SMSF trustees unable to raise significant capital to meet the costs of acquiring property via a limited recourse borrowing arrangement (LRBA) can use an excess conditional contributions strategy as a short-term solution, Advisers Digest director Peter Johnson has noted.
The SMSF educator pointed out trustees may find themselves in situations where an LRBA and cash in the fund will cover the cost of a purchase, but not the stamp duty or goods and services tax (GST) that may also apply.
“If a client says to you they want to borrow money for the deposit because they signed a contract and haven’t rolled any money over yet, that doesn’t comply with Practical Compliance Guideline (PCG) 2016/5,” Johnson said in a presentation hosted by the Institute of Financial Professionals Australia last week.
“If they want to borrow for the GST, that doesn’t comply with PCG 2016/5 either.
“They could become a second related-party lender, but that also won’t comply, so what can you do? I suggest using excess concessional contributions.”
To illustrate this, he gave the case study of Peter and Chloe, who have an SMSF that holds $200,000 in cash and want to buy their office that is $880,000, including GST, on which they will have to pay $40,000 in stamp duty.
Their bank will lend them 80 per cent of the purchase price, that is, $640,000, leaving them $40,000 short, which they hope to borrow and repay when they recoup their GST, and, in this case, the company could make additional concessional contributions to Peter and Chloe to cover the difference.
“They have maxed out their contributions, but if we now do another $40,000 each, that is an $80,000 excess concessional contribution,” Johnson said.
“Those will be added to their wages for the year, so they can reduce other income if they want.
“The company could lend the money to Peter and Chloe under a Division 7A arrangement as it will be paid back.
“After 30 June, Peter and Chloe do their returns quickly, get an assessment for excess concessional contributions and each withdraw 85 per cent of their $40,000 excess.
“They can use that to pay their Division 7A and in effect have borrowed money off the company by using an excess concessional contribution.
“They receive back $68,000 from the fund, as 15 per cent is tax paid in the fund, and return that money because by then they will have managed to do what they needed [to complete the various transactions].”
Jason Spits
SENIOR JOURNALIST
Jason is a senior journalist with Benchmark Media and writes for the selfmanagedsuper website and magazine and smstrusteenews website. He has covered financial services since 1999 and has written about life insurance, superannuation, investment management and financial advice, in both a freelance and in-house capacity, and also did a brief stint as a media manager for an industry association. He has been the editor of trade titles Money Management and Financial Standard, and was most recently senior journalist with life insurance title Riskinfo.
Articles by Jason