Self Managed Super Funds (SMSF’s) are a popular option for those seeking control over their retirement savings, but ongoing costs and trustee obligations realised by everyday Australians can be onerous when compared to alternatives. So is there still a case for using an SMSF? The short answer is ‘yes‘ dependent on your situation.
The following details some specific groups of people that could make great use of the flexibility allowed when investing through an SMSF, specifically in relation to business real property:
Business Owners
Business owners can make great use of superannuation. Having the right SMSF and investment structure in place can open the door to ownership of your business premises. This can provide you with access to your superannuation balance to acquire this property.
For instance, you purchase a warehouse for your business using your superannuation balance. You also borrow money to meet the full purchase price. The warehouse property is under the name of your newly established SMSF and the SMSF owns the property.
Instead of your business paying rent to a landlord, your business pays rent directly to your SMSF and claims a tax deduction for doing so. Your SMSF receives the rent money however only pays tax at 15% as afforded to the superannuation environment. Once you fully retire and assuming someone else is using the warehouse, any further rent received by your SMSF is tax-free.
Medical Professionals
It’s often suitable for medical professionals to look at the use of an SMSF, particularly those medicos that form businesses in partnership. Due to high levels of personal income, professionals such as general practitioners or dentists will have a considerable accumulated superannuation balance, which can be used flexibly to purchase commercial property.
For instance, a dental practice comprising of four dentists working together in partnership has several overhead costs like rent, receptionists and electricity. These costs are split equally at 25% per partner. Their business property comes up for sale and after getting advice from a financial adviser and accountant they decide to purchase the property via a unit trust. The recommended unit trust structure allows them to each hold their interest in the property, through superannuation, which effectively results in rent distributed between their SMSF’s.
Each dentist’s superannuation will hold 25% of the unit trust or 25% of the property value. When the business pays ongoing rent, money is transferred to the unit trust and then distributed to their SMSF.
Each dentist receives a tax deduction for rent paid and the rental income received by each SMSF is only taxed at 15% within superannuation, tax-free in retirement.
Farmers
Not only can SMSF’s invest in a commercial premises but they can also acquire primary production land used in farming and agriculture business operations. This may be suitable for farming families looking to boost their savings for eventual retirement whilst keeping ownership of the homestead.
For instance, after seeking financial advice, a farming family who owns their farm outright decides to use an SMSF structure to acquire their farmland. They set up a company to carry on the income-producing primary production business so that the business can pay rent and lease the property from their SMSF.
Instead of not paying rent at all, the new company structure pays rent directly to the SMSF and claims a tax deduction for doing so. The SMSF receives the rent money however only pays tax at 15%. Once mum and dad fully retire, and assuming the kids are using the land to carry on an income-producing primary production business, any further rent received by the SMSF is tax-free.
The homestead can be carved out of this transaction, which enables you to retain a tax exemption for your home and hold in your name.
Rules and eligibility – How do I go about this?
The sole purpose of your SMSF is to eventually provide a source of income for members in their retirement years as opposed to running your business. You need to ensure your business interests and dealings remain separate from your SMSF and any superannuation decisions are made in the best interests of members. Additionally, a formal investment strategy for your SMSF should reflect the investment choices you make and confirm why any chosen pathway is suitable for you as fund members.
It’s essential that you seek professional advice before deciding as you’ll need the right oversight, accounting records and structures in place. This is just one step of your financial life journey.
It can pay to establish a long-standing relationship with someone you can trust.
Sean Hocking works with individuals and their families to provide peace of mind and clarity around their financial future. Having a roadmap in place which clearly articulates what’s important in the years to follow gives his clients the confidence to make clear and informed decisions throughout their financial life journey.
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