Setting up an SMSF

Keep in mind the land will have no income. Could the trustee do this without breaching their fiduciary duties? (yes possibly).

 

Another similarity. Also aim to maintain a minimum of 2 - 3 years generous pension payments in cash. Current cash allocation range of 10 - 15% exceeds this and nudging the upper end of the range given the current market environment. More pension income than we need coming in so only add to holdings when great opportunities present. Other than one ETF the rest is LICs (direct shares are in family trust). Again I like to keep the portfolio simple. Simple portfolio, simple strategies, no borrowing, liquidity buffer, currently in pension mode equals low fees and minimal headaches.

Cheers

 

Ho @tobe , all valid points. i kinda have hit my serviceability wall so can't take more loan i think and we are looking to buy a land which has long settlement period. it is all bit sketchy , we are doing our homework atm

We do not have huge balance in super as we are just in our 30's and established properties are bery expensive at the moment.

We want something in Vic not interested in Brissy.

So we buy and wait once the title fets regustered then try to sell in that times market rate (hopefully double than what we will.pay) and by then thise areas will develop.

@kierank , thanks for the hint but the issue with shates is -you need to do alot of market research , find out which company is doing what. i have started reading lic thread bcoz after buying land whatever is leftover might put in shares. but if you do not follow the market shares can also create issues. we are planning to leave 10% in smsf and rest purchase block of land and then some Lics and etfs...but not in rush , still learning about NTA , DRP-worth takig the $ or invest back in shares.

(Alot to learn)

 

Buy an apartment, or a house in Geelong Ballarat or Bendigo. Maybe there will be capital gain, maybe not. At least you have a rental income while you wait and see.

 

And for most lenders, borrowing for smsf doesn't look at your capacity outside super. There isn't a serviceability wall borrowing in super, as long as you have employer contributions and rent to cover the loan repayments.

 

Thanks @tobe , i will look more into this but i am not familiar with those areas and the market.

I will also check loan on smsf.

 

@Newfast .... last I heard I am not sure there are any lenders that would finance the acquisition of vacant land in a SMSF so you would have to find it with cash which removes the power of leverage.

 

Hi @JacM , we will be buying with our smsf cash.

But couple of users has mentioned that areas i am looking may not provide any higher returns

We are interested in buying in Melton or Tarneit

 

I would consider commercial property but definitely not residential

 

Unlike many others on PC, I wouldn't even buy commerical property in an SMSF.

If one needs, say $100k in cash to top up one SMSF's cash reserves, one can easily sell 1% (or even 10%) of one's shares without impacting one's SMSF too much.

One has to sell 100% of one of their commerical or resi properties to raise the $100k (potentially in a bust market) which may not suit the long-term strategy and viability of the fund.

But, as I keep saying, each to their own.

 

I agree @kierank. I would only consider it if I already had sufficient investments in listed securities and cash and I had enough on top of that to invest in commercial while leaving the existing investments in place. I guess it is possible but I am not sure I would be bothered. I already have a lot going on and will focus on that. But who knows when I retire I might get inspired?

 

I agree. I might but then, I might not.

I am retired. So I think the 'I might not' has won .

 

Trouble is the new changes from July 1 are much more restrictive in how much you can get into a SMSF making the holding of lumpy assets like property even less appealing. And indications are this will probably get worse over time with future Governments meddling further with Super. One could try to max out having 4 members in a SMSF to increase available capital but that comes with its own risks. Like @kierank I agree that I think SMSF's are suited to more liquid assets. A fantastic environment also for shares especially those ripe with franking credits.

 

I think Terry hinted about this, putting aside whether it makes financial sense I think you would need to have a pretty good explanation/plan for how a non-income generating asset would meet the sole purpose test (ie the investment is solely to provide for the retirement benefit of the fund members). In other words, I'd seek specific advice on this and get a ruling from the ATO before going ahead.

 

No expert by any means but what if the intention is to develop the land? When you think about it plenty of SMSF's purchase shares that pay no income (dividends), artwork, collectibles etc.

Personally I like simplicity when it comes to our SMSF. No leverage, no lumpy assets, simple income generating assets, easy admin, less fees, less headaches.

 

Yes superfunds can develop in limited circumstances. But could not directly borrow to do so.

 

If the intention is 'to develop the land' it could fail the sole purpose test. The intent should be to provide for the retirement benefits of the members (at least that is my interpretation of the sole purpose test). How would you demonstrate intent to provide retirement benefit, some ideas;

• investment strategy referencing improvable land and a timeframe with desired income and CG returns
• trustee minutes / resolutions demonstrating due diligence
• a prudent development plan that will in all likelihood obtain a DA
• evidence of capability to develop (ie funds)
• evidence that you are not attempting to run a business
• evidence that similar developments have generated the income and CG desired and referenced in the investment strategy.

These are just suggestions, the onus is on the trustee and if the trustee fails to convince the ATO the fund could be determined to be non-complying and this is a really bad thing (loss of concessional tax treatment, trustee fines and potentially other consequences).
The example of buying shares (or artwork) that generate no income is an interesting one. If we look at shares first, would a share that doesn't generate income fail the sole purpose test? In my layman's view if you bought a share that can't generate income by virtue of the type of share (not sure if this is actually possible) then it could breach - after all what retirement benefit is likely. Simply arguing that it will grow in value unless backed by a guarantee (almost like a bond I suppose) may not be enough. Surely such an investment would be regarded as reckless anyway?
What about a share that could generate income if the company declares a dividend? This should be fine as long as the fund's investment strategy allows it. What if it is an IPO and there is no history of dividend and/or the prospectus states that a dividend won't be paid for at least x years? My layman's view would be that if you invested and there was no likelihood of income within the retirement time frame of the members you could be on shaky ground. With no prospect of income how would one convince the ATO that CG is certain and therefore it was for the retirement benefit of the members.
What about precious items such as; collectibles, jewels, exotic cars et al? If these were displayed in the members residence - you will fail the sole purpose test (providing a non-retirement benefit). If they were stored away safely and there was a demonstrable history of the item increasing in value then it should be OK.
So is land any different to shares and collectibles? The one difference I can think of is that to make a good income from land you need to improve it - thus extra action is needed. Without this action you are reliant on CG and this is where you might strike a problem. In my view a collectible with a proven track record of CG is easier to argue for retirement benefit than unimproved generic land where there is no hard plan to develop it.
Also, shares can generate income without the investor doing anything other than holding the shares.
Please take the above with a grain of salt, I am a conservative layman, not an SMSF specialist. You should seek specialist advice.
Trev

 

I'm an income investor and a layperson also. So treat what follows accordingly.

How do you define income? When it comes to shares one can draw on the dividends and / or draw down capital for income.

Take for example one of the greatest companies in the world, Bershire Hathaway (Warren Buffet). It doesn't pay a dividend so those that invest in it sell off capital for income. Man has it grown in value but there's certainly no bond like guarantee. A SMSF can easily invest in it through an online broker. Perhaps it might breach the sole purpose test but many I'm sure would not consider such an investment as reckless.

How is gold or an ETF invested in same judged under the sole purpose test?

Many SMSF's sensibly maintain a cash buffer. So say a SMSF holds a Gold ETF and BRK.B (Berkshire Hathaway) in conjunction with a cash buffer to cover a minimum pension for three years. The buffer reduces the risk of the SMSF having to draw down capital during major market downturns. Is this in breach of the sole purpose test?

You have however raised some very interesting points. I'd be very interested in @Paul@PFI's view on all this.

 

The sole purpose test is based on legislation - s62 Sis Act. You also have to consider trust law - a SMSF is a trust. It would be unlikely that an investment which produces capital gains but no income would breach the sole purpose test just because of this

Breaches of trust are different. A trustee must act in the best interests of the members and this includes maximising returns. It would be very unlikely that a member would sue a trustee for breach of trustee duties, because all members must be either trustees or directors of the trustee. However it could happen in situations where there is a dispute between members such as a family law matter, or a marriage break up and a Bankruptcy of one member at the same time - if I am going down I will take you with me sort of thing.

 

Austing - it is not me you have to convince - it is the ATO. I define income to mean funds generated by holding the asset, not by its sale or part sale (thus a passive cash inflow). In theory the price of an asset is based on its income generation or perceived/potential income generation. So investing in a stock that pays no income (the way I define it) means you are very confident that others will come along and value it higher and therefore buy at a higher price. Profit taking by disposing of such assets is of course a legitimate investment no doubt and if that is in line with the risk profile of the members then the trustee should consider it. I bet there are many that invested in Madoff's ponzi scheme that didn't regard it as reckless (not saying that BRK.B is a ponzi scheme or reckless btw).
The ease of investing in something has no bearing on whether it should be invested in by a SMSF and is irrelevant for the sole purpose test (I expect).
Gold is a precious metal that backs currency, has actual value in use and is easily priced at any point in history. Buying a KG of gold in your SMSF may not be the worst idea in the world it could be argued it is a defense against inflation & currency fluctuation and has good liquidity (and therefore better than cash in the bank). Would the ATO judge it consistent with the Sis act, I think it could be argued so as long as it was consistent with the investment strategy & trust deed as well.
With an ETF that pays no income, how would you convince the ATO that it was providing for retirement benefits? If it has a documented track record, is consistent with the SMSF's investment strategy and trust deed and can be readily traded then I think it could be argued it is fine even if not generating income.
The cash buffer is a must in an SMSF and presumably held in a bank. It generates income (albeit at a low rate) or it can offset debt. As long as this is consistent with the strategy and deed I can't see how the members are deriving anything other than a retirement benefit from it.
Bottom line, if you can demonstrate that an investment is for the sole purpose of providing retirement benefits and it is consistent with the fund's investment strategy and the trust deed (and therefore hopefully the Sis act) you should be fine.
I agree with Terry's point about a CG only investment being unlikely to trigger a sole purpose breach, however I honestly have no idea how the ATO might view an investment in a block of land that had no demonstrable prospect of generating income and just a hope that it will grow in value. For example, take Russell Island, you can get cheap water front land that would go up in value significantly if infrastructure improves. The trustee of an SMSF with members in their 20s-30s could argue it is a smart acquisition and defensible, but if the members were near retirement maybe not?
Note, I don't own land on RI or intend to own land there - just an example.
As I said I am a conservative layman and therefore a conservative trustee! Paul and Terry will know the actual rules.