There’s a lot said, written and discussed about superannuation. I know it’s generally not a popular topic amongst business people and farmers in particular. The main objection is that they can’t use their superannuation savings in their business. While it might be a wonderful off-farm asset to have, running a business like farming needs lots of capital so superannuation actually diverts capital away from where it’s needed. The other common concern is that you can’t access your retirement savings until you are 60 and retired (there are transition rules around this age). These are valid objections if you only understand superannuation from what we hear in the media. I think this is why it hasn’t been accepted by the rural community as an ideal way to invest.
Superannuation is not an investment
The greatest misconception about superannuation is that people believe it’s an investment. It isn’t. It is a tax special tax structure with a raft of taxation and compliance laws. How you invest your superannuation is largely the decision of the super fund member. That means there’s more freedom and control of how your savings are invested than you might think. Generally, the vast majority of super fund investors leave this important decision to industry and retail fund managers. This is a bit like buying a new home and leaving to the builder to decide what’s best for you.
Superannuation and your farm business
I want to discuss the principle of investment choice a little further and relate that back to operating a business. One of the most cost and tax effective ways to employ your superannuation savings is in purchasing assets such as farm land or commercial property. This is where huge amounts of capital can be soaked up especially if borrowing is involved. When you include the interest costs and additional tax involved, it becomes a very significant amount of money. One of the great benefits of this strategy is that you are the manager of your superannuation and you make the investment selection. Even better, you’ll be farming the land owned by your superannuation fund. I can’t think of a better tenant than yourself. The objection of not being able to use your retirement savings until retirement now goes out the window.
You can buy farm land with Superannuation
I feel the story even gets better. When you operate your own super fund (known as a self managed super fund) you have the unique ability to borrow to purchase farm land or commercial property. As a rule of thumb, a lender will lend dollar for dollar.
One of the most powerful benefits of the borrowing strategy is the tax effective way of repaying the loan. While interest costs are tax deductible, principle payments are fully taxable. We find this is often over looked and can be a problem when large capital re-payments are made. Even worse, it will affect your 5 year averaging. Superannuation is far more cost effective because of the flat 15% tax rate as opposed to personal or company tax rates which are generally twice as much or more than super. In a transaction involving significant amount of borrowing, the savings can be many hundreds of thousands of dollars.
I know this might sound too good to be true. And yes, there’s much more you should know and understand before going down this path. It is paramount that you get sound financial and tax advice around this strategy so you can make an informed decision if this is right for you. I do know that for those farmers we’ve assisted, they are grateful for the advice, support and savings.