Self Managed Super Funds
What is a SMSF and is it right for you?
Elodus Financial is your local SMSF specialist. Our advisers have years of experience and are accredited through the University of Adelaide.
Self managed super is one of the largest and fastest-growing types of superannuation in Australia. There are several advantages to owning a SMSF such as greater control over your investments, flexibility and transparency. However, there are also some very important facts to be aware of when considering whether a SMSF is right for you.
Cost – Do you have enough in your super fund for SMSF to be a cost-effective option for you? As a general guide, the ATO suggests a minimum of $200,000 in order for SMSF to be viable, given the costs in setting up and maintaining this type of fund.
Time – It is great for you to have control over your super, but do you have the time required to manage a SMSF? Administration, compliance reporting and research can take up to 8 hours per month.
Expertise – Setting up and managing a SMSF requires significant input into strategy and planning, as well as compliance and administration. You need to be sure that you have the appropriate knowledge and access to advice in order to gain the most benefit from this type of fund.
Exclusions – There are several limitations with a SMSF. You need to be sure that you understand exactly what you can and cannot use this type of fund for, especially when it comes to purchasing property.
Talk to us today about how we can assist with all of your superannuation needs.
When our client, Tim, first came to Elodus, he owned a property in his SMSF which also had quite a lot of cash in bank accounts. The fund was in the ‘Accumulation phase’, where Tim was building and accruing assets for his retirement. Tim is a business owner and the investment property was rented to his Company for the use of his employees. One very important consideration for a SMSF is the rule relating to ‘not providing financial assistance to members or relatives’. Simplistically, this means that a benefit must not be received by a member, their family or a business they control. It was considered that renting the property to Tim’s company’s staff may be in breach of these rules. SMSF’s are heavily scrutinized and are being specifically targeted by the ATO because breaches are common and mistakes are regularly made. In the case of ‘non-compliance’, penalties include significant fines and the claw back of previously received tax benefits. These can, in a worst case, be close to half of the value of the fund!
With the property requiring significant maintainace and the market being particularly buoyant, the sale of the property was a real option. However, with its value being $400,000 and its original purchase price $150,000, there was a capital gain of $250,000 that would be realised. At the flat rate of 10% in super the ‘capital gains tax’ (CGT) would be $25,000. Did Tim want to pay that? I think you know the answer!
As Tim was over 55 and met a ‘condition of release’ he could convert his SMSF ‘Accumulation balance’ to a ‘Pension Fund’ while still working. This is called a ‘Transition to Retirement’ strategy. Once this occurred, the property was sold. One of the many benefits of a Pension Fund is that income produced by its assets is not taxed and, most importantly for Tim, there is no CGT payable! The minimum pension that has to be taken from the Pension Fund was 4% of Tim’s fund balance. As he was still working, this was used to fund $35,000 in tax deductible super contributions
The proceeds from the property sale were added to the existing cash in Tim’s super fund which was only earning 0.2% . Working with Tim’s Bank, we assisted the SMSF to apply for and take out a ‘limited recourse loan’ and purchase a much larger commercial property valued at close to $1,000,000 which was tenanted and returning a strong yield. While interest rates were so cheap, the loan was fixed for 5 years at less than 5% with the expectation that the cash in the fund could be invested and would earn a lot more than this over time.
The new property was rented to a third party on an ‘arms length basis’, meaning the super fund was definitely complying and being used for the purpose it was intended. Leaving enough for liquidity in the fund (utilising a high yielding, online, variable savings account with an interest rate of 4%), the residual cash was rolled into a retail Pension Plan and used to purchase a diversified portfolio of managed funds comprising Australian shares, International shares, listed property trusts and Australian and International Bonds.
The upshot of this strategy was an immediate $25,000 tax saving, having Tim’s superannuation assets in a largely tax free environment, better diversification across asset classes, the building of a larger super base, assets working properly and efficiently, gearing appropriately with low interest borrowings, obtaining better returns, reduced fees, proactive advice, ongoing management and, probably most importantly, the knowledge that the fund was complying. This meant little likelihood of the ATO auditing the fund and being able to apply penalties. At the same time, a ‘Corporate Trustee’ for the super fund was put in place (Tim had recently divorced and his wife had resigned as a member – there must be 2 trustees or a Corporate trustee for the fund to be complying – it was not at the time), an appropriate investment strategy was prepared and a ‘Binding Death Benefit Nomination’ put in place to ensure Tim’s wishes could not be challenged in the event of his death. Elodus ensured that all stakeholders (our client, his accountant, solicitor and banker) were all ‘on the same page’ and working together to obtain the best possible benefit for Tim.