SMSFs, property and loans. Mark Ellem Policy Director, SuperConcepts

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1 SMSFs, property and loans Mark Ellem Policy Director, SuperConcepts

2 Mum & Dad SMSF with LRBA Cash Flow Rent (3.6% yield) $28,800 Concessional conts $40,000 Loan repayments* (P&I) ($44,645) Land Tax (SA) ($ 385) Rates ($ 1,200) Fund admin & accounting ($ 1,800) Fund audit ($ 450) ATO levy ($ 259) Fund tax ($ 4,807) Net cash flow $15,352 *25 year term, 5.6%, P&I Interest $33,312 Debt reduction $11,333 Bank $35k Property valued at $800k Harry aged 42 ($117,500) Wendy aged 38 ($117,500

3 One Year on. Cash Flow Rent (3.6% yield) $28,800 Concessional conts $20,000 Loan repayments* (P&I) ($44,645) Land Tax (SA) ($ 385) Rates ($ 1,200) Fund admin & accounting ($ 1,800) Fund audit ($ 450) ATO levy ($ 259) Fund tax ($ 1,807) Net cash flow ($ 1,648) *25 year term, 5.6%, P&I Bank $50k Property valued at $800k + death benefit payment, either: $137,000 lump sum; or Commence death benefit pension $5,480 min pension Harry aged 43 ($137,000) Wendy aged 39 ($137,000)

4 Member Insurance (start over) Cash Flow Rent (3.6% yield) $28,800 Concessional conts $40,000 Loan repayments* (P&I) ($44,645) Land Tax (SA) ($ 385) Rates ($ 1,200) Fund admin & accounting ($ 1,800) Fund audit ($ 450) ATO levy ($ 259) Insurance premiums (dedn) ($ 1,873) Fund tax ($ 4,526) Net cash flow $13,662 Bank $35k Property valued at $800k *25 year term, 5.6%, P&I Member Level Premium Harry $1,239 Wendy $634 Life Policy for $600k each member Harry aged 42 ($117,500) Wendy aged 38 ($117,500

5 Mum & Dad SMSF with LRBA Bank $650k Property valued at $800k $600k proceeds paid to fund Harry deceased ($737,000) Wendy aged 39 ($137,000)

6 Mum & Dad SMSF with LRBA Cash Flow Rent (3.6% yield) $28,800 Concessional conts $20,000 Loan repayments (P&I) ( Nil) Land Tax (SA) ($ 385) Rates ($ 1,200) Fund admin & accounting ($ 1,800) Fund audit ($ 450) ATO levy ($ 259) Insurance premiums (dedn) ($ Nil ) Min Pension (4%) ($29,480) Fund tax ($ 3,581) Net cash flow $ 11,645 Bank $74k Property valued at $800k Deceased spouse s benefit kept inside fund via death benefit pension, which can be ceased if no longer required Harry Wendy deceased death benefit ($737,000) pension ($737,000) Wendy aged 39 ($137,000)

7 LRBAs non tax dependant members Business partners Friends Parent with adult children Unable to: retain proceeds of insurance within the fund; and pay death benefit of deceased member as pension

8 LRBAs Strategy options Bring in new members with rollovers sufficient to payout death benefit & loan Remaining member(s) makes NCC to provide monies to payout death benefit & loan Use of insurance to provide monies to payout death benefit & loan Outside fund: insurance to fund NCC or buy property from SMSF Inside fund: member specific insurance; death benefit pension to surviving spouse Inside fund: Reserve allocation strategy Cross Insurance Strategy out since 1/7/2014

9 Death Benefit Pension To Spouse Bill $120K Malcolm $120K 3 AMIGOS SUPER FUND Clive $120K Assets & liabilities BRP $1M* Cash $15K Bank loan $655K 3 x Life policy $775K * Held via complying LRBA Cash flow Rent $46,000 Interest ($58,000) Principal ($8,000) Fund costs ($2,000) Premium ($3,000) Paid from respective member accounts Concessional contributions - Malcolm $10,000 - Bill $10,000 - Clive $10,000 Tax on income ($2,400) Net cash flow $2,600

10 Death Benefit Pension To Spouse Bill $120K Malcolm $120K 3 AMIGOS SUPER FUND Spouse Clive of Clive $895K Assets & liabilities BRP $1M* Cash $790K $135K Bank loan $655 Nil Cash flow Rent $46,000 Fund costs ($2,000) Pension ($35,800) Concessional contributions - Malcolm $10,000 - Bill $10,000 Tax on income ($1,650) Net cash flow $26,550 * Held via complying LRBA

11 Reserve Allocation Strategy 3 x Life insurance policies (each member) $765k each. Premiums paid from reserve (no dedn) Han (45) $165K Luke (42) $165K REBEL ALLIANCE SUPER FUND Ben (49) $165K $52k bank account $1m BRP $600k bank loan Cash Flow Rent (7% yield) $70,000 Concessional conts $45,000 Fund setup ($ 1,650) LRBA setup ($ 2,090) Loan setup fee ($ 5,000) Loan repayments* (P&I) ($68,807) Life insurance prems ($ 6,123) Land Tax (Qld) ($ 6,550) Fund admin & accounting ($ 2,000) Fund audit ($ 450) ATO levy ($ 259) Fund tax ($ 8,626) Net cash flow $13,445 *15 year term, 8%, P&I

12 One Year on

13 One Year on

14 One Year on $39, Benefits Accrued as a Result of Operations 90% of Year 1 Earnings allocated to reserve to fund insurance premium Forecast cash flow year 1 = $13,445

15 Questions. What is Earnings for the purpose of allocation to members and reserve? What is the main difference between accounting earnings and assessable earnings? What accounting trickery have I done in relation to the purchase and disclosure of the property acquired? Purchase Price of property - $1,000,000 Disclosure in annual Financial Statements - $1,043,025 Reg 8.02B SISR requires disclosure at market value. What if market value is still $1m?

16 Tragedy strikes 3 x Life insurance policies (each member) $765k each. Premiums paid from reserve (no dedn) Luke (43) $178K Insurance Res $1K Han (46) $178K REBEL ALLIANCE SUPER FUND Ben $178K $178k $82k bank account $9k tax to pay $7k creditors $1.043m BRP $578k bank loan Cash Flow Rent (7% yield) $71,060 Concessional conts $30,000 Loan repayments* (P&I) ($68,807) Life insurance prems ($ 3,295) Land Tax (Qld) ($ 6,550) Fund admin & accounting ($ 2,000) Fund audit ($ 450) ATO levy ($ 259) Fund tax ($ 6,805) Net cash flow $12,894 *15 year term, 8%, P&I

17 Insurance Proceeds 2 x Life insurance policies $765k each member Luke (43) $178K Insurance Res $766K Han (46) $178K REBEL ALLIANCE SUPER FUND Ben $178K $831k bank account $1.043m BRP $578k bank loan $4k Prepaid Borrowing Costs

18 Insurance Proceeds 2 x Life insurance policies $765k each member Luke (43) $178K Insurance Res $766K $75k bank account Han (46) $178K REBEL ALLIANCE SUPER FUND Cash Flow Rent (7% yield) $71,060 Concessional conts $30,000 Loan repayments* (P&I) Nil Life insurance prems ($ 3,295) Land Tax (Qld) ($ 6,550) Fund admin & accounting ($ 2,000) Fund audit ($ 450) ATO levy ($ 259) Fund tax ($13,170) Net cash flow $75,336 Payout Ben $178K $1.043m BRP Repay $578k bank loan $4k Prepaid Borrowing Costs

19 The Reserve Problem Allocation from the Reserve to a member counts towards the member s concessional cap Unless the allocation is per an exception Under 5% rule Use taxation of excess concessional contributions to allocate from reserve Member with no or very low other assessable income The Reserve problem better than: the bank calling in loan problem or spouse of deceased member demanding death benefit payment problem

20 Allocating from Reserve Not a contribution Counts toward concessional cap Exceptions Allocate to: { 65, <75} & not working 75 Use higher concessional cap + personal tax = $NIL

21 New Members to the fund Han s spouse Leia is added as a member to the fund Luke s 76 yo mother Patty May is added as a member to the fund Both have nil taxable income How much of the reserve can be allocated out each year with no adverse tax consequences to the members of the fund?

22 Amount allocated Han (46) Leia (43) Luke (43) Patty May (76) Concessional Cap 30,000 30,000 30,000 35,000 Used 15,000 Nil 15,000 Nil Remaining 15,000 30,000 15,000 35,000 Reserve allocated 15,000 80,000 15,000 85,000 Excess Nil 50,000 Nil 50,000

23 Tax on excess concessional Leia Patty May Excess Concessional 50,000 50,000 Other taxable income Nil Nil Tax on taxable income 7,797 7,797 s ITAA 97 rebate (15%) 7,500 7,500 Net tax Medicare levy (2%) 1,000 1,000

24 Reserve Allocation Total allocated from Reserve: Han 15,000 Leia 80,000 Luke 15,000 Patty May 85,000 Total $195,000 If either Han or Leia die, can retain capital in fund and pay death benefit pension If either Luke or Patty May die, and no spouse, must pay out death benefit as soon as practicable Total tax due to allocation = $2,594 Years to allocate Reserve: 4 to 6

25 Alternative ending Han puts his son (known to everyone as Chewie, aged 19), in as a member of the fund Chewie has no assessable income Amount allocated from the Reserve to Chewie is still $80,000 Tax on the allocation is still $1,297 Chewie, elects that the excess concessional amount be refunded Refund to ATO - $42,500 by SMSF Additional tax deducted by ATO - $1, Refund to Chewie $41,135

26 Equitable? Member who dies first (and dependants) definitely loses Premiums amongst members: Male (Non Smoker) Stepped Premium Level Premium (to age 65) Luke (42) $ $1, Han (45) $ $1, Ben (49) $1, $2, More equitable than cross insurance Member specific insurance requirements to provide capital for family Separate SMSF or other fund

27 Insurance Reserve Strategy Compliance SISR 4.07D(2) says: A trustee of a regulated superannuation fund must not provide an insured benefit (emphasis added) in relation to a member of the fund unless the insured event is consistent with a condition of release specified in item 102, 102A, 103 or 109 of Schedule 1. An insured benefit is defined in SIS regulation 4.07C for a member, means a right, other than an anti-detriment payment, for the member's benefits to be increased on the realisation of a risk.

28 Cross Insurance Strategy Initial 17/11/14 Q&A update: Q Can an SMSF take out insurance on a cross-insurance basis? A Regulations that came into operation on 1 July 2014 do not permit cross-insurance on any new insurance products. These types of insurance arrangements are not permitted because the insured benefit will not be consistent with a condition of release in respect of the member receiving the benefit.

29 Cross Insurance Strategy Latest wording for answer from ATO website: Regulations that came into operation on 1 July 2014 do not allow SMSFs to provide insurance for a member unless the insured event is consistent with one of the following conditions of release: death terminal medical condition permanent incapacity temporary incapacity. The Explanatory Memorandum associated with the amended regulations makes it clear that the proceeds of an insurance policy must be released to the member who is the insured under the policy. This means that cross-insurance arrangements where the proceeds of an insurance policy are paid to someone other than the insured under the policy are not permitted.

30 Planning & Communication, the key it is Adviser Accountant Lawyer

31 Thank you

32 SMSFs, Property & Loans Mark Ellem, SuperConcepts 2016 This presentation is for general information only. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.

33 Disclaimer SMSF Association 2016 This presentation is for general information only. The material and opinions in this presentation are those of the author and not those of the SMSF Association. Every effort has been made to ensure that it is accurate, however it is not intended to be a complete description of the matters described. The presentation has been prepared without taking into account any personal objectives, financial situation or needs. It does not contain and is not to be taken as containing any securities advice or securities recommendation. Furthermore, it is not intended that it be relied on by recipients for the purpose of making investment decisions and is not a replacement of the requirement for individual research or professional tax advice. This presentation was accompanied by an oral presentation, and is not a complete record of the discussion held. No part of this presentation should be used elsewhere without prior consent from the author.