Successfully managing your SMSF fund takes a lot of responsibility. But, when it’s done correctly, the benefits far outweigh the risks.
Here’s a list of proven SMSF strategies that we have seen work for our clients, so you can get an idea of what might be best for your situation.
A Liston Newton superannuation adviser can provide you with guidance and support to successfully navigate your SMSF. Contact us today to see how we can set you on the right path.
A withdrawal and re-contribution strategy
What is it?
A withdrawal and re-contribution strategy is exactly what it sounds like: a withdrawal of your superannuation benefits that you re-contribute back into your super.
How it works
Superannuation benefits are categorised into either taxable or tax-free components, depending on how the original contributions were made into the fund.
A re-contribution strategy involves:
- Withdrawing a lump sum from your super
- Paying any necessary tax on the withdrawal
- Re-contributing these funds back into your super account as a non-concessional contribution
In the end, your revised superannuation balance will potentially consist of an entire tax-free component.
When to consider implementing this strategy
This SMSF strategy is beneficial thanks to its tax benefits. It converts the taxable portion of your superannuation benefit into a tax-free component. Ultimately, this may result in a reduction of the potential tax payable when your super is passed onto your beneficiaries following your death.
This strategy can only be implemented if:
- You’re able to meet a condition of release to access your superannuation benefits
- You’re eligible to make a contribution back into your superannuation
Using your super to purchase commercial property
What is it?
This strategy uses your SMSF to purchase commercial property, which then gets rented back to your business. If you pay commercial rates, this is a perfectly legal SMSF strategy (despite sounding otherwise).
How it works
A small business owner uses their SMSF to purchase commercial property, for their business. Their SMSF covers a minimum 30-40% deposit, plus stamp duty, with the rest being borrowed. The SMSF now owns the property, which it rents back to the small business. The business owner claims this rent as a business expense.
- If borrowing occurs within the SMSF, the interest on the loan will offset the income, and the SMSF will receive minimal tax
- If no borrowing occurs, the SMSF receives 15% tax on the rental income, or 0% tax if the SMSF is in pension fund mode
This results in the SMSF receiving minimal tax, and the business owner receives tax deductions on their rent.
When to consider implementing this strategy
If you’re a business owner, and you actually need to purchase a property, this strategy can be useful.
- For those younger than 65 years of age, your SMSF only pays tax on the rental income at a rate of 15%, delivering a net tax benefit of 15% to your rental income every year
- For those older than 65 years, your rate drops to 0%
Even if you sell the property prior to your pension phase, the CGT tax rate inside a superannuation fund is just 10%.
The downsizer contribution
What is it?
Australians aged 65, or over, can make tax-free contributions of up to $300,000 to their superannuation when they sell their main residence. This is regardless of other caps or restrictions that normally apply.
How it works
If you’re over 65 and you’re looking to downsize, you can take advantage of this strategy.
If you’ve owned your home for over 10 years, and it’s been your main place of residence at one point, you can sell your home and use up to $300,000 as a tax-free contribution to your super. There’s no requirement for you to buy a new home following this sale, either.
- This contribution must be made within 90 days of receiving the proceeds from the sale
- A downsizer contribution form must be lodged to your super fund, to ensure it’s registered
If you are part of a couple, both spouses are able to take advantage of the downsizer contribution — meaning you can contribute up to $600,000 towards your super.
When to consider implementing this strategy
If you’re reaching retirement age, and you feel as though you haven’t had the chance to save up enough money, this strategy is a smart solution. It provides you with the opportunity to downsize your property, and make a sizable top-up to your retirement savings at the same time.
Carry-forward concessional contributions of unused caps over five years
What is it?
From 1 July 2018, if your total superannuation balance is less than $500,000 at the end of a financial year, you have the opportunity to start accumulating the unused portions of your concessional contribution caps from previous years. These can be used up to five years previous.
How it works
Individuals can make concessional contributions of $25,000 into their superannuation account.
Starting in the 2019-20 financial year, individuals who have a total superannuation balance under the $500,000 threshold are able to roll over the unused portion of their concessional contribution caps from the previous five financial years.
For example, if you make a $10,000 concessional contribution to your super fund in the 2018-19 financial year, this means in the 2019-20 financial year you can make up to $40,000 in tax-free superannuation deductions.
It’s important to note that any additional amounts carried forward that have not been used after five years will expire.
When to consider implementing this strategy
If you want to take advantage of concessional benefits you may have missed, this mechanism allows you to “catch-up” on concessional caps and make increased super contributions at this concessional rate
Spousal contribution splitting
What is it?
Spousal contribution splitting is a method of spitting ones’ concessional superannuation contributions into your spouse’s super account.
How it works
If you’re under 65, and not yet retired, you and your spouse can make up to 85% of the full concessional amount into each other’s superannuation account.
This means you can deposit up to $21,250 into each other’s accounts, which can take the form of employer superannuation, salary sacrificing, or personal deductions rolled over from the previous year.
Before you submit an application for spousal splitting, you must lodge a notice of intent to claim a tax deduction to your super provider.
When to consider implementing this strategy
Splitting contributions between spouses is a great way for one spouse to top-up their superannuation investment, without necessarily earning any money. It’s particularly beneficial if one spouse has taken time off from employment.
It’s also useful if one spouse has a super balance that may exceed $1.6 million. Couples can hold up to $3.2 million combined before they’re required to pay tax on their retirement funds. This method is useful to transfer, or split, your funds to enable a more tax-effective retirement for both spouses.
Put a Binding Death Benefit Nomination in place
What is it?
Unfortunately, when an individual dies, their superannuation doesn’t automatically transfer to their estate.
To ensure your superannuation balance is passed on in accordance with your wishes, a Binding Death Benefit Nomination should be put in place. This is a legally-binding notice that tells the trustee of your superannuation who will receive your superannuation benefit when you die.
How it works
You must make a valid nomination, in writing, to the trustee of your superannuation fund.
Clearly outline the proportion of the benefit for each individual nominated, and the type of benefit they'll receive. This must be signed by two witnesses over the age of 18 and then sent to the trustee.
Bear in mind:
- Only legal dependents can be nominated (this includes spouses, children, legal representatives, and anyone legally dependent on you for support)
- Nomination remains valid for three years (unless you choose a non-lapsing option through your superannuation fund)
- It remains in effect even if your situation has changed since its writing
For example, you may separate from your spouse, but if you haven’t amended your nomination or filed for divorce, it still remains valid.
When to consider implementing this strategy
This strategy is ideal if you want peace of mind that your beneficiaries will be looked after when you pass, or if you have a complex beneficiary list that needs to be carefully considered. It’s a good option for family businesses, as you can finalise the legal proceedings ahead of time.
Your beneficiaries will also receive your superannuation benefit more quickly — they won't have to wait for the trustee of your estate to determine its distribution.
Using your retirement exemption when selling a business
What is it?
This strategy enables you to disregard up to $500,000 of capital gains made from selling a small business.
How it works
Interestingly, while this is called a “retirement exemption” there is no actual age limit to it, and you’re not required to stop doing business — or even retire. All you need to do is sell an asset that triggers a CGT event.
To take advantage of this strategy, you must submit a CGT cap election form to your superannuation provider prior to this contribution.
This exemption has a lifetime limit of $500,000. You can claim either the full amount from the sale of one business, or use it across the sale of a number of businesses, up until the limit.
When to consider implementing this strategy
If you’re under 55, you can contribute the capital gain from selling your business into your superannuation account. If you’re over 55, you can receive the capital gain, tax-free.
