Why You Should Never Set Up An SMSF Without A Corporate Trustee

We will never, ever, ever, ever, ever set up a self-managed super fund without a corporate trustee.

There are administration benefits to it and the estate planning benefits are insane when you compare it to individual trustees. Individual trustees are relatively nightmares compared to corporate trustees.

A question i’ve been asked is “Why are 80% of new SMSFs using individual trustees rather than corporate?” My guess would be: simplicity at the setup, and also price. It will be cheaper by roughly $1,500 maybe, maybe a bit less than that, to set up individual trustees rather than corporate – but I will never do it.

If a client said, “Hey, I want an SMSF, and I insist on an individual trustee in my setup” I will say, “No, I won’t do it. Go somewhere else to set it up.” Even the admin is not great. We have helped clients unwind that and transfer from individual to corporate trustees. But again, even there’s some on the call today who have done that before, and even the paperwork for it, and the time it takes to do that is crazy.

If you are an individual trustee, any new members, or any existing members, or members who die, you need to do all that paperwork every single time. It is not fun.

What You Need To Realise Before Setting Up An SMSF

A bit of a warning to people who are considering setting up an SMSF. The “SM” in “SMSF” stands for “self-managed”. So you actually have to be actively engaged in making decisions about what you invest in, about doing the documentation and the compliance side of things, and making sure you’re doing the steps needed to look after your money.

As accountants, our role with the SMSFs we look after, is to hold our clients hands through that process – but it definitely isn’t us doing everything. You do need to be actively involved in that. There’s things that we need to make sure you’re up for when setting up an SMSF – it’s not a “set and forget” thing, but the benefits are huge. Huge, huge, huge – if it’s done right.

Is It Hard To Get Finance In An SMSF For Share Or Property Purchase?

I don’t think the bank is going to lend you for a share purchase (margin lending in Super). But, you can under certain rules, fund a share purchase with outside of Super money.
You can lend it to your SMSF to buy shares. However, it is complex and you would need to have a good reason why, but it is possible.

With property purchase, it’s not really too difficult. In fact the application form for finance in Super is actually three or four pages long for some lenders. If anyone’s gone for finance recently outside of super, it’s usually 30, 40 pages. So it’s actually an easier application process, in most cases with SMSF funding.

How To Get Your Business Ready for After JobKeeper

For some businesses, the end of JobKeeper 1.0 might have been 27 October 2020. But if you are eligible for JobKeeper 2.0 going forward, then your endpoint for JobKeeper is potentially from January 2021 onwards or from April 2021 onwards.

Some things to check, is your business making a profit without the stimulus measures? So cash flow boost and JobKeeper. We’ve got a recording that goes through your Xero file, how to run the reports and separate out your stimulus measures so you can see your profitability without JobKeeper and the cash flow boost. If you’re not making a profit, then you really need to make some business decisions and see if you need to reduce your expenses, how to bring sales in and that sort of thing.

We’ve been seeing a lot of business owners from a personal expense perspective, review what they’re spending their money on. Even right at the start of COVID, that happened with a lot of our clients. You do need to review your expenses and adjust if needed. Make sure to also put aside a cash buffer.

I’ve noticed that quite a lot of our clients have lots of cash in the bank, not necessarily from trading activity or operating profit. It’s actually been from the cash flow boost or the JobKeeper payments. They’ve got huge sums of money, in some cases, hundreds of thousands depending on the business. What I would do is actually keep that aside as a cash buffer. That’s hugely important for trading out of these conditions. So if that’s you, then protect that. Ideally, it’s at a separate bank to your main business trading activities. It’s out of your sight, you’re never tempted to spend the money.

Can I contribute more money to my SMSF than my $25,000 annual contribution?

Yes, you can. There’s two ways you can contribute to Super. The first one is as a tax deductible contribution or what we call concessional contributions. Concessional contributions, you are capped at $25,000 per person per year. But, from the 2019 financial year onwards, if you don’t use all of your $25,000 contribution, let’s say you only use $10,000 out of the $25,000, you can carry forward your unused amount for up to five years.

With concessional contributions, your super fund pays tax on those contributions at a rate of 15% when they go in. There is a higher tax rate for higher income earners called “division 293 tax,” which is basically doubling the tax that your super fund pays on those contributions. It’s a pain in the neck, but that’s unfortunately another rule that they brought in a few years ago.

Now, there is something called non-concessional contributions. The limit at the moment is $100,000 per person, per income year. You do not get a tax deduction on the money when it goes into the fund. On the flip side, your fund does not pay tax when it receives that $100,000.

With non-concessional or non tax deductible contributions of $100,000, there’s a special rule. If you meet certain conditions where you can bring forward that $100,000 contribution, so if we’re in the current financial year, which is the 2021 financial year, we can look at 2022 and 2023’s limits and bring those forward and put $300,000 in this financial year if we meet those conditions.

There are age limits and balance limits on the above – so please get advice before making any decisions.

When Does It Make Sense To Set Up An SMSF?

The most common question I get when someone’s exploring self-managed super is, when does it make sense to set one up?

The answer to that is never simple. It depends on what your current super is doing and what the performance is like.

The most relevant question is, what do you want to invest in? What sort of assets do you want to use your super for? If you’re going to close an industry super fund, set up an SMSF to invest in a term deposit, you’d be nuts because of the fees. You’d need a couple of million dollars before the fees would outweigh the benefits of just leaving it in a cash industry super fund.

I’ve seen some people with a balance of around $100,000 set up a self managed fund to hedge other investments they’ve got outside of super. People sometimes hedge with gold or silver bars, assets that are outside of super, like shares or property, where they want a valuable metal to offset or hedge some weird things like what happened with the property or share market.

I’ve also seen people with smaller balances set up SMSFs to invest through businesses, angel invest or lend money. These are some examples where it doesn’t always make sense or there’s a dollar figure that makes sense for everyone.

But there is a ballpark. If you Google “how much do I need to set up an SMSF,” most places would say between $200,000 and $250,000 in super to break-even from a costs perspective. So the cost of leaving it in an industry super fund versus setting up a self-managed fund.

Keep in mind, that $200,000 to $250,000 is the combined balance of the number of members you’ve got in your fund. So if it’s just you, then that’s your balance, but if it’s you and your partner, then you need to look at what’s your combined balance, and do you meet that rough guide to sort of break even.

Grow Your Wealth In A Legal Tax "Haven"

Tax Free Capital Gains Tax or CGT
Let’s say you run a business and you want to buy the premises. The premises is worth $1,000,000. You’re 40 years old. You might fund that mostly from the bank, around $600,000, $700,000 and the rest from your SMSF. Over the next 20 years through to retirement, you pay the loan off and you’ve got a fully unencumbered asset.

You bought it for $1,000,000 but it’s now worth $2,000,000. So you made a $1,000,000 gain on that.
The timing of when you sell that asset is huge from a tax perspective. If you sell that once you’re in tax free pension mode, you’ll pay 0% tax on your $1,000,000 gain. Now that’s impressive.

If you sell it and you pay normal Capital Gains Tax in Super, you’ll revert to the 10% tax rate which is the 15% tax less the 1/3 discount. So you’ll pay 10% on your $1,000,000, or $100,000 in tax, which is a pretty low tax even if you are still accumulating your balance.

Tax Free Business Profits
This is a bit of a cool thing that we’ve done for a couple of clients now. If you’ve got multiple business partners looking to start a business, we can look at owning that in your Super Fund.

The cool part about that is the profits of the business go to your SMSF. Again, you’re accumulating your balance, you’re paying 15% tax. But if you’re retired or you’ve ceased employment after you’ve turned 60, and you’ve met those conditions of being a 0% rate, then your profits that come through from that business might be 0%, which is a lot better than paying 30% or more outside of Super.

You might have $100,000s in business profits going to your SMSF tax free instead of paying $30,000 on every $100,000 of profit.

FBT Red Tape Reduction Explained

FBT is a bit of a pain to deal with if your business provides benefits to employees, that are not tax deductible in general.

Things like car parking, if they park near your work, attracted FBT now no longer applies from the 1st of April, 2021 – it is next FBT year onwards. There’s no FBT on electronic devices either, like laptops, iPads, phones – stuff that you might give to your employee. If they use it for personal purposes then you technically should pay FBT on that – but not any more (from that date onwards).

They’re also looking at no FBT on retraining or re-skilling employees. Basically, if you’re looking to make someone redundant and you need to retrain them, there’s no FBT on retraining or re-skilling from the 2nd of October, 2020 onwards.

Which Employees Are Eligible For the JobMaker Hiring Credit?

Eligibility Criteria:

It needs to be within one year of the relevant age ranges in their first year of employment. So they need to be in the age range.
Have worked at least 20 hours paid per week, on average for the full weeks they are employed.
Have commenced their employment between 7th of October 2020 and the 6th of October, 2021. It’s basically available for a year and it’s the employee start date plus 12 months for when you get your subsidy.
Have received the JobKeeper payment, youth allowance or parenting payment for at least one month within the past three months before they were hired. Now this is the key one and this is going to be kind of tough. You can’t just hire anyone for this to be eligible. Let’s say someone who works in tourism or hospitality ended up losing their jobs. They’re on JobSeeker, looking for another job, you hire them. That ticks the box.
And, they need to be employed on a permanent, casual or fixed term basis. But again, keep in mind, at least 20 hours a week, on average.

What You Need To Know About The JobMaker Hiring Credit

This is pretty exciting. Like JobKeeper, it needs your business and employees to be eligible.
Anyone hired from the 7th of October you get a credit for 12 months. Similar to JobKeeper, you almost get a subsidy on the wages which is $100 – $200 a week.

This is age-based and it’s aimed at younger people. For employees you hire between 16 and 29 years old, you’re looking at a $200 a week credit. Between 30 and 35 years old you’re looking at $100 a week of credit.
There’s no fall in turnover test for this, so it applies to people who haven’t received JobKeeper. You claim quarterly in arrears from February 2021 onwards.

Reading from the announcements, it’s probably going to be similar to how we claim JobKeeper in the business portal of the taxation portal.