Holiday Home into Superfund - Financial Planning Litigation

Another instance of bad financial planning advice that we have come across recently, where the advisor gave advice without any regard to capital gains tax, stamp duties, income tax and superannuation fund regulations.

The financial planner advised an investor to put his holiday home into a self-managed superannuation fund and for the superannuation fund to borrow so that the holiday home would have been negatively geared.

The advisor did not understand the implications of doing this, which are:

1. Capital gains tax would have been incurred on the sale of the house to the super fund - the advisor did not know that this transaction triggered a "sale" - with CGT payable of approximately $150,000.
2. Stamp Duty would be payable of approximately $33,000.
3. The super fund is prohibited from purchasing property directly from its members (some exclusions apply) – the fund becomes a non-complying fund which has serious consequences – generally the total of the fund’s assets will be subject to the highest marginal tax rate – approximately $450,000.
4. The super fund will then have to sell the property to pay its fines and become compliant, incurring sales costs of approximately $25,000.
5. No family member is able to use the “holiday house” whilst it is held in the super fund.

In total, the additional taxes, fines and selling costs would have been almost equal to the value of the holiday home.

Luckily the investor came to us for a second opinion as to this financial plan and we were able to set him straight. The alternative was he would have lost his holiday home and he would need us in litigation against his financial planner.