SMSFs explained: A definitive guide for small business owners

Self-managed super funds are a tricky business, and with legislation constantly changing, it’s difficult to manage your superannuation as a small business owner. 

Here’s how to make it easier.

Supercharge your business growth

The arm’s length pinpoints the principles underscoring the actions of independent parties in a transaction, which in turn is used to determine the fairness of related party transactions. This involves transacting at a fair, market price, with both parties enjoying equal bargaining positions to reach an agreement and neither party is subject to each other’s control or dominance.

Related party transactions include all members of your fund as well as associates of those members. Most transactions between your business and your SMSF would be regarded as a related party transaction. 

SMSFs must transact at arm’s length, ensuring that no member of your fund receives any present-day benefit. By leveraging an arm’s length transaction between your business and your SMSF, you can tap your SMSF to finance your business growth. 

Example: your business is interested in acquiring a commercial property for $800,000. 

Your SMSF can use its balance to purchase the commercial property, in turn leasing the commercial property at a market rate. By offering the lease at a market rate an arm’s length transaction between related parties is established. 

By leveraging your SMSF you can avoid the hassle of working with banks or other external parties to obtain a loan, enabling you to supercharge your business growth whilst creating a lucrative investment opportunity for your SMSF.  

Diversify your wealth

SMSFs offer small business owners significant wealth diversification, ensuring support into retirement regardless of the state of their small business. 

Almost all superfund contributions, including those to a SMSF, are taxed at 15%. For instance, if you make a voluntary contribution of $10,000 to your SMSF, you can expect to pay $1500. Simple? Not so quick.

As your SMSF grows your earnings will usually be taxed at 15%. Your earnings could include:

• Realised capital gains. For example: If you purchased 1,000 CBA shares at $85, for a total purchase value of $85,000, and later sold those same 1000 CBA shares at $90, for a total sale value of $90,000, then you can expect to be taxed $750 on your $5000 gain; and
• Distributions. For instance, let’s assume you own 10,000 AIZ shares. If you receive an unfranked dividend payout of $0.1 per AIZ share, for a total dividend payout of $1000, then you can expect to be taxed $150 on your $1000 payout.

Reduce your tax with accumulated capital losses

However, if you’re looking to make the most of your SMSF’s tax benefits, consider leveraging accumulated capital losses.

For instance, if you lost $2500 on your TSL shares last financial year, you can use your $2500 to offset your $5000 gain this year. This reduces your taxable gain to $2500, reducing your tax payable to $375 (from an original tax payable sum of $750 without accumulated capital losses).

Reduce your tax with fully franked dividends

Slash your tax bill even further by making use of fully franked dividends. 

For instance, let’s say you receive a fully franked dividend payout of $1000 from your CBA shares. The fully franked nature of the distribution ensures that CBA has already paid tax on the $1000 payout.  

Assuming a corporate tax rate of 30%, the $1000 payout would be grossed up sum would amount to $1428.57 ($428.57 of which is tax already paid). The ATO would then charge a 15% tax rate on the sum of $1428.57, amounting to $214.28. 

As $428.57 in tax has already been paid, the ATO will supplement your dividend payout with a tax refund amounting to $214.29. 

Effectively, buy purchasing shares that offer fully franked dividends, you can amplify your dividend payouts.