Follow these 10 smart steps before making the move.
Owners of small-to-medium enterprises (SMEs) can gain a lot from running their own self-managed superannuation fund (SMSF), although it’s not without its challenges.
Here we outline a few of the positives as well as some of the negatives.
1. You’re in control of your retirement
Most people who run their own business like to be in control of their working life; chances are they enjoy making their own business decisions. Big business holds little or no attraction for them – most of the time the big end of town is politics on steroids as well as slow to react and glacial at making business decisions.
It’s … well, big business! It’s a similar thing with retirement savings. Why trust your retirement savings to large organisations where you’re just a number? Running your own super fund allows you to have the same level of control over your retirement money that you exercise in your own business.
2. There is a place to invest if you sell your business
When you sell your business, you may be entitled to various capital gains tax (CGT) concessions. These concessions also give you the ability to make larger super contributions with your business’s sale proceeds of up to A$1.315 million (in the 2013-14 financial year).
This special limit is in addition to any other contributions you make to super.
Accessing these small business CGT concessions can be tricky and you should get advice from a tax specialist on your eligibility to access these rules.
3. You can own your business premises
A very popular strategy among SME owners is to have the SMSF own the business premises. This frees up working capital for your business, can have estate planning benefits, and also offers protection of this important asset from creditors.
In some states – New South Wales, Queensland, South Australia Victoria and Western Australia– you may be eligible to receive stamp duty concessions when you transfer the business premises you own into your super fund. How you access these concessions varies from state to state, so get good advice from a solicitor knowledgeable with the super and property laws.
4. There is an opportunity to borrow to invest
Borrowing money within an SMSF to purchase an asset is a hot topic. Officially, these transactions are known as limited recourse borrowing arrangements (LRBAs).
The loan has to be a special type of borrowing. It must be non-recourse, which means if the super fund defaults on the loan, then the lender can’t try and claim on the other assets of the super fund to cover its losses. (This is unlike most mortgages in Australia, where the mortgagee can claim on the other assets of the mortgagor.) Also, while the loan is outstanding, the asset has to be held in a holding trust.
There are some interesting strategies that people use with this, for example, borrowing money to buy your retirement home. If you like property investing, then this strategy might spike your interest.
Be careful with LRBAs. If you implement it incorrectly, you can find yourself paying ad valorem stamp duty on property transactions three times!
5. You can own a wider array of assets than large retail funds
Retail and industry super funds allow you to own unitised managed funds. Some might give you access to 20 such funds, while others might allow you to access more than 1000 different investment options. Some funds might allow you to invest in Australian Stock Exchange listed shares.
But that’s it.
With an SMSF, assuming your trust deed permits, you can own managed funds or listed shares if you wish but you can also own property, artwork, collectibles and a range of other assets.
6. Income in retirement can be provided
Large super funds nearly always force you to use managed funds when providing your retirement income. This forces you to trade with asset values, which is fine if these values increase, but when the value of assets vary often, or fall sharply, it ensures you’ll run out of money quickly.
In an SMSF, you can structure your affairs to be an investor and earn income from your investments, thereby avoiding the ugliness of trading assets to generate a return. This is a major advantage.
7. Estates can be better planned
It’s frequently acknowledged that you can achieve a more certain estate planning outcome in a small fund compared to large super funds. This can be especially important if you have a complex blended family.
It would be remiss not to mention some disadvantages of running your own super fund.
1. Your access to capital is restricted
Thirty years ago, many small businesses contributed to super, claimed a tax deduction for those contributions and then loaned the money back to the employer. You can’t do this anymore. You super is locked away until you retire.
2. The buck stops with you
There are heavy fines against your super fund and potentially you personally if you breach any of the super and tax laws that govern super funds and SMSFs in particular.
3. It may be more expensive
Running your own SMSF may prove to be a more expensive option than investing your super monies in a large retail or industry fund. As there are certain fixed costs in running your own fund (the Australian Taxation Office’s supervisory levy, audit and accounting or administration fees), the size of your fund will usually dictate the “cost effectiveness”, or not, of doing it yourself. Typically, you should have at least A$250,000 to invest in super if you wish to establish a SMSF.
Tony Negline has worked in financial services for more than 25 years and has been heavily involved in self-managed super funds since mid-1994. He writes about SMSF matters for a wide range of audiences including accountants, auditors, financial advisers and SMSF trustees.