Self Managed Superannuation Funds Taking control of your ďŹ nancial future
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Agenda
- Statistics - What is a SMSF - Contributions/BeneďŹ ts - Purchasing property in a SMSF - Case study 1 - Business property - Personal Insurance - Questions
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Disclaimer The advice given in this presentation should be regarded as general advice only. You need to receive advice speciďŹ c to your circumstances before acting on this information.
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Securing Your Financial Future 1 Rich
Take 100 Australians aged 65, after 40 years of work
4 Independent 5 Still Working 54 Depend on Government or Charity 12 Totally Broke 24 Died mulcahy.com.au
Statistics of SMSFs? - SMSFs are now the largest & fastest growing segment of the super industry - Currently over 550,000 SMSFs - Assets held in SMSFs are estimated to be in excess of $590 billion - SMSFs currently control one third of all superannuation money held in Australia. - Ten years ago SMSFs controlled 20% of all superannuation money
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Looking at the STATS
The three most popular investment classes for SMSFs are:
Direct Shares
Cash
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Direct Property
What is a SMSF? - A SMSF is your own personal Superannuation Fund that gives you total control over how your super beneďŹ ts are invested - Perfect for people who prefer to make their own investment choices for their retirement - Access to a broader range of investments such as direct shares, term deposits, property (residential & commercial) - Maximum of 4 members (allows you to pool super funds) - Concessional tax rates
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What is involved in running a SMSF? Members
Investment Strategy
Trustees
Trust Deed
Individuals for whom contributions are made & for whom beneďŹ ts will be paid
Appointed to hold the assets of the SMSF and to ensure the SMSF is operated in accordance with the Trust Deed
Document setting out how the SMSF’s investments are made.
Legal document setting out the rules for operating the SMSF
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Trustees of SMSFs SMSFs have the same role as any other Super Funds; the difference is, generally, that the members of SMSFs are also the trustees. Trustee’s of SMSFs - Corporate Trustees - Individual Trustees
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Vs. Company as Trustee
Individual as Trustee Cost
Cost
Sole Member SMSFs
Sole Member SMSFs
Liability
Liability
Administration
Administration
No additional costs for an individual
More expensive to establish, plus there is a small annual ASIC fee each year.
Cannot have a sole individual trustee, there must be two individual trustees.
Corporate trustee can have a single director
Could result in claims against the trustees personal assets if SMSF is ever used.
Fund’s assets are held in the name of the individual trustees. If an individual ceases to be a trustee then ownership titles will need to be changed which incurs additional costs
Provides greater protection in the event that the trustee of the SMSF is ever sued.
Assets of fund owned by company as corporate trustee. Can change directors without changing ownerships titles.
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Taxation BeneďŹ ts - A superannuation fund is taxed at 15% on taxable income and 10% on capital gains whilst in accumulation phase. - The tax rate reduces to 0% (nil) on investment income once a member enters pension phase. Tax on superannuation income can be summarised as follows: Details
Tax on this income
Accumulation Phase Investment income & concessional contributions
15%
Capital gains tax for assets held > 12 months
10%
Pension Phase Concessional contributions
15%
Investment income, including all capital gains
0%
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Super Contributions Traditionally cash contributions - Concessional limit currently Under 50: $30,000 Over 50: $35,000 - Non-concessional limit currently $180,000
Particular assets can be contributed by members to their SMSF (Shares, managed funds, commercial property)
Capital gains need to be considered prior to transferring these types of assets.
Residential property cannot be transferred from a member to a SMSF.
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Government Aged Pension
The Government is raising the pension age to 70 years old... what eect will this have? - The Age Pension age will increase to 70 years of age from 2035. - Your Age Pension age is: - 65 years if you were born before July 1952. - 70 years if you were born after 1965. - Between 65 years and 70 years if you were born after June 1952 and before January 1965. - Your preservation age however will determine when you can access your superannuation (see following slide). mulcahy.com.au
Paying BeneďŹ ts to Members Age 55 Accumulation Phase
Age 65
Transition Phase
Retirement Phase
Work Income Superannuation Income Investment Income Age Pension
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Paying BeneďŹ ts to Members Date of Birth
Preservation Age
Before 1 July 1960
55
1 July 1960 - 30 June 1961
56
1 July 1961 - 30 June 1962
57
1 July 1962 - 30 June 1963
58
1 July 1963 - 30 June 1964
59
After 30 June 1964
60
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Borrowing to Purchase Property in a SMSF - Now a viable alternative to borrowing in own name (ie outside super) - Use existing super to assist with purchase - Borrow in SMSF for balance of funds required - Additional super contributions in personal name for tax deduction - Use additional funds to repay loan - Preferential tax treatment - Members of the fund (or relatives of fund members) cannot use residential property for their own use.
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Bank or Private Loan Bank can only hold security over trust assets, not other SMSF assets
Loan
SMSF
Cash + Borrowed money
Bare Trust Eligible Assets
How it Works Security trustee holds legal ownership of assets SMSF can acquire legal ownership after paying suďŹƒcient instalments
Eg. direct property
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Case Study John & Betty are 55 years old & intend to retire at age 65 Their current combined super balance is $120,000 and they both intend to contribute $20,000 p.a. each to super. Based on a $400,000 property the bank will lend them $320,000 (80% LVR) Note: Capital growth is calculated at 6.8%, 3.6% net rental yield, $80K initial deposit, 7.9% p.a. interest rate.
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Analysis Age
Net Property After Tax Surplus Cash Total Debt Cashflow Contributions
55
Property Value
$320,000
$400,000
56
- $8,150
$34,000
$25,850
$294,150
$424,000
57
-$5,948
$34,000
$28,052
$266,098
$449,440
58
- $3,323
$34,000
$30,677
$235,421
$476,406
59
- $549
$34,000
$33,451
$201,970
$504,991
60
$2,482
$34,000
$36,482
$165,488
$535,290
61
$5,686
$34,000
$39,686
$125,802
$567,408
62
$8,977
$34,000
$42,977
$82,825
$601,452
63
$14,239
$34,000
$48,239
$34,586
$637,539
64
$18,089
$34,000
$52,089
$0
$675,792
65
$18,185
$42,500
$60,685
$0
$716,339
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Case Study Results At age 65, the property is worth $716K (based on 6% capital growth) After repaying the loan in full in the 9th year a further $78K cash has been built up through contributions and rent If John and Betty sell their property after starting pensions, they will have almost $800K available to fund their retirement, all tax free
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Business Property - Property you can own that is used wholly & exclusively in running a business can be transferred to, or purchased, by a SMSF (such as commercial property, farm land) - Unlike residential property, members of the fund (or relatives of fund members) can use the asset -There must be a lease in place and rent must be at market value in line with a typical commercial lease -Tax eective business option
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Advantages of Borrowing in a SMSF - Existing superannuation can be used for initial deposit on property - Additional super contributions can help repay the debt such as: - 9.5% super guarantee - Salary sacriďŹ ce - Self employed personal contributions - If purchasing a business premises rent is deductible in the business entity and tax free income in the super fund (provided fund is in pension phase) - Concessional tax rates - Potential tax free income
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Disadvantages of Borrowing in a SMSF - Property cannot be used as security for borrowing purposes in your personal name - Similar to all areas of taxation law, legislation is subject to change - Limitations imposed by banks (for example LVR)
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Personal Insurance
- Your SMSF can hold personal insurance policies (such as life trauma insurance) on your behalf. - Premiums are deductible to the SMSF. - Tax eective method of paying for this type of cover. For further information uon insurance, please speak to our ďŹ nancial planning division.
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Why SMSFs? Control over the management & investment of your super Access to a broader range of investments Asset protection for business operators Use to implement tax planning strategies, whether employee or self employed Tax rate 15% in accumulation phase 0% in pension phase Cost eective mulcahy.com.au
Assistance with SMSFs - Mulcahy & Co offer five divisions to help you be financially secure, which include Accounting & Taxation, Financial Planning, Lending, Legal and IT - All SMSF requirements including establishment, maintaining, administering. planning & implementing investment plans can be completed by us. - Our lending division has extensive experience with SMSF borrowing and our financial planning team are experts with SMSF investments.
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The Key Questions
Q&A mulcahy.com.au
Thank you!
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