SMSF in case of a family partnership business + day jobs

[Skyblues]

Hi,
I know hiho opened up a great thread in case of corporate trustee SMSFs (which actually confused me further) but wondering if you could point me in the right direction in my case:

- Hubby private sector employee - full time
- Wife public sector employee - full time
- We are also running a business with a family partnership structure with its own ABN, for which we are both and the only partners...

Are there any important changes/issues that I should take into account while opening and managing a SMSF bacause of a family partnership business? Or can I just go ahead and establish a SMSF and re-direct our day job super contributions to our own SMSF, and partnership/partnership income is just irrelevant?

And can a corporate trustee solution be applicable while you are in a family partnership business structure? If we go this way, how it will affect the business tax return is getting beyond me ...

Appreciate your insight and clarification as I am getting confused with SMSFs, no intention to take any suggestions as financial advice.

Thanks.

 

[nonrecourse]

There are a number of issues. I don't give advice but rather an opinion. I believe you should be planning 25 years ahead with a view that you will have built up a significant asset base, so much so that you need to protect yourself and your family from legal action to relieve you of some of your assets.

People who start with nothing are often advised that they don't need a complex structure because you don't have significant assets. The problem with that advice is that the advisor assumes that is not going to change as he or she is not looking twenty five years down the tract. Problem is as your income and asset base grows it becomes very expensive to change direction as it involves stamp duty and capital gains tax which sap away some of your early seed capital bcause of lack of foresight.

To answer your question about a corporate trustee;... ASIC has a cheaper version that is specifically just for your self managed super fund.

You do not want to have the same trustee for your super and family partnership business, keep them seperate.

With regards to why have a corporate trustee for your SMSF see this link;

http://www.smh.com.au/money/super-a...ucture-best-for-diy-super-20100803-114cw.html

The next issue your wife may face is that as a public sector employee there may be a sweetheart union wink wink nod nod "Enterprise agreement that compels her to keep some of her super in the "union controlled fund" usually around $5000 minimum the rest she can transfer. They will try and scare her with horror stories and threats about her losing great income protection/Life laddity, yaddity...just ignore that.

Setting up a corporate trustee for your SMSF and learning how to operate it is part of your development as a fiscally literate investor. Good Luck, ask lots of questions and enjoy the journey

Kind Regards
non recourse

 

[Skyblues]

Thanks for the response nonrecourse, I really appreciate it, I will have more questions coming up but let me reflect on what you wrote quickly.

She is a nurse with SuperSA fund, whatever the enterprise agreement clause is, it wont affect our decision, happy to proceed with this pursuit to open up a SMSF...and about keeping trustees separate, there are no trustees in family partnerships, income is personal income paid through individual returns...

My major confusion is if establishing this special status corporate structure will further complicate things in the future. We established the family partnership structure now, with the hope that one day it will become a liable business for one or two of us to make a living, in which case we would consider creating a Family Trust and a Company - it is not a viable solution for our needs today...I have no idea how this corporate structure SMSF will affect things in that case...

I hadnt considered corporate structure SMSFs until hiho's thread, and am pretty much convinced about it now. However, feeling suffocated about its potential or future ramifications with family partnership business or in the future, a family trust + company...

So in other words, how does a corporate structure SMSF interact with your family structure business, or your company, in terms of:

-establishment
-tax returns (individual tax returns, partnership tax return, corporate SMSF tax return) - or would corporate SMSF tax return be completely independent to your other financial life?
-and annual management

 

[Cracka]

Hi Skyblues,

Again this is not advice - more a comment,

You are confusing yourself a bit in relation to the whole issue. HiHo has made good comments in relation to corporate trustees in other threads, so I do not intend to go over them here again, suffice to say that each of the components you have discussed are seperate, they do not overlap.

That is:

you are a separate legal entity
your wife is a separate legal entity
your SMSF is a separate legal entity (or will be when it is set up)

your business seems (from the information you have given) to be a un-incorporated partnership, which reflects in your individual statuses.

A trust (which is essentially what a SMSF is) needs to have a trustee, this can be either:

A) both you and your wife as individual trustees for the trust, or
B) a corporate trustee.

in both the above scenarios, everything is carried out by the Trustee/s on behalf of the trust. ie Mr Skyblues and Mrs Skyblues as trustee for the Skyblues Superannuation Fund.

so if you have individual trustees (scenario "A") when it comes to tax time, you will need to prepare:

your personal tax return
your wife's personal tax return
your SMSF's tax return - which will be in the name of the Skyblues Superannuation Fund - you will both sign off on the return as trustees of the fund.

if you go scenario "B", when it comes to tax time, you will need to prepare:

your personal tax return
your wife's personal tax return
your SMSF's tax return - which will be in the name of the Skyblues Superannuation Fund - you will both sign off on the return as directors of the corporate that is trustee for the fund.

It is always separate to whatever else you are doing, the ATO wrote a booklet a number of years ago which summed it up pretty well, it was called something along the lines of "It's your money - but not yet". You have to make all the decisions on what you do, investment wise etc , but you do in both scenarios, either as individuals or as directors of the Corporate trustee.

My wife and I originally started our SMSF off with individual trustees and changed later to a corporate trustee, primarily because we felt it it was cleaner to do it that way, nothing could be confused with us as individuals, as it was in the Corporate trustee name.

I hope this makes it clearer - and does not confuse you more.

If somewhere down the track you decide to incorporate the family business, then that too is treated as another separate entity, with it's own tax return.


Cheers

Cracka

 

[jorgon]

Bravo Cracka and nonrecourse, nice answers!

Just a couple of other points which concern contributions into the SMSF.

With respect to the family partnership business, it sounds as if you are self employed in that business. If so, then you will only be able to make tax deductible contributions into the fund if less than 10% of your total assessable income (plus reportable fringe benefits) for the income year is attributable to employment. This rule does not stop you making contributions to your SMSF from your share of the partnership profit, but it will not be tax deductible (but in return it will not be taxed at 15% upon receipt by the fund). In other words, during the time when most of your income comes from employment, contributing to your SMSF from partnership profit will not itself provide a tax advantage. Once the money is in the fund however, the fund will have a tax advantage because of the lower tax paid by superannuation funds.

Also as I understand it, with superSA your wife gets an extra 1% employer contribution if she elects to contribute 4.5% or more of her salary after tax. You will need to look at the small print but I suspect that she will lose this if she nominates the SMSF to receive the contributions. She needs to understand this if she goes with you into your SMSF. Instead, it might be better for her to stay with superSA.

I would also recommend you check your private super scheme to see if there is a similar catch which applies to you.

 

[Skyblues]

In other words, during the time when most of your income comes from employment, contributing to your SMSF from partnership profit will not itself provide a tax advantage. Once the money is in the fund however, the fund will have a tax advantage because of the lower tax paid by superannuation funds.

Also as I understand it, with superSA your wife gets an extra 1% employer contribution if she elects to contribute 4.5% or more of her salary after tax. You will need to look at the small print but I suspect that she will lose this if she nominates the SMSF to receive the contributions. She needs to understand this if she goes with you into your SMSF. Instead, it might be better for her to stay with superSA.

Great points jorgon, and thanks for the responses all...

Just a few dumb follow up points I would like to raise, just to be sure:


1-) What is the rule in terms of contributions from our own family partnership business, which is basically a form of self-employment...Do we have to contribute a percentage of annual profits after the tax return of the business, or can choose not to...I would rather not have to pay super contributions from our business at this stage of our lives, and rather try to invest back what little we can spare into the business or into mortgage, what is the ruling on such self-employment type businesses, in other words, structures such as family partnerships and sole traders ...


2-) As Cracka explained clearly, come tax return time, we will have to prepare tax returns for

my personal tax return and my wife's personal tax return - we do it via ATO's etax software
family partnership business' tax return and our SMSF Company's tax return - Is there any software to do these last two, or will we have to go through paper copies, if we choose to do ourselves...


3-) And just a minor point to clarify, we are also looking into making a permanent move to Perth within 1-2 years, not just to be closer to the Mint ), but also to be closer to friends... In this case, if we choose to go with a company SMSF structure, there wont be a need for additional documentation, right, considering the Company, unlike a state-based business, is operational nationally. So, just changing the addresses of the trustees will be enough or should I be aware of anything and postpone the SMSF establishment process till after we move to Perth...

4-) In terms of the opening date of the SMSF, when exactly the SMSF is considered established...If I for example, initiate the ACN application and SMSF documentation now, would I have to do a tax return for 2011-12 too, or shall I just wait till after June 30...ACN approval date is the start date of the SMSF company structure?

5-) Would it be possible to use an auditor over the internet, is cloud-based auditing allowed (if there is such a thing yet, I know there is cloud-based accounting now) or will that auditor have to come over and oversee papers and/or investment physically, if the investment strategy of the SMSF is real estate or PMs...I wouldnt be happy to invite an auditor into my house and show him the stash, how does auditing works in practice...

6-) Might be a complex question but want to raise, if the company structured SMSF''s investment strategy is determined to be real estate by trustees:

- Does it have to be in Australia?
- Any limits or restrictions for real estate investments in Australia?
- Can that investment/real estate purchase be made overseas - would there be too much paperwork for compliance with rules in this case.

Thanks...

 

[jorgon]

What is the rule in terms of contributions from our own family partnership business, which is basically a form of self-employment...Do we have to contribute a percentage of annual profits after the tax return of the business, or can choose not to...I would rather not have to pay super contributions from our business at this stage of our lives, and rather try to invest back what little we can spare into the business or into mortgage, what is the ruling on such self-employment type businesses, in other words, structures such as family partnerships and sole traders ...

There is no obligation for the self employed to make super contributions. As the partnership progresses however, it may have employees in which case it will be obliged to make contributions for those employees. It is conceivable that the partners themselves may take on the status of employees of the partnership and if so, super contributions would be required.

family partnership business' tax return and our SMSF Company's tax return - Is there any software to do these last two, or will we have to go through paper copies, if we choose to do ourselves...

I can only speak for the SMSF (ie the corporate trustee's tax return). Currently there is nothing like eTax to do this, and so if you do it yourselves it is a paper exercise. You need to complete this in draft first, and provide it to the auditor who is conducting the fund's annual audit. The auditor will check that you have completed it with figures that correspond with the accounts. The tax return itself is not really the problem. The more difficult work is to produce good accounts (Statement of Financial Position and Operating Statement) using the correct accounting rules, to present to the auditor for checking against the base documents of the SMSF. You can do your own accounts if you are an accountant, or good with figures. There are software packages to assist, some I am told are good. However all the ones I have tried have simply been more trouble than they are worth and did not produce good accounts at all. I ended up preparing my own ledgers using Excel spreadsheets and these are also capable of automatically creating the accounts exactly how I wanted them.

And just a minor point to clarify, we are also looking into making a permanent move to Perth within 1-2 years, not just to be closer to the Mint ), but also to be closer to friends... In this case, if we choose to go with a company SMSF structure, there wont be a need for additional documentation, right, considering the Company, unlike a state-based business, is operational nationally. So, just changing the addresses of the trustees will be enough or should I be aware of anything and postpone the SMSF establishment process till after we move to Perth...

You are correct the company has nation-wide validity. Just change the registered office of the company and addresses of the directors. You will need to inform ASIC (for the company and directors) and the ATO (for the registration of the fund and the ABN details including the addresses of the fund's "associated individuals") within 28 days of the change.

In terms of the opening date of the SMSF, when exactly the SMSF is considered established...If I for example, initiate the ACN application and SMSF documentation now, would I have to do a tax return for 2011-12 too, or shall I just wait till after June 30...ACN approval date is the start date of the SMSF company structure?

The SMSF is actually "established" upon the first transfer of funds to it for its members upon or following execution of the trust deed. In other words as soon as it holds money on trust for members. New funds have more time to do their first audit and tax return than existing funds. New funds have until 28 February following the end of the tax year in which they are established. So if your fund is established on 20 June 2012 it will need to lodge its first return following the audit by the end of 28 February 2013. If it is established on 20 September 2012 then the first return would be on 28 February 2014.

Would it be possible to use an auditor over the internet, is cloud-based auditing allowed (if there is such a thing yet, I know there is cloud-based accounting now) or will that auditor have to come over and oversee papers and/or investment physically, if the investment strategy of the SMSF is real estate or PMs...I wouldnt be happy to invite an auditor into my house and show him the stash, how does auditing works in practice...

There are cloud based accounting systems for SMSFs, where all the accounting is carried out on a distance computer using data entered by you on your computer. Such systems also are able to organise the audit. However, the auditor is almost certainly going to ask to see your base documents (stockbroker's reports, bank statements, resolutions, trust deed etc). Some auditors do home visits but most expect photocopies of the documents in the post. Basically with an SMSF you won't have a "stash" since everything needs to be documented and recorded - to satisfy the audit process.

Might be a complex question but want to raise, if the company structured SMSF''s investment strategy is determined to be real estate by trustees:
- Does it have to be in Australia?
- Any limits or restrictions for real estate investments in Australia?
- Can that investment/real estate purchase be made overseas - would there be too much paperwork for compliance with rules in this case.

Provided the trust deed permits, an investment can be anywhere in the world. Real estate investment is perfectly feasible and many SMSFs do this. However there are several rules which apply, which become stricter if the SMSF borrows money to make the investment. The best I can do is to suggest you put this in the search engine: "ATO Self-managed super funds - home". When you reach that page click on "assets and investments" and you will see all the rules set out there.