We recently gave advice to two business partners looking to purchase business premises together for $1.5M.
The business partners did not have adequate funds of $750,000 each to personally purchase the business premises.
However, each partner did have a respective self-managed superannuation fund (SMSF) with $400,000 each in cash reserves. The two SMSFs had total combined funding of $800,000.
The shortfall required to purchase the business premises was $700,000 ($1.5M purchase price less $800,000 via SMSFs).
We were also asked to advise on a structure that provided ideal tax minimization, along with delivering asset protection on the investment and any future investments.
Solution: Two separate SMSFs using a fixed unit trust 50/50 investment by each SMSF.
A flexible approach for this scenario is for the establishment of a fixed Unit Trust with each SMSF purchasing 50% of the units in the fixed trust.
The fixed trust, being an uncontrolled (each party holds an uncontrolled interest of 50%) and unrelated trust of each person, could then borrow to buy the difference needed to complete the desired property purchase.
Problems;
Higher structuring and ongoing costs of running two SMSFs
By law, one SMSF cannot buy out the other SMSF’s units while there is debt over the property in the unit trust.
Benefits;
The SMSFs receive distributions from the fixed unit trust and enjoy concessional tax rates of 15%.
The two SMSFs are not dealing with LRBA rules. Due to the debt held in the trust, the members of the SMSFs would possibly need to act as guarantors for the bank loan. As long as they are not acting as individual trustees of the SMSF, with no recovery over other SMSF assets, there is no issue.
In the event of the death of a member in one SMSF, the SMSF could pay the units in the trust as an “in-specie death benefit” to the dependant or legal personal representative to put in the estate. By doing this, the property is further protected, and there is no need for it to be sold to pay death benefits.
If one investor does pass away, the surviving investor has no control over the deceased investors’ SMSF or how death benefits are paid.
The investors can implement their own investment strategies and mixes within their independent SMSFs.
The property can be improved and altered in the trust as LRBA rules would not apply. Further lending to fund improvements and investment can be carried out in the trust without having to deal with contribution caps that would generally be an issue if it were a shared SMSF.
If you are considering a joint venture arrangement with two SMSFs acquiring property, please contact one of our Superannuation Specialists on 03 9863 6997 to discuss if the above strategy is suitable for your needs.
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