Nestor was recently referred to us by one of his colleagues. He is medical professional in his late 50s who owns and operates a medical practice. His practice turnover is approximately $1,500,000. He owned the business premises in his personal name and leased it out to his business for approximately $100,000 per annum.
Nestor was thinking about selling his commercial property to pay off his home loan and invest the remaining proceeds into super.
At the time, the council was in the process of rezoning the area in which he owned his business property, which would turn the location into a medium density residential development site. This would result in significantly uplifting the property value, which was already valued at $1,200,000.
He had $98,010 only in super and had an outstanding loan $350,000 on his main residence.
The problems before we got involved
- If Nestor sold his business property after the property was rezoned for medium density residential development, this would result in a significant capital gain and tax liability on the sale
- Nestor was paying in excess of $46,000 in taxation on the rental income generated from his commercial property
- If Nestor sold his business premises, he would more than likely have to relocate his business, causing unnecessary stress and potential loss of business
- If Nestor was successfully sued, his commercial property would be at risk of being taken because the property was owned in his personal name
- Nestor had insufficient funds in his super accumulating in a low tax environment, minimising his ability to tax-free build wealth
How Tax Effective helped Nestor
- After considering Nestor's situation, we advised him to establish a self-managed super fund and roll over his existing super balance
- We helped Nestor make a partial in specie transfer of his commercial property ($850,000 – being 70% of the property value) into his self-managed super fund
- We applied the small business tax concessions to ensure the in specie transfer was made tax and stamp duty free
- We established a limited recourse borrowing arrangement and borrowed the remaining $350,000, which was paid directly to Nestor from the bank to complete the property transfer to his self-managed super fund
- We advised Nestor to use the $350,000 proceeds to eliminate his home loan, making him personally debt-free
- We advised Nestor to make personal deductible contributions to his super up to the maximum allowable limit to boost his super balance
The result so far
By implementing our advice, Nestor achieved the following:
- By accessing the small business tax concessions, we were able to eliminate all capital gains tax payable on the transfer of Nestor’s commercial property into his self-managed super fund
- By transferring the commercial property into Nestor’s self-managed super fund, the fund was also exempt from paying $51,490 in stamp duty
- We successfully increased Nestor’s investable super value from $98,010 to approximately $1,298,010
- With a maximum 15% tax on super income, Nestor saves approximately $31,500 per annum in tax on the rental income paid to the self-managed super fund, increasing the net return on investment
- By transferring his commercial property to his self-managed super fund, his property has complete asset protection from business or personal lawsuits
- Nestor is now personally debt free and should be able to eliminate his SMSF debt in under 5 years
- When Nestor retires, he can sell the property in his super tax free, saving hundreds of thousands of dollars in taxes
- Should Nestor hold onto his property inside super, he will pay no income tax on the rental income received on the property when he converts his super into pension. As a result he should receive over $100,000 per annum in tax-free rental income from his SMSF commercial property
- By paying off his home loan, Nestor significantly increased his personal cash flow and is looking to reallocate the surplus into funding additional investment, significantly increasing his wealth creation potential
Post becoming clients
We are currently in the process of implementing a online accounting package that will simplify his business finances and give Nestor a complete overview on his business 24/7.
We are also helping Nestor create a personalised financial roadmap to help him grow his wealth and reach his personal life goals.
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