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CGT in a SMSF . When dose it stop ?

Discussion in 'Accounting & Tax' started by See Change, 28th Feb, 2016.

  1. See Change

    See Change Timing Lord Premium Member

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    CGT in a super fund is at the 15 % with a 1/3 discount which brings it down to 10 so not a high rate .

    I know at some stage it cuts down to Zero , but at what stage ?

    Is it when a fund goes into transition to retirement , age related or when the fund goes fully into retirement ?

    We have four properties in our super fund and the aim was to use profits from sales of personal IP and make lump sums to do that , but the APHRA changes have limited what we can buy . One property is sitting on a very nice gain and at the stage we bought it we were restricted to an LVR of 67 % so there is also a reasonable amount of " fund money " in there .

    Selling this would come close to paying two of the other properties off , turning a borderline cash flow situation in to a healthy cash flow positive senario which would enable us to diversify into managed / indexed funds .

    Cliff
     
  2. York

    York Finance Broker Business Member

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    I see managed/indexed funds being mentioned a lot lately. I think this may be a popular additional/alternative vehicle for many.
     
  3. Cadbury99

    Cadbury99 Well-Known Member

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    My understanding is any account (you can have multiples in the same fund) that is in pension phase (including transition to retirement) has a CGT tax rate of 0%. However an account in pension phase must pay out a minimum (goes up based on age) of 4% of account balance per year and prior to age 60 there is tax payable on that. An accountant can probably state how this is taxed as from what I have read it is not that straight forward to work out. It seems to depend on how the money got into super in the first place.
     
    kierank likes this.
  4. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Generally it is when the asset is supporting the payment of a pension. Paul pointed out some traps the other day and he is probably best to answer
     
  5. JacM

    JacM VIC Buyer's Agent Business Member

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  6. See Change

    See Change Timing Lord Premium Member

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    Terry , do you have a link to that ?

    I can see a post by Paul talking about pitfall's of SMSF , but not specifically about CGT or transition to pension .

    Cliff
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Cliff i am just working on the mobile so difficult to search but it was in the last 2 days or so. Paul mentioned that a property owned under a limited recourse borrowing arrangement could not be tax exempt.
     
  8. JacM

    JacM VIC Buyer's Agent Business Member

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  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    JacM likes this.
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    And another gem....

    In the year you start a pension you cannot hold off until the pension starts (Say Sept 30) then have a CGT event (10th October) and because it happened after the pension commenced its tax exempt. Such a capital gain is always apportioned !! Thats a trap many have fallen for. Such strategies require advance(d) planning
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Why did I say that ? SIS Regulation 1.06....Its a LONG......and complex bit of law with many underlying links to other laws. The issue is mirrored in repeated sub-sections dealing with different types of older (grandfathered) pensions. eg 1.06 9A(d) deals with account based pensions commenced after 1 July 2007.

    But what can be a real arse kicker is Reg 1.06 which can be summed up as the complying pension rule. It has two limbs. This is the one HEAPS overlook and dont check very very carefully before 30 June. Lets say the minimum pension isnt paid during the year by say $10. Then NONE of the pension complies during the year and taxable income and CGT results as well as lump sum payments that are taxable to members. Non-compliant pensions aren't pensions !!

    I wont mention the second limb yet. See if you can find it. It the easiest one of the lot to lead to a taxable CGT and loss of pension exemption. And few people know about it. The ATO do but have never made much of the issue.

    You may be surprised how many find their pension isnt compliant in a year when a large CGT event occurs.
     
  12. See Change

    See Change Timing Lord Premium Member

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    Paul

    thanks for that . very useful bit of info , that seems to answer one question , re timing . Lease ends in July . So we lend the money to super in June so we can have it paid off and T/ F into super and then go into TRIP just before the end of this fin year . Don't renew lease , get the place styled and sell in July and should be CGT free .... Correct ?

    Will look at regulation 1.6 ... when I get time

    Cliff
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I dont think so and.... how do you make a capital gain on a property that is acquired in one month (with duty) and sell the next month at a profit ? I dont follow your explanation. Looks, smells and appears a scheme and you have not followed the non arms length CGT rule to get there. Non-arms length income is taxed to the fund at a far higher rate.

    GST will apply if its commercial property and if its resi its prohibited.

    Well worth seeking advice before acting. Small business concessions may impact a commercial property favourable too.
     
  14. See Change

    See Change Timing Lord Premium Member

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    Paul , maybe you misunderstood .

    We bought the property ( Manly , sydney ) back in 2011 , in a bare trust . Sitting on nice capital gain and if we sell we will come close to paying off two other properties in the fund , using a combination of capital gain and deposit funds the fund put in when buying

    Aim is to personally loan money to Fund to pay off the bank loan so the property will then revert from the Bare Trust to the ownership of the super fund .

    When this has happened , we would go into TRIP close to the end of this financial year . Then early in next financial year ( mid July ) we would sell the property , pay back the personal loan and then use the remaining funds to pay off the other properties and then put them into the TRIP section of the fund and at that stage the TRIP would be generating a health income which we can distribute to us .

    Does that make sense ?

    We will be getting advice , but still like to be on top of things as possible and have a road map laid out .

    Cliff
     
  15. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    There is a hole in the logic which does not comply. It is this :

    Aim is to personally loan money to Fund to pay off the bank loan so the property will then revert from the Bare Trust to the ownership of the super fund

    1. A refinance is fine provided the bare trust deed allows this to occur (I argue that many were drafted without allowing for a different loan). A lawyers should confirm this position. Ideally one who knows SIS...DBA Lawyers may be ideal.
    2. Its still a limited recourse borrowing facility since there is a new loan. (Otherwise it would be a prohibited borrowing by the fund)
    3. So the property remains on bare trust and held by the Custodian trustee.

    Unless the new loan was secured I would argue it fails to meet the ATO requirements for a LRBF and fails the arms length requirements. One of those arms length requirements is security. An unsecured loan is a major concern.

    So I cant see how Reg 1.06 is met. No pension asset, arms length issues and a possible prohibited loan.

    I do consider the property may be sold by the Custodian Trustee and a CGT event will result in 2/3rd of assessable gains being taxed at 15% in the 2016 year but not exempt. Commence a pension after the CGT event and the other loans repaid and title of all 3 reverts to fund and then a % proportionate income exemption is available based on an actuarial certificate. May take a few days / weeks. If the pension docs and pension start is done quickly the taxable period may be limited but it wont be a 100% exemption. Would be determined at year end. 2017 year may be a 100% exempt income fund if all mbrs are pension.

    Your road map is leading to a Cliff....
     
    Last edited: 2nd Mar, 2016
  16. See Change

    See Change Timing Lord Premium Member

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    that's why I use a GPS to see where I am ( called Property Chat )

    So personally paying down loan won't help .

    So sell property in Bare trust , early next fin year , with bank loan in place , then that goes in to the super , then pay down other loans , then go into TRIP and CGT will be paid proportionally according to how long the fund is in trip and not in trip for the year ?

    Cliff
     
  17. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Pauls right a private loan wont work because a SMSf can only borrow to acquire an asset or refinance. It may also no be necessary to transfer title from the custodian trustee to the smsf as the beneficial owner could instruct the trustee to sell. I hace no idea if there are soecial tax consequences for a smsf in this regard.
     
  18. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Start of a plan at least. I cant say yes or no as that would constitute financial advice. Paying down the loan personally would be a contribution and may blow caps. Worth exploring as plan B.
     
  19. See Change

    See Change Timing Lord Premium Member

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    But legally it sounds ok .... ? :) . Will talk to our accountant in next few days .

    Have been to a financial planner on one occasion ( Westpac insisted on it otherwise they wouldn't lend the money for this loan ) biggest waste of money ....:mad:

    Happy to do own research and base decisions on what we work out . Paid off so far .

    cliff
     
  20. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Is your accountant licenced to give financial advice?

    I am not sure if this is tax or financial advice myself.