Seven Signs a Business Is Ready for an SMSF
A self-managed super fund (SMSF) can offer business owners greater control over their retirement savings and, in some circumstances, an opportunity to purchase their own commercial premises through superannuation.
But an SMSF isn't automatically the right choice for every business owner.
While the benefits can be attractive, there are also important responsibilities, costs and restrictions to consider. Your business needs sufficient cash flow, your super balance needs to justify the ongoing expenses, and you must be comfortable taking on the responsibilities of being a trustee.
One of the strongest reasons for a business owner to consider an SMSF is the ability to purchase eligible commercial property and lease it back to their business. However, there is much more to the decision than property ownership.
Here are seven important signs that your business may be ready for an SMSF, together with a practical checklist to help you assess whether the structure is worth considering.
1. You Want to Hold Your Business Premises in Super
For many business owners, commercial property is the strongest reason to establish an SMSF.
Superannuation law allows an SMSF to acquire eligible business real property from a related party at market value and lease it back to the business at market rent.
Business real property generally means land and buildings used wholly and exclusively in a business. This is an important exception to the usual restrictions on acquiring assets from related parties.
The arrangement can offer several advantages:
Your business pays rent to the SMSF rather than an unrelated landlord.
Rent may be deductible to the business, subject to the usual tax requirements.
Rental income is received by the SMSF and may benefit from concessional superannuation tax treatment.
The property is held separately from the trading business.
An SMSF may also be able to borrow to purchase commercial property through a limited recourse borrowing arrangement (LRBA), provided the strict borrowing rules are satisfied.
However, the arrangement must be properly structured. The lease should be documented, rent must reflect market value, and payments must be made as agreed. Simply reducing or forgiving rent when the business has a difficult month can create serious compliance problems.
There may also be capital gains tax and stamp duty implications when transferring an existing property into an SMSF.
If commercial property is part of your strategy, read our guide to leasing SMSF-owned commercial property back to your business before making any commitments.
2. Your Super Balance Can Justify the Ongoing Costs
An SMSF has ongoing expenses that don't necessarily increase in proportion to the fund's balance.
These can include:
Annual accounting and financial statement preparation.
An independent SMSF audit.
The ATO supervisory levy.
Investment valuations and administration.
Legal and other professional services when required.
This means the costs can represent a much larger percentage of a smaller fund's assets.
For example, two business owners with relatively modest super balances might find that establishing separate SMSFs costs considerably more than remaining in their existing industry or retail funds.
Combining eligible family members' super balances in one SMSF may make the economics more attractive, although there are other considerations when members have different retirement plans or investment preferences.
There is no universal minimum balance that guarantees an SMSF is worthwhile. The important question is whether the expected benefits justify the total costs.
ASIC and the ATO encourage prospective trustees to compare the actual dollar cost of an SMSF with their existing fund, rather than relying solely on percentage-based comparisons.
Our article on SMSF establishment and annual running costs explains the expenses you should factor into your decision.
3. Your Business Can Operate Without Access to Super Money
This is an important consideration for business owners.
Once money is contributed to super, it is generally preserved until the member satisfies a condition of release. An SMSF cannot simply return that money to its members because the business needs additional working capital.
There are also strict restrictions on lending money to members, their relatives and related businesses.
Consider a business owner who has a particularly profitable financial year. They make a substantial super contribution before 30 June to obtain a potential tax deduction.
A few months later, trading conditions deteriorate and the business needs cash to pay suppliers, wages and other expenses.
The owner cannot simply withdraw the super contribution to keep the business operating.
This can become especially problematic where the SMSF owns the business premises. The business must continue paying rent under the lease, even when cash flow becomes tight.
An SMSF should therefore be treated as a retirement investment structure, not an emergency source of business finance.
Before proceeding, make sure your business has adequate working capital and that super contributions are planned around the business's actual cash-flow requirements.
You should also understand the applicable concessional and non-concessional contribution caps.
4. You Are Prepared to Take Responsibility as a Trustee
An SMSF gives members greater control over investment decisions, but that control comes with significant legal responsibilities.
Every member must generally be a trustee or a director of the corporate trustee. Trustees are responsible for ensuring the fund complies with superannuation and tax laws.
Responsibilities include:
Acting in members' best financial interests and in accordance with the fund's governing rules.
Keeping SMSF assets separate from personal and business assets.
Maintaining and regularly reviewing an investment strategy.
Keeping accurate financial and investment records.
Arranging an annual independent audit.
Preparing and lodging the SMSF annual return.
You can appoint an accountant to handle the administration and compliance work, but the legal responsibility remains with the trustees.
For busy business owners, one of the most common risks is mixing business and SMSF finances.
For example, a business receipt might accidentally be deposited into the SMSF bank account, or a fund expense might be paid using the business credit card. Even a temporary loan between the business and the fund can create a compliance breach.
Administrative penalties can also be imposed personally on trustees and cannot simply be paid out of the SMSF's assets.
A corporate trustee can help simplify administration and ownership arrangements, particularly when members change. You can learn more in our guide to SMSF structures and trustee responsibilities.
5. You Understand the Restrictions on Investing in Your Own Business
Business owners sometimes assume that establishing an SMSF will allow them to use their superannuation to invest directly in their trading business.
Unfortunately, the rules are much more restrictive.
Investments involving related parties are subject to strict requirements. In particular, many investments in related companies or trusts, and loans to related entities, are classified as in-house assets.
An SMSF's in-house assets are generally limited to 5% of the fund's total market value.
There are some important exceptions, including qualifying business real property leased to a related business.
Other restrictions include:
Buying assets from members: Generally prohibited, except for specified permitted assets and transactions.
Lending to the business: Loans to related entities are generally in-house assets and subject to the 5% limit.
Investing in related companies: Generally subject to the in-house asset rules, unless a specific exception applies.
Running a business inside the SMSF: The activity must satisfy the fund's governing rules and sole purpose test. It cannot be used to provide members with present-day benefits.
All dealings with related parties must also be conducted on arm's length terms.
Getting these arrangements wrong can result in significant tax and compliance consequences. Our article on SMSF tax leakage explains how avoidable mistakes can affect a fund's tax position.
6. You Have Considered Your Retirement and Exit Strategy
An SMSF is a long-term structure. It is important to consider what happens when circumstances change, rather than focusing only on the benefits of establishing the fund.
Business owners should consider several possible events:
What happens if the business is sold?
What happens if a family member or business partner wants to leave the SMSF?
How will the fund deal with the death or incapacity of a member?
Will the fund have enough cash to pay retirement benefits?
What happens if the commercial property is no longer required by the business?
The sale of a business can be particularly important. Certain small business CGT concessions may allow eligible sale proceeds to be contributed to super under separate contribution rules and limits. However, eligibility depends on specific conditions that should be reviewed well before a sale.
Retirement also creates a liquidity issue. If an SMSF holds most of its assets in one commercial property, it still needs enough cash to meet pension payments and other expenses.
A warehouse cannot easily be sold one room at a time to meet a payment obligation.
Planning for these events early can help avoid disputes and unnecessary costs later.
7. You Have Access to the Right Professional Support
Running an SMSF involves ongoing administration and compliance, not just establishing a trust and selecting investments.
An SMSF accountant can assist with financial statements, contribution records, annual returns, compliance monitoring and coordination with the independent SMSF auditor.
For business owners, there is an additional advantage in having an accountant who understands both the business and the SMSF.
Many potential compliance problems arise where transactions occur between the two. Understanding both sets of accounts can make it easier to identify issues before they become serious.
It is also important to understand the distinction between accounting assistance and financial product advice. Recommending that someone establish an SMSF is generally a financial product advice matter requiring an appropriately licensed adviser. An accountant can explain the accounting, tax and compliance implications within the scope of their professional authority.
Guidance Accounting offers an SMSF Support Package with fixed-fee options covering financial statements, annual return preparation, compliance monitoring and auditor coordination.
Is Your Business Ready for an SMSF? Eight Questions to Ask
Before establishing an SMSF, consider the following questions:
Does your business own, or plan to purchase, commercial premises that it uses wholly and exclusively for business purposes?
Are the combined super balances sufficient to make the ongoing costs reasonable?
Can your business operate without needing access to money already contributed to super?
Are all proposed trustees prepared to meet their legal and administrative responsibilities?
Does your investment strategy work within the restrictions on related-party transactions?
Have you considered what happens when the business is sold, a member retires or someone leaves the fund?
Are you comfortable taking on the additional responsibilities and understanding the differences in protections compared with an APRA-regulated fund?
Do you have access to an SMSF accountant and independent auditor?
Three or more "no" answers suggest that you should investigate further before proceeding. Even one or two concerns may be significant, depending on the circumstances.
For a broader comparison, read our article on SMSFs versus industry super funds.
Final Thoughts: Get the Numbers Right Before Establishing an SMSF
An SMSF can be a valuable structure for a business owner, particularly where commercial property is involved.
However, the decision should not be based solely on the appeal of owning business premises through superannuation or having greater control over investments.
The fund's costs, your business's cash flow, the restrictions on related-party transactions and your willingness to take on trustee responsibilities all need to be considered.
The best approach is to compare the proposed SMSF with your existing superannuation arrangements, using actual figures and a clear understanding of the long-term implications.
Thinking about establishing an SMSF for your business?
Guidance Accounting can help you understand the accounting, tax and compliance requirements, compare the ongoing costs and identify potential issues before you commit to a structure.
Contact Guidance Accounting to discuss your circumstances and find out whether an SMSF is worth exploring.
Disclaimer
This article provides general information only and does not constitute financial, legal, taxation or investment advice. SMSF rules and tax outcomes depend on individual circumstances and may change. Establishing an SMSF involves significant responsibilities and risks. You should obtain professional advice appropriate to your circumstances before making decisions about superannuation or investments. Guidance Accounting does not provide personal financial product advice unless expressly authorised to do so.