With the end of financial year looming and new super choice legislation set to be introduced, the time might be right for business owners to consider their own superannuation options and the DIY option.
Despite being compulsory, your superannuation payments are an opportunity to build your financial future throughout the course of your business life. And while there are many types of superannuation funds to choose from, if you want to control what actually happens with your money once it’s injected into your chosen fund, a self-managed superannuation fund (SMSF) or DIY fund might be the way to go.
SMSFs are approved by the Australian Tax Office (ATO) and have no more than four members who are also trustees of the fund, and are ultimately responsible for the trust’s activities and compliance. According to information on the Australian Superannuation Funds Association (ASFA) website (www.superannuation.asn.au), the permitted structure of a SMSF varies depending on the number of members and whether the trustee of the fund is a company or group of individuals, and so it’s important to establish which structure your fund will take early on.
There is a legal requirement for all superannuation funds to follow an investment strategy, however the whole idea behind SMSFs is the members/trustees get to decide what that investment strategy will be. There are a few compliance restrictions and conditions, and the ATO website (www.ato.gov.au/super) is a good place to start checking them out. In general though, people set up SMSFs to provide them with an opportunity to control their own affairs; and they generally use the fund as one part of an integrated strategy to build assets that will provide their retirement income.
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Major Benefits
“Most people like to control their own money,” says Barbara Smith, CEO of SMSF specialist company, Online Super. “Especially small business people because they’re already doing that and it’s a natural step for them to choose to have their own super fund.”
Smith says a key advantage to small business is that they can own their business premises in their SMSF, and this has a number of benefits. “They can pay themselves rent and claim a tax deduction at their normal marginal tax rate, and then only pay tax on the contribution that goes into the fund at 15 percent, and that’s the same as the rent.
“Another benefit of owning your business premises in your super fund is that it’s protected against creditors up to your pension reasonable benefit limit, which means about $1.24 million value is protected against creditors if you should unfortunately get into trouble.”
ASFA also suggests operating your own SMSF can lead to investment savings. “Where an individual has a large superannuation account balance (more than say $200,000) an SMSF can allow access to investments at the wholesale level which have a lower fee structure. Direct holdings of investments by a SMSF can also lead to lower investment costs, although a SMSF will have fixed operating costs as well,” says Smith.
The main ongoing costs include having your fund audited each year, which is compulsory, and having your tax return prepared. Smith says that while some people can do this themselves, many will use an accountant or a specialist. With a fairly straight-forward SMSF, she believes these fees should stay relatively stable. This is an advantage as your fund grows, unlike managed funds where they charge a percentage of the funds under management.
Despite their benefits, SMSFs aren’t necessarily for everyone. The ASFA website states, “people who start SMSFs generally also have the financial and management skills, and the available time to competently perform the tasks required by a trustee”.
Smith agrees, adding that this is why SMSFs are so popular with small businesses. “They don’t suit somebody who is sloppy and can’t keep their hands off the money. But most ongoing small business people don’t fall into this category because they’re used to budgeting and balancing their own money and putting money aside to pay the tax.”
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She explains that your SMSF is only as complex as you make it and there is a lot of assistance out there for people who need help at any stage of the SMSF process. “It’s like anything, you can live on an acre of land and you don’t have to do all the gardening yourself. It’s just the same with a SMSF, you can outsource most of the work but you need to make your own investment decisions, and that’s what people like.”
But, she stresses, because setting up a SMSF is more than simply purchasing a trust deed it’s important to seek advice, at least at the outset. You can nominate the start date of your fund if you don’t want to use it straight away. “So even if you set it up today, you can register it all with the Tax Office but you can say you want to start it on July 1 to begin in the new financial year, but you wouldn’t set it up to start in July 2006.”
Smith says you can start a SMSF for as little as a few hundred dollars but packages are available for around $2,000 from superannuation specialists that include everything from the trust deed, set-up advice, training courses and ongoing workshops. “There isn’t anything legal that says you have to have a minimum amount in your fund,” she says. “I’ve seen people set up with $30,000 and because they’re contributing to it on an ongoing basis it works for them. A good benchmark I’d say is looking to get to $100,000 in the foreseeable future. Everybody has a different opinion on how much is viable, and so it’s whatever suits you.”
