Inflation: The friend of SMSFs, but the enemy of private investors!

In these times of low inflation, investors with a small level of funds within their SMSFs may be tempted to believe that they should hold their investments outside super in their own names.

This approach is fraught with danger due to the different tax treatments of SMSFs and individuals. Whilst SMSFs 100% in pension mode (that is, providing an income stream for their members to live on) is exempt from taxes (both income and capital gains), income earned “outside ” is not, and the investor must rely on being below the tax free threshold to be sure of not paying tax.

Whilst in times of low interest rates, lower rental returns, low dividends and low capital growth income is generally also low, the reverse is true when inflation increases and the investors must rely on the tax free threshold increasing accordingly to be sure of not having to pay tax.

The SMSF, however, (and any Super Fund for that matter) maintains its tax exempt status (under current legislation) and therefore is immune from tax no matter how high interest rates, rentals, dividends and capital gains may go!

 

The problem becomes even worse when one of the partners die. In normal circumstances, the surviving spouse will have twice as many assets, up to twice as much income but only one tax free threshold!

For these reasons, any investors should consider carefully the pros and cons of taking their funds out of super – particularly if their age means that they will be unable to undo the decision and return these funds back to the safety and security of superannuation.

 

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