IMPORTANT NOTE. This article was written and supplied for authorised use by Rayden James, Director (and Representative) of Super Strategist Pty Ltd (AFSL No. 503085). This article is for information purposes only and should not be relied upon to make any financial or investment related decisions. Please speak with your financial advisor about anything in this article as it may relate to your own situation.
Financial advisors that aren’t business owners love to preach about ‘diversification’ and not having all your wealth tied up in your business. What nonsense!
Every successful entrepreneur I know has gone ‘all in’ on their business. “In for a penny; in for a pound” was instilled in me from a young age. I can’t imagine advising Ray Kroc to ‘diversify’ into selling pizzas after opening 50-100 restaurants.
This article isn’t about ‘what you should do’; it’s more of a ‘here is what I’ve done’ as a business owner and Financial Advisor. I don’t believe entrepreneurs should be told what to do – they simply need a team around them that illuminates all their options.
Boring investment advice (or as we call it in my business: “financial broccoli”) is annoyingly successful. There might be one or two professional investors on the planet that can compete with the returns on offer from a simple strategy that you stick to with a fervent stubbornness. On top of that, my best advice is to ‘get real’ (i.e. buy real assets like property and gold bullion) and focus on assets that “your grandkids will love” (i.e. assets that will look like a no-brainer ‘good decision’ in 50+ years – which helps avoid the ‘noise’ of short-termism). For most Australians, they can harness these investment themes via a leveraged residential investment property strategy. In fact, my business was borne out of the tinkering with the legislation in the late noughties that allowed families to do this via their superannuation.
In a nutshell, ‘mum and dad’ investors could ‘pool’ their super accounts via a Self-Managed Super Fund (or SMSF) and buy a ‘normal’ investment property. Take Kenneth and Karen (actual clients by the way) who setup a Fund with us in 2021 with a combined balance of $207,000. They bought a property worth $399,000 that’s now worth $620,000, meaning their $207,000 starting balance is now worth over $400,000 during a period when ‘normal’ (i.e. retail and industry) super funds have offered lacklustre returns. The best is yet to come: when they retire, they’ll live very comfortably on the passive rental income the property will provide for life. (And they’ll own another one or two properties in their Fund before they retire.)
But that’s just the tip of the iceberg compared to what business owners can do: you can use your super (and potentially combine it with your partner) to buy premises for your business. By the way, ‘partner’ in this context could mean your husband/wife or your ‘business’ partner. The Fund can have up to six members comprised of family or friends – though involving employees (unless related) is a big no-no.
Now, I’m not a property valuer. That being said, most *commercial* property Agents I’ve spoken to have told me it’s a ‘special market’, which I think is code for “no-one really knows what’s going on”. So do your own research. But when I look around Brisbane, there’s a solid argument that a lot of the commercial property market sectors haven’t had the ‘boom’ that the residential market has enjoyed post COVID. Case in point: office space.
But you don’t even need to buy ‘cheap’ to engineer a winning outcome. Most business owners I know simply crave stability and certainty (e.g. “control the things you can control”) and relocating your business is the quickest and easiest way to lose six months of your life.
My business, Super Strategists, is in Spring Hill QLD. I bought the 83sqm space via my family’s SMSF in 2013 for $255,000. It’s a stone’s throw north of Brisbane CBD and had enough room for the business to grow over the last decade. But you could buy any type of commercial real estate anywhere around Australia – and there are a handful of lenders that will lend you c70% of the property’s value, meaning you can secure the asset with a c30-35% deposit.
You can then lease the property from yourself (i.e. via your SMSF). The rent remains a tax deduction to your business, whilst the rent received by the super fund will be taxed at a maximum rate of 15%; or 0% once you retire or are in ‘pension’ phase (potentially from age 60). If/when I sell the business, I’ll also be sure to include a ‘lease-back’ agreement on the space. Given the special tax concessions on offer, if the buyer agrees to this I wouldn’t need to be as greedy on the sale price.
My parents are members of my family SMSF. Despite being their loving (and only) son, they continue to charge me a ‘market’ rate of rent. And I’m only too happy to pay it – it’s tax-free income for them.
Without getting too nerdy, there are all sorts of concessions that could be available to you to quickly and easily (i.e. in a tax-efficient manner) move money into super for you or your family to help make this work. Your Accountant or Advisor can brief you on these, though a ‘special mention’ for people with under $500,000 in super as of July 1, 2023: you should review your ability to make a ‘catch up’ tax-deductible contribution pre-June 30 based on any ‘unused’ pre-tax contributions over the past five years. Just be careful re Div 293 – again, something to discuss with your Advisor or Accountant before acting on.
Your Advisors should also be able to help you harness some ‘extra special perks’ by using this strategy.
So many business owners lament how to get ‘more’ out of their business. Well, this is one of a handful of ways to really ‘squeeze the juice’.
As you can tell from the above, you need a good ‘team’ to make this happen: a licenced Financial Advisor that specialises in SMSFs, a Mortgage Broker and a good Conveyancer. Plus, your Accountant should be on board. All parties should be divisionalised (i.e. separate businesses: I’d recommend avoiding a ‘one-stop shop’ so that they’re not feathering each other’s nests) but collegiate – and make sure there is one person everyone acknowledges is the ‘project manager’ (preferably not you).
Early on, don’t just ask if they “do SMSFs”: be sure to ask each party how many SMSF transactions they’ve been involved with. If it’s under 10-20 politely walk away. Think of your business and the accidental stuff ups made in the first 10-20 instances you rolled out a product or service. The unfortunate reality is that the slightest error can be costly, oftentimes many moons down the line when the party at fault is long-gone, leaving you in the lurch.
There are a few types of folks who shouldn’t do this. Whilst the regulators in Australia (ASIC comes to mind) will suggest having a minimum balance of $200,000 when you start your SMSF, I’d rather caution people against this strategy who struggle with paperwork or delegation of paperwork e.g. a quick self-assessment would be to ask if you 2023 personal income tax return has been lodged. If not, an SMSF will likely only add to your burden and potential late-lodgement fees.
On the flipside, how does this strategy go wrong?
1. Some people simply borrow too much money, which is a shame because you don’t need to borrow ‘up to the eyeballs’ to access a wonderful result.
2. The Fund runs out of cash due to an unexpected expense – so keep a healthy ‘buffer’ in cash.
3. When the wrong professional is responsible for helping manage the administration and compliance of the Fund.
RE ‘3’ above: no, that’s not intended to be blatant self-promotion. Administration and advice costs vary, but in my experience having a central point of contact you can call (via their personal mobile preferably) who ‘lives and breathes’ all things SMSF in general and your Fund in particular is a great starting point. And you can tell when you’re not dealing with someone passionate about it.
I’ve been waiting for an Accountant or Advisor to ‘ring the bell’ on this strategy for over a decade now, as for too long it seems to have ‘slid under the radar’. Perhaps it’s because there isn’t much ‘in it’ for the banks and the big super funds; you’re the only one who keeps all the profit.
This article was written and supplied for authorised use by Rayden James, Director (and Representative) of Super Strategist. (AFSL No. 503085).
At Super Strategists we help Australian families who are tired of watching others ‘get ahead’ whilst their financial position is treading water. We do this by following our 6 Step Passive Income Plan, to create your ‘Passive Income System’, or the way in which you and your family will grow your wealth.
Visit https://superstrategists.com.au/ for details.
Benchmark Business Advisory Pty Ltd does not provide financial advice and is publishing this article only as a ‘for interest’ topic. Please consult your professional financial advisor to discuss anything contained within this article before acting on anything mentioned in this article.