Do it yourself super
An increasing number of business owners are choosing to invest their own superannuation. Christine Long considers how you could benefit.
If your plans for retirement barely stretch beyond a vague dream of selling your business and buying a caravan to tour Australia, it might be time to put some thought into superannuation.
As owners of growing businesses, we may be diligent about contributing to superannuation for our employees, but with no legal requirements to save for our own retirement our own future can end up neglected.
NAB's Head of Financial Planning Iain Rogers says it can be an unwise strategy on a number of fronts to have your business as your sole retirement plan.
"It makes a lot of sense for taxation, protection and wealth planning purposes to have assets accumulating outside of a business. Superannuation is still one of the best tools we have in this area. And the fortunes of super will be separate from any business fluctuations.
You control your super
While it is possible to contribute to a mainstream superannuation fund like our employees, an increasing number of business owners are exploring self-managed, or DIY, super funds.
In recent years these have been one of the fastest growing areas of super. By mid-2005 there were almost 311,000 DIY super funds in Australia and their numbers were growing at a rate of about 2,000 a month.
Figures from the Association of Superannuation Funds of Australia show there is about $169 billion in assets in DIY funds, which represents about 23% of the total assets in super.
Like other super funds, contributions to DIY funds are invested and made available to members when they retire. The major difference between DIY funds and other forms of super is the number of members is limited to four and each of the members is also a trustee of the fund.
As trustees they are able to control the investment of their contributions and the payment of their benefits, making it easier to maximise the tax efficiency of the fund.
This added control over investment choices and increased flexibility are often the reasons people choose to set up a DIY super fund, according to Rogers.
"Self-managed super gives the individual total discretion over the assets they wish to invest in. This can be very attractive if they have a special interest or expertise, as they are making the decisions," he says.
They can also include more diverse assets in the super fund's assets such as artworks, antiques and wine collections.
Owning business property
But for business owners one of the primary advantages is DIY funds can be used to hold business property.
For instance, the owner of a chain of gyms can use their DIY super fund to hold their properties and then they can lease the gyms back to the business. They must pay market rent but in the super environment the rental income will only be taxed at a rate of 15%.
And such arrangements can benefit the business in other ways, says Rogers. "A smart strategy can be to separate property assets from the operating business. Any property owned by the business entity will be subject to the fate of that business, and that is not always sensible.
"Holding the property in a super fund can largely protect it from business creditors, and the rental income paid by the business is adding to the super fund tax-effectively," he says.
"If the property is subsequently sold or transferred, the capital gains within the super fund will be taxed at a maximum of 10%, and this is a big advantage over other structures."
Another reason to consider a DIY super fund can be cost. People with significant savings in super, or with the ability to rapidly increase the amount they are setting aside, can find they are a cheaper option than a retail super fund.
However, Jeffrey Lucy, Chairman of the Australian Securities and Investments Commission, suggests people think carefully before setting up a DIY fund for cost reasons as they can be more expensive and complex to establish and run than they expect.
What do you need?
Super experts suggest you need between $200,000 and $400,000 in super to make the cost of running a DIY fund worthwhile. Fulfilling the auditing and reporting requirements can lead to annual costs of between $1,700 and $3,000 and if trustees elect to seek financial advice these costs can be even higher.
And it is not just direct costs that should be considered. Along with the increased flexibility and control of DIY funds comes increased responsibilities and obligations. The trustees of a DIY fund are legally responsible for making sure the fund is correctly structured, keeps satisfactory records and meets all the reporting requirements.
The operations of the fund must be audited annually and income tax and regulatory returns lodged annually.
The investment side of running a DIY fund also requires a significant commitment. Trustees must have the time and the knowledge to devise the fund's investment strategy and then select and monitor the necessary investments to ensure the fund grows and achieves its aims.
"These factors in combination mean DIY funds will not be for everybody", says Rogers. "For the less disciplined investor, it can be a better option to take advantage of the superannuation opportunities through traditional managed funds. This will take a lot of the investment and management risk away, but still deliver the taxation and protection benefits of super."
Staying on the right side of the rules
One of the advantages of DIY super funds is they can extend their assets into the more diverse end of the investment spectrum and hold artworks, antiques, even wine collections.
But the regulations governing these funds are very clear that such assets must only be used for providing a benefit on retirement. You cannot purchase art as an asset for a DIY fund and then hang it on your wall or drink your wine collection.
Any trustees found breaching the regulations surrounding DIY funds run the risk of being prosecuted or being disqualified from acting as a trustee.
The Tax Office can also make the fund non-complying which would mean that the fund's assets and income would be taxed at 47% rather than 15%.
Christine Long is a finance writer who contributes regularly to Money Magazine and The Age.