How an SMSF Can Provide Tax-free Income

SMSFs and Tax-free Income


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How An SMSF Can Provide Tax-Free Income

Today, this Super Fund has accumulated assets in excess of $5m, made up of unencumbered commercial real estate, precious stones, cash, shares and managed investments. This is a diversified portfolio mix. It provides tax-free income to one member of more than $120k per year, whilst the other member can continue in accumulation, therefore enjoying generous tax breaks!

How did this happen?

It all started in 1995 when J & K?s accountant, Henry Quarles de Quarles, co-founder of Quarles Pty Ltd, ?suggested that J & K set up their own Self-Managed Superannuation Fund (SMSF). J & K started off their SMSF with the modest sum of $25,000.

J & K had sold their business and were looking for an opportunity which would meet their long-term investment goals of:

  1. Providing a tax effective income stream;
  2. Providing good capital growth;
  3. Enabling J & K to develop new business opportunities by way of developing commercial rental properties on the land;
  4. Ensuring multi-generational security;
  5. Becoming self-funding over time;
  6. Being in control;
  7. Providing the most tax effective structure for their Investments.

Of course, there had to be short term benefits as well:

  1. Enabling the related entities to claim a deduction for superannuation contributions; thereby being
  2. Tax effective;

What to do once the SMSF was set up?

J & K purchased a parcel of land consisting of six subdivided blocks in a relatively new metropolitan location. The land had potential because of its proximity to arterial roads, the railway and new industrial and commercial developments.

To facilitate the purchase and development, we structured the ownership of the investment and arranged funding in this way:

Self Managed Super Fund (SMSF) Tax-Free Income

Step 1??? The Family Trust borrowed funds from the Bank

Step 2??? The Family Trust purchased Units in the Unit Trust

Step 3??? The Family Trust made tax deductible contributions to the SMSF

Step 4 ? The SMSF purchased Units in the Unit Trust

Step 5 ? The Unit Trust purchases the property

How did the SMSF assist in generating income?

Any profit made by the Unit Trust was distributed in cash to the unit holders. The Family Trust, which had operated business activities since 1978, over time reduced its unit holdings in the unit trust. At the same time, the SMSF increased its unit holding.

Currently, the SMSF owns 98% of the units in the Unit Trust, generating a healthy income stream for the fund?s members. As well as income, any potential capital gain will be generated within a very tax effective environment.

The same scenario without the benefit of a SMSF would be paying far more income tax on earnings and likely more tax on any future capital gain.

Are you looking for a way to generate income for your future through a Self-Managed Superannuation Fund? Not sure where or how to start?

Don?t worry, the SMSF experts at Quarles can help you. They will ensure that an SMSF is the best choice for your situation and goals, then they will get you on the road to being one of the many Australians benefiting from having an SMSF.

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