Business owners with Self-Managed Super Funds (SMSFs) are well placed to make a significant, and positive difference to their long-term financial security. The key to doing so successfully, however, lies in making the most of the SMSF.
At Equil Advisory, we’ve helped business owners strategically use SMSFs to build long-term wealth, maximise tax benefits, and secure a better financial future. These proven strategies can help you achieve the same results.
Maximise Retirement Savings and Long-Term Growth Through SMSF Property Purchases
Strategic property investment is one of the most effective ways for business owners to optimise their SMSF. For example, a sound SMSF investment option might be to identify and purchase business properties in emerging growth corridors with strong potential for capital appreciation. This type of proactive SMSF property purchase strategy offers key advantages for long-term investment, rental income, and tax benefits.
First and foremost, property is a proven and solid long-term investment foundation for retirement wealth.
Second, properties held in SMSFs can generate rental income and contribute to the fund’s long-term stability and growth.
Third, superannuation tax rates (15% in the accumulation phase, potentially 0% in the pension phase) are lower than personal tax rates, making SMSF property investment more tax-effective than direct personal ownership.
Purchase the Business Premises through an SMSF and Lease it Back to the Company
Purchasing a business premise through an SMSF and leasing it back to the company offers both financial and operational benefits for the fund and the business. In particular, it guarantees security, stability, and long-term tenancy for the business. Essentially, business owners become their own landlords, maintaining greater control over their premises and financial future.
The business then pays rent to the SMSF at the market rate, creating an income stream for the fund while keeping rental expenses within the business.
Those rental payments in turn directly build wealth within the business owner’s SMSF, and contribute to its capital growth.
Make Additional SMSF Contributions to Maximise Tax Benefits
Concessional SMSF contributions are tax-deductible, making it a smart strategy for business owners to make additional contributions to their fund. This approach not only reduces the business owner’s personal taxable income but also boosts their super balance and accelerates retirement savings.
It’s important to note that SMSF earnings are taxed at a lower rate of 15%, compared to higher personal tax rates.
However, there is a catch. To fully benefit from tax deductions through SMSFs, and avoid Division 293 tax, the taxpayer’s annual taxable income must remain under $250,000.
Use Limited Recourse Borrowing Arrangements (LRBAs) to Buy High-Value Assets
Limited Recourse Borrowing Arrangements (LRBAs) allow SMSFs to borrow money to invest in diverse or high-value assets without putting the fund’s overall holdings at risk.
‘Limited Recourse’ means the lender’s rights are limited to the asset purchased with the borrowed funds. This protects the rest of the fund’s assets.
Generally, LRBAs are used to buy property. However, they can also be used to invest in specialised equipment, private equity stakes, or various high-value assets to expand the fund’s investment portfolio. The fund’s cash resources thus remain available for use in other ways.
While gearing in this way can enhance returns, it also carries risks that require careful management. Therefore, it is important to consult a financial advisor before proceeding.
Access Investment Options not Available in Industry Super Funds
Industry and retail super funds are restricted in what asset classes they can invest in. In contrast, SMSFs offer greater flexibility, allowing business owners to take advantage of a broader range of assets and investment options.
This can include direct property purchases (residential and commercial), private equity and unlisted investments, and alternative assets like commodities and cryptocurrencies (subject to SMSF rules).
Maintain Full Control Over SMSF Investments
The ability to directly control an SMSF is perhaps the most compelling reason for choosing an SMSF over industry funds. Public superannuation funds pool members’ money and make broad investment decisions. SMSFs, however, allow business owners to make strategic investment choices based on their own knowledge, business experience, and risk tolerance. They can use targeted SMSF strategies to align their super with business goals, and to complement and support their business’ financial growth.
Additionally, SMSF owners have the advantage of being able to respond swiftly to market changes and adjust their portfolios as needed, without waiting for fund managers to take action.
Make use of In-Specie Contributions
Transferring eligible in-specie assets, like blue-chip shares or valuable commercial property, to the fund allows those assets to continue appreciating in value and generating income, but at the more favorable SMSF concessional tax rate. This provides a significant financial advantage compared to holding the assets personally.
Add Fixed Income Investments
Diversifying into fixed-income securities, such as government or corporate bonds, offers stable returns and provides a hedge against market volatility.
Re-contribute Taxable Components into Non-Concessional (Tax-Free) Ones
Business owners who meet the eligibility criteria for accessing their superannuation can strategically re-contribute the fund’s taxable components as non-concessional (after-tax) contributions. This strategy may reduce tax liabilities for adult beneficiaries and offers greater flexibility in super management and estate planning.
Add More Members to the SMSF
Members of an SMSF each have their own concessional and non-concessional contribution caps. Adding more members to the fund (up to a total of six) can substantially increase annual contributions and grow the fund’s assets. A larger pool of assets in turn opens up a wider range of investment opportunities.
Managing an SMSF and optimising its potential can be complex for business owners. However, with some strategic planning and the right advice, SMSFs can be maximised to significantly increase retirement savings and provide long-term financial stability. That said, there are also legal compliance issues that must be observed, such as contribution caps, Division 293 tax implications, and the rules associated with LRBAs and in-specie asset transfers.
At Equil Advisory, we provide tailored professional advice to help business owners maximise the potential of their Self-Managed Super Funds, all while ensuring full compliance with legal regulations. Contact us today for expert guidance on optimising your SMSF and securing your financial future.
