quandry regarding owned property into superfund

Mate of mine owns a property, house and land and also a block of land, but he would like to put these inside his fund. Now I understand that in general you can't purchase your own property for your fund. So am thinking that sale to a third party and then superfund buy from that third party. I know there are costs etc, but otherwise what sort of other options are there. They are investment related properties.

thanks

 

Couldn't he cause the SMSF to buy another similar property instead?

 

thanks fellas, but the land in particular is developable into multiple blocks (5-10), so he would like to take advantage of doing such things inside super. I am thinking the tax savings would more than cover the changeover costs many times over.

 

Does he realise that a SMSF cannot borrow to develop?

 

thanks, yes he is aware and would not need to borrow to develope, but if I use an example. Cut off block land on road frontage, subdivision cost is 40 grand. Sells block of land for 200 grand, so basically profit is roughly 160 grand.

So capital gains tax is roughly 40 grand if held for more than year under personal name, or around 16 grand if done inside super, as I understand it.

The other thing is that if he did this with multiple blocks under their own names then they would be perceived to be in the business of development thus placing the profit as income tax assessable rather than capital gains tax. I am therefor assuming that no such risk is run inside the super fund. He is 49 and can access his super when 60 so if we use cutting off 10 blocks at that price of 200, just as an example, then the 30-60 grand changeover price from sale to third party and back to super would be worth it.

 

Sounds like a SISA s66(3) scheme to even try. A third party acting as intermediary would also likely trigger duty and other concerns while still being a problem. And as Terry points out likely prohibited acquisition under s67A as it may not continually meet the definition of a single acquirable asset. But then s67A prohibits certain assets so s66 also impacts s67A.

There are ways this could still be OK but the most problematic issue will be the GST trigger it creates IF it could even be allowed. A SMSF can acquire real business property. But resi sites arent going to meet that definition. It must be real business property immediately prior to a acquisition to be permitted. That would trigger a gst issue BUT it could then be permitted and subject to the fund investment strategy etc. The more difficult matter is that of financing it. A different structure may be the key. SISA doesnt specifically prohibit a JV but a range of limitations apply.Get it wrong and its non-arms length income. A major compliance and tax problem.

Its complex and if its not correctly considered with experienced and qualified advice it will be a serious concern

 

Value of land at present = $0? I don't think so.

 

Thanks Terry, Also thanks Paul, don't worry all those things would be looked into but I was just after possibilities for him, as he is family related and so the more pre existing knowledge/options he has then he can more easily understand what the experts are saying and the vagaries of those options.

thanks

 

Yeah - not to mention that the profit is reduced by the GST payable on the sale of land. And stamp duty, legals, Council contributions and so on....

8 out of 10 people tell me they planned a subdivision to make profit. And lose money or make a LOT less than planned.

 

thanks Paul, He is going to look more closely into this in the new year so if he goes down that track he might join this site and then make personal contact with yourself as an example.

 

some budding property 'developers' think they can sell a subdivided piece of land and pay no tax because they sell it less than the original purchase price.
e.g. buy one block for $100,000 subdivide it and sell one of the new blocks for $90k and they think this is not taxable because $90k is less than $100k.

But what they don't realise is they have to apportion costs about both blocks so there would be a $40k profit on the sale of one.

 

And they think that subdiv costs are simple to work out. Anyone who has endured a land subdiv will know its a complex system with loads of costs. eg GST, tax advice, TP fees, legals, meters, connections, permits for this and that, council fees and contributions, civils, temp fencing, new fences, landscape and retaining, valuer to apportion site etc and....selling costs, registration fees and much more. Dig and hit rock and the services connections multiply in cost. Most seriously under estimate these costs.

Holding costs too. A $100K loan costs $375 a month. Then throw in an annual land tax assessment, rates, Water services charges etc

 

if land is that good suggest just subdividing in own name, build and retain for investing. No capital gains tax if not sold, great depreciation from new dwellings, income from rent, no need to put it in super, use the smsf to buy something else good. win win win.

 

Hey Tim,

While I understand the reason why he wants to put it into to super to get the SMSF CGT concession rate, it's not possible under SIS Act. While he may sell to a non-related party, it comes with an agreement to sell back to his SMSF, which would contravene the act.

A couple of people said that you cannot build on the land once in super but that is not the case. As long as there is no debt against the asset in super, you can do develop on it as long as it benefits the member(s).

You can't get a loan for it in the super fund to do it though. You would need to pay stamp duty twice as well which is considerable. Plus all the subdivision costs will need to be paid for by the SMSF. He could possibly do a JV with his SMSF if he doesn't have the funds.

Best to see an accountant or financial planner who can do some modelling and see what the overall profit would be and how it looks once the profits are distributed.

 

SMSFs pay the same tax on all income...15% generally. The CGT discount is bugger all. A 5% tax saving. It can be almost just as lucrative for a SMSF to have a ownership interest in land and pay full tax as chasing a discount.

Depending on property equity etc its possible to structure this with a unit trust as a JV vehicle by using other property as loan security and borrowing against that external property. But sound advice needs to obtained before pursuing any actual decision as a unit trust may also be a prohibited SMSF investment if its not compliant in all aspects of the complex rules

Get it wrong and the fund is exposed to significant tax and held as non-complying

It merely indicates complexity and a range of options if the right advice is obtained.