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Andy and Pam

Andy and Pam

Property Developers

Super saves nearly $5,000pa in tax

Andy and Pam have worked in the construction industry for more than 20 years, have been property investors most of their lives, and have recently become involved in their own property development projects.

They had also accumulated over $1m in super, driven largely by tax planning opportunities identified by their accountant each year, but had spent little time or effort on any kind of investment strategy. Like most SMSF investors, they had about a quarter of their money in at call cash accounts, and although they had invested a bit in shares, conservativeness since the GFC had them accumulating more and more in term deposits.

It wasn’t until they laid out their plans to their accountant, and he called Greenlight in, that a world of possibility opened up for them.  They had always had the SMSF with plans for greater flexibility and control, but had been overwhelmed by the rules about what they COULDN’T do with their fund.

In summary, what they did was:

  • They bought a Display Home from their own Property Development Project (even through an SMSF typically can’t transfer a residential property from members or a related party, Trading Stock is an exception to this rule, and that’s exactly what the Display Home was.
  • They ensured that the transaction was done at “arms-length” by ensuring they had an Independent Valuation, and that a market rate of 4% for the lease was in place
  • They then leased the property back to the business as a Display Home, on an “arms-length” basis, at market rates.

Important points:

  • This strategy would not have been possible, if the property they were trying to transfer was a standard residential property, as regulations prohibit this.
  • Andy and Pam need to ensure that the property is not used for any kind of personal use, now or in the future
  • Had they borrowed to invest in this property, they would have had further restrictions in place, such as the inability to further improve the property in any way whilst the loan was in place. As it turns out, they were able to purchase the property outright using their superannuation savings.

So not only did the strategy allow them to use their super to invest in assets that they well understood, they also created significant overall tax savings for themselves and the business:

  • The business pays rent to the SMSF which attracts a 30% deduction to the business
  • Because they are over 55 and able to run a “pension” from within the fund (referred to as a Transition to Retirement Income Stream (TRIS)), the SMSF pays Nil tax on the rent, representing a saving of almost $4,800pa
  • Because the fund is in “pension phase”, they will pay Nil Capital Gains Tax when it comes time to sell the house

Oh, and though they were confident it wouldn’t happen, in the event of a business failing of some kind, the property is more likely to be protected from creditors within the super environment.

Greenlight won’t tell you how to manage your money, but it will work with you, and your trusted advisers, to make the most of it!

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