The ultimate personal protection for successful business owners
For many business owners, the eventual sale of the business or businesses IS the retirement fund. And current profits are used to extend the business or fund personal lifestyle decisions such as luxurious family holidays. In fact the more successful a business is, the more the family tends to rely on its future success to fund an accustomed lifestyle.
So super, quite understandably on the surface, is almost considered risky given the access restrictions, and the fact that a rainy day may come when the funds are required.
However, a long term growth investment, in the form of listed or unlisted companies, property, loans or collectibles, may just be the best insurance policy your current profits could buy.
Any business, no matter how successful today, faces the risks of poorer returns, creditor risk, margin squeeze, even insolvency. The prospect of starting again becomes increasingly daunting as the 50s and 60s draw nearer, so to have assets largely secured from creditors for the purposes of being able to provide a tax free passive income at some future date is just smart business.
Take a scenario where a commercial property is valued at $1,500,000 today. The likelihood of the super fund having this kind of balance is low for many reasons, not least because of the contribution caps in place that makes most people assume they are completely restricted as to how much they can get into the super environment.
But a Self Managed Super Fund (SMSF) can borrow from Related Parties, such as Family Trusts and Companies owned by the members. Restrictions then do apply as to what the Fund invests in, and the commercial terms of such arrangements – BUT it is feasible that the super fund MAY lease the premises back to a related company.
And the immediate benefits from a tax perspective shouldn’t be overlooked.
For simplicity’s sake, assume the following:
- Growth rate of 8% incl CPI
- Income (or rent) at 5% net of costs
If the commercial property was owned by an SMSF instead of a family trust or individual person as is generally the case, the super fund would generate over $1.1m more income over 20 years*, purely because of the difference in the tax rates (assuming a 46.5% top marginal tax rate).
More importantly, if the property was sold after 20 years at a future value of almost $7m*, the beneficiary could be up for a tax bill of over $1.2m, vs NIL if the members after that time had commenced pensions (a likely strategy so long as the members were over 60, even 55 in some cases). And even if they sold earlier, the tax rate would only be 10% representing significant savings.
So not only is the strategy extremely tax effective, the notion of hedging today’s investment (or lifestyle) bets in favour of a future income, partially funded by tax savings, is worthy of consideration, we think!
* We’ve ignored any impact of the 3 year Debt Levy of 2% for high income earners. We’ve also ignored the impact of borrowing costs and related deductions for illustrative purposes.