Numbers game

Smart investing through multiple self-managed superannuation funds may help deliver financial security, but such a strategy requires caution to navigate taxation rules.

There are many financial options to consider when weighing up whether to establish a new practice, share rooms or go into partnership. Another option to take into consideration is the utilisation of funds within superannuation to facilitate the deal. It’s a potentially crucial financial instrument. Many specialists use self-managed super funds (SMSFs) for tax benefits as part of their retirement planning when buying their rooms, but the rules around such SMSF strategies can be complex and confusing.

An SMSF is one of the few super structures that lets you buy property directly. This is thanks to the exemptions related to what is called ‘business real property’. Medical rooms are usually classified as business real property. That means an SMSF could be a viable option for specialists looking to purchase their own practice, but sometimes you also need to keep your business and personal assets separate. This is where it gets complex, so the key is to make choices armed with the facts and with the help of an experienced and reputable financial adviser.

Two better than one?

The attraction of an SMSF is clear. Superannuation income is broadly taxed at 15 per cent. Realised capital gains can be taxed at an effective tax rate of 10 per cent. Compare that with a marginal income tax rate of, say, 37 per cent or 45 per cent (which most medical specialists will have to pay) and the long-term potential benefits of investing in an SMSF can be significant.

Flexibility is important, too. It's possible to have more than one SMSF. If you have reached the preservation age (currently 55), you may also be able to receive a super income stream in the form of a ‘transition to retirement pension’ from your SMSF. This lets you access super benefits without having to retire.

Having multiple SMSFs has been something many specialists have been looking at in recent years. This is because of the introduction of the $1.6 million transfer balance cap for super funds. This limits how much super can be transferred from your taxable accumulation account to a tax-free 'retirement phase' account. The move has led some specialists to consider having two SMSFs to quarantine their high-yielding assets in the tax-free retirement phase. They then leave lower-earning assets in the accumulation phase where income is taxed at 15 per cent.

Broadly speaking, having two SMSFs could also be used to assist with estate planning. For example, a second SMSF can smooth the transfer of different assets to different beneficiaries, like spouses or children.

Setting up a second SMSF may also allow higher-risk investments to be isolated if assets need to be safeguarded. For instance, if the SMSF owns property, setting up a separate SMSF for this asset class might protect other SMSF assets from any public liability claims for injury or loss.

Tax Office warning

While setting up multiple SMSF accounts may be an option, the Australian Taxation Office (ATO) has issued warnings that it will scrutinise any deliberate attempts to avoid tax or manipulate tax outcomes. Funds that break the law could be fined or disqualified.

In public comments, Australian Taxation Office deputy commissioner James O’Halloran has cautioned against individuals repeatedly switching between accumulation and retirement phase in SMSFs “to ensure that large gains and income are always incurred by assets in the retirement phase, achieving a greater effective tax exemption than would ordinarily be available”.

However, the ATO also notes that there are genuine reasons for having multiple SMSFs. These include in the case of blended families that want to keep particular assets or amounts separate from a particular family unit.

Another valid case could be establishing a separate business SMSF that keeps business assets which are leased back to the business, separate from family assets.

Possible fee blowouts

Assessing any cost implications of having two SMSFs is vital. Having two or more SMSFs means you are liable for multiple sets of fund establishment and administration costs. Set-up costs could include capital gains tax liability on the transfer of assets from the existing SMSF to the new fund. Stamp duty may also be payable on these transfers.

So, in short, the benefits of two or more funds need to outweigh all the additional costs, which requires careful planning with the guidance of a financial and tax advisor.

The scenarios raised in this article highlight some of the possibilities and risks associated with setting up one or more SMSF. Whatever your objective, seek independent professional advice before making any decisions. Adding additional structures to your financial affairs is complex and can lead to greater risks and the prospect of a knock on the door from the ATO if you break the rules.

As with any financial strategy, it’s better to be safe than sorry.

Click here to see how a specialist cardiologist achieved her goals through using finance through her SMSF. Contact one of our financial specialists on 1300 131 141 to discuss the options available to you.

You may also be interested in