The Tax Benefits Of An SMSF

In a recent webinar, “Become an SMSF millionaire” we run through the SMSF tax benefits.

SMSFs have a very low tax environment.

Under trust, it says 0% because trusts like discretionary trusts, give their profit to other entities or people in their family group and they pay the tax. 0% is not quite correct for trust but it actually gives it away.

With an SMSF, an SMSF pays 15% tax or 0% tax on the money it makes. So, they are much lower than the other tax rates and that is kind of a high-level overview of the differences between the tax rates.

Why are there two rates for an SMSF?

The first one is 15% when you’re accumulating your balance over the majority of your lifetime. Then you switch into 0% tax when you’re drawing a pension and when you are over a certain age. You can only get that 0% concessional rate on up to $1.7 million per member in pension. So, if you have $3 million in your own fund balance and in your member balance, then you can’t get that 0% concession on the whole lot.

On the difference. So, on the remaining $1.3 million, if you’ve got the total of $3 million in super, you will still pay the 15%. It’s still low and it’s just not zero. Even if you had $50 million in your own pension account, whatever it earns is taxed at 0%.

Benefits of drawing a pension or being in 0% tax mode plays out if you earn dividends from owning shares in super, then you will pay 0% tax. But some other instances are if you own a business through super, or part of a business, then the profits that go back to the SMSF in that pension account are at 0% tax and similarly if you sell an asset.

So what we see is if you buy a commercial property in your forties or fifties, hold it for 20 years and sell it when you are retired and in pension mode, you can make a massive gain and you can do that without paying any CGT.

Pros & Cons Of Paying Insurance Through Super

The benefit of paying insurance through Super is cash flowed from super, so you don’t have to pay it personally and it may be tax-effective. If there is a portion of life insurance that’s usually deductible in super and if you pay for that outside of super, then it is not tax-deductible.

The con is it reduces your super balance, the insurance payments, or it could suck up a lot of your contributions that you put in straight to insurance.

“Payment made to fund” means that if you die, your life insurance pays out. If you’re paying it from super, and if super is the policy holder, then the life insurance payment will be paid to the super fund, but not on your estate. It has to be dealt with by the fund and you can get it to the estate if you’ve set it up that way. But keep in mind that there are two steps if your wish is to get it into your estate.

Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant at https://inspire.accountants/chat

How Your Super Compares To An SMSF

A lot of people ask, “How much do I need in super to consider setting up an SMSF?”

If you Google that question, the suggestions for the normal range is about $200,000 to $250,000 in super. But the idea is breaking even, comparing the costs of your current super to the cost of running an SMSF.

A lot of industry or corporate super funds charge a percentage of your balance. So the bigger your balance is, the bigger your dollar figure in fees will be in the financial year.

If you put $500,000 into your super fund as a contribution, rarely would your accounting fee go up in that proportion. It’s more of a fixed fee for the SMSF.

Regardless: Do you have a good chance of outperforming your current super?

If you are not just looking at the fees and trying to save on the fees, if you go and invest in shares or property that you can’t get in your current super fund, then you will outperform if you do it yourself. Then the fees become still relevant but that’s not the only thing to compare when considering setting one up.

The “SM” in SMSF stands for Self Managed and it requires diligence to set up and run. So, it doesn’t happen by itself. As advisers for clients with SMSF, we are there for a sounding board and they assist with certain functions but we can’t transfer money, and we can’t make investment decisions, you need to self-manage it.

For compliance requirements, there are rules of the game with super and there are big penalties if you stuff it up or you do illegal things. You have to work with someone who can guide you through what’s allowable, and what’s not. And they do require an annual audit by a third-party auditor. So, when we prepare the financials and tax returns for our client, we send that off to a third-party auditor, and they give that a second check that everything is compliant.

Watch the full webinar, ‘Become an SMSF millionaire’ at

https://learning.benwalker.com/courses/SMSFmillionaireweb

How To Create An SMSF Investment Strategy

Some of the things that you should consider in creating an SMSF strategy are:

Risks of your investments

If you’re investing in cryptocurrency, note that it might be extremely risky compared to leaving it in cash, which also has its risks with inflation. You need to basically have a common sense and documentation of the risks and why you’ve chosen that for each of the members.

Diversification of investments and benchmarks for classes of assets

You need to set in your investment strategy and you may target 60-70% of your fund that you want in real property whether it’s residential or commercial. You may want 40% in cash because you want a bit of liquidity, so you have to document what you’re aiming for and keep it up to date. Make sure the range that you are aiming for is what reality looks like.

If your SMSF holds property, and your home or property has increased in price and in value, then you may have a larger portion of your funding property and it may be on the upwards range of your investment strategy.

It is important to make sure that your investment strategy is kept up to date with the market values of your fund.

Document your intended return on investment

Document your intended return on investment and document your overall fund targeting the cash rate plus 5% or an overall return of 20% net of tax or whatever it is.

Borrowings

If you want to explore Borrowings in your fund, it is usually with property.

Insurances

It doesn’t mean you need to have insurance in your SMSF, but you do need to document what you’ve done with insurances.

Liquidity

Liquidity needs to be documented as well. It’s just common sense. There’s a bit of planning with liquidity and cash flow requirements. If you are in pension mode, you need to make an account for cash to pay out pensions. It’s not set and forget so we need to review that each year.

Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant at https://inspire.accountants/chat

300K Gain Tax-Free Case Study

Tax-Free Case study:

A few years ago, we had a client who had a commercial property outside of Super worth about a million dollar value. He is shifting into retirement and he wanted to move more money and assets into Super. So, he transferred that million-dollar property to Super. He wasn’t an owner-occupier, but he received rent for a few years at 0% tax because he was in pension mode.

Within 2 to 3 years, he received an offer to buy that property for $1.3 million. And because he was retired, he paid no tax on the gains. So, he got a $300K gain at the 0% tax because he bought it for about 1 million, and sold it for 1.3 million – a great outcome for him.

Watch the full webinar, ‘Become an SMSF millionaire’ at https://learning.benwalker.com/courses/SMSFmillionaireweb

5 Things To Know About Estate Planning

Estate planning is not just a ‘Will’. Superannuation proceeds after dying is dealt with by binding death benefit nominations. If you don’t have one in place, then that is dealt with under the trust deed. It may be simple for the trust deeds to deal with it if you don’t have a binding death benefit nomination in place, but it may be very difficult for them to work out what to do with it.

Great advice in estate planning is, you need to be certain of this stuff and have these documents in place. Your estate planning costs such as your wills, estate planning, and all those fees associated with it can easily be thousands of dollars and you can pay that from your SMSF. We help our clients through this process ourselves and they regularly pay if they have an SMSF from their super fund to get this stuff done.

It can be paid to the estate to be dealt with under the will. But it’s not guaranteed if you don’t have a binding death benefit nomination in place.

If you’ve got an insurance policy worth hundreds of thousands of dollars or millions, then you die, that’s going to pay out. So, all of a sudden you could have heaps of money in super. You will probably not care too much if it’s you that’s gone, but if it’s someone else in your SMSF that this is happening to, then you’ve got to deal with it. A massive asset and no documentation to guide you, or give certainty around it.

Everyone is going to need estate planning in place because one of the certainties in life is death.

Watch the full webinar, ‘Become an SMSF millionaire’ at https://learning.benwalker.com/courses/SMSFmillionaireweb

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The 3 Key Aspects of Incapacity Planning

in a webinar, “Become an SMSF Millionaire” we talked about the 3 key aspects of Incapacity planning.

If you do lose the capacity to make financial decisions for yourself, or another member of your SMSF is in that situation, always have an enduring power of attorney in place for every member of your SMSF.

The Super Fund requires all members to be Trustees or Directors. If you’re a member in a fund, you need to be a Trustee of the fund, and if it’s Individual Trustees, then we don’t recommend that anymore. If it’s a Company Trustee, you need to be a Director. But the Director or the Trustee can be the enduring power of attorney for the person who’s lost capacity, and it can’t just be a general power of attorney.

Also, you need to make sure the Trust Deed or the SMSF Deed and Constitution of the Trustee is set up to allow this in the event of incapacity. A lot of the good Deeds at the moment should be fine around this stuff but the bit that you need to make sure is everyone having an enduring power of attorney in place.

You won’t want to be in these situations, and you can’t access money, you can’t invest, you can’t sell an asset because you haven’t got some of this stuff sorted, and it creates a massive problem that you have to work through legally.

Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant at https://inspire.business/chat

Risk-Takers & Asset Holders Explained

Here at Inspire, when there’s a couple in the family group, we designate one of them to be the risk-taker and one of them is the asset holder. And when we’re running the business, we are setting up structures for that family. When they are buying and investing in property or shares, we make sure it’s done very specifically.

Risk-taker roles are the director of the trading entities, the director of trustee companies if a trust is running the business. And ideally holds no assets in their own name. For instance, if the family home isn’t in their name.

In terms of the asset holder, they’ve got control of the assets and holding entities such as asset trust and bucket companies. 100% ownership of family assets like home, cars, and their typical roles in structures are the shareholders, trustee of asset trusts and the appointor of trusts.

What if the asset holder just buggers off and leaves the risk-taker without anything, nothing in their own names?

We’ve been told by multiple family lawyers that even though the assets are spread between the spouses with 100% in one and zero in the other, all of that is seen as marital assets. In the case of relationship breakdown or divorce, it’s not just one person who gets everything and the other gets zero. The idea of that is because the family court is the court that can look through all this asset protection and structuring.

Need to speak to an accountant? Book a ZERO cost 20 minute strategy call with an Inspire Accountant at https://inspire.business/chat

Why Division 7A Was Brought In

Why Division 7A was brought in? If you were a sole trader and you made $1M, here are some options:

Option 1:

Taxed in your own name at 47% top tax rate. 47% is the highest marginal tax rate of an individual and it’s higher if they have a hex debt of another 8-10%. So, you are above half of your profit going to the taxman and more again if you don’t have private health insurance. For argument’s sake, let’s say 47% tax is option 1 which means on a $1M, you’re left with $530,000 in after tax profit.

Option 2.

If you earn a $1M profit in a company, and you meet the requirements for the reduced company tax rate of 26%, which is a flat rate of tax and it is not marginal, you’re left with net after tax profit of $740,000.

Whether a million bucks was earned in a single year, or over a couple of years, the point is, In a company, you end up with a lot more after tax money. The whole idea of Division 7A is for most people to get that out and spend it.

Here’s an example:

Clive Palmer wants to buy a bigger boat. He can buy a bigger one if he funnels the million dollars in profit through a company versus his own name. He’s got more net cash if he structures as a company versus taking it out in his own name.

What he would do in this case is, he buys a boat in a company name. It is still a Division 7A issue if the asset that he buys is a personal asset like a boat, for instance. If it’s nothing to do with his business, then he has Division 7A consequences on his boat even if it’s in the company name.

The second option is where he takes the cash out of the company into his own name and buys a house.

He buys another Gold Coast mansion, so instead of paying tax on the profit in his own name, the company pays less tax, and it loans him the net profit. He still puts it through the company, but instead of paying it out as a salary or a dividend, he loans it out, so he doesn’t pay that extra tax. Basically, it’s a way of taxing that money that’s loaned out, or personal assets that are bought in the company’s name.

Watch the full webinar, ‘Solving Company Loads Division/7A Problems ’ at https://learning.benwalker.com/courses/solvingcompanyloansD7AP

When Is A Bucket Company Worth It?

When is a bucket company worth it? A webinar attendee has said, “In the future, the personal income tax rate will reduce for most people to around 30%.”

Yes, we have been signalled by previous budget releases, but we still have a high marginal tax rate which is still above the $180K of income or more. You still pay probably 47% or similar, but the 30% tax rate will be a lot larger. The band will be from memory from about $45k to maybe $180k, or $120K. It is a larger band which should be similar to a company tax rate.

“Considering the admin fee (accounting fees of running a company) how much profit is worth to set up a company structure as a bucket company? So, when is it worth having a bucket company?

This really comes down to the family situation. $120K right now is where the tax rate goes from 34.5% to 39% tax. So at that stage, if it’s just you, it’s already better off to go to a company. But if you can spread income between you, your spouse, and if you have adult children that we can give some money to, then the cost benefit of a bucket company might only come into play at $300K, $400K, or $500K in profits.