SMSF and Property

[VeryGreen]

Hello everyone,

I am not sure if I have this "idea" of mine correct so thought I would drop a thread in here and see if anyone could tell me if it was incorrect. Obviously, I am aware of the strict financial advice rules and limitations and I am definately NOT seeking financial advice. I would just like to know if I have interprited things correctly and thought I would ask here to arm myself with more knowledge BEFORE approaching an accountant or financial advisor.

[background]
I am 32 years old, and so is my wife. We were recently blessed with the arrival of a baby boy (he's 2 weeks old). I am an electrician/instrumentation technician and my wife is doing her masters in pharmacy. I was earning a significanly high wage for a short period of time but when the wife (at that stage girlfriend) and I became pregnant I halved by wages and came back to Perth.

I am paying off a house we live in (subdivision is on the cards) and own one investment property
[/background]

[Idea]
So I read this article - http://www.perthnow.com.au/business...-you-should-know/story-e6frg2qc-1226588598905 and it got me thinking. I've been reading a bit on SMSF's and and trying to arm myself with knowledge so I can perhaps oneday be the master of my own destiny.

The article refers to the rules about purchasing property in a super fund and what you can/cant do etc.

Applying it to our circumstances I formulated what sounds to me to be a good plan. Once I have confidence in my ability to return the same, if not more than a normal super fund I could set up a SMSF. Hopefully at this stage my wife has finished her masters and our little boy (perhaps another) are old enough to go to school.

For the next 5 years or so my wife gains the hands on experience required to run a phamacy. I continue working as per nomal and inject into our super as much as I can. By this stage I suspect we would be around 40.

The article states a SMSF is able to borrow money now to invest which includes marginal loans as well as property loans. At this stage I would hope to have enough funds in the SMSF to maintain a significant share portfolio as well as contribute towards buying a business address. Now according to the article, the rules are strict when it comes to the use of property owned by a SMSF. It states that at no stage is anyone associated with the SMSF able to stay in the property. You can't purchase a house and land package in Cairns to use as a holiday home free of charge. BUT! if you own a business, you are able to run the business out of the premisis provided that the rent you are paying is the going rate. You cant discount yourself.

So my idea was perhaps to buy a place with the SMSF and rent it out to my wife and I so she can run a pharmacy.
[Idea]

[Questions]
My understanding may be incorrect (and this is why I thought I would post here and see if anyone could tell me if I am wrong) but this would provide the following advantages:

1) Rent paid would not go to a 3rd party, rather it would be returned into the SMSF. Although your not allowed to discount yourself or occupy it rent free you pretty much are because its going back into your super anyway.

2) As well as retaining the rent, the rent would also be written against profiets because its a running costs of the business which is a seperate entity from the SMSF

3) Rental income going into the SMSF would be taxed at 15%

4) If the property is held by the SMSF for more than 12 months the capital gains are discounted by one third. Meaning you only have 2/3 of your capital gains to pay tax on

5) That remainding 2/3 you only pay 15% on.

Am I being too optimistic here?
Have I miss interprited the article?
[Questions]

Obviously, I would seek the advice of a good accountant or financial advisor before jumping in and trying to set up a SMSF but I thought if I asked here in the beginners forum someone might have a similar experience that could relate to it.

Thanks for reading!
VG

 

[Trembling Hand]

Huh? And where does the money come from to set up and run a pharmacy? You would think that would easily be in the many 100s of thousands!! Forget about owning the property thats marginal. Concentrate on having enough money to survive what seems like a very tough business.

 

[VeryGreen]

Huh? And where does the money come from to set up and run a pharmacy? You would think that would easily be in the many 100s of thousands!! Forget about owning the property thats marginal. Concentrate on having enough money to survive what seems like a very tough business.

Thanks for your reply Trembling Hand.

Obviously that has costs associated with it too, but i thought that would be irrelavent to where I was going with property/SMSF questions. Your looking more into the 1.5m mark in todays prices. If you purchase an existing company your paying for good will as well. We would be looking more at going into a new area rather than pick up an existing business. Obviously this is going to take market research to make sure we select an area to service wich is not already over populated with pharmacy's.

Currently, today, if I we were to try and raise funds to start a pharmacy we would fall short. You're correct there. Being conservative I think I could raise 800k. This of course would be a combination of borrowed money and selling off existing intrests which I do not mind at all. No point in holding onto a valuable asset until the day you die.

I would hope that in a decade we could get closer to the mark, which would have shifted up as well. One thing that a lot of phamacists do is partner together in a business agreement. They push this hard at university because they know that none of the pharmasist coming out will be able to set up their own shop right away. Many go on to work for others or move into hospital pharmacy. I am sure there would be 1 or 2 other phamacists that would be looking for people in our position. Doing this has the added advantage of splitting shifts and sharing costs. There are some pharmacists out there that have part intrest in 3 or 4 pharmacy's and do 2 days a week at each store.

I was mainly just wondering if I had the SMSF and property thing correct in my head though.

Cheers!

 

[craft]

The big pharmacy companies - Sigma, API etc do a lot of financing, guaranteeing etc to tie up pharmacies – and it is probably the only logical way in unless you are totally loaded. Whilst the industry remains regulated as it is, the big pharmaceuticals can’t own the pharmacies so they bend over backwards helping people establish in return for a wholesale purchase/ franchise agreement etc.

The location which are best suited to a pharmacy (the ones SIP etc will help you into) are probably more likely rental locations but if you could find a good location to buy then it could be purchased through a SMSF as it is a business premises – but only the premises, running the business itself in the SMSF would be near on impossible without running afoul of the sole purpose and non-recourse borrowing rules.

 

[sptrawler]

Don't think you can put your investment property into the SMSF, it's a big no no.

I know in Perth Chemist Warehouse and Wizard warehouse, seem to have things sown up.
Also Coles and Woolies have been trying to break into the pharmacy market.
Not trying to put a damper on things, but do your research and chose your area carefully.

 

[craft]

Don't think you can put your investment property into the SMSF, it's a big no no.

The problem with seeking information on forums is that you always get two stories and they can’t both be right.

You can defiantly hold business real property in your SMSF – you can even buy it from a related party.

I’m sure if you plug ‘business real property & SMSF’ into a search on the ATO you will find the ruling that covers it, from the horse’s mouth.

 

[Ves]

You can defiantly hold business real property in your SMSF – you can even buy it from a related party.

I’m sure if you plug ‘business real property & SMSF’ into a search on the ATO you will find the ruling that covers it, from the horse’s mouth.

You're correct - and I'm pretty sure the current ruling is still SMSFR 2009/1.

 

[sptrawler]

Sorry guys, I made the assumption the investment property was residential.LOL

You guys are probably right and it is a commercial investment property, they are far more common.

If the investment property is residential, seek advice, otherwise you will end up deep $hit.

 

[houtman]

Hi VG,
We did something similar a few years ago, mainly for tax advantages to do with our company.
If it hadn't been for those reasons, or if we were further from being able to access the super then we wouldn't have bothered.
Just be aware that once it is in the superfund it wont be coming out in any form until retirement.
Also you can't use it as collateral for any personal borrowings, and can the govt. keep their snouts out of super.


Looks like you are well set up for a young fella(good job, instro ) so maybe the potential downsides aren't a prob.

All jimho of course.