SMSF and Your Business
Episode 1 – ‘Why Super? Why SMSF?’
Gemma Dale: Welcome to our new series, SMSF and your Business. In this series, we’ll talk to you about self managed superannuation funds, their advantages and disadvantages, and strategies that are designed specifically to allow business owners to super charge their retirement savings. In this short video, we’re going to look at why SMSFs are so popular, and talk to a business owner who has used his own super fund to really make the most of his retirement savings.
I’m Gemma Dale, and I’m the Head of SMSF Solutions at nab. I’ve been working with self managed superannuation funds for over 15 years, and over this time we’ve seen a lot of change. From a small niche strategy largely employed by the wealthy, SMSFs have become a popular way for over 1m Australians to actively managed their wealth for and in retirement.
Firstly, why super? Superannuation used to be an afterthought for a lot of small business owners – often they would think ‘my business is my super’. Superannuation though, is one of the most tax effective investment vehicles you can use. Earnings are taxed at just 15%, and once you retire, you can generally create a completely tax free income stream – no tax on earnings or withdrawals. That kind of opportunity is hard to beat, and it is just one of the reasons why SMSFs are so popular.
Today there are over 560,000 SMSF in Australia, with over 1 million trustees, holding nearly $570bn in assets. The average SMSF has two members (often a couple, although there are lots of other arrangements), who have a combined balance of over $1m. The average SMSF invests about a third of their assets in cash and term deposits, another third in Australian shares, and 20% in direct commercial and residential property. The remainder is split across a variety of other assets. More than half of these assets are now supporting a pension, meaning the member has retired and drawing down an income stream.
So how did SMSF go from a little known and complex structure 15 years ago, to a mainstream wealth management strategy today? There are three main reasons.
1. Control – so long as you follow the law (and there are some tricky laws for SMSFs), SMSFs allow you to have complete control your investment savings. All the major responsibilities fall to you, as the trustee, and for many people, especially small business owners who like to do it themselves, this is a really attractive opportunity.
2. Flexibility – SMSFs have an almost unlimited investment menu. Ultimately, you choose what you’re going to invest in, and how much, and for how long. You need to have a documented plan, a documented investment strategy, and you have to comply with the law, but other than that, you can choose and change investments any time you like, in order to get the most out of your savings.
3. Unique investment strategies – that are available for SMSFs that they can use to really maximise their retiremenet savings. Some of these are available in all funds, but some of them are unique to SMSFs. We’re going to use this series to explore these, and how they can be used by business owners to really optimise their super. Some of the strategies include buying your commercial premises through your super, even using borrowed funds, using super to minimise and even eliminate capital gains tax on the sale of your business assets, and using super contributions to pay for your insurance.
If these attributes appeal to you, then an SMSF could be right for you.
Let’s have a chat to a nab customer who has chosen to manage his own superannuation, and is taking advantage of some of the more exciting superannuation opportunities available.
Gemma Dale: Hi Ivan, thanks for joining us. You’re a nab business customer – can you tell me a bit about yourself and about your business?
Ivan: Great business – we provide IT services, we’ve got 25 staff, and we’ve been in business for 18 years. It’s a growing business (growing slowly but strongly), and we really enjoy it – people love working here.
Gemma Dale: That’s great Ivan – sounds like a really valuable service you provide. Now I understand that not so long ago, you made the decision to manage your own super. Tell me a bit about that decision.
Ivan: I’d been paying rent for 16 years, I had some money invested in super, and I thought “I need to do more with it.” So I did some research and worked out that setting up my own self managed super fund, and then buying a property, was the ideal thing to do to secure my future.
So I looked into it, got an accountant to help set the fund up, then I approached Tanya (my Business Banking Manager) and explained to her what we were doing. She was right behind me and said,
“That’s fantastic. Let’s just get on and do it.”
And so she put the financing together for it, I rolled my existing funds into the new fund and then bought this property.
Gemma Dale: Wow, great strategy Ivan. So you set up your SMSF, used your existing super as a deposit, and then borrowed to buy your business premises. Now your business pays rent to your SMSF, instead of to a landlord, and that rent is being used by your SMSF to pay off the debt, so soon your fund will own the property outright. How do you feel about the decisions you’ve made so far?
Ivan: Absolutely great. We’ve renovated, it’s a great place to work. We’ve decorated, made it really funky for the staff, and they enjoy working here. It’s been a great investment and no landlord anymore! So I’m my own landlord, and the money I’m spending on rent is going into my super fund. It’s a great asset – worth more now than when I bought it, and it’s just going to continue to increase in value.
Gemma Dale: Perfect! Thanks so much for your time.
So let’s have a look at Ivan’s strategy:
1. He set up an SMSF, and rolled his superannuation into it.
2. He saw his banker about borrowing to buy a property.
3. He used his superannuation to make a deposit on the property, and then borrowed the remainder.
4. He purchased the business premises in the name of his SMSF.
5. Now, his business pays rent and contributions to the SMSF, which are used to pay down the loan.
Gemma Dale: These are some of the strategies we’re going to look at in more detail in this series.
In the next episode, we’re going to look at buying commercial property using your superannuation.
Thanks for your time today, and we look forward to seeing you next time.