tax effective self managed superannuation structures for the property game
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Tax effective self managed superannuation structures for the property game. Presentation to The Brisbane Property Networking Group. April 2011. Who we are. Chartered Accounting firm with offices in Brisbane and Sunshine Coast - PowerPoint PPT PresentationTRANSCRIPT
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Tax effective self managed superannuation structures for the property game
April 2011
Presentation to The Brisbane Property Networking Group
Who we are
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Chartered Accounting firm with offices in Brisbane and Sunshine Coast
Specialist tax and business structuring practice, focussing on asset protection and tax effective strategies for business and high wealth individuals
Clients range from various industry sectors, and the focus is hospitality and property developers/investors
Range of other professional services include: superannuation, financial planning, due diligence, and management consulting
Proactive approach to managing client issues, with comprehensive tax planning prior to 30 June, along with medium term wealth strategy
Have two partners and 6 staff, so we’re big enough to handle complex work and small enough to care
Introduction (and disclaimer) to presentation
3
This presentation has been split into the following two parts:
1 Self Managed Superannuation structures for property investing
2 Case study – 4 townhouse development in Coorparoo
Disclaimer This information has been prepared as a presentation for general information purposes only, without taking into account any potential investors’ personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to you/your client’s objectives, financial situation or needs. All potential investors should obtain financial, legal and taxation advice before making any decision about whether to act on any information.
We are investing in a sustained period of uncertainty, and terms such as “negative gearing” and “capital growth” have been replaced with “yield” and “positive gearing”. Rather than new age thinking, I would just call this common sense.
Topic
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11 Self Managed Superannuation structures for property investingSelf Managed Superannuation structures for property investing
2 Case study – 4 townhouse development in Coorparoo
Some basics of Self Managed Superannuation Funds (SMSF)
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Benefits
Control over decision-making and investment options
Asset purchased in a very secure environment (almost bulletproof)
Ability to access low capital gains tax rate (10%) and low income tax rate (15%)
For business owners, ability to purchase commercial premises used by business
Flexibility for people approaching retirement, especially when putting in place a Transition to Retirement Strategy
Ability to borrow within appropriate structure
Ability to create joint agreements with other entities and other super funds to acquire assets
Helps with land tax issues
Basic conditions
Need to have a clear strategy in mind
Need to meet the requirements of the SIS Act, including:
• Not carrying on a business
• Sole purpose test
• In-house asset test
Maximum of 4 persons in the fund, and cannot be employer/employee relationship
Consider the trustee of the super fund if the SMSF is for a couple
Consider cost effectiveness and having a minimum balance of $200,000 plus
Cannot purchase residential properties from related parties
Scenarios
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Mr Mechanic and Mrs Teacher
• Mid 30’s• Runs a small mechanic
shop• Tired of paying leaseMr Software Sales and Ms Real Estate agent
• Mid 50’s• No superannuation saved• Just received lump sum from estate (out of
probate) • Earning good income and concerned
about taxMr Almost There
• Self-employed and earns good income; however, likes the night life and never seems to save any money
• He’s not getting any younger and needs to start putting together a plan
How can SMSF work for Mr Mechanic and Mrs TeacherPurchase of a commercial premises leased by business
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Lender Bare trust
Business
Loan
Repayments
DepositLimited recourse
Contributions
Lease payments
SMSF
Scenario
Existing super of husband and wife of $120,000
Industrial shed cost $350,000
Currently paying $33,000 per annum in lease costs plus outgoings
SMSF
Based on 70% LVR, $105,000 deposit on shed, borrow balance to secure asset
Based on 8.5% loan (on $245,000), annual interest is under $21,000
Personal contributions and spouse contributions help with any topups
How can SMSF work for Mr Software Sales and Ms Real Estate Agent Purchase of a residential premises
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Scenario
Mr Software Sales inherited $250,000 and had no existing superannuation
Ms Real Estate agent had around $80,000 in superannuation
They’re earning good income personally, and are both getting close to 60 and have to ramp up their savings for retirement
SMSF
Purchase a residential property with 30% deposit to minimise cashflow
Enter into a Transition to Retirement plan to contribute significantly into super (and retain some disposable income)
Do it again; however, the second time use the equity in their main residence (LOC)
Lender Bare trust
Clients
Loan
Repayments
Deposit
Instalments
Contributions
Limited recourseSMSF
How can SMSF work for Mr Almost There Purchase of a property (likely commercial) via a Joint Venture
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Scenario
Mr Almost There has $70,000 in super, and runs a motorbike building business
He’s got interesting friends, and like Mr Mechanic, wants to own the shed where his business is based
Can’t save for peanuts, but is able to pay bills
SMSF
Purchase a commercial shed with one of the investors in the bike business with ownership based on money tipped in
As the tenant and member, Mr Almost There can pay more/less off over time, thereby managing tax and building wealth
Other option would be to invest in US property market, where it’s a buyers market
SMSF Mr Almost There
SMSF Mr Cool
Questions
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?
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Topic
1 Self Managed Superannuation structures for property investing
22 Case study – 4 townhouse development in CoorparooCase study – 4 townhouse development in Coorparoo
Property development using a SMSF in a Joint Venture (JV)
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Team Investors
Good experience running businesses, but not in property development
Still looking for “that first development”
Significant funds in superannuation
Recognise opportunities in the market but apprehensive to move
Team Biggs
Experienced at property development
Licensed builder with 35 years experience
Some financial ability
Able to manage the structure, negotiations, and paperwork side of the development
The project Two adjoining properties in a leafy area of Coorparoo, 908 sq/m per block $725k each Deal came through a business associate, Mr BA Issues are: Demolition Control Precinct and Character residential, one property pre 46, 1 unit per 300 sq/m
land Proposed development: strata existing homes to 400 sq/m lots (or even smaller) under two SUDs and sell
sooner than later, put a driveway between the blocks and put four townhouses at the back (MUD)
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The structure
Land ownership Construction company
Kingfisher Constructions Qld Pty Ltd
$$$
Building Services
Biggs Trust
Investor Trust
SMSF Team Investors
Money providers
Acme Pty Ltd
Biggs Trust
$$
Considerations of the JV
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The deal
Commercial return paid to SMSF and other money investors
Security provided to SMSF on the properties
Minority share ownership of related entity
Separate loan and joint venture agreement
50/50 share split after return paid on monies lent
Finders fee split between up-front, project management, and BA
Construction based on cost plus arrangement
Full capital up-front with co-signing on general account (using on-line technology)
Use personal credit cards for small spends
Clear delineation of roles and responsibilities
SMSF
Ensure not carrying on a property development business
Ensure compliance with SIS Act (in-house asset)
Ensure protection for funds invested
Key learnings
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Careful how you secure the funds (avoid second mortgages)
Careful naming the entities you use (avoid the word “Development” in any new entity names)
The important thing is the business relationships, not the deal (greed can cloud decision-making)
Consider the full cost of a project (i.e. finance, selling fees, holding costs, GST, etc)
Avoid self-delusion (you make money when you buy)
Have a defensive optimistic strategy (i.e. hope for the best, document for the worst)
Build a product for the area you’re in
There’ll be overruns, so always have a contingency
Listen to the specialists, because they know better
Earthworks are expensive, so don’t underestimate the savings of a flat block
You’re hopefully never going to live in these places, so don’t over-finish them
