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Catherine's Chat

Wholistic Financial Solutions provides information and updates regarding the property investment industry. Learn more from Catherine's chat here.

SMSF Proposed Changes for 2014

Monday, April 08, 2013

Hi all,

As we probably all know by now the government has released it's proposed changes.  At this stage we can't say exactly how this will affect SMSF and property investing.  It is very disappointing the the government is yet again tinkering with the SMSF rules.  This will erode confidence in SMSF's to some extent.  As usual, the announcements come with no technical detail as to how they will actually work in practice.

All we know so far is 15% tax on earnings over $100,000.  Yet Capital Gains on Properties in super have always been taxed at a maximum of 10%.  My guess is that, if these rules get through, which is doubtful, the following will occur.  When a property is sold and say a gain of $500,000 is realised, then the first $100,000 will be tax free and then the balance of the gain of $400,000 may be taxed at 10% or $40,000. In other words property is still a extremely viable investment option.  You have still made a net profit of $460,000.

However, the tax is still unfair and inequitable as at this stage it appears it will only apply to SMSF's.  Retail and Industry Funds also invest in property on a large scale.  Is the same rule going to apply to the proportion of funds allocated against pension members who have more than $100,000 in income stream.  Probably not, as most people with supposedly super rich superannuation of $2,000,000 or more are smart enough to have their money in SMSF despite the tinkering of the rules.

 

I will update again when we find out more about this.

 

This week we are in Canberra Weekly Magazine

Thursday, March 28, 2013

Bumper Property Growth in 2013

Monday, March 04, 2013
Experts are predicting bumper growth for property in 2013

Some of the key trends supporting this potential growth are;

  • Australians have been saving more after the scare of the GFC!  In fact, 68% of people are ahead on their mortgage payments and credit card debt is historically low.In other words, Aussie’s are being smarter financially…and this means they have more money to invest in property.
  • ‘China’s growth predictions are of a whopping 8% growth this year.  This will have a very positive impact on the Australian economy.
  • There is an implosion of cash from SMSF’s (Self-Managed Super Funds) are flooding into the real estate market…as more investors choose to invest in property directly through their super.
  • The share market is showing signs of entering into another ‘bull run’ which will greatly enhance people’s wealth and their ‘confidence’ to invest in property.
  • The finalisation of the federal election will give investors more ‘certainty’
  • Interest rates are at a historic low making it easier for first home buyers & investors to get into the market
  • Migrants continue to come to the country in large amounts & housing supply still remains tight in many areas…we will likely see rents continue to climb.
  • This makes the rent yields for investors more exciting.
Property prices have remained subdued over the last year but this could all be about to change.  As the uncertainty lingering from the GFC finally lifts, economic stability returns, China booms again and we see a change of Government the underlying property shortage will see prices start to rise.  For anyone who has watched the market through it swings and troughs before will know, once it starts to increase, it just goes up and up, as investors who have been sitting on the fence start jumping in.  So seize the opportunity and get in now before prices rise.

Queensland Property Research

Friday, March 01, 2013
Hi,

I just wanted to update you as to my property research findings so far.

Note: I haven’t finalised my research but just wanted to let you know the direction I am heading.

I have been examining QLD in depth.  I have previously mentioned that Gladstone & Mackay are definitely ongoing hotspots.  My research has revealed this is still the case.  However, Gladstone has already had significant price rises so I would only recommend Gladstone if we can find a bargain.  Mackay (and neighboring Emerald) have not yet risen as significantly as Gladstone and are my preference in this area.  The price point however is still in the mid to high $400,000’s and SMSF stock is hard to come by.  SMSF stock needs to be a completed house rather than house and land package and due to the high demand builders are able to sell off the plan so quickly they are reluctant to sell to SMSF’s as they have to wait longer to receive their money.  Watch this space though as I do have a developer promising me SMSF stock next week.

If that price range is too high and/or you would prefer not to go that far South in QLD – I am also looking at really good options very close to Brisbane CBD.  These are a lower price point (mid to high $300,000) and have a great rental yield.

My research has involved reading numerous independent economic and valuation reports, government infrastructure plans and bureau of statistics data.  I am looking into capital growth %’s, rent yields, vacancy rates, future expectations etc.  There is a lot to consider when investing in property and I am hoping to draw all this data together for you ASAP.

I am also expanding my research to include numerous NSW areas such as Newcastle, Dubbo and surrounds.  Watch this space for more information.

I will let you know more next week.

Catherine


The truth about Self-Managed Super?

Monday, February 25, 2013
Self-Managed Super Fund’s are growing at a rate of 4 new SMSF setups per hour in Australia.  Research shows that the average balance in an SMSF is 17 times higher than balances in industry and retail funds.  Do you want to know why?

SMSF’s allow greater control over your super.  They also allow greatly flexibility. You get to decide how much to put in and take out (within the guidelines of the law). They can also cost a lot less than industry and retail funds.  But most importantly, SMSF’s can buy geared property in a simple and uncomplicated manner.  

Why would you buy property in a SMSF instead of personally?

For many reasons; you get the benefit of leverage (maximizing the amount growing for you), the stability of the property market and the generous tax concessions available in the superannuation environment. There is a maximum of 15% tax on any rental income in excess of costs, you receive a tax deduction for the loan repayments of principal via salary sacrificing, you get asset protection from creditors and most importantly any capital gains on the property when sold will be taxed at 10% or TAX FREE if you are over 60.

Please visit Our Events Page to book in and come along to our free information seminar to find out the simple truth about SMSF’s or call 6162 4546 for a free consultation.

ATO concerns over SMSF investing in Property over stated

Friday, December 28, 2012

The Australian Taxation Office (ATO) recently released a Taxpayer Alert (TA 2012/7) which outlines the ATO’s concerns that some arrangements entered into by an SMSF to acquire property do not comply with the law.

The ATO is concerned that it may not be possible to simply restructure or rectify the arrangements, and unwinding the entire arrangement could lead to a forced sale of the asset, potentially at a substantial loss to the fund.

The ATO is concerned about the potential consequences of poorly structured arrangements regarding direct property investments using limited recourse borrowing arrangement

Under a limited recourse borrowing arrangement (LRBA), the SMSF borrows money to acquire a property which is held via a holding trust (the Bare Trust). The rights of the lender in the event of default of the loan are limited to the asset over which the borrowing is held.

 

Issues of concern:

  • Where the borrowing and the title of the property is held in the individuals' name and not in the name of the trustee of the holding trust. The SMSF pays part or all of the initial deposit and the ongoing loan repayments.
  • The title of the property is held by the SMSF trustee not the trustee of the holding trust.
  • Where the trustee of the holding trust is not in existence and the holding trust is not established at the time the contract to acquire the asset is signed.
  • The SMSF trustee acquires a residential property from an SMSF member.
  • The asset is a vacant block of land. The SMSF trustee intends to use the same borrowing to construct a house on the land. The land is transferred to the holding trust prior to the house being built.

Superannuation issues that could arise from such arrangements

  • The arrangement may be in breach of the sole purpose test (SISA section 62).
  • The arrangement may be in breach of the borrowing provisions (SISA section 67).
  • The asset acquired is not a single acquirable asset (SISA section 67A(2)).
  • The asset is subject to a charge in breach of the borrowing provisions (SISA section 67A(1)(f)).

Summary

In my opinion all of the above issues can be overcome by Trustees of the SMSF obtaining advice from qualified and experienced SMSF administrators.  WFS Canberra Pty Ltd is able to offer such advice as well as set up the Bare Trust and obtain the loan to acquire the property. As long as all the correct legal steps are undertaken, in the correct order SMSF trustees have nothing to be concerned about.

 

Self-managed super funds urged to be cautious with property investments (ATO)

Friday, November 23, 2012

The ATO today warned trustees of self-managed superannuation funds (SMSFs) to be cautious when investing in property.

Acting Commissioner Bruce Quigley said he is concerned people are using their SMSF to invest in property without fully understanding their obligations under the law or some people are seeking to take advantage of certain types of arrangements.

Mr Quigley acknowledged that investing in property can be a confusing area for some people.

"We have observed that some arrangements are deliberately entered into to get around the law, which can result in the fund's trustees being disqualified, facing civil penalties or even facing criminal charges. Those marketing properties to SMSF trustees as part of such arrangements could be referred to Australian Security and Investment Commission (ASIC)."

"The fine details are important and trustees need to be sure that property is the right investment for their SMSF and that the arrangement is legal,"

"We have also seen instances where holding trusts have not even been established at the time the contracts to acquire are signed. In other instances the title of the property is held in the individual's name rather than the trustee of the holding trust. Another common mistake is gearing in a related unit trust, which is not allowed under the law," Mr Quigley said.

"Some of these arrangements, if structured incorrectly, cannot simply be restructured or rectified. The only option may be to unwind the arrangement which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences."

"I urge trustees to get reliable, independent advice when making investment decisions and to obtain advice from us if they are contemplating entering into these sorts of arrangements. The responsibility for ensuring their SMSF complies with the law rests with them."

The upshot of this advice is to ensure you are getting reliable advice from specialist SMSF Advisors and Accountants who are experieced in assisting clients buy property through an SMSF. www.wfscanberra.com.au can assist.

2012 Tax Changes - Superannuation

Saturday, July 28, 2012

Superannuation changes

There will be plenty of changes made to superannuation this July.

The Government has deferred the start date of maintaining a cap at $50,000 for individauls aged over 50 years with balances below $500,000. So that means for everyone, the concessional contribution cap will drop to $25,000. 

The government will also provide a low income superannuation contribution for individuals earning up to $37,000, so they’ll effectively be refunded the 15% contributions tax.

It will also reduce the super co-contribution by 50%, to just 50c per $1 contribution, effectively reducing the top benefit from $1,000 to $500.

There will also be some changes for high-wealth individuals. People with income greater than $300,000 will have contributions reduced from 30% to 15%

SMSF super funds investing in property need to beware

Friday, July 27, 2012

The volatility in the sharemarket may tempt self-managed super funds (also known as DIY funds) to look elsewhere to invest and the recent rule changes to allow those funds to invest in property might look tempting.

Broadly, while super funds are generally not permitted to borrow money in their own right, there is an exception whereby a DIY fund is permitted to borrow money provided that the borrowing is made pursuant to what is known as a limited recourse borrowing arrangement, for example, an instalment warrant.

Such an arrangement entered into from July 7, 2010 can only be referable to a single "acquirable asset" held in a holding trust which the DIY fund is not otherwise prohibited from acquiring directly. In addition, a borrowing applied to the original acquirable asset can only be replaced with a "replacement asset" according to the relevant provisions of the law.

A major ruling has now been released by the Tax Office which gives the Commissioner's views on the limited recourse borrowing arrangement provisions. The ruling explains the key concepts of:

  • What is an "acquirable asset" and a "single acquirable asset".
  • "Maintaining" or "repairing" the acquirable asset (which is allowed with borrowed money) as distinguished from "improving" it (which is not allowed).
  • When a single acquirable asset is changed to such an extent that it is a different (replacement) asset.

The ruling outlines where money borrowed can be applied in maintaining or repairing (but not improving) a single acquirable asset. While such borrowings cannot be used to improve an acquirable asset, the Tax Office says money from other sources (e.g. accumulated funds held by the DIY fund) could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.

The ruling notes that an "acquirable asset" is any form of property (other than money) that the DIY fund trustee is not otherwise prohibited from acquiring under the superannuation law. Although "property" can include proprietary rights or the physical objects of proprietary rights (e.g. land or machinery), the Tax Office says it is necessary to consider the meaning of property in both senses to determine whether money borrowed under a limited recourse borrowing arrangement has been applied for the acquisition of a single acquirable asset.

While the money borrowed can only be applied for the acquisition of a single acquirable asset (or a collection of identical assets with the same market value), the Commissioner considers that a single object of property may be acquired notwithstanding that it is comprised of separate bundles of proprietary rights (e.g. if there are two or more blocks of land). However, this will only be so where it is reasonable to conclude that, notwithstanding the separate bundles of proprietary rights, what is being acquired is distinctly identifiable as a single asset.

Money borrowed under a limited recourse borrowing arrangement may be applied in "maintaining" or "repairing" (but not "improving") the asset. To determine if an asset has been repaired or maintained (or whether it has been improved), the Tax Office says reference is made to the qualities and characteristics of the asset at the time the asset is acquired under the borrowing arrangement. To this end, the Tax Office says an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.

To some extent, this repair vs improvement issue harks back to the age-old income tax treatment of repairs versus improvements. "Maintaining" the asset, which is allowed under the rules, means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration provided that the work merely ensures the continued functioning of the asset in its present state. "Repairing" means remedying or making good defects in, damage to, or deterioration of, an asset and contemplates the continued existence of the asset.

In contrast to a repair, the Tax Office considers that an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.

The Tax Office has given examples contrasting repairs (or maintenance) with improvements:

 

Repairs/maintenance (permitted)

Improvements (not permitted with borrowed money)

  • Fire damages part of a kitchen (cooktop, benches, walls and ceiling).
  • Restoration (replacement) of damaged part of kitchen with modern equivalent materials or appliances would constitute repair or restoration.
  • If superior materials or appliances are used it is a question of degree as to whether changes significantly improve the state or function of the asset as a whole.
  • Addition of a dishwasher would not amount to an improvement (even if dishwasher not previously part of kitchen), as minor or trifling improvement.
  • If house extended to increase size of kitchen this would be an improvement.
  • If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house, external kitchen would be an improvement.
  • Guttering on a house replaced with modern equivalent and the house repainted. In replacing guttering a leaf guard can be fitted as minor or trifling addition to asset as a whole.
  • Fence is replaced using modern equivalent materials. Can add a gate to new fence as minor or trifling improvement.
  • Fire alarm installed to comply with new requirements of local council. Not an improvement as minor or trifling.

 

  • Pergola built to create outdoor entertaining area.
  • Addition of swimming pool or garage.

 

  • Integrated home automation system installed including electronically controlled lighting, multi-room audiovisual distribution and security system.
  • House extension to add further bathroom.
  • Cyclone damages roof of house. Replacement of roof in its entirety with modern equivalent is a repair.
  • If superior materials are used it is a question of degree as to whether changes significantly improve state or function of asset as a whole.
  • Addition of second storey to house at time of also replacing roof would be an improvement.
  • If fire destroys a three bedroom residential house. Rebuilding broadly comparable house is not an improvement as it restores asset.
  • If superior materials, fittings or appliances are used it is a question of degree as to whether significantly improve state or function of asset.
  • Rebuilding a residential house that is not broadly comparable to that destroyed is an improvement. If the funds to rebuild are from an insurance company and not from borrowings this does not affect the LRBA.
  • Residential house acquired under an LRBA and rented out for a number of years. The area is now a "real estate hot spot".
  • Decision to renew kitchen which, although functional, is significantly out of date and showing wear and tear. The design of kitchen is improved and modern equivalent, rather than superior, materials and appliances are used. Changes do not significantly improve state or function of asset as a whole.
  • Residential house is acquired under an LRBA and is rented out for a number of years. The area is now a real estate hot spot.
  • Decision to demolish house. Rebuilding a residential house that is not broadly comparable is an improvement. However, if the funds to rebuild are not from borrowings this does not affect the LRBA.

Farm (on single title) is the single acquirable asset under an LRBA. At the time of entering into the LRBA the farm includes one set of cattle yards, 4 bores including windmills, tanks and troughs and 3 km of fencing:

  • Replacing a section of cattle yards or existing fencing is a repair.
  • Ensuring bores, windmills, tanks and troughs continue working is repair or maintenance. This would include laying new pipes between the tank and trough to replace old pipes.

Each of the following further additions is an improvement:

  • A further set of cattle yards;
  • A further bore, tank;
  • A windmill and trough;
  • A further dam; further shed;
  • A further 2 km of fencing.
  • Machinery or equipment item of earth moving equipment acquired under an LRBA. Immediately after its acquisition money borrowed under LRBA is used to fund repairs to hydraulic system of the asset to return it to its full functionality. This would be a repair.
  • A major overhaul of the asset is carried out with all significant parts of the asset being replaced. This is likely to be an improvement as changes have significantly improved the state or function of the asset.

Note that the improvements listed above could be carried out provided that the DIY fund uses its own money (and not borrowed money). According to the Commissioner, these improvements would not fundamentally change the character of the asset to such an extent to result in a different asset.

There are many rules surrounding the investments that a DIY super fund is allowed to make, and many traps for the unwary. Anyone with a DIY fund who contemplates investing in property should seek professional advice.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

Five strategies for SMSFs investing in property

Friday, July 27, 2012

SME owners should now have more confidence about arranging for their self-managed super funds to borrow to acquire their business premises and other investment properties – provided the assets measure up as quality investments.

This follows the recent release of a self-managed super fund final ruling providing a detailed explanation of the ATO’s interpretation of the SMSF borrowing rules in relation to the purchase, maintenance and improvement of geared assets.

Undoubtedly, many SME owners have been reluctant to gear an SMSF to acquire their business premises because of uncertainty about how the ATO, as regulator of self-managed super, may interpret the borrowing provisions in superannuation law.

The uncertainty – which largely arose after the tightening of the SMSF borrowing laws several years ago – mostly related to repairs and improvements to geared property, as well as the gearing of properties involving more than one title.

Countless SME owners have long favoured holding their business premises in their family self-managed funds. But it is understood that doubt about the ATO’s interpretation of the SMSF borrowing laws has deterred some from proceeding with the strategy.

Business real estate – such as the premises of a family SME – is among the few types of assets that SMSFs are permitted to acquire from their members and other related parties. Further, business real estate is one of the few types of assets that funds can lease to related parties – including fund members and their businesses – without a limit on its value.

SMSF trustees in general are likely to feel more comfortable about borrowing to invest in residential and commercial property now that the ATO has issued this final ruling.

While the final ruling largely confirms the main points made in a draft ruling issued in September last year, there are some significant clarifications and additional examples.

Here are five strategies for SMSFs that are considering gearing to buy property:

1. Don’t waste time on an unnecessary clash with ATO

The final ruling provides wide perimeters for SMSFs wanting to buy, maintain and improve a geared property without breaching the borrowing laws or upsetting the regulator.

In short, this gives SMSFs a solid base to work within without having a costly and time-wasting dispute with the regulator.

Meg Heffron, co-principal of SMSF administration group Heffron, won’t go as far as saying that the final ruling provides a definite rule book for SMSFs with geared property – “but we are probably a lot closer to it than we have ever been”.

As Heffron says, circumstances will inevitably arise with geared SMSF properties that are not covered in the final ruling.

2. Borrow to invest with more confidence

This is because the final ruling confirms that the regulator will provide SMSFs with a fair degree of freedom within the borrowing laws when carrying out repairs and improvements to geared property.

Heffron is convinced that the ruling will give SMSFs more confidence about borrowing to invest in property.

This marks quite a turnaround for the prospects of holding geared property in SMSFs.

Almost two years ago, amendments to superannuation law toughened the laws about borrowing to invest through a SMSF. After July 7, 2010, an SMSF could:

  • Only acquire a single asset – not multiple assets – under a borrowing arrangement.
  • Could only drawdown on a loan (entered into after July 7, 2010) to make repairs, not improvements to a geared property.
  • Could not make a capital improvement to a geared asset that was extensive enough to have created a new or replacement asset.

Heffron says her “gut reaction” to the ATO’s initial views on these amendments were that it would be almost impossible for an SMSF to borrow to buy property. And she had regarded the ATO’s interpretation at the time as “a ban by stealth” on future gearing of property in an SMSF.

But the release of the final ruling together with its earlier draft has confirmed how ATO has taken a much more pragmatic and much less restrictive approach.

It is taking a more realistic attitude about what is a geared single asset, the difference between repairs and improvements, and about the extent of improvements will lead to a new asset being created.

3. Feel more assured about borrowing to invest in properties covering more than one title

This can be a key factor for SMSF property investors because many properties are on multiple titles.

Take the classic example of an apartment that has a car space on a separate title or a factory that happens to be built over several titles.

Following the 2010 amendments, ATO’s initial view was that a property with, say, two titles equated to two separate assets and could not be acquired under the one borrowing arrangement.

This meant that many properties were simply considered unsuitable for gearing through an SMSF.

But under the draft and final rulings, Heffron says the ATO takes a broad interpretation of what is a single asset. “The ATO takes the view that where the two cannot realistically be separated, they will be treated as a single asset for this purpose,” she explains.

In the ruling, the ATO gives the example of a factory that is built over three titles would be treated as single asset that could be acquired under a single borrowing arrangement.

And the ruling gives the example of an SMSF that wants to gear to buy an apartment and its car park, that are on separate titles on the same strata plan, yet state law specifies that the two cannot be registered separately.

Under the final ruling, the ATO regards the apartment and its car park as a single asset that can be acquired under the same borrowing arrangement.

4. Carry out quite extensive repairs to geared property

The final ruling clearly explains the ATO’s views in details about how far repairs can extend before reaching the point of becoming improvements. This is a vital distinction for gearing a property through an SMSF.

Martin Murden, a director of SMSF consulting for services provider to accountants Partners Group in Melbourne, suspects that uncertainty about the ATO’s initial interpretation of the difference between repairs and improvements had caused much concern among SMSFs.

“I believe people can now determine before proceeding [with repairs or improvements] whether their actions are going to result in a problem with super legislation and regulation,” he says.

Under the 2010 amendments, as discussed earlier, SMSFs could only drawdown on a loan to buy and maintain an asset – not to improve it.

This made the different between repairs and improvements even more crucial. And the question immediately arose: When does building work on a geared property reach the point of going beyond a repair to become an improvement?

“These issues will always be regarded as a matter of degree,” comments Heffron, “but the ATO clearly envisages quite a wide range of activities which might incidentally add to the value of the property falling into the ‘repairs’ category.”

“Replacing or rebuilding with ‘modern equivalent’ materials will generally be considered a repair or maintenance, but replacing or rebuilding with superior materials is potentially an improvement,” she explains.

Crucially, a fund can use its own money to improve a property – within limits discussed in Strategy Five.

5. Carry out improvements to a geared property with more confidence

The challenge for SMSFs is to know how much they can improve a property, such as the fund members’ business premises, without reaching the stage of creating a new asset.

If improvements to a geared asset lead to the creation of a new or replacement asset, the borrowing arrangement would have to be dissolved.

“The ATO originally took the view that improving a property will necessarily trigger the replacement of one asset [the unimproved property] with another asset [the improved property],” says Heffron.

“Like the draft ruling, the final ruling takes a far more liberal position and indicates that, in the ATO’s view, not all improvements will necessarily result in a replacement asset.

“Essentially, the ATO now draws a distinction between improvements that ‘fundamentally change the character of that asset’ and those that do not.”

The ruling gives examples of improvements that would not be regarded as replacing a geared asset. For instance, the addition of several bedrooms, granny flat, extra bathroom, a garage or a swimming pool would be regarded as improvements that do not lead to the creation of a new or replacement asset.

But the ATO ruling states a new asset would be created if, say, a residential house was converted into a restaurant with such changes as the inclusion of a “fully-functioning” commercial kitchen.

Related Items :

Extracted From http://www.smartcompany.com.au/superannuation/050040-five-strategies-for-smsfs-investing-in-geared-property/2.html

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