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