Q: Can I set up a self-managed super fund (SMSF) and invest the funds in a company of which I am the sole director? If yes, will the earnings of the super fund be tax free and would my drawings from the fund be tax free? I am 64 years old.
Question one: Can you invest your super money in your own company?
Your first question is a popular question with business people running SMSFs.
Anyone considering such a strategy should definitely be talking to a financial adviser or accountant who knows a lot about SMSFs, but I can offer you a general response.
Generally speaking, a SMSF can invest no more than 5% of a fund’s assets in investments involving related parties, such as purchasing shares in a company owned by a fund member. Such investments are officially known as ‘in-house assets’. Quoting directly from the ATO website:
An in-house asset is a loan to, or an investment in, a related party or trust of the fund. An asset of the fund that is leased to a related party is also an in-house asset. You are restricted from lending to, investing in or leasing to a related party of the fund more than 5% of the fund’s total assets. There are some exceptions, including for business real property that is subject to a lease between the fund and a related party of the fund…
A related party can include a company associated with a SMSF trustee/member. For more information on the ins and outs of in-house assets and related parties, you can check out an ATO SMSF ruling on in-house assets (see SMSFR 2009/4).
Question two: If my SMSF can invest in my company, how are the earnings from this investment taxed within the fund?
You’ll need to confirm the tax treatment of your SMSF with your tax adviser. Generally speaking however, assuming that such an investment fits within the in-house asset rules, that is, no more than 5% of a fund’s assets are invested or lent to related parties, then any earnings from such an investment would usually be considered ‘non-arms length income’. Non-arms length income was previously known as ‘special income’.
Such income is taxed at 45% (and 47% from 1 July 2014 until 30 June 2017) rather than the usual 15% tax normally associated with super fund earnings. NALI is taxed at 45% in accumulation phase, or in retirement phase.
For example, dividends paid to a SMSF from a related private company are often considered NALI. In some circumstances, the ATO may exercise its discretion and treat such income as arms-length income, which would then be taxed at 15% rather than 45% (and 47% from 1 July 2014 until 30 June 2017).
For more information on the tax treatment of super fund investment earnings, see SuperGuide article Super for beginners, part 15: Super tax – as easy as 1-2-3.
Question three: I am 64 years of age. Would my pension or lump sum withdrawals from my SMSF be tax-free?
The tax treatment of fund earnings is a separate issue to the tax treatment of benefit payments to fund members. Any benefits paid to SMSF members aged 60 years or over are tax-free.
Note: Any SMSF trustee considering investments in a related party should seek independent advice on the legal and tax implications of such a strategy.
For more information on the tax treatment of super benefits, see the following SuperGuide articles:
- Retiring before the age of 60: the tax deal (includes summary tax tables)
- Tax-free super for over-60s, except for some (includes summary tax tables)
- Superannuation after-life: Dear Dad, Tax for everything