When you’re a small business owner, it’s not uncommon for you to put everything into your business – after all, this is what provides the income to fund your lifestyle.
But it’s important that this doesn’t come at the expense of your super, even if retirement seems many years away. Because there’s absolutely no guarantee that selling your business when the time comes will provide all the money you need to support your post-working years.
The bottom line? Don’t ignore your super.
One way you can actually use your super to grow your business is to set up a Self-Managed Super Fund (SMSF).
Why? An SMSF gives you more control over what you choose to invest your super funds in, and it can be used as an investment strategy that supports your business goals.
As an example, you can use your SMSF to purchase commercial property, and then lease the property back to your business.
Now, this only makes sense if you need a physical location. But if you do, and the numbers stack up – purchase price, location, rental yield and potential long-term capital gain, then it’s well worth considering because it gives you control over an important business asset, reducing the risk of you being forced out of the premises by circumstances beyond your control.
SMSF’s are currently taxable at 15% so holding a commercial property may also result in a tax advantages. But, as always, careful and detailed planning is required to see if it fits your overall strategy.
There’s also the opportunity to reduce personal risk with this strategy. Small businesses often start out financing themselves by securing assets and business borrowings against the family home, or other personal assets that have sufficient equity.
Without wanting to be negative, in the event of bankruptcy, this poses an enormous risk, with personal assets in the firing line. However superannuation assets are generally protected from creditors, which builds a protective buffer.
The business advantages are worth considering.
Get the details right. SMSFs can be convoluted to set up, and you need to understand your purchasing and borrowing power if you want to buy property.
Ask yourself: Does commercial property ownership fit your overall business strategy?
The ATB Partners’ five-step process can help you decide.
If you’re an online business, then obviously it makes no sense. As a retailer, buying through your SMSF in an out-of-the-way part of town because that’s what you can afford might not make sense either.
Because, ultimately, your SMSF needs to grow your retirement wealth, there are other considerations too: If you put all of your SMSF funds into your commercial property, then you’re going against an age-old investment strategy called: diversification.
Diversification simply means not ‘putting all your eggs in one basket’.
All investments go through cycles – upswings and downswings – and when you have a diversified investment portfolio you can mitigate the risk that comes when some of your investments are under-performing.
The theory of diversification is that when you invest in a range of asset types, some investments will likely be doing very well at the same time as others are not doing so well, but overall, when averaged out, your returns should still be moving you forward financially.
So, consider how much of your SMSF you want to put into property, and how much you want to put into other investments, for example a managed fund or other assets.
Beyond commercial property investment, the flexibility of having an SMSF means you can invest in your company or business too.
This is called having an ‘in-house’ asset and it is restricted to a maximum of 5% of the SMSF’s total asset pool.
In-house assets can be complex and need to be structured properly, but they can provide the right strategy to a business that may need a capital injection in order to grow.
While having an SMSF does put you in charge of your investment pool, it does also require a bit more work in terms of management and reporting.
For some, an SMSF is too simply too burdensome to stay on top of.
For others, it can open a range of opportunities.
The key to using your super wisely really comes down to what’s right for the business – not just short-term, but long term.
And this needs to take into consideration your eventual exit strategy, because there will come a time for you to retire and that’s when you need your superannuation to have performed well, enabling you a solid income to enjoy your latter years.
Obviously, there’s a lot to work through, so take your time and do your research. If we can help you explore your options, then talk to us.
The advice provided is general in nature and may not apply to your specific circumstances It is not intended as financial advice or as an offer or recommendation you should seek qualified professional and independent advice that address your circumstances and objectives before making any investment decisions.