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Tim Miller, head of education and technical for Smarter SMSF, said on a budget wrap webinar that negative gearing changes from an SMSF point of view don’t necessarily impact funds from an operationally because they are excluded from the new measures.
However, he said, they have been excluded because although negative gearing isn’t ultimately something that plays itself out significantly in the SMSF space, there is the link to limited recourse borrowing arrangements.
Aaron Dunn, CEO of Smarter SMSF, said in the context of negative gearing inside the super space, in which borrowing and leverage is utilised, the income of the fund is positively geared, and that debt and the interest cost is helping to fund a reduction in the contributions tax.
“For those with existing properties under existing negative gearing rules, they will probably maintain the status quo,” Miller said.
“However, looking at new investments, not everyone is going to do a new build, particularly because certain things like the new build rules are quite interesting. You can’t just knock down a house and rebuild it and expect to get negative gearing.
“You’ve got to knock down a house to build a couple of townhouses, or do something else or build on vacant land, which becomes a problem, obviously, in an LRBA context, so there’s certain areas where it’s not going to be within scope to look at these.”
Miller continued that cash-rich funds might look to subdivide land or other things, which is quite possible.
He gave an example of a couple who can contribute up to $1 million over a two-year period in June or July, subject to having less than the $1.8 4 million threshold.
“It creates a significant wealth pool to be able to then look at making property investments inside the super environment with that lower tax rate, with the final goal being from an end tax point of view, looking at the rental incomes and things,” he said.
“From that end tax point of view, the maximum tax is going to be 10 per cent on the sale of that asset, as long as things are done correctly and no NALI provisions are invoked along the way which would permanently taint the asset.”
He continued that as well as considering making those kinds of contributions, members can also look at whether they can lend money to the fund if they are not thinking about permanently preserving benefits through a contribution.
“Do we look at the proceeds of lending money to super under the related party guidelines? Yes, that generates income for the individuals from an interest point of view. But then is there a capacity to offset that with concessional contributions and subject to carry forwards and other things,” Miller said.
“There might be scope in that timeframe to be able to use a little bit more than the standard cap to offset some personal tax liability as well. Having that future vision of how holding property inside super subject to the overriding sole purpose test on the fund’s investment strategy can provide a huge tax benefit to investors.”
Dunn said there are other questions that can be asked including whether to consider refinancing with existing property to get money to buy a new property, to retain the negative gearing.
“I think it’s important to remember from that point of view, that if the asset is already in the fund, you can’t leverage that existing property, so any sort of funding needs to stack up on its own two feet,” he said.
“I’m sure we’re going to see a range of ideas get thrown out in this area, with quite clearly, off the back of the attractiveness that we see around superannuation getting structured.”
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