Forum Replies Created
Terry – I think you have nailed it. We do NOT want to use our SMSF to borrow. The SMSF is just contributing funds. I think I might not have been clear enough about that in my initial post.
The plan would be that the SMSF simply contributes cash to the deal (through buying units in the unit trust). We would personally borrow from the banks in our own names to purchase our units in the trust. So it is like a JV.
My concern is whether we can do this as we are all family. I believe there are complications about SMSF and related parties investing.
Does that sound like a workable plan? Or are there still problems?
Greg
Freckle – I agree the building industry is in trouble (especially in Vic). It is not just developers but builders as well going under.
On the positive it means there will be less competition for good sites. I think a lot of the developers are in trouble as the banks have changed their appetite for risk. Having a business plan which assumes you will always get finance is not always going to work.
Thanks Freckle – I had a look at that website.
How do you see he mitigates the risk? I assume you mean the risk is reduced for himself as the developer?
Greg
Thanks – great list to use a starting place.
I think my initial post was not very clear. The SMSF will not be buying the property so your point 4 (the second one) should not be applicable.
To clarify – the plan is that the SMSF invests money into a property development that we purchase in a different strucure.
I think the issue is more your point 3. Invesments at arms length. This is the area I am unclear on as the plan would be that my SMSF would be investing in a unit trust (that will purchase the property development site). Myself and my brothers wold also be investing in this unit trust with our personal cash and getting bank debt as well.
I think that is what I need to get advice about. Ideas?
Greg
Dan42, appreciate the tip. I am very wary of getting tangled up with the ATO for breaching a rule. Can you suggest any SMSF experts who could help us out?
Greg
Freelife – Thanks for the article. We do have something similar in mind for future developments once we are more established.
However, the current goal is to figure out how we can do it considering we are all family members. I assume that adds a level of complexity under the 'related parties' type rules. Can you point me in the direction of any SMSF experts where we can get this advice?
Greg
Thanks wilko1 – a very interesting read. Concerns me a bit that the document was published in 2005, so much may have changed since then. SMSF rules seem to change every week.
Terry, The SMSF will not be purchasing the property so I don't think it will be accused of being in business. Rather the SMSF will be investing money into a unit trust which is where the property will be purchased.
I am concerned about getting this correct – so if you can suggest any names of people who specialise in structuring investments to be SIS compliant I'd be grateful.
Greg
Thanks for all the help..
They think it is the refinance is a magic bullet that is going to cure all of their problems.
I just wanted to get an idea of how much money they could get (depending on valuation) to try and give them a balanced view of how it will look. They hadn't factored in all the fees and as such thought they could pay out more cards than they thought..
I suggest they renegotiate some debt with other lenders also..
Cheers,
GregThanks Richard, some good info in that post..
You are right they are currently with the NAB and that is why they want to refinance and stay with them (Better the devil you know, I guess).
I am still a little unsure of how much money they will end up with to pay out the other debts.. I understand that there is a cost of approx $600 and there is no stamp duty on mortgages in Tassie now.
So that leaves the LMI cost – any idea of how much that would be? Does it make a difference if it is capaitalised or not?
Is that all we need to consider when looking at how much money they will have available to pay out the credit cards etc?
Can someone give me an approx figure of how much there will be after all the fees and expenses?
Much appreciated,
GregHi Elizabeth,
I have done a few wraps in Vic, I'm not an accountant but I'm happy to share my thoughts.
If you signed a wrap contract with your father it is most likely he would not pay CGT on the property. However, he would most likely pay income tax on the profits. If you wrote the contract so that there was no profit (ie you are simply covering costs), then you may be able to avoid this income tax also. I believe in NSW you would be eligible to receive the FHOG and/or avoid stamp duty as a first home buyer providing the price is under $500,000. (Check this with the OSR).
With a wrap your father would not be able to claim any expenses against his income as he would with a normal investment property, but as you would be meeting all the outgoings this would be of no real disadvantage to him.
An alternative would be to use a Lease Option contract. This would allow him to claim income tax losses, but as I mentioned these should be nil, as you will be paying all the expenses. If it is a lease option he may be liable for land tax, depending on what other property he owns. (Land tax would not apply if it was a wrap).
A lease option would have the added complictaion of the OSR charging stamp duty on the market value of the house when it is transfered to your name (ie in 5 years). This would most likely mean you pay more in stamp duty, possibly double!
So it is really six one way and half a dozen the other. I would suggest a wrap might work better. Just write it up so that the price you are buying it for is the same as the price he paid.
Definately get legal advice though. Like I said these are just my thoughts.
Hope it helps,
GregMust have been typing as you posted LA Aussie..
I agree totally it is a false economy.. You have to think about why the government (Tax Office) allowed normal employees to claim vehicles as tax deductions back in 1996 (I think)..
It has boosted the GDP (making people spend more) and boosted the car industry.. Plus people feel richer..
As I drive around now I notice how many people drive new or near new cars these days.. Take a drive in the outer suburbs which are full of first home buyers and you’ll see what I mean.. There has been a shift to consumerism in the world of cars over the last decade or so..
Greg
I have leased a car about 6 years ago through my employer and I personally wouldn’t do it again..
Since the top marginal tax rate back then was $50,000 it made a lot of sense.. But now the top tax rate kicks in at $150,000 and has been reduced to 45%.. You have to do your numbers and even with after tax contributions for FBT it may be marginal if worthwhile at all..
Check with your employer if you can get a fleet discount on new vehicles (They may have negoitiated this). Also ask if your employer will pass GST credits on to you.. This makes a big difference as you effectively don’t pay GST on the purchase price of a new car, the lease payments, petrol, maintenance etc..
Above all remember that just because you receive some tax benefit doesn’t necessarily mean it makes smart investment sense.. Many of my colleagues went and purchased $50k cars just because they could get big deductions.. But a few years later when they look at the depreciation that they have suffered they are bleeding..
My tip if you choose to go this path is choose a vehicle type NOT used by fleet companies (Government and rental companies).. Commodores and Falcons are worth dirt in 5 years.. Look at something like a Subaru or Mazda which generally will sell for a higher percentage of the purchase price even after a few years..
Be aware that the leasing company will build in adminisitration fees etc and the rate they charge for included petrol and tyres may not be competitive.. Negotiate the interest rate too!
Personally I chose a non-maintained lease, which doesn’t include any maintenace costs, fuel etc.. My company allows me to deduct them seperately from my pay (pre-tax) and this means I can shop around to get the best price..
Having said all that it is probably better than getting finance on a new car.. Especially if you travel more than 25,000 km each year as the FBT rate drops to 11%.. If you do less than 25,000 km per year (500km per week) then forget it – the FBT will kill you at 20%..
Hope that helps,
GregHi Guys!
Can someone give me an indication of the interest rates I could expect on both a No Doc with a 70% LVR and also one at 80% LVR..
Prefer to stay away from Lo Doc because of the need to state income..
Greg
Hi Henry!
No matter what price range you are in the fundamentals are similar. Bottom line is you have to purchase the porperty at a good price in the first place. Personally I would consider wrapping below $200k to be a cheap house – especially these days.
Greg
Hi Caston!
I would wrap a commercial property to you (if I had one!) provided my position was secure. You would need to provide me with sufficent deposit and possibly (depends on circumstances) a personal guarantee or caveat over something else of value (possibly your family home – depends on existing LVR/equity).
Provided my position was secure, through some of the items above, I would be less interested in your ‘reported’ cashflow as you have a lot to lose if things go bad.
IMHO the biggest problem with wraps in commercial is that values are more precise than in residential, as more buyers will buy on facts and figures rather than emotion.
Some lenders are now providing Lo-Doc lending on commercial with 20 year terms and no annual reviews.
Another option might be to sub-let a portion of an office from another small business. Perhaps a local accountant or solicitor has a room or corner in their office you could utilise.
Cheers,
GregA ‘Put & Call’ option is often used to shift the capital gains tax liability into a more favourable year.
CGT is based on the contract date – NOT the settlement date. So if I know that my income is going to be high this year and lower next year, then if I can choose I would prefer to pay CGT next year.
Often used in commercial and by developers a ‘Put & Call’ option essentially obliges each party to enter into a contract, possibly when defined conditions are met.
So in my case the option might say the option can not be excersied until after 1st July 2006 – thereby moving my CGT liabilty into the next finacial year.
The advantage is I have certainty NOW that the property is sold. Either myself (the seller) or the buyer can excise the option and force the other party to enter into the contract.
Cheers,
GregOriginally posted by carl_vic:What about this then; Say the company that is to be the trustee existed before the exchange however the trust did not. The contracts are signed either in the company name, or ‘and/or nominee’. Between the exchange and settlement a trust is created with the company as trustee. At settlement the appropriate paperwork is done related to the property being held in trust. Would this be ok?
I think you still have a problem with this idea in that the ‘Duties Stamp’ from the SRO will post date the contract you have signed.
A trust can exist without the deed being stamped by the SRO, but if it acquires property and then you take the deed in for stamping they will hit you with duty again for the current value of dutiable assets held in the trust.
Hope that makes sense,
GregOne of the legal experts can sort out whether I am on the right track here..
Despite most peoples belief ‘Title’ and ‘legal ownership’ are not strictly the same thing. When the contracts are signed and accepted you have a interest in the property, as an owner, even though you have not paid yet.
So you can’t sign the contract then run off and set up the trust before settlement. Here in Vic the SRO will hit you with a bill for double stamp duty if you try it.
The ATO could even have a look at you under Part IVa tax avoidance provisions if they deem you bought the property and then onsold it into a trust for the intent of avoiding tax.
Maybe the developer in WA is doing it differently as he may not sign the contract until the trust exists, although he knows the offer is accepted.
Any developer with a good accountant/lawyer will always setup a new company and trust for each new development project. At the end of the development they leave the trust holding no assets. If they want to keep a few apartments they transfer them to another holding entity to minimise lawsuits should something go wrong.
There is a story of a developer in Tasmania who didn’t do this and kept using the same trust to build and hold apartments. After a number of years one of the buildings developed serious problems and the new owners collectively sued him and as he had plenty of assets – he was cleaned out. Whoops.
Hope I am on the right track.
GregHi Guys!
Thanks for the replies. A question on LVRs..
When you mention 80%.. Is that based on the completed market value of the house and the land or is it based on the actual construction costs of the house plus the land value.
They have borrowed from Westapc to buy the land, but may need to go elsewhere if it will be difficult to owner build. It is a metro postcode, which will help.
I’ll pass this thread to them and they can get in touch with you if they need more info.
Thanks,
Greg
