Heading should be 'Related SMSF loan'. Edit does not allow heading to be updated. Darned Auto spell checkers
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For the technically minded.
From a strategic POV there are options regarding loans to Pension SMSF.
Background. A few days ago the feds announced that a loan taken by a pension SMSF will only incur the credit transfer, if taken out post 1/7/2017.
This MAY open up some interesting planning opportunities for a small % of retiries.
Example:-
Current SMSF in Pension Phase $2.6m
$1m in personal account.
No ability to contribute further funds into SMSF as fully funded using the 3 year advance contribution limits.
Post 1/7/17
$1.6m. in Pension and $1m in Accumulation. And $1m in personal account.
Possible strategy:
Prior to 1/7/17, SMSF borrows $1 from trustee member.
At 1/7/17 pension account now has $2.6m and a liability of $1. Accumulation account has $1m. Personal account is zero.
Loan is based on a 10 year payback with interest at a commercial rate of 5.0%
Loan and principle amounts are paid from the accumulation account, on a regular basis (half yearly to keep accounting easier).
Outcome at end of ten years:
Assume pension, accumulation and personal accounts would all earn at 5%, just to keep the numbers manageable in the example.
The trustees would be receiving about $50,000 PA interest (in the early years) which is probably non taxable for pensioners. And in any case would be no different to have left the $1m in their own name and be earning a return on it. So the income can be considered a wash.
The accumulation fund would be reduced to zero, prior to the 10 years.
The pension. account would be +$1m, and the personal account would be back to $1m plus the interest.
A net effect of zero. However $ 1m has been transferred from Accumulation to Pension account over me above what otherwise could be achieved.
The impact of this transfer is that an additional $1m is now in a tax free environment rather than taxable at 15%. Using the 5% rate of return, this would equate to $7,500 PA, or $75,000 over the ten years.
The SMSF member would be recieving, each year, $80,000 (or more) pension (5%), and $50,000 (reducing) interest from the loan. So in year one the income would be about $130,000. In addition the capital would be being paid back so in year one around $100,000 would be paid.
The above numbers are for example and may not reflect a realistic probability, but are used to show the potential of the strategy.
Would be interested in any feedback from those who can get their head around the above.
Cheers.
