@business_DEPOT businessdepot businessdepot.com.au

Head of Tax & Super

- Building & Construction - Property- Small to medium business

m.garrone@businessdepot.com.au(07) 3193 30020404 869 255

@mgarrone

• 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

• Specific

• General

• Ask as we go

• South East Qld property market stronger

• Owner occupier growth

• Super borrowing growth

• 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?

• Business cycle

• Availability of equity – growth

• Business = Super?

• 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

• Deposit – use SMSF cash

• SMSF income 0% - 15%

• SMSF capital gain 0% - 10%

• Free up SMSF cash – transfer property into SMSF or buy property

• 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

Investment decision:

• Impartial – rents, location & yield

• Will the premises always be suitable?

• What is your business plan?

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?

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!

• 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

• Cashflow

• Pre-GFC vs Post-GFC Considerations

• Individuals, Trust or Company

• Maximum flexibility

• No SMSF restrictions

• Availability of long term equity

• Cheapest (unless SMSF benefits outweigh costs)

• < 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

• Outside Super [no restrictions]

• SMSF [no borrowing, some restrictions]

• SMSF Borrowing [more restrictions]

• Must have – a SMSF with corporate trustee

• Must have - Instalment trust with corporate trustee

SMSF

Rent Expenses

TRUST

Tenant

Lease

Limited recourse

Loan Repayments

LENDER

Instalment Trust

• Name on contract, eg: “Corporate Trustee Pty Ltd atf Instalment Trust”

• The Corporate trustee of the instalment trust purchases the asset

SMSF

• SMSF pays the deposit [stamp duty exemption]

• Bank lends to SMSF

LOAN

• Must be “limited recourse” – SMSF assets not at risk

• Security only over asset being purchased

• Personal guarantees allowed

• Accounting [SMSF accounts only]

• Use SMSF ABN & TFN

• SMSF collects rent & pays expenses

• SMSF GST & BAS

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?

THE SET UP COSTS

• Instalment Trust

• Corporate Trustee

• Bank Review Costs

• SMSF Review Costs

• Advice and assistance

• 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?

RESIDENTIAL * COMMERCIAL SPECIAL PURPOSE

House Retail Farmland

Townhouses Industrial Swimming Complex

Apartment Commercial Theme Park

• 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

• 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

• 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

• 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]

• 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?

• 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?)

• Market valuation

• Business real property definition

• Commercial & Industry only

• Residential [is it used as a business premises?]

• Commercial and residential?

• Vacant Lot?

• Cash going in or out

• Property as contribution [in-specie]

• 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

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

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

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

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]

[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

[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

• Different rules if individuals, trust or company own

• Elections required

• Timing – capital gain, contributions

• Great benefits

• Costly if you get it wrong

• ATO audits not unusual – compile your audit file now

• Need expert:

• CGT advice

• Super advice

• Super borrowing advice

• GST-free going concern on transfer?

• Stamp duty on GST component

• SMSF registers for GST

• SMSF cannot de-register for GST later

• Sole Purpose Test

• Investment Strategy [Diversification]

• Related party acquisitions

• Related party tenants

• Breaches of lending rules

• 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

• Those with equity outside super

• Mid 40’s to 50’s

• Businesses wanting to own bus property

• Retirement strategy to boost super

• Self managed Super

• Property

• Structuring

• Strategic Advice

• Retirement planning

• Estate Planning

@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

@business_DEPOT

businessdepot

businessdepot.com.au

m.garrone@businessdepot.com.au

(07) 3193 3002

www.businessdepot.com.au/self-managed-superannuation