Using your superannuation to help expand your business
Jim and Lauren came to see me last year as their niche equipment supply business, run from their home and a small industrial storage unit, had done very well and now needed larger premises with warehouse and office space to cope with expansion. They certainly came across as the new breed of modern entrepreneurs, thinking a few steps ahead all the time rather than reacting to opportunities as they arise. They were looking at alternatives to using up all the equity in their business or home, as they expected to need funds to expand in the coming years.
Jim had looked at leasing premises but realised that any property would need modification to suit their business needs, and that would require landlord approval. They would also need a secure long term tenancy to justify the money being spent. Suitable premises would cost $450,000, and the business would spend $40,000 to adapt the building.
We went through their assets, liabilities and future cash flow forecasts provided by their accountant and accessible through a link to his online client portal. (Don’t you just love the ‘cloud’?) When asked about their superannuation, they weren’t sure of their provider, their asset allocation or their current balances. We discussed the concept of using an SMSF, or Self-Managed Superannuation Fund, as part of their strategy and included their accountant and lawyer in the discussion. We do regular PowerPoint presentations on the subject, and a copy is available on slideshare.com here.
They had $230,000 across three super funds and $26,000 in savings. The couple rolled $220,000, the majority, (not all – wait, I will explain later) of their super into an SMSF and used their savings to make personal, tax deductible super contributions.
They used the SMSF (now worth $242,000) to invest in the industrial unit of their choice and borrowed the remainder of the funds through an SMSF limited recourse borrowing arrangement (LRBA). The intricacies of the structure are best explained by your advisor, but it’s not rocket science.
Their bank lent the SMSF $280,000 (62 percent of the $450,000 needed for the premises), and their SMSF paid the balance, including all the usual transaction costs. They still had funds to act as a buffer on the loan and to diversify into other investments.
- The business moved to customised premises and pays the market rent under a commercial lease with the SMSF. With a secure tenancy, the alterations were put in place, which added value to the property for both tenant and the SMSF as owner
- The rent covers the interest on the loan after tax deductions
- All future capital gains in the value of the property are concessionally taxed (10 percent after one year), and, should they wait until they enter pension phase, there will be 0% (NIL) capital gains tax
- If either should die, the SMSF has the insurance funds to pay out a death benefit without having to sell the property
- The money left in their industry / retail superannuation continues to fund personal insurances at the more competitive group rates available to members. (See, I didn’t forget to explain that part!)
- The business still has borrowing capacity, and lenders will be more willing to fund future expansion
It pays to be innovative, think outside the square and seek advice when exploring avenues of business financing.
If you want to find out more about using an SMSF, then start with the ATO guides available here.