Author Archives: Vanessa Rae

  1. LRBAs and related party leases: what you need to know

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    A common strategy implemented by business clients is to buy a commercial property (usually the premises from which their business is run) via their SMSF and then lease this property back to the related party.  Borrowings are often used to finance the acquisition.  The complexity arises when the related party tenant wants to make changes or improvements to the property, as the borrowing rules typically prevent property improvements.


    Alistair is the sole director and shareholder of a company that runs a dentist surgery, and he has found retail premises to suit the rapidly expanding business. Alistair establishes an SMSF, enters into a Limited Recourse Borrowing Arrangement (LRBA) and borrows to acquire the retail premises. Following settlement, the SMSF leases the premises to the related company on arm’s length terms.  So far so good.

    However as would typically be the case, the company requires a special fit out to suit the surgery requirements, including a minor design makeover, new walls, cabinetry, lighting and other equipment requiring installation.

    Alistair is naturally concerned that the installation of the fit out will affect the superannuation law compliance of the acquisition.

    Prohibition against related party acquisitions:

    The starting position is that if an object is affixed to a property, it will form part of the property.  This means that any item the company attaches to the property will be treated as an acquisition by the trustee of the SMSF.  This is an acquisition from a related party which is also prevented under Superannuation Law and the ATO has confirmed this view.  However agreements can be structured in such a way so as to provide the tenant with the “right of removal”.  In fact agreements should go further and stipulate that items that the tenant affixes to the property remain the sole property of the tenant and the tenant must then remove the items at the expiry of the lease. Whether or not the items are removed at the end of the lease would seemingly be less important so long as the intent of the landlord and SMSF Trustee was not to acquire those new assets.

    SMSF Borrowing Rules:

    SMSF Trustees too are not allowed to improve or change the nature of assets whilst borrowings are in place. However, so long as the changes outlined above are not funded using borrowed funds, and that lease agreements contain “retention of ownership” and “make good” clauses ensuring the property assets remain with the tenant, there should be a case for allowing the changes.

    Identity of Payee:

    When implementing a strategy as outlined above, it is really important that all purchases are made by the related party tenant and not the SMSF itself. If the SMSF was to pay for some of these expenses, a number of compliance issues would arise subjecting the Fund to a myriad of financial penalties.

    The above has been adapted with thanks from an article by Tina Conitsiotis and Daniel Butler at DBA Lawyers, with their permission.  As always, please talk to us if you intend on entering into any such complex transactions.

  2. Preparing for 30 June

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    With 30 June only 2 weeks away its time to make sure you have everything in order for the end of the financial year.  Here are our top tips to help:

    1. Make sure you have taken your minimum pension for the financial year, we have been busy reviewing all our funds to make sure you know where you’re up to but if you are unsure feel free to give us a call and check in…we always love to hear from you!
    2. Bank your contributions early, preferable by Friday the 26th to make sure the deposit has time to clear before the cut off on Tuesday.
    3. If you are making an off market transfer of shares in or out of your fund make sure you submit the forms to your stockbroker or share registry well before the 30th June and keep a copy for the auditor.
    4. Start collecting documents to support the market value at 30 June for all unlisted investments, such as property, collectables and unlisted companies and trusts
    5. Now is a good time to check in with your financial planner or insurance broker to review your  insurance requirements, it is possible to hold life and TPD insurance inside your SMSF so this may be worth discussing with your insurance specialist.  One of your responsibilities as an SMSF Trustee is to consider whether the fund should hold life and/or TPD insurance for the members and document the decision as part of the fund’s investment strategy.
    6. Review your last year’s correspondence from the fund’s auditor and make sure that any issues identified during your audit have been fully rectified.  Depending on the nature of the issue, the auditor may be required to lodge a report, and with new ATO Penalties in place from 1 July 2014 you may be personally liable for any financial penalty imposed by the ATO
  3. Divorce on the horizon?

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    Aside from the emotional turmoil that a divorce brings to a family situation, there are an enormous range of financial issues to be worked through.  Here we breakdown the key issues from an SMSF perspective:

    1. Despite the extent of breakdown in the marriage, the law is very explicit about the expectations of all Trustees to continue to “act in the best interests of all members at all times”.  Specifically it spells out that Trustees cannot:

    • exclude another trustee from the decision-making process;
    • ignore requests to redeem assets and roll money over to another regulated complying super fund;
    • take any action that is not allowed by the Superannuation Industry Supervision (SIS) Act 1993 or the SMSF’s trust deed.

    2. A recent case highlighted the ongoing compliance responsibilities that any Trustee continues to carry, particularly if established as individual trustees, despite a marriage breakdown.  When the Shail’s divorced, Mr Shail withdrew $3.46m of the SMSF assets and took off overseas.  Despite appealing the original decision, it was upheld that Mrs Shail was jointly responsible for the missing assets, with the ATO issuing a penalty for non-compliance of nearly $1.5m and a devastating tax bill to boot of over $1.5m, both of which the individuals, not the super fund itself, were liable for!  (Check out a recent blog for more about the new ATO penalty regime.)

    3. When it comes to the divvying up of financial assets, you need to consider all of the assets before applying any super splitting, taking into account any tax or access implications.  Often lawyers and advisers can overlook the ages and personal situations of each of the members, missing opportunities to provide earlier access to an older member, or consider the future contribution opportunities of a younger member, for example.

    4. Payment flags can be applied to unlisted assets until they have been properly valued, preventing those assets from being liquidated before agreement has been met.

    5.If an asset needs to be sold down in order to split the superannuation (in the case of property for example), consider whether it is possible or feasible for the super fund to borrow money (either from a related party or bank) to meet the cash requirements.  This would only be possible however if the asset was originally set up to be held within a unit trust which was owned by the super fund.

    6. If the fund has not initially been set up with a Corporate Trustee and the split leaves a single member running the Fund, a new Trustee will need to be added or a new Corporate Trustee put in place.  This isn’t a costly exercise, but it will require all assets to be transferred to the new name.

    7. Liquidating assets to then “rollover” to another fund will create a Capital Gains Tax event that the Fund will need to pay before the proceeds can be rolled over.  In the case of divorce, CGT rollover relief is available where assets can be transferred to another SMSF set up by the exiting member.  In this case, the new fund takes on the original cost base of the asset.

    Extreme care in the strategy and record keeping needs to be taken to avoid costly mistakes, which is often challenging when communication breakdowns occur.  Make sure a trusted source of advice is guiding you every step of the way.  Better yet, avoid it completely if you can!

  4. Superannuation Guarantee frozen until 2021

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    The government has just announced that it had been successful in gaining support for the repeal in the Mining Tax Tax, but with that comes a freeze on the increase in Superannuation Guarantee Contributions (SGC). Until this year’s budget, the Labor government had SGC reaching 12% by 2019. This change sees it staying at 9.5% until 2021 before increasing in 0.5% increments until 2025. Adding fuel to the fire is suggestion that with the change comes increased powers to current and future Treasurers, allowing them to make further changes to this without parliamentary approval.

    The bad news in this of course is the fact that our compulsory retirement savings will potentially fall further short of where they need to be to fund future retirement income needs. This comes at a time when the government has also increased the Age Pension age to 70 for those born after 1966, and there are grave concerns for the nation being able to fund our ageing population.

    The good news in all of this is that for the large percentage of people on Total Remuneration Packages (TRP), it means that the money stays in “take home pay” and can fund current debt and lifestyle needs. This “take home pay” though is of course taxed at Marginal Tax Rates, which for many people is far higher than the 15% that superannuation enjoys. Take someone earning $150,000 a year. If they contributed 12% to super instead of 9.5%, the tax saving would be $900 per year. That $900 saved year and invested, (assuming a 12% return incl CPI) over 15 years is over $31,000.

    Extra $900 super savings
    With contribution caps now making it difficult to contribute to super later, the smart money will likely look to increased Salary Sacrifice strategies to make up likely income shortfalls later. For more about Salary Sacrificing, check out the ATO Website, and keep an eye out for next month’s Super Vision where we’ll explore the benefits in more detail.

  5. How long will my super last me?

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    Have you ever wondered what your super is actually going to give you once you decide to stop working?  When is it going to run out? Will there be any left for the kids?  Here, we use the ASFA “Will My Super Savings Be Enough” calculator to show you how you can determine:

    1. When can I access my super?
    2. How much income will it give me?
    3. How long will it last?

    Our calculator is great at anticipating that you might want to slow down a little at some point, or take work breaks, for whatever reason.  To show this flexibility, we’ve incorporated a desire to work less in our 50’s, and see what impact this is going to have on our ability to accumulate enough passive income for later.

    Here’s our scenario:

    Case study

    We’ve then assumed:

    Case study p2


    …and played around with some assumptions that you can tailor to your situation:

    Case study p3


    The result is a significant shortfall, and heavy reliance on the Age Pension being available when I hit 64…

    Case Study Graph1

    For more information, plug your own details into the calculator, and give us a call if you need to accelerate your strategy.

    Remember, we’re experts at finding tax savings to boost your bottom line, now and down the track!