Alex and Bronwyn are business owners in their early 40’s, who operate through a Family Trust. They had been speaking with friends who have a self-managed superannuation fund and were wondering if such a vehicle could be appropriate for them.
While it had been presented to them by their friends as a completely positive experience, they were cautious in their approach. Alex contacted us to meet and discuss the benefits and the pitfalls.
SMSF’s are the fastest growing area of superannuation, thanks to their flexibility, greater control and perceived lower fees. However, this does not make them appropriate for everyone.
The two major issues that needed to be discussed were trustee capability and current and prospective amounts within superannuation.
Alex and Bronwyn have successfully run their business for twelve years, and have strong systems in place for accounting, compliance, and business and IT risks. This attitude was a good indicator that trustee responsibilities would be taken seriously and would be seen as a necessary component.
They also advised that they quite enjoy investment and have a small share portfolio within the Family Trust that they each monitor and discuss. The idea of having more control of the assets appealed to them.
They were wary however of the potential time commitment, recognising that every hour away from the business could be costing them profit. They have three children approaching their teens, so personal life is also crowded.
In terms of current superannuation, the balances for each were not large. Alex had been a self-employed tradesman after his apprenticeship and had not contributed to super until they started the business. Bronwyn had worked as an employee prior to starting the family, so actually had a higher balance. Even then, they each made only the compulsory contributions required relative to their salaries. In total, they had almost $250,000 in super.
We had reservations about the use of an SMSF at this level. They are very cost-effective for larger amounts, as accounting and audit fees tend to be constant and not affected by fund balances. However, this can mean that the relative cost for smaller balances is high.
Our discussions therefore centred around their future intentions with superannuation. They acknowledged the need to start thinking about retirement (not easy in your 40’s!) and had an open mind about the value of superannuation. Further exploration convinced them that from a tax and savings viewpoint, it is a very strong option.
Business profit was sufficient to allow them each to maximise the tax deductible contributions of $25,000. This meant that prospectively there could be $42,500 after tax being contributed each year. There is also the opportunity to make extra non-deductible contributions of $100,000 each per year, but at that time they had little capacity for this form of saving. There was a substantial debt on the family home and they were naturally keen to reduce this quickly.
We eventually agreed that it may not be appropriate right now to establish a SMSF, but it is something to revisit regularly. If maximum contributions could be maintained over the next two years, and if a part sale of the business eventuates, Alex and Bronwyn could take advantage of some attractive small business concessions to immediately boost the value of the funds to more meaningful levels.