You have many options when it comes to preparing for your retirement. But one of the most popular options is a self-managed super fund or SMSF.
With enough assets in your SMSF, you don’t have to rely on the government for your retirement. It provides for members who are in retirement. This would shift to the beneficiaries upon a member’s death.
Generally, this funding option allows members to receive contributions and rollovers. You can also make investments. One feature most members take advantage of is the lump sum payments and pensions.
There are many benefits to having this type of superannuation fund. But one of the biggest is investment control. You have more investment options than you would with other retirement funds.
An SMSF gives you flexibility and range to invest in the things you want. Respond quickly to market changes. And take more control over your investment portfolio.
Additionally, other benefits include estate planning, multiple members, and tax management. Despite these many benefits, trustees are often confused about the payments they’re legally able to make. Furthermore, the liable taxes are also a source of confusion.
When you don’t fully understand your SMSF, you can’t take full advantage of its benefits. This is painfully so when it comes to managing taxes.
SMSFs can give you greater control when it comes to taxes. There are ways to take advantage of this and pay as little taxes as possible.
The Tips
Investment control is just one perk. Knowing your way around taxes for this fund is how you can get the most out of it.
Knowing how it works can help with compliance, one of the major headaches related to SMSFs. Ready to get started? Take a look at some essential tax tips below:
Tip #1 – Identify Deductible and Non-Deductible Expenses
Can you properly identify deductible expenses?
According to superannuation laws, deductible expenses have to be directly related to running your fund. Still confused about whether you can deduct an expense? It’s best to figure out what you can’t deduct first.
Non-Deductible Expenses
Before you take a deduction, think of the sole purpose test. This means that any decision has to have a direct effect on providing retirement benefits to the members.
For example, the following expenses are likely to get extra attention:
- personal computer
- training course
- holiday
These expenses look personal and excessive. So you shouldn’t risk using the fund to pay for them. In addition, here are some more examples of things that are not deductible:
- loans or financial assistance to fund members or their family
- payments to yourself or business
Keep in mind that any expenses incurred during the initial planning and setup of your SMSF are not deductible. They’re considered capital in nature.
If you work with a specialist or accountant during the setup phase, their fees are not deductible. However, the fees can turn into deductibles if you maintain their services for managing the fund after the initial phase.
Also, as of 1 July 2017, you can’t claim travel expenses related to residential investment properties anymore.
Deductible Expenses
There are a variety of deductible expenses to keep track of, though. You can and should deduct the following expense on your tax forms:
- personal computer
- training course
- holiday
Additionally, certain rental property expenses are tax deductible. This includes:
- fees for agent management
- council and water rates
- repairs and maintenance
- insurance
If you have the above expenses, remember to pay it directly from the super fund account. Also, make sure that the invoice reflects the super fund account and not your personal or company bank account.
Tip #2 – Trigger the Account-Based Pension
Transition to retirement pension is a viable strategy if your earnings are $37,000 to $2,250,000. But if you’re turned 60 after 1 July 2017, you may want to take on a second part-time job. This second job has to qualify for the superannuation guarantee contributions.
Why would you do that? Because if you get that second job that qualifies and then ends the arrangement, you’ll trigger a “condition of release.”
If you do this, you can convert a transition to retirement pension to a full account based pension. The difference between the two is that the retirement pension has a 15% tax. On the other hand, the full account pension is tax exempt.
Keep in mind, though, that you only qualify for that tax break if you’re still working your main career.
In addition, you can also go with another version of this strategy. You can retire after you turn 60 from your current job and return at a different date. This one may not be available to everyone, though.
Tip #3 – Take Advantage of the Tax-Exempt Status
Are you taking full advantage of the tax-exempt status?
Unfortunately, while you’re in the accumulation phase, you have to pay taxes. However, once your fund starts, it becomes tax exempt.
One of the most common ways to take advantage of this status is by property investment. Choose either residential or commercial investments.
Generally, you keep these types of properties for a long period of time. So it can increase capital growth.
In addition, some people like to hold onto the property and receive rent income. Usually, they’ll sell it as they enter into retirement, though.
Furthermore, some small business owners have a commercial property in their fund. They run their business from the property and sell it when they retire.
Tip #4 – Understand Concessional Tax Rates
Did you know that higher concessional contributions can help you save on tax? It also has the added benefit of building your savings. However, you have to stay within the contribution limits for your age.
Sacrificing your salary is one of the biggest ways to make contributions to your SMSF. You can make a saving if you:
- put money into your SMSF fund pre-tax
- claim a tax deduction if you have a higher personal tax rate
Furthermore, there’s a special rule that came into effect as of 1 July 2017. If you’re employed and have a super guarantee from your employer, you can:
- contribute to the fund from your own money
- claim it as a deduction in your individual tax return
To do this, though, you need to stay within the cap.
This strategy may be appealing if you inherited money or received money from selling personal shares.
Tip #5 – Familiarise Yourself with Rules and Regulations
Tax rules and regulations are always changing. So keep current with all SMSF changes. This may include concession caps, deductibles, and payments.
For example, the $500,000 lifetime limit for non-concessional contribution caps may affect you.
What happens if you’ve contributed that maximum limit or more since 1 July 2007? You can’t make any further contributions in the non-concessional arena.
However, you also don’t need to withdraw any excess if you contributed prior to 3 May 2016.
A firm understanding of these rules and regulations can help redirect money into other areas.
Tip #6 – Understand Double-Dipping Strategy
Are you self-employed? Or maybe you retired under 65 and had an above average income or capital gain?
If either instance sounds like you, you may want to use the contribution reserving strategy. This is what the “double-dipping strategy” looks like:
- make a second concessional contribution up to your annual limit
- hold the second contribution in the allocation reserve in your SMSF
- allocate it to the member’s account in the new financial year
Why would you do this? You would receive twice the tax deductions for one year. In addition, allocating the contribution covers two financial years because you reserved it in your fund.
Tip #7 – Anti-Detriment Deduction
This deduction is one of the most beneficial. But very few people use it. It is for any fund that pays a death benefit.
The deduction is simple. To qualify, a member has to have died prior to the end of the previous tax year. If the trust deed allows, you can claim an SMSF deduction for an anti-detriment payment.
In reality, the payment represents a refund of paid taxes while the benefit was in accumulation. In some instances, the tax deduction may carry forward and offset future tax liabilities.
However, these payments are only available if the death occurred prior to 1 July 2017. Furthermore, 1 July 2019 is the deadline for receiving death benefits.
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Conclusion
Which one of these tax tips surprised you?
Tax obligations for SMSFs may be difficult to understand. However, you don’t need to memorise every regulation to make this superannuation fund work for you.
If you’re unsure about whether something is deductible, do a “sniff test.” Claims that sound personal will come under heavy scrutiny.
Also, make sure that your claims make sense. A share-trading course may seem like a great idea. But not if you don’t have the SMSF funds. Or if you don’t have investments in that area.
You can, however, encourage growth by taking advantage of some tax tips. Investments in property are one popular way to make the most of your tax exemption. Depending on your situation, you may be able to employ multiple strategies to take advantage of your tax status.
As mentioned before, tax rules and regulations are ever-changing. That complexity can stump even veteran trustees. Unusual tax deductions like the anti-detrimental one may go unnoticed by most trustees.
You don’t have to go it alone, though. Yes, there are a lot of obligations that come with being an SMSF trustee. But you can always seek professional help to navigate these murky waters.
Wondering whether an SMSF is right for you?
Book a free SMSF strategy review with a super expert to evaluate the benefits.