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Quiz: Instalment Warrant - How to magnify growth
Answer to win 2 movie tickets (see below)
John is 61 years old is married to Joan also 61 years old,
both are retired. They have been managing their Self Managed Super fund (Fund
A) for last five years. They sold their own house in January 2008 for $1.2M and
setup another fund (Fund B) in January 2008 to avoid adult children paying tax
on growth of assets at the time of death and deposited undeducted 900K ($450K
each) to this fund and commenced a pension. With the balance they purchased a
decent villa in north coast.
John & Joan Fund A has $600K in it, all deductible
contributions ($300K shares & $300K property - land) the fund was converted
to pension phase on 1st July 2007.
They want to develop land of Fund A which has been recently
rezoned as commercial shopping; however at the moment this land is not
generating any income. There is not enough money in Fund A to develop this land.
They will need another $600K to develop and build 5 shops which will generate $150K
rent on total investment of $900K ($300K land + $600K developing cost).
John & Joan think that developing this land is a good
investment, since tenants are ready to sign long term leases with every year rental
increase in line with CPI, along with capital growth. But it will take two years
to build and they need at least minimum 4% pension to live as they are retired.
Which legal option would you recommend to John and Joan for best
result for them and their adult children?
1) John
and Joan should not develop the land as Fund A does not have enough cash to
develop the property and should sell the land for $600K market price;
2) Use
Fund B's cash to develop land owned by Fund A as tenants in common;
3) Fund
A should borrow from Fund B via an instalment warrant;
4) Fund
A should sell the property to Fund B for market price of $600K. The property
can move to Fund B as an instalment warrant. Then fund B can use its $600K of
its $900K to develop the property, pay interest to Fund A and pay pension to
the two pensioners for the next two years, Fund A can sell shares to pay
pensions ;.
5) Fund
A should sell the property to Fund B for market price of $600K for cash. It
will have only $300K cash left, Fund A should lend (via an instalment warrant)
to Fund B, $600K cash to complete the purchase - so that Fund B can develop the
land for $600K and pay a pension to the two pensioners for the next two years,
Fund A can sell shares to pay pensions.
6) The
above options (4) and (5) cannot be used as any related party (including a
SMSF) cannot lend money as an instalment warrant to a SMSF.
7) Commute pension of Fund B, rollover the cash
in Fund A, then commence a pension and develop the land for rental income. Ignoring
any tax adult children may have to pay on growth of rental property.
Please answer to quiz@ucservices.com.au
with your 2 line reason for your answer. First 5 correct winners will be mailed
2 movie tickets. Please answer with your mailing address before 10th June.
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