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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

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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

Questions

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?For more information, contact John Biggs on:

e john@conquestaccounting.com.aup (07) 3852 4844