by clicking the arrows at the side of the page, or by using the toolbar.
by clicking anywhere on the page.
by dragging the page around when zoomed in.
by clicking anywhere on the page when zoomed in.
web sites or send emails by clicking on hyperlinks.
Email this page to a friend
Search this issue
Index - jump to page or section
Archive - view past issues
News Bulletin : ADA News Bulletin December 2010
31 DECEMBER 2010 either start out or become positively geared over time as rents increase and outstanding debt decreases. In the case of a $1,000,000 positively geared or un-geared (no borrowings) property, producing income of $40,000 pa (4%) after expenses, the tax liability could be as follows: Table 1. Investor Tax Rate % Tax Payable $ Tax payable over 10 years $ SMSF member in pension mode 000 SMSF member in accumulation mode 15.0 6,000 60,000 Individual tax payer 31.5 12,000 126,000 Individual tax payer 38.5 15,000 154,000 Individual tax payer 46.5 18,000 186,000 Over a number of years the tax saving through structuring ownership to benefit from lower applicable tax rates can be considerable. MINIMIZING CAPITAL GAINS TAX WHEN THE INVESTMENT PROPERTY IS SOLD Investors typically buy property for both the income it produces and capital growth. When borrowings are used the after-tax income is often small, or even negative, so this makes capital gains even more important. If held for a relatively long time the capital growth on a well chosen property can be very sizeable, which is great, but this can result in a large capital gains tax liability, particularly if the investor has a high marginal tax rate at the time the capital gain is realized. Using a simplified example that ignores transaction costs, a property purchased for $1,000,000 would be worth $2,000,000 after 10 years if it grew at a compound rate of 7.2% pa. (Remember the rule of 72). As the asset has been owned for longer than 12 months the long-term capital gains tax discount of 50% should apply, meaning the taxable capital gain would be 50% of $1,000,000 or $500,000 if the property was sold after 10 years. The resulting tax liability could be as follows: Table 2. Investor Marginal tax rate % Tax payable $ SMSF member in pension mode 00 SMSF member in accumulation mode 15.0 50,000 Individual tax payer 31.5 157,500 Individual tax payer 38.5 192,500 Individual tax payer 46.5 232,500 The potentially large tax savings through structuring ownership to benefit from lower applicable tax rates are self evident. HOW BUYING PROPERTY THROUGH A SMSF WORKS • The property purchase process is broadly similar to when you buy a property in your own name. It is very important that the right party signs the contract of sale. • Documentation of the loan is somewhat complex as the property being acquired must be held on trust for the SMSF until such time as the borrowing is fully repaid. The trust is now commonly known as a 'holding trust' and the trustee must be different from the SMSF trustee. Specialists should be used to ensure there is no breach of the rules and regulations applicable to SMSF's. • Getting structuring and documentation wrong can be very expensive, such as through double stamp duty, and the ATO can be expected to apply the rules strictly. • It is not permissible to acquire assets with multiple titles under one borrowing arrangement. For example, there are special requirements where an apartment and the associated car parking space are on separate titles. • In addition to the normal costs associated with acquiring an investment property, such as stamp duty, conveyancing, building inspections and insurances, loan establishment and associated documentation costs will be moderately higher for investors borrowing through their SMSF. For investors with an existing SMSF these additional costs are generally between $3,000 and $8,000. Where one or more investors need to establish a new SMSF first that will typically have establishment costs of between $2,000 and $5,000. Structure: Loan Payment Rights of lender limited to asset Income SMSF Investment asset Separate trustee Lender investment insight
ADA News Bulletin November 2010
ADA News Bulletin February 2011