All Topics / Help Needed! / Smsf – unit trust – development/strata titling

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  • Profile photo of wilko1wilko1
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    @wilko1
    Join Date: 2010
    Post Count: 510

    Hey forum members.

    My dad was looking to buy a block of 4 units / 1 title in his self managed superfund.

    SMSF set up before 1999.

    His idea was to renovate and strata title them and then hold for long term growth.

    I told him he would be able to renovate (so long as he used super fund cash as opposed to borrowing) and that he wouldn't be able to strata title due to changing the original title.

    I said best bet would be to set up a unit trust and contribute your smsf cash into the unit trust first then buying the block of units with that.

    Firstly am I correct with what I said?

    And secondly if he was to buy within a unit trust.

    For example.

    Smsf contributed 350k cash

    Personal contribution 50k cash.

    Can he use the the superfund cash to pay not only for the 20-30% deposit and stamp duty.

    But also use that to fund the strata title and renovation?

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
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    You cannot strata title a SMSF property that is under mortgage with the bank.  In order to do this, your dad's SMSF would need to fall into one of the following categories:

    – So cashed up it can pay cash for the purchase, no loans at all.

    – Use another avenue for the lending (eg if your dad is cashed up outside his superfund and can lend all the monies to the SMSF that it requires to make the purchase.  Note however there can only be one lender per SMSF property, so if your dad himself is the lender, he can't then get additional cash for the SMSF property from a bank)

    – Buy the property in the SMSF with a bank loan, and wait until the thing is paid off and then strata-title

    Richard Taylor (userid Qlds007) is a broker on these forums who is a gun at SMSF mortgages and has also done a lot of strata-titling of unit blocks inside his SMSF.  Bit of luck he'll notice this thread and cast some wisdom over it (and no doubt correct me on any indiscrepancies in my own comments hehe)

    https://www.propertyinvesting.com/user/qlds007

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of RPIRPI
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    @rpi
    Join Date: 2012
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    I would not strata and then hold.  You will paying a lot more in rates.

    RPI | Certus Legal Group / PRO Town Planners
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    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    Agreed with RPI.  Particulary since a SMSF cannot leverage equity from one property to fund the deposit of another.  Only way to realise a gain is to sell the property.  If a SMSF is going to strata it would absolutely be for the purpose of on-selling.  I did neglect to say so in my original post – thanks for picking up on that RPI, it is an important point smiley

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of wilko1wilko1
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    @wilko1
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    1) Use another avenue for the lending (eg if your dad is cashed up outside his superfund and can lend all the monies to the SMSF that it requires to make the purchase.  Note however there can only be one lender per SMSF property, so if your dad himself is the lender, he can't then get additional cash for the SMSF property from a bank)

    2)- Buy the property in the SMSF with a bank loan, and wait until the thing is paid off and then strata-title

    1)Both these options would be reasonable options for him.

    ie option one set up LOC on couple investment properties. Loan money into SMSF and then purchase, strata title/renovate and sell after 1 year paying 15% tax. (because it is set up so that he pays interest to himself (because he is his own lender), what would happen then if he charged himself 7% whilst his LOC is only 5%, he wouldn't be allowed to Im guessing as that would be extracting smsf cash from the smsf itself (bit by bit).

    2)- Option 2 is viable as well. As the Unit block itself 4 units currently has pretty low council rates by itself. After he paid off the loan, most likely would be in retirement phase, strata title the units and sell off for a nil captial gains tax.

    Well 1 more week to go of DD before tender closes so we will see how this turns out.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
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    I don't know if there are any rules regarding there being only 1 lender to a SMSF. The assets of a bare trust can only be mortgaged or charged by one lender – I'm not even sure if this is the case actually. But a member can loan funds to the SMSF without security. This can be over and above the secured loan.

    A member has to becareful with the interest rate charged. There are some ATO advices out saying you can charge less, but not more. It may even be possible to charge no interest – but be very careful

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    Hi Terry, yep that's what I meant – one lender per property.  I cannot even recall where I read it but I have most definitely read it somewhere.

    Wilko – capital gains tax of assets sold in super are subject to 15% during the first year, 10% thereafter, or 0% if in retirement phase.

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of wilko1wilko1
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    @wilko1
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    Would this be a ok setup to buy a house and do a subdivision on.

    tennants in common superfund owes 80 percent – personal name or family trust  owns 20 percent 

    Property purchase 420

    20k stamp duty approx

    Superfund pays cash 350

    personal contribution of 90k. (Borrowed via LOC against a different asset held in personal name) LOC limit 150k

    Buys property rents out for year.

    Does a subdivision on the property approx 30k fees paid for via LOC.

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    No. Your SMSF is not allowed to jv with a related party

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of TerrywTerryw
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    @terryw
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    JacM wrote:
    No. Your SMSF is not allowed to jv with a related party

    JacM – any authority to back this up?

    I don’t know of any restriction in a SMSF buying property jointly with a related party.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of TerrywTerryw
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    @terryw
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    JacM wrote:
    No. Your SMSF is not allowed to jv with a related party

    SIS Act section 71(1)(i)
    http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/s71.html

    (1) For the purposes of this Part, an in-house asset of a superannuation fund is an asset of the fund that is a loan to, or an investment in, a related party of the fund, an investment in a related trust of the fund, or an asset of the fund subject to a lease or lease arrangement between a trustee of the fund and a related party of the fund, but does not include: …

    (i) property owned by the superannuation fund and a related party as tenants in common, other than property subject to a lease or lease arrangement between a trustee of the fund and a related party; or

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    There is no issue in purchasing a property as Tenants in Common with your SMSF however neither party could use the asset as a security for a loan.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
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    Hm I had understood a SMSF could not essentially go into business with or joint-own an asset with a related party.  Would the 5% rule apply here then?

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of TerrywTerryw
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    @terryw
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    JacM wrote:
    Hm I had understood a SMSF could not essentially go into business with or joint-own an asset with a related party.  Would the 5% rule apply here then?

    No because of the above section I quoted which specificially says a jointly owned asset is not classed as an in house asset.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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