Self Managed Superannuation Fund (SMSF)

Self Managed Superannuation Fund (SMSF) For Tax Saving- A Case Study

Background

Our client, a farmland owner approached us for wealth management advisory services. The farmland owner recently retired has 2840 hectares of farmland and does farming with his wife, son and daughter in law. The farmland owner is 62 years of age while his wife is 60 years old.

The farmer has other assets including his residential property and $600,000 in shares generated from the estate of his wife’s father.

His residential property is free and clear without any encumbrances and interests by other parties and valued at $ 25,00,000.

The landowner entered into an agreement with his son and daughter in law that they will pay him and his wife $ 1,50000 annually during retirement. He and his wife each can contribute $ 200,000 as Non-Concessional Contributions, NCC or $ 600,000 using the bring-forward rule.

The landowner owned the land for more than 15 years, and the applicable capital gains tax, CGT concession can enable both husband and wife to contribute $ 10,00,000 each or else or up to $ 28,90,000 in case he sells or transfers the asset.

Strategy

As we proposed, the farm owner and his wife set up a Self Managed Superannuation Fund (SMSF).

The wife transfers her share from her father’s estate into the SMSF using the $ 600,000 NCC bring forward rule.

They also transfer the residential block into the SMSF using the 15-year small business exemption rule allowed as CGT concession and rent it to his son and daughter in law for $ 1,50,000 annually as per commercial lease rate.

Outcomes

All income to the SMSF will be free of tax. including $ 30,000 about the shares transferred from the wife’s father’s property.

The son and daughter in law can claim an annual income tax deduction on the $ 1,50,000 rent paid.

The farmland owner and his wife have a tax free Superannuation pension of $ 1,80,000 annually and almost $ 25,000 more than that under 2018-2019 marginal tax rate for non-SMSF.

For future planning of their asset and son and daughter in law, the landowner and his wife organized BDBN, Binding Death Benefit Nomination to the SMSF leaving the farmland to their son and the shares to their grandchildren.

We, however, informed our client that the farmland can’t be used as security or mortgaged for business borrowing.