The document discusses self-managed superannuation funds (SMSFs) for small to mid-sized businesses. It provides an overview of how SMSFs can be used to build wealth through investments like property. It highlights a success story of business owners using an SMSF to invest in commercial properties. However, it warns that borrowing within an SMSF carries risks that require professional advice to navigate properly. The document aims to explain the benefits, risks and mechanics of SMSFs and borrowing within them.

1. Self-Managed
Superannuation
Funds for
Small to
Mid-Sized
Business
Contributors:
James Price, JPAbusiness Pty Ltd
Michael Pisani, Chapman Eastway

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Table
of
Contents
Introduction
........................................................................................................................
3
SMSFs
in
practice
..................................................................................................................................................................
3
A
SMSF
success
story
............................................................................................................................................................
4
A
word
of
warning
................................................................................................................................................................
5
Meet
our
contributor
...........................................................................................................................................................
6
Chapter
1:
Self-­‐managed
super
–
is
it
for
me?
.....................................................................
7
1.
As
a
small
to
mid-­‐sized
private
business
owner,
how
can
I
use
my
superannuation
to
build
my
wealth?
.......................................................................................................................................................................................
7
2.
How
do
I
know
if
a
SMSF
is
for
me?
..........................................................................................................................
8
Chapter
2:
Using
your
SMSF
to
borrow
for
property
investment
–
the
risks,
benefits
and
mechanics
.........................................................................................................................
10
1.
I
hear
about
business
owners
using
their
SMSF
to
buy
a
business
premises
or
other
investments
using
leveraging
(borrowing).
What’s
the
story?
.................................................................................................
10
2.
What
are
the
risks
of
borrowing
within
your
SMSF?
......................................................................................
11
3.
What
are
the
benefits
of
borrowing
within
your
SMSF?
...............................................................................
12
4.
What
are
the
mechanics
of
borrowing
within
your
SMSF?
..........................................................................
14
Chapter
3:
Self-­‐managed
super
FAQs
................................................................................
17
1.
Does
a
SMSF
provide
me
with
asset
protection?
...............................................................................................
17
2.
Can
I
use
my
SMSF
as
a
family
succession
tool?
................................................................................................
17
3.
If
my
SMSF
owns
my
business
premises
does
it
provide
significant
tax
advantages
over
normal
business
deductible
expenses
if
my
business
owns
its
business
premises
outright?
Are
there
other
implications?
.........................................................................................................................................................................
19
4.
What
happens
if
I
want
to
sell
my
business
premises?
...................................................................................
20
5.
How
can
I
transfer
my
business
property
into
my
SMSF?
.............................................................................
21
Disclaimer: The information contained in this eBook is general in nature and should not
be taken as personal, professional advice. Readers should make their own inquiries and
obtain independent advice before making any decisions or taking any action.

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Introduction
Comments by James Price
JPAbusiness Pty Ltd
Many of our clients are looking to not only build the value of their operating
business, but also build their wealth over time and extract some value along
the way.
Often their business has a going concern aspect to it. It has clients,
operations in different geographical areas, various products and staff, but it
also has a business premises, or a range of premises.
The challenge is in how to treat those investments – the business
investment and the real estate investment – separately. This is done
because the investments have separate risk and return profiles, and also
because there are extra wealth creation
opportunities for the real estate investment
within the current superannuation and
taxation environment.
This eBook looks at some of these
opportunities for value and wealth building,
which are afforded by utilising Self-
Managed Superannuation Funds.
SMSFs in practice
About one-third of Australia’s
superannuation pool is held in self-
managed super funds (SMSFs), with the
number of funds rising by 35% since
2008.
Many business owners are aware SMSFs offer opportunities to control their
super more closely and also utilise gearing to buy assets.

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But sometimes creating a SMSF for these purposes is simply a bridge too far
in terms of a lack of understanding of what’s available and how it can actually
be done.
The purpose of this eBook is to bring that information to light and explain in
practical terms:
• How to decide if a SMSF is for you;
• How to borrow within your SMSF, and
• The pros and cons of borrowing within your SMSF.
A SMSF success story
Self-managed superannuation is growing in prominence and that’s partly
because – if done well – it can be a great vehicle for wealth creation.
For instance, I have clients – a husband and wife team – who own a family
business in the heavy equipment industry.
They’ve been in business for more than 30 years and the business has solid
earnings of 20% of turnover, with a turnover of between $10 and $20 million.

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These clients have at least five commercial and industrial properties
they have developed and now own as part of their SMSF.
Those properties are separate from their operating business, but one of the
properties is the business’s premises and is leased by the business at a
market rental.
When you look at their example, you see the business owners are driving a
return from their investment in their business – from the engineering,
construction and earthmoving industry – but they’re also drawing a return on a
different risk profile in the commercial and industrial property market.
They’re getting a capital return from the properties they’ve developed, but
they’re also leveraging their SMSF and enjoying the advantages that come
from owning those properties separate from the business.
A word of warning
It’s important to note that borrowing to purchase an asset or investment within
your SMSF is just like borrowing for any other investment. You must look
carefully at the return and the risk.
If you’re making a commitment to a bank to borrow and repay funds, you
need to be sure it’s a commitment you can meet, despite what fluctuations
may occur in the business or the fund. Borrowing within your SMSF
doesn’t make the risk any less.
Another point to keep in mind is you need to have both a short- and long-term
view when choosing investments for your super fund. If you’re a business
owner making a decision just for the short term, that approach may be fraught
with danger.
A SMSF can give business owners flexibility and control over their retirement
savings, but it’s not a silver bullet for wealth building. It has risks, complexities
and issues that must be carefully considered, so make sure you get
professional advice from a firm well versed in the rules and regulations
applicable to SMSFs.

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Meet our contributor
So just what does a SMSF offer and how can you tell if self-managed
super is for you?
To answer these questions, and many more, we’ve called on a long-time
accounting partner of ours, Chapman Eastway, a specialist firm we have
known and worked with for more than 25 years.
Chapman Eastway is a family and business advisory firm based in Sydney,
and one of the highly respected service providers in the JPAbusiness network.
Chapman Eastway Principal Michael
Pisani has kindly agreed to share his
expertise on this topic with us.
A chartered accountant and specialist
tax advisor, Michael has a special
interest in SMSFs, along with the
provision of related taxation advice.
Michael has more than 10 years
experience providing taxation and
business advisory services to a diverse
group of corporate and private clients.
He has a strong technical background
with experience in group restructuring,
retirement and succession planning,
ongoing taxation planning and family
wealth preservation.

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Chapter 1: Self-managed super – is it
for me?
Comments by Michael Pisani
Chapman Eastway
1. As a small to mid-sized private business owner, how
can I use my superannuation to build my wealth?
Many people who own or run small to mid-sized businesses have much of
their wealth tied up in their business.
Building wealth through superannuation provides an avenue to diversify their
wealth away from the day-to-day business activities and provides an
environment that can be:
a) tax effective, and
b) offers additional asset protection.
It is a great vehicle for building retirement
wealth.
I see superannuation as providing a bit of
a safety net for business owners,
because it can be used as a source of
wealth that sits outside their business.
Why choose self-managed super?
Business owners tend to like having the ability to control their own destiny.
For this reason self-managed superannuation funds (SMSF) are often
attractive to small and mid-sized business owners; they offer a combination of
flexibility and control of retirement investments.

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What is a self-managed super fund (SMSF)?
Almost anyone can have a SMSF. Basically it is:
• A special trust;
• Regulated by the Australian Taxation Office;
• Run by members for their own benefit.
SMSFs growing in popularity
At the end of June 2013 the Australian Tax Office (ATO) reported:
• More than 500,000 SMSFs in Australia – a rise of about 35% since
June 2008
• Approximately 960,000 members
• $495 billion held by SMSFs – about one-third of all superannuation
• At June 30 2012, 25.6% of SMSFs were valued $200k-$500k
2. How do I know if a SMSF is for me?
There are 3 key questions you should ask yourself before heading down the
SMSF route:
1) Do I have the skills and knowledge required to make
investment decisions for my own retirement?
A SMSF is basically do-it-yourself super. You have to have the skills
and knowledge to make investment decisions and decisions about your
own retirement.
You can and should take advice from professionals but, ultimately, the
responsibility lies with you.

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2) Am I prepared to accept the responsibility that comes with
being a trustee?
All SMSF members must be a trustee or a director of a corporate
trustee. You can be an individual trustee of your own SMSF, or a
director of a corporate trustee.
Trustees are responsible for running the fund within the law and
meeting audit and taxation obligations.
In December 2013 the government announced new penalties applying
to SMSF trustees, including fines up to $10,200 for breaches of the
Superannuation Industry Supervision (SIS) Act.
3) Do I have enough investments to make it worthwhile?
I’m often asked ‘how much do I need to set up my own SMSF?’ There’s
no minimum amount in law, however there are some benchmarks
published by ASIC and the ATO.
The ATO website features a number of publications and general
information for people considering SMSF and, in their opinion, around
$200,000 is an appropriate minimum benchmark.
As an indicative compliance cost associated with SMSF the ATO
suggests you might be looking in the order of $2000 per year on
$200,000. That represents 1%, which is comparable with a lot of the
management expense ratios of public offer funds.
I’m happy to accept their guidelines, however I think you could consider
having a fund with a balance of less than $200,000 if you set it up with
the strategic view to grow the SMSF in the short to medium term, or if it
was used to purchase a strategic asset.

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Chapter 2: Using your SMSF to borrow
for property investment – the risks,
benefits and mechanics
Comments by Michael Pisani
Chapman Eastway
1. I hear about business owners using their SMSF to buy a
business premises or other investments using leveraging
(borrowing). What’s the story?
If we look at borrowing within super to buy real property, there has been a
very large uptake of ‘limited recourse borrowing arrangements’ in the past
few years.
Even five years ago, borrowing within super was considered a little ‘out there’
and many people were skeptical.
But in the last couple of years, in particular, the financial institutions, other
lenders and a lot of the SMSF advisors have really taken to it, so it has
become much more commonplace.
Some of that is to do with the promotion by the real estate industry, as well as
lenders, banks and non-banks, who are looking at it as another product
offering.
At a professional level this has caused some concern.
In response, the SMSF Professional Association of Australia has developed
new industry guidelines on limited recourse borrowing arrangements. On July
30, 2014 the NAB became the first lender to sign up to the best practice
guidelines.

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2. What are the risks of borrowing within your SMSF?
Some of the risks on limited recourse borrowing arrangements are:
1) Incorrect documentation: You need professional help if you’re looking at
borrowing in super – it’s
not straightforward.
It’s a specific type of
structure and specific
type of loan, so it’s
important to get it right
from the beginning.
If you don’t document
the arrangement
correctly or the loan is
not structured properly, it
could lead to a breach of
SIS (Superannuation
Industry Supervision) Act,
which could make your fund non-compliant, i.e. not conducted in accordance
with the SMSF rules.
In extreme cases there are heavy penalties and taxes that apply to funds
seen to be non-compliant.
Get proper professional advice to manage that risk.
2) Double stamp duty: If the limited recourse borrowing arrangement is not
documented correctly from the beginning, it could lead to instances where
stamp duty is paid twice on the same property.
3) Liquidity issues: If you have a very large asset within the SMSF, say
you’ve borrowed to buy a piece of real property, you may have liquidity issues
within your fund. For example, if one of the members wants to exit the fund or
start a pension, you may find there is not enough liquid assets or cash to be
able to do that and also meet borrowing commitments.

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4) Inadequate insurance: Another risk when you have borrowed to purchase
a large asset in the fund surrounds appropriate insurances.
If a member was to die and you needed to pay out their benefits in the form of
a lump sum death benefit, you need to ensure there are appropriate
insurances to provide liquidity.
For example, say you’ve got a mum and dad inside a super fund
and one dies. You want to pay out the benefits but 90% of the fund
consists of a piece of property.
You can’t sell half a property, so you may be forced to sell the whole
property at a time that doesn’t suit.
If you have other investments, such as cash or listed equities, you have
less liquidity issues.
5) Ability to service debt: Like any debt, you have to ensure you can service
the debt and meet covenants, particularly with commercial property.
If a fund buys a piece of commercial property and there is an extended period
of vacancy, it’s going to be very difficult for the fund to service the debt and,
again, that could lead to an instance where you’re forced to sell the asset at
an inopportune time.
3. What are the benefits of borrowing within your SMSF?
1) Strategic asset acquisition: The key benefit of this gearing strategy is
that you’re able to buy an asset you may not have otherwise been able to buy.
In other words, an asset that is greater than the value of the fund alone.
That may present great opportunities to buy strategic assets, in particular. For
example, business owners may have the ability to buy a key piece of
commercial property, such as the property the business is conducted out of,
which they may not have been able to do without the gearing.

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2) Capital growth: The power of gearing can increase the ability to access
capital growth. Debt can be used to increase the asset base of the SMSF and
if the assets appreciate in value, the capital growth can be accelerated.
However, it also increases risk.

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4. What are the mechanics of borrowing within your
SMSF?
SMSF Borrowing Strategies – Chapman Eastway
As you can see from the diagram above, borrowing within your SMSF is
not exactly straightforward.
A lot of Australians are very familiar with the concept of gearing – going
out and buying an investment property in your own name. This is not that
simple.
Let’s take a look at the diagram, starting with the lender.
The Lender: The lender doesn’t need to be a bank; it can be a non-
bank and can even be a related party to the members of the super fund.
The definition of ‘related party’ can be a little complex, but generally it
can be another entity that the members control. For example, if Mum
and Dad are the members of a super fund, the lender could be ‘Mum
and Dad Pty Ltd’ or ‘Mum and Dad Family Trust’.
The lender provides a Limited Recourse Loan to the SMSF.

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Limited Recourse Loan: This is a special type of loan – it is not a
typical mortgage arrangement. ‘Limited recourse’ means, in the case
of a default, the recourse of the lender is limited to the asset being
purchased – they can’t use any of the other assets in the fund to repay
the debt.
In practice, that means the interest rates paid on a limited recourse
loan are usually a bit higher than standard interest rates and the
lending-to-value ratio (LVR) is generally a little lower than you could
otherwise borrow.
The lender will be more cautious: they’ll lend less and the interest
rate will be higher.
Holding Trust: The Holding Trust will own the asset being
purchased – the title of the asset will not transfer to the SMSF itself
until the debt is paid. This is because one of the rules under the SIS
Act is that assets within a SMSF must be unencumbered; they can’t
have a mortgage or charge over them.
The Holding Trust sits to the side and owns the asset, and it provides
the mortgage or charge to the lender for security.
Declaration of Trust: This states that the ‘Holding Trust is holding this
asset on behalf of the SMSF’. Some banks and lenders have specific
requirements as to the form a holding trust must take or who can
be the holding trust. There are some legislative requirements, but there
is also some flexibility.

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Beware stamp duty trap
At the end of the arrangement, when all the debt is paid off, the asset is
transferred from the Holding Trust to the SMSF. This is the point where a
double stamp duty trap can be found.
Normally, when you buy real estate, you pay stamp duty. In this case the
Holding Trust pays stamp duty when it first buys the asset.
However, if the loan arrangement and Holding Trust wasn’t set up and
documented properly at the beginning, the Holding Trust’s transfer of the
property into the SMSF can trigger another round of stamp duty.
Be prepared for higher costs
Entering into one of these borrowing arrangements does add a layer of
complication in the affairs of the super fund.
SMSF members should expect their compliance costs will also increase as a
result.
Powerful strategy
The two issues mentioned above are cons of borrowing within your SMSF, but
there are also some big positives.
When the lender is another entity within the family group, or borrowing allows
you to purchase a strategic business or family asset, borrowing within your
SMSF can be a very powerful tool.
It allows you to put a key asset inside super which you may not have been
able to get in there without borrowing.
The asset is then in a low-tax environment with an additional layer of
protection from creditors.

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Chapter 3: Self-managed super FAQs
Comments by Michael Pisani
Chapman Eastway
1. Does a SMSF provide me with asset protection?
I can’t give legal advice, but generally assets held within a SMSF have an
increased level of protection from business creditors, in the event of a
business default or if there is litigation.
However, people should be aware commencing a pension within super
may increase the exposure to creditors, and so increase the ability of
creditors to access your retirement earnings.
If the member had provided a personal guarantee for the activities of the
business – and small business owners are often required to do so – then that
income stream could be attacked by a creditor in the event of a business
default or personal bankruptcy.
2. Can I use my SMSF as a family succession tool?
Many people don’t consider a SMSF as a tool for succession planning, but it
can actually be used really effectively.
The key reason is a SMSF doesn’t have a finite life.
A lot of key family assets are held in discretionary family trusts which all do
have a finite life – generally about 80 years – but a SMSF doesn’t have a shelf
life.
It can be used to transfer assets between generations without actually
triggering capital gains tax (CGT) or stamp duty, which are the two major
drawbacks when transferring assets between generations.

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For example:
Mum and Dad have a SMSF which holds a farm.
You can have up to four members in a SMSF, so two of their children
come in as members of the same SMSF.
They progressively build up their balance while Mum and Dad start
taking pension payments as they move into retirement phase.
Eventually, Mum and Dad have taken their super monies as a
retirement benefit while the next generation has effectively taken
control of the asset by building their super balances.
That can be done over a couple of generations.

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3. If my SMSF owns my business premises does it provide
significant tax advantages over normal business
deductible expenses if my business owns its business
premises outright? Are there other implications?
Holding commercial property within a SMSF which is controlled by the owners
of the business occupying those premises is a very powerful tool for building
wealth and accessing some significant tax advantages.
Rent paid by a small to mid-sized business is a deductible outgoing business
expense. So there could be a 30% tax benefit on rent paid, or 49% tax benefit
when you think about funds flowing to individuals at the top marginal tax rate.
If that rent is being paid to your own SMSF, the income going into the fund is
being taxed at a flat rate of 15% while the fund is in accumulation phase, or
even 0% while the fund is in pension phase.
For example:
A small business operates as a company.
It receives a deduction of 30 cents in the dollar for rent paid to the
super fund and, because the fund is in a pension phase (because it’s
paying a Transition to Retirement pension or something similar) the
income going in is taxed at 0%.
In order to access these benefits you must ensure the rent is paid on an
‘arm’s length basis’, i.e. a fair market rent.
However, even with a market rent this strategy is still a very powerful tool,
particularly in recent times as the yield on commercial property has been
relatively high, compared to residential property.

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Planning strategy implications to consider
The planning opportunities increase as people approach retirement age.
As explained above, income
generated within a SMSF is
taxed at 0% when the fund is in
a pension phase.
A SMSF can be in a pension
phase if the members have
commenced a Transition to
Retirement Income Stream.
People aged between 55 and
65 may commence such a
pension and still be actively
involved in the business.
Even for members who are still
in the accumulation phase of
their super there is a flat rate of
tax of 15% on income in super.
That is a lot less than taxes
paid at the business level.
4. What happens if I want to sell my business premises?
If the premises are owned by the SMSF and have been held in the fund for
more than one year, they are eligible for a Capital Gains Tax (CGT) discount
when sold.
The discount brings the effective rate of tax to 10% on profits on the disposal
of the asset.
However, if the fund is in pension phase and an asset is sold, the effective
rate of tax on any capital gain is zero.

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For example:
You’ve had a piece of property inside the SMSF for 10 years.
You start a pension in year 10 and a year later you sell the property.
You effectively escape paying CGT on that property even though you
may have had 10 years of appreciation.
It requires careful planning, but it represents a huge retirement planning
opportunity.
5. How can I transfer my business property into my SMSF?
There is a significant planning opportunity in NSW at the moment and that is
the availability of stamp duty exemptions when SMSF members transfer
assets from themselves into their fund.
If a member owns a piece of business real property there are avenues where
they could transfer that piece of property into their SMSF without paying
stamp duty on the transfer.
There may be some Capital Gains Tax (CGT) implications on transferring an
asset from a member to their fund, but there may also be some opportunities
to minimise or even totally remove those CGT implications through the Small
Business CGT Concessions.