Self-Managed Super Funds (SMSFs) are increasing in popularity as retirement savings structures. Investors often choose to set up SMSFs instead of using retail super funds because they prefer to have control, flexibility and transparency over their money. There are also tax incentives to using SMSFs in the form of lower rates of income tax and capital gains tax.
Control and versatility
One of the key benefits of using an SMSF is investment control and versatility of investment products. Compared to retail or industry super funds, investors can choose to invest in a broad range of assets, including listed and unlisted shares, collectibles, term deposits and residential and commercial property. Investors with less knowledge in finance and share trading may choose to invest in real property, while experienced property investors and small business owners may look to establish an SMSF to hold real property for the tax benefits it provides. One often-used structure for business owners is to purchase the commercial property from which the business is operated using their SMSF and then lease the property back to the business. This structure provides not only secure tenancy for the business but also steady income for the SMSF which is entitled to the benefit of a lower income tax rate.
Since the amendments to the legislation concerning limited recourse borrowing arrangements in 2010, SMSFs have been able to take out loans to purchase residential or commercial property provided, among other things, that the recourse of the lender is to the specific property only and that the borrowing is not being undertaken to improve the property. Generally, an SMSF may borrow up to 75% of the purchase price of a property. This means that, where the SMSF meets the servicing requirements of the financier, if the SMSF holds $300,000 in cash it may purchase an investment/commercial property up to the value of $1 million (including legal costs, transfer duty, and other costs).
Nearly all superannuation funds offer the ability to take a tax-free pension as an income stream upon retirement. An SMSF additionally allows more flexibility when it comes to timing of contributions, amounts of contributions, allocation of earnings and implementation of reserves. A tailored investment combination provides trustees with the ability to minimise the amount of overall tax that the SMSF members pay within the fund by utilising concessional tax treatment and franking credits.
For example, if an SMSF has income of $200,000 for a financial year, the tax payable is 15% x $200,000 = $30,000
If $70,000 of the $200,000 represents fully franked dividend income from shares in a public company (providing $30,000 franking credits), then the tax payable is nil because the franking credits offset the income tax payable
The tax benefits in purchasing properties via an SMSF in comparison with purchasing personally can be summarised in the table below:
Purchasing Property in Personal Capacity v SMSF
|Deposit / Transfer Duty/ Legal costs||Personal Savings||Funds in Super|
|Loan Repayment||30 years||Up to 25 years|
|LVR||Up to 90%||Up to 75%|
|Rental Income Tax Rate||19% – 45%||0 – 15%|
|Marginal Tax Rate||19% – 45% + Medicare levy 2% (potential)||0 – 15%|
|Capital Gains Tax||Assessable income taxed at marginal rate||0 – 10% (if property held for more than 12 months)|
Superannuation in general can be a structure that protects members from litigation and bankruptcy. If an individual’s assets are owned by an SMSF, such assets are protected from creditors in the event of business failure. The legislative policy behind this is that superannuation is intended to fund an individual’s retirement, so SMSF assets cannot be accessed either by the member to revive the failing business (prior to preservation age) or to creditors in the event the member becomes bankrupt.
Establishing an SMSF
The decision whether to set up an SMSF should first be discussed with financial advisors such as accountants and financial planners. It is important to understand the responsibilities involved in acting as the trustee before establishing the SMSF, and once it is established ongoing professional advice should be sought as superannuation is a highly regulated and technical area. If you would like to discuss the use of an SMSF structure for investment purposes, please don’t hesitate to contact us.