22nd February, 2016
People who run small businesses are in a unique situation with their superannuation.
If you are a small business person you’ll know the score. You pay tax like everyone else, but unlike everyone else it comes out of the money your business makes (or you make yourself).
You may draw a wage of $100,000 for yourself out of your company, but you need to pay $27,000 or so in tax, and then pay yourself another $9,500 in super contributions.
So that means you need to make around $109,500 in your business to create around $73,000 a year to live on. So often it seems like you are just working to pay everyone else for the privilege of being self employed.
Most small business people wouldn’t have it any other way, but the rules just don’t make it easy. Many feel they are just paddling, very hard, uphill.
So for these people, control over their income is more important than for many others and once they have this control they want to extend it to their retirement savings.
A self-managed superannuation fund (SMSF) presents as a major opportunity for small business people to redress the balance, and possibly set things up so they can get a little bit ahead in the long run.
There are several scenarios in which an SMSF can be used to advantage by small business.
For example, the current tax regime allows business owners to roll up to a lifetime limit of $500,000 capital gains from the sale of a business into superannuation and obtain a capital gains tax exemption.
The value of business that has been built and nurtured now becomes an additional retirement nest egg and so it should.
Melbourne-based accountant and SMSF auditor Haydn Growden cites the example of one of his clients who has a truck body building business and a SMSF.
“Many of his customers rush jobs in June in order to obtain tax deductions, but for my client this means he could face a large tax bill,” says Growden. “So his business makes a deducted contribution to his SMSF before June 30, saving him thousands and putting those funds into a protected secure investment.”
Many business owners also use the SMSF to purchase premises where their business operates. Instead of paying rent to a landlord they can benefit from the property investment.
Under changes introduced in 2007, self-managed super funds are now able to borrow to buy property, making purchasing even easier.
In many cases couples who are in business roll their individual super balances into a joint self-managed fund and use those combined funds as a deposit for the purchase of business premises.
Two of Haydn Growden’s clients – a married couple – did this to purchase the premises for a hair salon, run by the wife.
“Instead of the business struggling with cash flow to pay the rent, the husband – who doesn’t actually work in the business – is happy to pay his savings into the mortgage on the property.”
“So it is a real win win,” he says.
There are other advantages as well, says Growden. The business will not be subject to unreasonable landlord claims relating to personal guarantees, rent increases, lease terms, shop maintenance or fit out. If the business folds or moves on the super fund will continue to hold an appreciating and rent-producing asset.
Many small business people also have private share portfolios, which are taxed at the highest marginal tax rate, but which they view as retirement savings. Subject to the contribution limits these shares can be rolled into a SMSF where they will enjoy concessional tax rates.
If you are a small business person without your own SMSF, it may be worthwhile getting a range of professional advice on how the structure can work for you.