For the last few decades, many tax accountants around Perth have held the mantra that SMSFs are the “go-to” tax vehicle for family business owners. However, with a massive change in technology, taxation, legal and investment changes, the question remains—are SMSFs still worth it for family businesses in Perth, and where are SMSFs ever worth it for families in business?
The question of whether an SMSF is right for you is even more complex for Perth families that own businesses.
What is an SMSF?
Most people give their superannuation to a third-party investment group such as an industry super fund, large investment corporation, or stockbroking firm. However, a self-managed super fund (SMSF) offers an alternative avenue, allowing individuals to directly oversee their super investments.
On the surface, this might seem straightforward. However, SMSFs demand significant time, expertise, and risk management investments. Any missteps could potentially put your retirement savings at risk – and with the volatile market conditions in Perth this could be devastating.
At its heart, an SMSF is a trust that has made an election under Taxation Law to comply with superannuation laws. This election is irrevocable and gives the now SMSF a special tax environment compared to other trusts.
The Australian Taxation Office regulates SMSFs. This is where your Perth SMSF Tax Accountant comes into play— the ATO and your SMSF connection is through your SMSF Tax Accountant.
While an SMSF operates similarly to conventional third-party super funds, there are distinctions in its administration and regulation. Key regulations include:
- Limiting membership to no more than six individuals.
- Mandating collective management by all members.
- Prohibiting members from being an employee of another member unless they are related.
An SMSF operates as a trust, with the trustees responsible for its management. There exist two trustee structures for SMSFs:
- Individual members appointed as trustees.
- A company appointed as the trustee, with the SMSF members serving as directors.
The trustee cannot be dishonest, insolvent, child, bankrupt, or banned under superannuation legislation from acting as trustee. So, practically, it is every adult.
SMSF Myth’s
SMSFs have long been surrounded by misconceptions, so let’s debunk some common myths:
Myth 1: You need a balance of at least $200k to start.
Fact: Incorrect. While balances under $200k may pose challenges in competing with mainstream returns, advancements in technology and electronic administration have made it possible for lower balances to remain competitive in particular circumstances.
It is also possible that the SMSF balance will increase quickly in a short period of time. A person could start an SMSF with, say, $15,000 and then proceed to make large contributions to that fund with Small Business Capital Gains Tax Concessions.
Myth 2: SMSFs are only for the over-60s.
Fact: Not true. Young and middle-aged investors increasingly turn to SMSFs to manage their investments and secure their financial future.
Children can also be SMSF members.
Myth 3: SMSFs are too complex and expensive.
Fact: Not necessarily. With the advent of new technology, online education courses, and professional advisory services, it’s now more accessible and more affordable than ever to establish and manage an SMSF.
At Westcourt, we encourage potential SMSF trustees to take an SMSF education course to understand their role—it is an “eye’s wide open” exercise.
Myth 4: SMSFs are too risky.
Fact: It varies. The level of risk is tied to the trustees’ ability to make sound investment decisions. Seeking guidance from licensed investment advisors, the opportunities for diversified investments should ensure your investment choice matches your risk profile.
Myth 5: SMSF generate a better investment return
Fact: While many SMSFs have made great investment returns, this is not always the case. Some SMSFs have lost the entire capital invested.
Your choice of investments drives the underlying investment return for your SMSF. So, talking to a licensed investment advisor about what you are considering investing in is always prudent. It might also be that other superannuation platforms will generate a better return or lower operating cost than your proposed SMSF.
Myth 6: SMSFs are cheaper
Fact: The cost of running an SMSF will vary depending on your investments and record keeping. And while an SMSF is cheaper for many larger SMSFs, this is not always the case. Changes in investment choice and technology are reducing the costs of significant super funds, with many investment groups capping their costs. An investment advisor can help you understand other superannuation cost options.
Some industry funds will also have insurance built into their costs. So, talking to an ASIC-licensed insurance broker or financial planner about your life insurance needs and their cost in an SMSF is also essential to properly compare costs.
SMSFs for Business Owners
An SMSF holds considerable appeal, particularly for families in business around Perth. Essentially, it gives you greater authority over the allocation of your super funds. This can prove advantageous for business owners, as it potentially allows your superannuation monies to be used as an investment tool for your business.
Here are the benefits of SMSFs for small business owners:
- Enhanced Business Value: Use your SMSF to finance business assets and give your business long-term stability. For instance, with the advice of your Perth SMSF Tax Accountant you could employ your SMSF to purchase commercial property and lease it back to your business. Possessing the property where your business operates not only offers a safety net in the event of bankruptcy but also gives certainty on the payment of rent to your super fund.
- Tax Incentives: Generating rental income in your SMSF, along with deductions for repairs, maintenance, renovations, enhancements, and property management fees, can be attractive to an SMSF that taxes that income at a lower rate. Your SMSF might avoid capital gains tax on selling the property in retirement.
- Future Security for You and Your Family: SMSF assets, including business property, are protected from creditor attacks. By controlling your SMSF, you can continue to invest in your business and separate creditors and banks over your assets, away from ordinary trading conditions.
If you are going to invest into property with your SMSF but you don’t have the cash to do it a SMSF professional can always discuss how to use and navigate a 50:50 Unit Trust with an SMSF.
How to choose your SMSF Support Team
While an SMSF gives you complete control, unless you possess a high level of investment expertise and ample free time, you will likely seek professional assistance from your Perth SMSF Tax Accountant, lawyer, insurance broker and investment advisor. SMSF service providers offer aid in legal matters, taxation, auditing, administration, and investment guidance.
Sadly, not all service providers are equally competent or free of conflicts. Some are conflicted and some advisors simple dabble in SMSFs. As a trustee of your fund, you bear responsibility for any penalties or fines incurred if things go awry. It’s essential to seek quality support.
When choosing your SMSF support team, consider the following criteria:
- Qualifications and Licenses: Ensure that professionals, such as investment advisers, hold appropriate licenses from ASIC. Perth SMSF Tax Accountants like Westcourt should possess specialist qualifications like the Chartered Accountants SMSF Specialist Advisor qualification.
- Track Record: Choose providers with extensive experience managing SMSFs and a history of satisfied clients over many years.
- Fees: Fully comprehend the fee structure, scrutinise the fine print for hidden charges, and confirm that you won’t be tied into lengthy service contracts.
- Choice: Review the service provider’s fine print. If the SMSF service provider restricts your choice to a bank, stockbroker, or insurance company, you are potentially not getting the choice you are striving for with your SMSF. Likewise, if your SMSF provider cannot state in writing that they are independent, impartial, and unbiased, the chances are that they will have a conflict in their advice.
- Support: Ensure your SMSF provider can give you advice and insight when needed – including managing your SMSF for the new $3m Super Tax. Getting face-to-face advice in Perth is important for big life decisions and strategic advice.
- Global reach: If your SMSF is going to invest offshore, make sure your team has the technical capacity to understand offshore taxation and has access to a deep professional network that can support your global portfolio.
- Tax expertise: If a major purpose of SMSFs is for tax you should check that your advisors can legally give tax advice otherwise you might suffer 7 common SMSF mistakes. Only a registered tax agent or a lawyer can provide SMSF Tax Advice.
Succession planning your SMSF
Just like smart business owners around Perth plan for their business succession, SMSF trustees should also plan. SMSFs are not indefinite entities, and trustees often opt to wind them up for various reasons. Factors such as a trustee’s death, the overwhelming time and cost involved in management, or underperforming investment strategies can prompt this decision.
Regardless of the circumstances, it’s prudent to have a comprehensive exit strategy to facilitate a smooth transition and ensure the appropriate distribution of funds.
Given the intricacies of exiting an SMSF, seeking professional advice and assistance is highly advisable. In summary, the exit process typically follows these steps:
- Conduct a trustee meeting to align everyone regarding the exit plan.
- Calculate any outstanding expenses, taxes, and refunds.
- Dispose of assets and determine member entitlements.
- Transfer entitlements accordingly.
- Settle any outstanding expenses and taxes.
- Finalize accounts and submit the annual return.
- Notify the Australian Tax Office and SMSF members of the fund’s closure.
- Confirm the cancellation of the SMSF ABN and bank accounts.
- Retain the SMSF records for ten years.
Conclusion
The mantra that an SMSF works better for every family business owner was never true. There is a range of superannuation options in the market, and some people aren’t suited to run an SMSF. However, it is also true that there are tax benefits and strategies available only to SMSFs– and this is where Westcourt can help. With our single focus on families in business, proven technical excellence in SMSF Tax Advisory, global reach and commitment to independent advice, we are the natural choice for SMSF advice – so why not give us a call?
