Ask Ban Tacs Question
We have just sold our property and intend to place some $300,000 each into our SMSF as a bring forward non concessional contribution, and intend to buy an investment property. We are the trustees of the SMSF and not yet retired but close to it.
The value of the investment property is more than we have in our super account, but we have enough funds outside of super.
If we set up a ‘bare trust’ and make a loan to the SMSF to purchase the property can we alter the property – that is demolish the existing house and subdivide the land prior to the loan being repaid. Also what is a ‘nominal interest’ that the SMSF would need to pay to us for the loan.
As another option could we go ‘partners’ with the SMSF in purchasing the property; say 75% – 25%? Can we development and subdivide the land and with keeping all costs strictly proportional as per the purchase price, would ownership or title of new lots created also be the same. That is if 4 lot subdivision, 3 lots for SMSF and 1 for ourselves.
I would think the ‘bare trust’ loan scenario would be more tax advantageous as all property would be in SMSF and only pay 10% CGT, as per 25% CGT on lots in our names (assuming property held for more than 12 months).
Could you advice on both options if they are ATO acceptable, and of any traps to be wary off.
Answer
Yes you can lend the money to your SMSF but it must be on exactly the terms that a bank would lend you, same LVR same interest rate etc. Best to get an offer from a bank and follow it to the letter. But a loan is probably not going to be a long term solution.
You are right you will not be able to develop the property while it is security for a loan.
https://www.ato.gov.au/law/view/document?Docid=SFR/SMSFR20121/NAT/ATO/00001 paragraph 30 and following.
Yes you can set up an arrangement where you and your SMSF own property together but you are absolutely right it is not going to be the best way (I assume the block you wanted to keep for yourself was only because of the joint venture not that you do intend keeping one block for yourself ie to build your home on) so let’s look at ways we can get that extra money into superannuation.
Was it the family home you sold? You say property, if it was a farm or property you used in a business you may be entitled to much higher caps.
If it was your family home how old are you? If you are 65 or more you can get another $300,000 each into super
http://www.budget.gov.au/2017-18/content/glossies/factsheets/html/HA_15.htm
You are telling me you have $600,000 you are putting into super and it looks like that, from your example, of owning a property with your SMSF, the $600,000 is 75% of the money you need. So you only need another $200,000 to go in, correct? If so then I suggest you only put $100,000 each in this financial year and wait until July 2018 before you do the draw forward ie put the other $600,000. It has to be done in that order because once you draw forward you can’t put anymore in for 2 years. If this still leaves you short don’t forget (assuming you qualify) you can still put in $25k each in deductible contributions this year and next which is another $100k.
If you are desperate to grab the property now see if you can go for a 4 1/2 month settlement or take an option to buy. Otherwise maybe borrow all but the $200k you can put in without drawing forward this year but come July pay the loan back so you can go ahead with “changing the nature of the asset.” Messy I know but so is buying a property 75:25 with your SMSF.
Don’t just take this at face value and go ahead and do it. Before you lock away your money in super you need to look at your overall financial situation. Further, I have not gone into every detail here on the restrictions to making contributions. Before you assume you can do this you need to talk to your Accountant about whether you qualify and whether your cashflow can handle it.
