The Federal Government introduced two measures from the beginning of the new financial year that truly highlight why SME owners should think twice about holding all of their personal investments in a self-managed super fund – or any type of super fund.
By cutting the annual concessional superannuation contributions cap to just $25,000 from July 1 for all fund members, the government reinforced concerns that politicians will just keep meddling with super. It may only be a matter of time before the present or a future government attempts to further erode the great tax concessions of super.
Also from July 1, the government more than tripled the tax-free threshold to $18,200. And when linked with the other tax concessions, this means that eligible older Australian couples can earn up to $57,948 outside super without paying a cent in tax. (See details below.)
And what if individual investors are ineligible for any of the older Australian tax breaks? Mark Gleeson, technical services manager for financial services group OnePath, calculates they could earn dividends of $120,000 from a fully-franked share portfolio held outside super without paying any extra tax. This is apart from absorbing their franking credits and paying Medicare.
Therefore a couple could earn a breathtaking $240,000 in fully-franked dividends from their joint non-super share portfolio outside without paying extra tax. This is on the assumption that they have no other taxable income.
The bottom-line is that a couple in their retirement could earn a very high income from, say, a multimillion-dollar SMSF portfolio and still receive a very decent income outside super without paying any tax or any additional tax. This is a crucial consideration even if you are many years away from retiring – proper retirement planning should obviously be done years in advance.
Keep in mind that if your share portfolio produced, say, a 5% fully-franked yield, it would take a $4.8 million portfolio to produce cash dividends of $240,000. While most of us can only dream of such a portfolio, it makes the point.
Here are three of the key reasons why SME owners should have some of their savings inside a self-managed fund:
Trustees in bankruptcy do not have access to assets held in super unless the amounts were contributed in an effort to cheat creditors. This asset protection is without a dollar limit.
And many SME owners choose to have their business premises in a self-managed fund for both the asset protection to gain many of the usual tax breaks of being a landlord. (Of course, as later discussed, many SME owners can also get great tax breaks from holding their premises and certain other business assets outside super.)
Income from a super fund is taxed at just 15% and most capital gains at 10% during the savings phase. This is, of course, way below personal tax rates.
Further, superannuation assets backing the payment of a pension (including a transition-to-retirement pension) are not subject to tax on income or capital gains. And once the fund members turn 60, their super pension is no longer taxable in their hands. This is a double tax benefit.
By nature, many SME owners want to exercise as much control over their lives as possible. And their fondness for self-managed funds is an extension of that.
With self-managed funds, this control extends beyond being able to invest in investments unobtainable in public-offer funds such as direct property and unlisted shares to the possible use of innovative estate-planning strategies.
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