Looking at ways to enhance your wealth, protect your hard earned assets and pay less tax? 

Borrowing to buy property and placing assets into superannuation to reduce taxation is not new.  However, using a ‘property instalment warrant’ approach is!

An Instalment Warrant is an agreement whereby the buyer agrees to make a number of successive payments from the purchaser instead of a once off payment. 

Usually the purchaser will pay the buyer either monthly or yearly.  Essentially it is like buying an asset on ‘lay-by’.  Instalment warrants have become popular in large scale commercial property or property development deals. 

Trustees are now starting to seriously consider this strategy to help boost investment returns and maximize retirement benefits. 

Why would you consider this? 

• To diversify super assets
• Seek perceived safety in bricks and mortar
• Access funds to take advantage of market conditions
• Purchase business premises and/or other property through the fund
• Super fund becoming the business landlord
• Boost savings
• Reduce taxes 

Whilst there are a number of compliance issues/paperwork etc. to deal with, eg does the trust deed and investment strategy allow this type of transaction, we are able to easily complete this for you.  The following are some case study examples that may apply to you. 

If you think any of these example case studies fit your goals and objectives, then please give us a call to set up a suitable time to discuss your circumstances. 

Let us be Your Advantage

CASE STUDY EXAMPLES

Warning Note: These case study examples are for illustration purposes only.  If you require specific advice, please contact us to discuss.

1.        A NEW BEGINNING 

Louise is a 45 year old partner in a firm of architects who was looking at purchasing a unit for $500,000 as an investment. 

After re-entering professional life only a few years ago, Louise is particularly keen to look for sensible ways to accelerate her retirement nest egg. 

Among the options considered, she weighed up the alternative strategies of a “normal” negatively-geared investment or setting up a Self Managed Super Fund (SMSF) to purchase the investment. 

Louise was surprised to find that, by utilizing a SMSF, the total projected advantage to her on selling the property at age 60 would amount to $146,165 – including Capital Gain Tax savings. 

Assumptions:  Loan of $400,000 repaid by Rental income and SGC (balance re-invested); Marginal income tax rate of 46.5%; Rent received - $500 per week increasing by 2% pa; Property value increases by 5% pa; Loan interest rates average 8% pa over term.  Current Taxation & SMSF Laws remain unchanged. 

2.        SUCCESSION PLANNING & RETIREMENT 

Roger is 62 years old and runs a successful hardware store from a building he bought in 1992 and has now fully paid off. 

Roger wants to retire and let his son James take over the business.  But James can’t get a loan to buy the property because, at a value of $1 million, like most people his age, James doesn’t have enough deposit. 

Roger, his wife and James have an SMSF with total assets of $500,000.  Roger recently learned that his super fund can acquire the property using a SMSF loan. 

The family’s SMSF invests in the property by taking out a $650,000 loan and the SMSF uses its existing funds for the $350,000 deposit and other transaction costs. 

Roger and his wife receive $1 million which they use to top up their super and produce a retirement income steam. 

No CGT is payable as the sale was exempt under the small business retirement provisions.  Roger and his wife each get a tax deduction for up to $50,000 of the super contribution and can receive up to $85,000 pa tax-free income. 

James’ business pays the same tax deductible rent as previously except now the $75,000 pa goes to the SMSF.  Roger doesn’t have to worry about selling the business or premises to an outsider and James doesn’t have to worry about being evicted or suffering ‘unfair’ rent increases.

3.        BUILDING A PORTFOLIO 

Will and Grace are in their mid 30s and have always had a desire to provide for their future income streams through property investment.  They have read everything they can on the subject and have been working for several years with a property investment group.  They have already acquired four geared properties but are keen to keep investing in one per year until they reach their goals. 

Unfortunately, they have just been hit with the double whammy of reduced Lender Loan to Value Ratios (LVR), which has affected the available equity for their next acquisition, and lenders declining their loan applications based on more stringent servicing requirements.  They are now faced with the prospect of two or more years without any acquisitions, which not only puts them behind on their goals – but they feel they are out of the market at a time when there are some “great buys” to be had. 

One of the options they considered was to look at their next acquisition through super.  Will and Grace don’t really understand how this can help as they are PAYG income earners and do not yet have a SMSF.  In any event they have heard that gearing through super is quite low at around 70% and they normally like to be highly geared at 95% to 100%. 

They were amazed to learn that, by rolling their existing super into a SMSF and utilizing SGC payments, rental income and preferentially taxed voluntary contributions, they can continue to build a property portfolio inside their SMSF.  As retirement income has always been one of their key motivating factors, they are very happy.  Over following years they acquire several more properties – inside and outside super – establishing both medium and long term income streams.

 4.        TURNING BUSINESS PROPERTY INTO A RETIREMENT FUND 

Tim and his wife, Susan, operate a successful health practice.  The 52 year olds are keen to put more of their assets into super to take advantage of its tax-effectiveness.

 They used their life savings to buy the business property three years ago for $1.8 million with a $1.25 million loan.  It has since appreciated to a market value of $2 million and the loan has reduced to $1.2 million.  The practice pays Tim and Susan $20,000 per month in rent, which they use to service the interest on the loan and reduce the principal outstanding. 

They make a good living from the practice, earning over $300,000 pa between them – but they have few assets outside the business property, their family home and an $850,000 SMSF.  One of the options considered was for the SMSF to acquire the business property.  The transaction looks like this: 

• The SMSF purchases the property for $2 million (market value) with a loan of $1.3 million
• Tim and Susan receive $2 million, use $1.2 million to pay off the existing loan and contribute the remaining $800,000 back into their SMSF.  $100,000 is deductible and $700,000 is non-deductible
• No CGT payment is required as the $200,000 gain is reduced to $100,000 (50% Capital Gains Tax Discount) and is offset by the combined $100,000 deductible contribution to super
• The practice pays the same tax-deductible rent as before – except now it is funding their retirement
• All future gains in the property’s value are concessionally taxed 

The balance could be contributed as concessional contributions over the next few years because they qualify for the transitional arrangements being over 50.

Warning Note: These case study examples are for illustration purposes only.  If you require specific advice, please contact us to discuss.