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Self-Managed Super Funds (SMSFs) gain more and more popularity, as the number of Australians that start thinking about their future financial stability well in advance, rises dramatically each year. The numbers show that in June this year, there were 528,700 SMSFs, compared to 10 years ago when there were only 271,000 DIY funds.
SMSFs are funds whose members are also their trustees. The trustees are responsible for running the fund, complying the fund’s work with super and tax laws, making the investments and paying the benefits. While a perfectly great option for funding an independent retirement, SMSFs become very convenient for small business owners as well.
As small business owners, you are all probably very concentrated on reaching three main goals: quickly adapting to the fast changing business environment, making your assets work for you and make you money, and creating a certain financial future. With all the benefits a SMSF as a financial option for retirement offers, small business owners can gain a lot using the fund for meeting the previously mentioned goals.
Here’s a short analysis on the specific benefits small business owners can get from an SMSF and a few disadvantages they may encounter; to establish whether this is a good step to take:
A possibility to own your business premises
It’s a popular strategy for the SMSF to own the business premises of a small business. The main benefit of this practice, is that your premises will be save from creditors. In addition, you can free up working capital and gain estate planning benefits. In some countries in Australia, like New South Wales and Queensland, you can even get a stamp duty concessions when you transfer business premises to your SMSF. How will you access these concessions varies a lot from state to state, so be sure to consult a professional before you enter this arrangement.
Limited Recourse Borrowing Arrangements
Limited Recourse Borrowing Arrangements or LRBAs are transactions with which you borrow money within your SMSF to purchase an asset. This is a special kind of borrowing transaction. The loan needs to be non-recourse, so if the SMSF defaults on the loan, you can’t claim on other assets of the fund to cover its losses. And, while the loan is outstanding, a holding trust needs to be made for the asset to be held in.
You have the possibility to own a wider array of assets than most large retail funds
This refers to where can you put your money. While industry and retail super funds allow you to own unitized managed funds, and access about a 1000 of these, an SMSF allows you to own listed shares, managed funds, artwork, collectibles and property. This of course, assuming you have all your trust deed permits.
However, there are some disadvantages:
You may have restricted access to capital
Some 30 years ago, you would’ve been able to make a contribution to a super, claim tax deductions for that contribution, and then lend the money from tax deduction back to your employer. This is not possible anymore, which means that the money you make as contributions to the super, are locked away until you retire.
It may be more expensive
Running your own super fund, comes with some fixed costs like: Australian Taxation Office’s supervisory levy, audit, accounting and administration fees. In addition, you must have at least A$250 000 to even start the fund. These parameters in large determine the “cost-effectiveness” of your fund.
In conclusion, while there are many benefits of running a SMSF for small business owners, one must have in mind that a small business operates with significantly smaller amount of assets than for example, medium sized or large businesses; therefore, all the assets should be directed towards the most productive option. At least in the beginning and in particularly tough business climates.
