Free Money. It's something we would all like. But usually if offered there is a catch. Well imagine there was no catch. Imagine you could add $20,000 or more to your final Super Payout by doing little more than establishing a SMSF. Well it is possible and the savings are enough to pay for our annual SMSF. Every Year! For the life of your Fund!
We understand that this sound too good to be true. But in reality it is not. In fact you don't really have to do anything other than simply follow the law and the savings automatically flow. So how does it work? One of the major anomalies or disadvantages with the current Superannuation System, is the timing of the tax payments to the ATO on Employer Contributions made to the Fund. That is with large Superfunds when an Employer makes a Contribution into that Fund, it immediately withdraws the tax on the Contribution and forwards it to the ATO. So if you contribute $1,000 per month in Super Contributions only $850 is invested by that Fund, as the 15% tax or $150 is immediately forwarded to the ATO.
This sound fair enough but is it? Let's now compare what happens in a SMSF. In a SMSF when an Employer Contribution is made to your SMSF, you do not have to withdraw and remit the tax at that time. Tax is only payable on Concessional Contributions into a SMSF on the completion and lodgement of the SMSF annual tax return which can be up to 11 months after the end of the Financial Year! That is, in the first year your SMSF is setup the SMSF must lodge its tax return by February 28 following the end of the Financial Year. In the second year and future years the SMSF must lodge its tax return by May 15 following the end of the Financial Year. That is 11 months after the financial year ends! It is at the time the SMSF lodges its tax return that the tax is due. By delaying the payment of the tax to the ATO this means that you can invest the tax you would otherwise pay on the Employer Contributions and derive interest on the tax amount invested, before it needs to be paid to the ATO. The additional earnings are staggering!
Example:
Let's consider a simple example. Barney is 40 years old and earns a salary of $100,000 per annum. His employer contributes 9% of his Super into his SMSF every month. The Super contributions are invested in a conservative cash account earning 5% per annum. Barney's salary is assumed to increase by 3% per annum in line with inflation. Given that the Employer Contributions are invested in a SMSF, Barney is not required to remit tax immediately to the ATO. In fact for contributions made in July, the contributions tax will not be due until May following the end of the financial year. That is 23 months later! In the first year alone, Barney will save $557 in additional interest (net of taxes) compared to a large retail Fund that would have deducted the tax on receipt of the Contribution.
In the above example the additional interest saving nearly pays for our annual compliance fee in full! In fact if we extrapolate out the savings, at age 60, Barney will have an additional $23,677 in Super when he retires, using this tax deferral strategy, compared to what he would have has by using a large retail Fund. This is FREE MONEY that required no reduction in fees or additional returns to generate. In fact the extra $23,677 would pay for our fees over the entire 20 years period, which would total $18,782 assuming that our fees increased by 5% per annum over that time. Amazing! And you do not need to do a thing!
In fact if we extrapolate further and assumed that Barney was able to salary sacrifice an additional $10,000 per annum over the 20 year period the savings would jump to $44,202. These are amazing savings simply by legally "deferring" NOT avoiding your contributions tax bill. There are many reasons to establish a SMSF, namely control, choice, lower fees and so on. However this one benefit, which is truly amazing has been long forgotten! We think it is just another reason that a SMSF is the only choice for your retirement.