Join Australia's most dynamic and respected property investment community

Transitioning to Pension - Pro's and Con's / CGT

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

  1. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    We're looking at selling one property within our SMSF which has made a very health capital Gain ( Manly in Sydney ) with the aim of paying off a sgnificant about of the debt on the remaining properties within our SMSF . Effectively all our super is in Property . We have borrowed to buy all the properties and they were purchased within bear trusts

    We are eligible to go into a Transition to pension ( TRIP ) phase and had noted that CGT on assets within the pension are capital gain are CGT.

    If we keep the forth property , cash flow wise the fund is treading water , however if we sell it , it will generate a strong cash flow , enabling us to pay down our remaining debt and start diversifying into other investments . Given all our personal investments our property as are our current SMSF a degree of diversification is wise , if only to make sure the fund is able to pay out the appropriate percentage as time goes buy without having to sell a property , possibly at the wrong time of the market

    On another thread I was directed to the following quote by paul which seems to raise a question abut this . As that thread was about Commercial Property I thought it was better to start separate thread

    BTW we will be getting professional advice but I like to gather as much info

    Paul does mean that if a property is held in a bear trust , if we sell it while we are in transition phase , we would pay CGT , the same as if we stay in the accumulation phase . 15 % with a 33 % discount as the property has been held by more than a year .

    I was debating whether to go into TRIP , partly because of this benefit , but also because of the tax benefit .

    If we still had to pay the CGT on sale of the property , that cuts done one of the pro's of going into trip .

    If we paid down the property fully , which I understand will bring the property into the ownership of the SMSF would we then be able to go into TRIP and sell without CGT .

    The SMSF doesn't have the funds to do that , but we could make a non concessional contribution which would pay the property off . However to do this we'd personally have to draw the money down from a LOC and I wouldn't want to do that unless we could pay it back and the only way we could do that is if we drew back the funds from the super after the sale was completed . It all sound like pushing the envelope and is probably illegal , however to an out side observer parts of the TRIP set up appears to be designed to specifically decrease the amount of a tax paid.

    From what I gather , you make you distribution from the fund , which is treated at a lower tax rate and then tax free after 60 , but you would be able to contribute that money straight back to the SMSF as a non concessional contribution , hence not decreasing the amount in the super until thou actually need it ?

    With non concessional contributions , what are the rules for drawing them back ?

    I intend to keep on working part for a long time after I need to , probably into my mid 70's.

    Are there any major cons for going into TRIP once you can , assuming it doesn't impact your ability . I know that you can contribute into a SMSF until you're 75 , but does going into TRIP limit that ?

    I know that's a few questions , but I couldn't see a thread on TRIP on Property Chat and I thought it was a topic worth raising , out side having specific issues I want to clarify .

    Cliff
     
    Last edited: 28th Feb, 2016
  2. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Cliff one possiblity may be lend the fund money which it could use to pay out the loan on that property and then the lbra could be wound up. Once that happens the pension could be commenced and then trustee could sell the property. The loan may then be repaid by the smsf to you.

    You need expert advice prior to attempting this.
     
    legallyblonde likes this.
  3. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    Obviously the super fund would lend at commercial basis , which effectively be the rate of the LOC draw down .

    Am I correct in assuming the tax rate if we stayed in accumulation would be at 10 % ( 15 % with 33 % discount ) . We're probably looking at a gain of around 3 - 400 K so 30-40 K is something that's worth while trying to avoid .

    Cliff
     
  4. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    Terry

    Another thing I forgot to ask in the initial thread , was I saw that you can go into TRIP , but then back into accumulation phase . Is that correct ?

    Outside the fact that you have to distribute money , are there any negatives of going into TRIP ?

    Cliff
     
  5. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    This is something outside of my comfort zone to answer off the top of my head. You should probably lend at arms length and the CGT on a SMSF held asset would be 10% for an asset held more than 12 months.

    I don't know of any negatives of going into a transition to retirement phase, but this would be more along the lines of financial advice and something you should see a financial planner about.
     
  6. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    Terry

    Thanks for you're advice so far . I've got a WHOLE pile of questions that I've drawn up , what would be pushing the friendship to ask on the forum which I'll run by our accountant to see if they fall within his area of expertise , so whether we need specialist advice , but there is one area that wouldn't mind getting as many opinions for as it doesn't fall within the financial advice realm ( well I don't think so )

    One thing that we need to look at is the timing of the sale and whether we sell with the tenant in place or wait until their lease expires in July . At the moment there is very little on the market , in particular comparable, though there is one auction coming up next weekend ( fortuitously ) which is in the next street which is in reality the only comparable I've been able to find looking through past sales for around the last 18 months ….

    Our loan is westpac . Have you had any experience with clients going through the process of paying out a loan within a bear and transferring the property into the ownership of the super fund and if you have , how long did this take ?

    What is the process ? Does paying down the loan automatically fold up the Bear trust , if not , is that something the bank has to organise or is that something our accountant does ?

    Cliff
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    Transfer of title is a legal issue. You should read the bare trust deed and see how the trustee can ask for title to be transferred. Seek advice on stamp duty from your lawyer, pay out loan, pay duty (nominal hopefully) and transfer title.

    Did you get the bare trust deed stamped when purchased? This way the OSR knows it is a bare trust and won't charge full duty.
     
  8. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    Haven't heard that raised before , but I sincerely hope so :oops: . The company we used for that , specialise in that area .

    Another thing to add to my growing list of things to Check .:rolleyes:

    Cliff
     
    Last edited: 29th Feb, 2016
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    I don't know about other states, but for NSW we have always declared the bare trust upfront to the OSR and to do this we provide evidence that the SMSF trustee is the beneficial owner - evidence that the SMSF paid the deposit from bank statements and statutory declarations etc.
     
  10. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    So presumable even if it wasn't declared up front ( which I assume was done ) , we can prove where the deposits came from and which accounts the rent goes into and which entity the rent has been attributed to and who has paid any maintenance costs etc blah blah ( with the ATO ) , we would be able to work around that if it hasn't been declared up front .

    Cliff
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

    Joined:
    18th Jun, 2015
    Posts:
    8,972
    Location:
    Sydney
    yep. for most smsf the transfers may occur 20 or 30 years later so harder to prove all this, but your purchase is relatively recent so not so hard to come up with evidence.
     
  12. MLH

    MLH New Member

    Joined:
    29th Feb, 2016
    Posts:
    2
    Location:
    NSW
    Hello See Change, I have a couple of questions I wanted to ask that are relevant to this thread, would it be possible to PM you when you have a moment? I met you a number of years at one of the Sydney Somersoft meetings. Many thanks in advance. MLH
     
  13. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

    Joined:
    18th Jun, 2015
    Posts:
    2,363
    Location:
    Sydney
    The bare trust deed is evidence of the SMSF beneficial interest. It is required to be stamped after execution under Stamp Duties law. It is a dutiable document. The stamped deed can be presented as evidence of the concession provided other conditions are also satisfied.

    Many of the other questions are financial advice and cannot be answered in a forum. The CGT on a property held for 12mths equates to a rate of 10%. (15% less 1/3rd discount basis). Limited Recourse assets cant generate exempt income as the minimum pension standards do not permit assets which as used as loan security to be considered in the amount of a minimum pension.

    Using the cash to repay the other loans may have a limitation v's using an offset !!
     
  14. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    I'm not an expert in this area , so probably better to ask on the thread . I wouldn't be prepared to give advice , unless it was in a situation where someone who knows what they're talking about can correct any errors .

    Now , If you want to know there to invest in Brisbane , there's a thread on Goodna for that :D

    Cliff
     
  15. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    Thanks for that Paul . I understand re financial advice comment , but was worth asking >

    We have an offset which we use as our transaction , but that's on the loan of the property we're selling ( first we purchased in Manly , Sydney , hence the capital gain ) . Checking the other loans for offset facilities is on already on my growing check list .

    We would be quite happy to pay off at least two of the remaining properties as it will increase the amount of money we have available to invest elsewhere and then we have the issue if we go into TRIP and the other properties are still in bear trusts can we use the funds in TRIP to put into the offset accounts of properties still held in a bear trust . And we need to be in TRIP to gain the CGT exemption . Each thought I'm having at the moment seems to generate another 3-4 questions ....

    We've thought of buying another property , but given how every investment is in property we're happy to start to look at other classes at this stage , though might consider something in a few years . What we've done so far with property ( in terms of how much we've bought ) wouldn't be achievable under current lending policies

    Cliff
     
  16. MLH

    MLH New Member

    Joined:
    29th Feb, 2016
    Posts:
    2
    Location:
    NSW
    Thanks Cliff, actually the question included that as well, I realise advice is not able to be offered, but I did want to ask about something if possible. thanks again
     
  17. See Change

    See Change Timing Lord Premium Member

    Joined:
    18th Jun, 2015
    Posts:
    2,142
    Location:
    Sydney
    send away

    Cliff