />Family Trust<br />rent<br />Trading Company P/L<br />owns<br />Land<br />lease<br />makes<br />Other Investments<br />
  3. 3. INTRODUCTION<br />SMSF Model<br />A SMSF<br />A Trading Company P/L<br />Deductible rent<br />Tax free pensionincome<br />Member over age 60<br />Lease<br />Land<br />Owns<br />
  4. 4. Business Real Property<br />Section 62: sole purpose test<br />Section 109: transactions on “arms length basis”<br />Section 295-550 ITAA: non arms length income<br />Section 66: acquisitions from related parties<br />
  5. 5. Section 66 of SIS<br />Prohibition on intentional acquisitions of assets from related parties.<br />Exception: acquisition of “business real property” of the related party<br />
  6. 6. Section 66 of SIS<br />“Business real property”<br />Acquire: for consideration <br /> in specie <br /> on grant<br />Asset = property <br /> assignment of contract<br /> lessee's improvements<br /> fixtures / non fixtures<br /> related party service provision<br />
  7. 7. Section 66 of SIS<br />“Business real property”<br />“Market value”<br />SIS definition<br />In specie contributions<br />Multiple uses: farming land / property subdivision<br />
  8. 8. Section 66 of SIS<br />“Business real property”<br />Market value<br /> C SMSF: 200 Hectares acquired for $1M<br /> 5 Hectare subdivisions authorised under rezoning<br /> Land contract for $40M<br /> Commencement transition to retirement pension for C<br /> Tax free: $34M capital gain for C SMSF?<br />
  9. 9. Section 66 of SIS<br />“Business real property”<br />Freehold / leasehold / Crown land interests<br />Use in relevant business immediately before acquisition time<br />Does not need to be business of transferor<br />Cannot be an interest held as “beneficiary” of a trust estate<br />Primary production land: 2 Hectares private usage<br />
  10. 10. Section 66 of SIS<br />“Business real property”<br />When is there a business<br />Whitfords Beach?<br />
  11. 11. Section 66 of SIS<br />“Business real property”<br />“Wholly and exclusively”<br />Water rights, oyster licences, marina berths<br />“Not for profit”<br />Fixtures / plant<br />Units / shares in property holding trusts / companies<br />Residential property<br />
  12. 12. Commercial Issues<br />Stamp Duty<br />GST<br />Land Contracts<br />Income tax ramifications for related party<br />
  13. 13. Tax Planning<br />Market place experience:<br />Pension strategies<br />Working with Division 152 strategies<br />Instalment Warrants<br />
  14. 14. Tax Planning<br />Div 152-B: 15 year exemption<br />CASE STUDY<br />(ii) Promissory note $1M<br />E Family Trust<br />E SMSF<br />E Trading Co Pty Ltd<br />Owns<br />Business Real Property<br /> (i) Acquires<br />E Member<br />(iv) Section 292-100 contribution<br />(iii) Trustpayment / endorsed promissory note <br />Leased<br />
  15. 15. Tax Planning<br />Division 152-B: 15 year exemption<br />CASE STUDY<br />Division 152-A: basic conditions<br />E Family Trust: must have owned BRP for 15 years<br />E Family Trust: must have had significant individual for 15 years<br />E must be significant individual of E Family Trust be for disposal year aged 55 and be retiring<br />E Family Trust must make payment to E <br />
  16. 16. Tax Planning<br />Division 152-B: 15 year exemption<br />CASE STUDY<br />Assume $500KCGT cost base of BRP in E Family Trust<br />Assume $1M market value of BRP now<br />Outcome<br />E Family Trust disregards $500K capital gain<br />Section 292-100 E able to make super contribution least of:-<br />$1.1M (2010 cap)<br />Payment from E Family Trust<br />Stakeholder’s participation percentage x capital proceeds<br />E endorses promissory note to evidence contribution / fund purchase price. Written choice to make contribution to be communicated to E SMSF<br />
  17. 17. Tax Planning<br />Division 152-B: 15 year exemption:<br />Section 292-100 ITAA Contributions<br />Note: need capital proceeds not capital gain <br />Applies to pre CGT assets<br />When does it apply?<br />Main considerations:-<br />Individual retiring having attained age 55<br />Business asset held for more than 15 years<br />
  18. 18. In House Assets Test<br />Section 71(1): an asset subject to a lease arrangement with a related party<br />“Lease arrangement”: broad definition<br />Section 71(1)(g): exception for “business real property” subject to a lease / lease arrangement with related party<br />Section 71(1)(j): Division 13.3A SIS Regulations<br />
  19. 19. In House Assets Test<br />“related party” / “related trust”<br />Difficult / important definitions<br />“related party” to super fund<br />Standard employer sponsor<br />Members<br />Relatives / controlled companies /trusts of above<br />
  20. 20. In House Assets Test<br />Division 13.3A<br />“clean balance sheet”<br />Problem: investment in another entity<br /> credit loans<br /> mortgages / provision of security<br />
  21. 21. In House Assets Test<br />Section 71(1)(g): Exclusion<br />Lease enforceable by legal proceedings<br />Property must remain BRP throughout term of lease<br />Land & fixtures / not plant & chattels<br />
  22. 22. Unit Trusts<br />G Unit Trust<br />Land<br />Acquisition<br />loan<br />Mortgage<br />$<br />⅓ eachunitholders<br />Bank<br />A SMSF<br />B SMSF<br />C SMSF<br />
  23. 23. Instalment Warrants: Arms Length Financier<br />Personal guarantee<br />H SMSF<br />Bank<br />H Member<br />Nomination<br />Mortgage<br />H Nominees P/L<br />Land<br />Legal ownership<br />Loan<br />
  24. 24. Instalment Warrants: Vendor Finance<br />Vendor finance converted to loan<br />I Family Trust<br />I SMSF<br />$1M: $500Kvendor finance<br />Owns<br />Deed of nomination<br />BRP<br />Legal title<br />I Nominees P/L<br />Mortgage<br />
  25. 25. Instalment Warrants<br />Issues<br />Capital works after acquisition<br />One borrowing / multiple titles<br />What happens when debt repaid<br />Personal guarantees / guarantor right of subrogation<br />
  26. 26. SMSFs Owning Real Property and Paying Pensions<br />Assumptions:<br />Minimum pension paid<br />$1M real property at commencement<br />Pension commenced for J at age 65<br />Real property only asset of J SMSF<br />CPI 3% each year during term of pension<br />Investments accruing from net rents yield at 6% per annum<br />
  27. 27. SMSFs Owning Real Property and Paying Pensions<br />
  28. 28. Land Speculation <br />More difficult than first appears<br />ATO issues:<br />Lessee’s improvements: acquisition of asset from related party<br />Building contracts with related parties<br />Where to next?<br />
  29. 29. Conclusion<br />SMSFs growth industry <br />Appetite for real property investments<br />Numerous strategies <br />Search for integrity in tax / super advice<br />