April 2010 Tax Update


Welcome to the April 2010 Tax Update. In this issue, we will discuss:

Purchasing more property with your Super

You may be considering ways of increasing your exposure to buy properties (residential or commercial) in your super fund but may be concerned that you do not have sufficient cash in your super fund to purchase it. However, there are ways that you can purchase more properties in your super fund even if you do not have sufficient cash in your super fund.

The general way you can increase your exposure to purchase further properties in your super fund (including residential or commercial properties) is to do the following:

  1. Setup a unit trust which is a investment vehicle, units would be partly owned by your super fund and the rest of the units can be owned by you or your family trust
  2. The unit trust would purchase a property from an unrelated third party
  3. The property owned by the unit trust cannot have a mortgage attached to it.
  4. Some of the units will be owed either personally or in a trust because if your super fund does not have enough cash to buy the property then you or your family trust can buy the remaining units in the unit trust. This offers negative gearing opportunities for your personal tax situation.
  5. If the property in the unit trust is a residential property then it cannot be used by any member or the relatives of any members of your super fund.
  6. The property owned in the unit trust cannot conduct any business.
  7. When your SMSF acquires further interests in the unit trust from you or your family trust, that new percentage acquired must not have a mortgage attached to it. Therefore, the bank MUST rearrange the security on the property as it is now owned by your SMSF and no longer owned by you or your family trust.

The main benefits of setting up a unit trust structure are the following:

  1. Your super fund can progressively acquire units from you or your family trust over time. This is the ONLY STRUCTURE that allows your super fund a buy back of residential property from a related party. This can be done when the super fund has sufficient cash with the possibility of paying less stamp duty than if the property was owned in a tenant in common arrangement if the unit trust is not land rich.
  2. Any capital gain made by you on the transfer of units to the super fund may have a maximum tax rate of 23.5% rather than 46.5%. The capital gain will be the market rate of the units being transferred less its original cost price. We can discuss tax planning methods before this occurs to minimise any potential tax.
  3. You can increase your super contributions to minimise your tax. The extra cash in the super fund can be used to buy further units in the unit trust over time.
  4. You can also protect your assets and the assets of your dependents by increasing super contributions as generally your super fund assets are protected from creditors. By having the ability to buy property you may have an incentive to increase super contributions as you have control over you super investments.
  5. You can reduce your personal tax if the property is negatively geared.
  6. The super fund does not borrow. Therefore, there are no complicated loan documents to complete or be stressed about.

Main Points:

  • If you would like for your super fund to increase its exposure in property, especially residential property you are able to use a unit trust structure in order to buy the property.
  • The main benefits to you will be an opportunity to increase the wealth in your super fund and also the ability to minimise your personal tax liabilities.
  • We would request that you contact us in order to ensure the structure is setup appropriately.

Traps on transferring assets to your Super Fund

You may have assets in your trust or company that you would like transferred into your super fund. The benefit to you would be that these assets can grow for you in a low tax environment and also provide income to you in a tax efficient manner. The main types of assets that may be transferred to your super fund would be commercial property and listed shares.

The ATO has taken the view in SMSFR 2010/1 that if you would like to transfer properties/shares from your trusts or companies then they would first need to be transferred to your personal names and then they can be personally contributed into your super fund.

The same rules apply if your trust or company has cash that you would like to contribute to your super fund. The cash would need to be transferred to your personal name before it can be contributed into super. Therefore, there must be bank statements showing that the money was transferred from your personal bank account.

If the above events do not happen then there may be excess contributions tax imposed on the contribution because they will not be treated as concessional contributions and this will have a major affect on your superannuation balance. The concessional contribution caps are currently $50,000 if you are over 50 and $25,000 if you are under 50. This limits your ability to contribute to super so it is important to avoid being in this situation.

One possible way to avoid this problem is if your trust or company owes you money and the transfer of the asset to your super fund has been made to extinguish the debt owing to you.

Main Points:

  • Be careful if you plan to contribute assets into super that are owned by your trust or company and please speak to us beforehand to avoid problems
  • If there is a cash contribution into your super fund then you will need to prove that the money came from your bank account and not from your trust or company.

Land tax and your home

There is no land tax on your home but this may not apply if you purchase another home and not complete the sale of your existing home by 31 December which is the date that land tax is levied on a property. This may be a substantial cost to you if you pay land tax because you were not able to sell the property in time. However, you may be able to claim an exemption for both residences if:

  1. You dispose of the former residence within six months after 31 December
  2. You became the owner of the new residence during the six months before 31 December

Your former residence has not been used or occupied except as your principal place of residence and no income has been gained from the use or occupation of the residence between the preceding 1 July and 31 December, except:

Income derived from dual occupancy, or
Income derived from a lease or license entered into by the purchaser under a contract for sale of the former residence for a period prior to completion of the sale

Since you became the owner of the new residence it has not been used or occupied except:

As your principal place of residence, or
By a tenant under a lease entered into by the previous owner.

You must also use and occupy the new residence as your principal place of residence by the 31 December immediately following the relevant taxing date, or this concession will be revoked. Therefore, you cannot begin constructing a new home before moving into the property if you intend to use this particular exemption.

Main Points:

  • It may be possible to own 2 homes on 31 December without paying land tax
  • It may be possible for the new home to derive rental income for a short period of time
  • The new home must be occupied as your principle place of residence by the following 31 December

Trust distributions to Companies

A trust would normally distribute to a company in order to ensure the tax rates for a family group are not more than 30%. Under a proposed draft ruling TR 2009/D8 there will have to be a physical cash distribution to the company from 1 July 2009 when previously the distribution could just be by an accounting entry referred to as an unpaid income entitlement. If there is no cash distribution then there will be Division 7a implications. This means higher dividends paid to the company shareholders and this may result in more tax being paid by shareholders.

We hope you have enjoyed this article and found it informative and useful. Please contact us if you would like further explanation on any topics discussed in this article.

Disclaimer - The material contained in this newsletter does not constitute advice. DPL is not responsible for any action taken in reliance on any information contained in this newsletter. Anyone reading the newsletter should not act upon material contained in this newsletter without appropriate consultation.

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