How One Call Saved Between $72K to $500K in Fines!
Written on the 3 April 2019 by Quentin Carter - Fox Wealth Solutions
Yesterday I had cause to call a financial planning client to congratulate them on their lending being approved by our inhouse broking team. It was a complicated lending solution that required many ducks in a row and therefore had taken some time to complete.
As part of the overall process the client's intention was to purchase a commercial premise from which they operated their business via a Self-Managed Super Fund (SMSF); a perfectly legal transaction any day of the week provided the i's are well dotted and the t's crossed at absolute right angles. The clients had established the fund some time ago via their accountant's "super guy".
Their "advice" was to take $600,000, of borrowed funds, pay it into the SMSF and then have the SMSF transfer the funds to the seller's lender and the property transferred to the fund. Fortunately, being in NSW this isn't a stamp duty event.
The first error in the impending mess was no independent valuation had been sought on the commercial property. Therefore, significant risk existed the property was purchased on a non-arm's length basis; what someone else could have purchased it for on the open market. The purchase was going to occur at the loan value currently secured against the commercial premises. On a good day a $12,000 fine!
The next pearl of wisdom inflicted on these folks was that they didn't need a bare trust for the loan. A bare trust is a type of trust that holds the property for the SMSF whilst the loan is being paid off.
You guessed it another $12,000 fine heading their way!
These poor guys already giddy with angst, then discovered their advice, to pay the loan back at 7% because the lender, no longer in the SMSF market, had suggested they could provide the loan at that rate was also fatally flawed. A particular RBA interest rate, currently 5.8% must be used in a related party borrowing or a rate which would be otherwise commercially available. Sensing a theme yet?
You guessed it another $12,000 fine heading their way!Remember the lack of valuation? Consequently, the client would have difficulty demonstrating the rent was being paid by the tenant at the market interest rate. So far $48,000 in fines!
To add insult to injury if the loan was more than 70% of the value of the property it would fall outside the safe harbour provisions for related party loans. Yup +$12,000!
No Registered Mortgage +$12,000.
The reality is the Australian Tax Office would have very likely looked at the cluster bomb and simply made the fund non-complying, which would mean the value of the fund would be taxed at 45% or +/-$500,000 and the income of the fund taxed at 45% instead of 15% until the issue was resolved. This very likely would have meant the sale of at least one property, perhaps 2 to resolve the issue.What a difference a day makes!
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Author:Quentin Carter - Fox Wealth Solutions
About: Qualified Financial Planner