Tax effective self managed superannuation structures for the property game

1. Tax effective self managed superannuation structures for the property game Presentation to The Brisbane Property Networking Group April 2011

2. Who we are • Chartered Accounting firm with offices in Brisbane and Sunshine Coast • Specialist tax and business structuring practice, focussing on asset protection and tax effective strategies for business and high wealth individuals • Clients range from various industry sectors, and the focus is hospitality and property developers/investors • Range of other professional services include: superannuation, financial planning, due diligence, and management consulting • Proactive approach to managing client issues, with comprehensive tax planning prior to 30 June, along with medium term wealth strategy • Have two partners and 6 staff, so we’re big enough to handle complex work and small enough to care

3. 1 Self Managed Superannuation structures for property investing Case study – 4 townhouse development in Coorparoo 2 Introduction (and disclaimer) to presentation We are investing in a sustained period of uncertainty, and terms such as “negative gearing” and “capital growth” have been replaced with “yield” and “positive gearing”. Rather than new age thinking, I would just call this common sense. This presentation has been split into the following two parts: Disclaimer This information has been prepared as a presentation for general information purposes only, without taking into account any potential investors’ personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to you/your client’s objectives, financial situation or needs. All potential investors should obtain financial, legal and taxation advice before making any decision about whether to act on any information.

4. Topic 1 Self Managed Superannuation structures for property investing Case study – 4 townhouse development in Coorparoo 2

5. Basic conditions Benefits Some basics of Self Managed Superannuation Funds (SMSF) • Need to have a clear strategy in mind • Need to meet the requirements of the SIS Act, including: • Not carrying on a business • Sole purpose test • In-house asset test • Maximum of 4 persons in the fund, and cannot be employer/employee relationship • Consider the trustee of the super fund if the SMSF is for a couple • Consider cost effectiveness and having a minimum balance of $200,000 plus • Cannot purchase residential properties from related parties • Control over decision-making and investment options • Asset purchased in a very secure environment (almost bulletproof) • Ability to access low capital gains tax rate (10%) and low income tax rate (15%) • For business owners, ability to purchase commercial premises used by business • Flexibility for people approaching retirement, especially when putting in place a Transition to Retirement Strategy • Ability to borrow within appropriate structure • Ability to create joint agreements with other entities and other super funds to acquire assets • Helps with land tax issues

6. Scenarios Mr Mechanic and Mrs Teacher • Mid 30’s • Runs a small mechanic shop • Tired of paying lease Mr Software Sales and Ms Real Estate agent • Mid 50’s • No superannuation saved • Just received lump sum from estate (out of probate) • Earning good income and concerned about tax Mr Almost There • Self-employed and earns good income; however, likes the night life and never seems to save any money • He’s not getting any younger and needs to start putting together a plan

7. Scenario SMSF How can SMSF work for Mr Mechanic and Mrs TeacherPurchase of a commercial premises leased by business • Existing super of husband and wife of $120,000 • Industrial shed cost $350,000 • Currently paying $33,000 per annum in lease costs plus outgoings • Based on 70% LVR, $105,000 deposit on shed, borrow balance to secure asset • Based on 8.5% loan (on $245,000), annual interest is under $21,000 • Personal contributions and spouse contributions help with any topups SMSF Deposit Loan Lender Bare trust Limited recourse Contributions Repayments Lease payments Business

8. Scenario SMSF How can SMSF work for Mr Software Sales and Ms Real Estate Agent Purchase of a residential premises • Mr Software Sales inherited $250,000 and had no existing superannuation • Ms Real Estate agent had around $80,000 in superannuation • They’re earning good income personally, and are both getting close to 60 and have to ramp up their savings for retirement • Purchase a residential property with 30% deposit to minimise cashflow • Enter into a Transition to Retirement plan to contribute significantly into super (and retain some disposable income) • Do it again; however, the second time use the equity in their main residence (LOC) Clients Contributions Deposit Loan Lender Bare trust SMSF Limited recourse Repayments Instalments

9. Scenario SMSF How can SMSF work for Mr Almost There Purchase of a property (likely commercial) via a Joint Venture • Mr Almost There has $70,000 in super, and runs a motorbike building business • He’s got interesting friends, and like Mr Mechanic, wants to own the shed where his business is based • Can’t save for peanuts, but is able to pay bills • Purchase a commercial shed with one of the investors in the bike business with ownership based on money tipped in • As the tenant and member, Mr Almost There can pay more/less off over time, thereby managing tax and building wealth • Other option would be to invest in US property market, where it’s a buyers market SMSF Mr Almost There SMSF Mr Cool

10. Questions ?

11. Topic 1 Self Managed Superannuation structures for property investing Case study – 4 townhouse development in Coorparoo 2 11

12. Team Biggs Team Investors Property development using a SMSF in a Joint Venture (JV) • Experienced at property development • Licensed builder with 35 years experience • Some financial ability • Able to manage the structure, negotiations, and paperwork side of the development • Good experience running businesses, but not in property development • Still looking for “that first development” • Significant funds in superannuation • Recognise opportunities in the market but apprehensive to move The project • Two adjoining properties in a leafy area of Coorparoo, 908 sq/m per block $725k each • Deal came through a business associate, Mr BA • Issues are: Demolition Control Precinct and Character residential, one property pre 46, 1 unit per 300 sq/m land • Proposed development: strata existing homes to 400 sq/m lots (or even smaller) under two SUDs and sell sooner than later, put a driveway between the blocks and put four townhouses at the back (MUD)

13. Land ownership Construction company The structure Money providers Kingfisher Constructions Qld Pty Ltd Building Services Acme Pty Ltd SMSF Team Investors Biggs Trust Investor Trust $$$ Biggs Trust $$ 13

14. SMSF The deal Considerations of the JV • Ensure not carrying on a property development business • Ensure compliance with SIS Act (in-house asset) • Ensure protection for funds invested • Commercial return paid to SMSF and other money investors • Security provided to SMSF on the properties • Minority share ownership of related entity • Separate loan and joint venture agreement • 50/50 share split after return paid on monies lent • Finders fee split between up-front, project management, and BA • Construction based on cost plus arrangement • Full capital up-front with co-signing on general account (using on-line technology) • Use personal credit cards for small spends • Clear delineation of roles and responsibilities

15. Key learnings • Careful how you secure the funds (avoid second mortgages) • Careful naming the entities you use (avoid the word “Development” in any new entity names) • The important thing is the business relationships, not the deal (greed can cloud decision-making) • Consider the full cost of a project (i.e. finance, selling fees, holding costs, GST, etc) • Avoid self-delusion (you make money when you buy) • Have a defensive optimistic strategy (i.e. hope for the best, document for the worst) • Build a product for the area you’re in • There’ll be overruns, so always have a contingency • Listen to the specialists, because they know better • Earthworks are expensive, so don’t underestimate the savings of a flat block • You’re hopefully never going to live in these places, so don’t over-finish them

16. Questions ? For more information, contact John Biggs on: e john@conquestaccounting.com.au p (07) 3852 4844