Supercharge your SMSF
Posted on May 26 2015
Self Managed Super funds (SMSFs) has been the fastest growing sector of the superannuation industry for the past five years with more than 500,000 in existence, catering for nearly 1 million Australians. Many Doctors have discovered that SMSFs have a number of great benefits for their wealth creation.
Firstly, like all superannuation funds, an SMSF is tax advantaged. The maximum tax rate during your working life (what we call the accumulation phase) is only 15%, and potentially less if you hold assets for greater than 12 months and if you take advantage of the franking credits that Australian shares can offer. When you retire (and enter what we call the pension phase) your superannuation fund becomes a tax exempt structure. That’s right no more tax at all! None on income, none on gains, and none on the pension you withdraw so long as you are aged over 60. Superannuation is the only legitimate tax haven in the country!
Secondly, a Doctor can purchase his or her medical practice’s premises using their own SMSF. So rather than paying rent to a landlord you can now pay rent that is going towards your retirement! Furthermore, if there are insufficient funds in your SMSF to purchase the premises outright, you can borrow the money due to legal changes made a number of years ago, enabling SMSF entities the ability to borrow.
Practice Premises & Your Self-Managed Super Fund
Purchasing your Medical Premises in your SMSF is a relatively straightforward process.
The infographic below gives an insight into how this strategy works:
How does this work?
For this example, we will assume two things. The first is that you already have a self-managed superannuation fund in place and the second is that you have enough cash in your super fund to cover a 30-35% deposit on the practice that you wish to purchase. The reason for this high level of deposit is that unlike a conventional loan, it is a limited recourse loan, which means that the recourse (or solution for the bank) in event that you default on the loan, is limited to the asset you have purchased. The bank cannot hold as security other assets within your superannuation fund.
A trust, known as a ‘bare trust’ needs to be established to hold the medical premises. This trust sits outside the superannuation fund, specifically to prevent creditors from accessing the assets of the super fund in the event of default on the loan. The beneficiary of the bare trust is the Self Managed Super fund, so that at the end of the loan the legal ownership of the property can pass to the fund.
Aside from the slightly more complicated structure than a traditional home loan, the principle is the same. You are able to purchase your premises using this bare trust structure and effectively pay off the loan with the rent you are paying.
For more information, call Jonathan Hoyle (Head of Financial Planning) at Stanford Brown on (02) 9904 1555.