End of year
strategies and opportunities
for business owners
2012
Agenda
1. Overview of super rules and legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
2
Agenda
1. Overview of super rules and legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
3
Choose your tax rate
Individual
• 45% - Top marginal rate + 1.5% Medicare Levy
• Discount of 50% on capital gains
45%
Company
30%
Super
15%
Pension
0%
• 30% Company tax rate
• No CGT discount
• 15% on earnings and deductible contributions
• 10% on capital gains - CGT discount of 33-1/3%
• Tax free earnings within super when drawing a pension
• Tax free pension payments once you turn age 60
• 15% tax offset on pension payments if over 55 and under 60
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Super is a tax structure not an asset class
No greater investment risk when investing through super
– you can invest in same assets
– Cash is an option
Bankruptcy protection
Low tax environment
Insurance
Cash
Super
Fixed
interest
Shares
Property
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Who can contribute to super?
Anyone under 65
Between 65 and 74 (‘work test’ required)
Age 75 and older (only Mandated employer Super Guarantee contributions)
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Tax deductions for small business owners
A Company contributing on behalf of employees
– 9% SG contributions
– Salary sacrifice arrangements
Self-employed
Partnership
Sole traders
Tax deductible contributions are referred to as “concessional contributions”
and are taxed @ 15%
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Maximise your deductible contributions
More important to start salary sacrificing earlier than ever before!
– 9% compulsory super counts towards cap
*Transitional arrangements for over 50’s
Proposed legislation to allow continuation of $50,000 cap for over 50’s where
super balance less than $500,000
Deductible contribution cap
2011/12
2012/13
Standard cap
$25,000
$25,000
*Transitional (Over 50’s until 30 June 2012)
$50,000
$25,000
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Personal contributions can help plug the gap
Case Study
Brad (age 55)
Employed on a
package of
$180,000 plus SG
Was sacrificing up
to $50,000 cap.
From 1 July 12 may
only have $25,000
cap
500,000
450,000
400,000
350,000
300,000
250,000
200,000
150,000
100,000
50,000
0
1
3
2
4
5
6
7
8
Year
Salary Sacrifice $34,225 (50K Cap)
Salary Sacrifice $9,225 (25K Cap)
Salary Sacrifice $9,225 plus $15,375 after-tax
Note: Assumes a return of 7% after fees and tax
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9
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Who can make a non-concessional contribution?
Individuals within the partnerships can – treated as personal after tax
contribution (nil tax applies on contribution)
Sole traders can – treated as personal after tax contribution (nil tax applies on
contribution)
Employees can – treated as personal after tax contribution (nil tax applies on
contribution)
A Company cannot – always taxed as concessional (15% tax)
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Maximise your personal contributions
No deduction is claimed
Personal contributions capped at $150,000 pa
If under 65 you can bring forward 2 years of cap and contribute up to
$450,000
$150,000
30 June 2011
$150,000
30 June 2012
$450,000
30 June 2013
$0
$150,000
$150,000
30 June 2014
$0
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$450,000
$150,000
30 June 2015
$0
Agenda
1. Overview of super rules and legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
12
Lump sum tax on super
Tax free
component
Taxable
component
55 to 59
Tax-free
First $165,000: Tax-free*
Balance: 15% tax, plus Medicare levy
60 and over
Tax-free
Tax-free
Note: Applies only to withdrawals from a taxed fund and only to the taxable component of the payment
* For Financial Year 2011/12
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Pensions – income/payments
Investment return in
pension account
Pension income that you
receive
55 to 59
Tax-free
Assessable –
15% rebate
60 and over
Tax-free
Tax-free
Note: Applies only to withdrawals from a taxed fund and
only to the taxable component of the payment
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Agenda
1. Overview of super rules and legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
15
SMSF market*
450,498 funds registered with the Government
33,600 new funds established last financial year
126,000 new funds in last 4 years
SMSF Share of Super
Total super assets are $1,280 billion
SMSF assets $400 billion (31%)
31%
853,700 members
69%
$835,000 average fund size
(member account size is $440,000)
69% of funds have no more than 2 members
* ATO stats as at June 2011
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Age profile of SMSF members
As at March 2011
< 25 years
1.1%
> 64
years
25-34
years
4.4%
35-44
years
20.6%
14.3%
More than half of SMSF fund
members are age 55+ (nearing
and post retirement age).
These members would have
higher average balances and as
they move into pension draw
down the growth in assets will
slow.
26.0%
33.7%
55-64
years
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45-54
years
Customer drivers for SMSF
Advantages
Disadvantages
Control of investment decisions
Full trustee responsibilities
Direct Investments options
Lack of Knowledge
Investment returns
Time consuming to run
Lower Costs
Tough penalties for breaching rules
Ability to Gear
May be uneconomic for low balances
Tax Management
Extra legal responsibilities
Flexible retirement pension options
Potentially higher costs
Flexible estate planning / protection
options
Maximum of four members
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The investment strategy
Trustees are required to prepare and implement an investment strategy, and
regularly review it.
As trustees you must consider:
– Risk involved, likely returns and fund objectives
– Composition of a fund’s investments, diversification
– Liquidity requirements of the fund
– Ability of the fund to discharge present and future liabilities
– Penalties: $220,000 and possible 12 months gaol for trustees
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The fund’s investment flexibility
Shares
Managed Funds
Abalone Licenses
Stocks
Property Trusts
Stamps etc
Bonds
Private Trusts
Options
Fixed Trusts
Futures
Art works
Notes
Special Objects
Mortgages
Life Office Policies
Rental Property
Taxi Plates
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Investments you cannot make within a SMSF
You cannot:
Lend to members/relatives
Acquire assets from a related party however:
– Few exceptions include; listed shares, widely held unit trusts, business
property
Exceed 5% in-house asset rule
– An investment in a related party
– A loan to a related party
– A lease to a related party
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How can a SMSF acquire an asset?
1. Outright purchase from a member if SMSF has sufficient cash or SMSF
could borrow – not treated as a contribution
2. Transfer asset in-specie to SMSF trustee – will be treated as a contribution
3. Purchase from a third party
Issues to consider:
Asset locked into super until retirement
CGT implications on transfer of ownership
Stamp duty
Contribution caps for in-specie contribution method
Financial planning strategic advice will be critical
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Case study – shares in-specie transfers
David, aged 59 (self-employed) wishes to make contributions to his SMSF.
He does not have cash but...
Owns $200,000 worth of listed shares
Solution/strategy:
Transfer shares In-specie to the SMSF trustee.
Realises personal capital gain of $20,000 (after claiming the 50% discount).
Meets eligibility to deduct personal contributions to super
Claims a tax deduction for $20,000 of the amount contributed.
Remaining $180,000 is a non-concessional (limited to $150,000 pa or $450,000
'bring forward' 2 years contributions)
Important notes
• You need to take into account the appropriate value for the purposes of the contribution caps that
apply under super Legislation at the time
• Note that a self managed superannuation fund is only able to accept an in specie contribution if it is
allowed under the trust deed of the fund.
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Agenda
1. Overview of super rules and legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
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Opportunities for small business owners
Business owners may hold business property tax effectively in SMSF
The benefits to business owners:
Source of income and growth for the SMSF
Business stability – SMSF trustee is the landlord
Rental income taxed at maximum of 15%
If property sold for either business succession or retirement CGT maximum of 10% or
0% if sold in pension phase
SMSF may provide asset protection
Assets in super don’t count towards Net Tangible Asset test for Small Business CGT
Concessions
Able to transfer business premises in-specie into the fund
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How an SMSF can acquire property
Purchase at arm’s length (or deemed market value)
Via contribution (business real property only)
Combination of contribution and purchase
Tenants-in common option – where fund has insufficient assets to purchase
outright residential or commercial
Related unit trust structure which is ungeared
Unrelated trust or company (geared or ungeared)
Borrowing option - where fund has insufficient assets to purchase outright
residential or commercial
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SMSF borrowing rules
Loan must be used to purchase a single acquirable asset
The asset must be held in trust for the SMSF- SMSF has beneficial interest in
that asset
SMSF has the right to acquire the asset following the SMSF making one or
more payments
Lender’s recourse is limited to rights relating to the asset in the event of
default or exercise of rights by the trustee
Rules are complex and extreme care should be taken in setting up properly
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Case study
John and Jane are 55, live in their $1.5 million dollar home.
They have $750,000 in cash and shares.
The couple have a motel business.
Their motel ($2.5 million) is security for business loans ($500k).
The couple wish to purchase another motel at $1.2 million and do
Repairs and improvements - spend $1 million.
Strategy: Purchase motel via SMSF and lease the property to their business for
$200,000 pa
What are their options?
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Related trust option
John and Jane
contributes $750k
to Smith’s SMSF
Smith’s Motel $2.5M
Business loan( $500,000)
Equity $2,000,000
SMSF and
couple acquire
units
Smith’s Unit Trust
New motel
$2,250,000
Distributions
to unit holders
Lease tax deductible
Access transition
to retirement pension
at 55+
Smith’s Motel Business
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Agenda
1. Overview of super rules & legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
30
Capital gains realised on moving business assets to
super may be reduced
Small business capital gains tax concessions
15 year exemption - $0 assessable
50% active asset reduction
Small business roll over
Retirement exemption
Must meet eligibility criteria:
– Small business entity or $6M net asset value
– Active asset
– Additional requirements for company or trust
– Requirement for each concession
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Increase super via CGT exempt contribution
Assessable for
CGT
50% active
asset reduction
(optional)
50% general
exemption
CGT Exempt
Component
Up to $500k
Nonconcessional
contribution
Up to $450k for
under 65s
Cost base
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Super fund
Agenda
1. Overview of super rules & legislative changes
2. Your super fund retirement options
3. The self-managed super fund option
4. Opportunities for small business
5. The small business retirement exemption
6. Other matters
33
Review asset & family protection
Providing insurance cover (Super or Non-super?)
Insurance in super is owned by the fund and covers the life of the members
The fund can insure members for:
– Life Insurance as a result of death
– Total and permanent disability
– Income protection
Provides cover where your cash flow is short
Life and total permanent disability premiums are a tax deduction for the fund
Provides cash liquidity for payment of disability and death benefits to members
and beneficiaries
Provides protection for any borrowings within the fund
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Review SMSF & estate planning
In the event of death of a member the SMSF can pay death benefits in the
form of:
– A lump sum to beneficiaries
– A pension to a SIS spouse dependant or child dependant beneficiaries
– A reversionary pension to spouse for existing pensions
Super death benefits do not form part of your estate unless the estate is
nominated as beneficiary under binding or non-binding death benefit
nomination form
If structured correctly the SMSF can be an efficient way to pass assets to
beneficiaries bypassing the estate
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Katz v Grossman [2005] NSWSC 934
SMSF with $1m of assets
Mr and Mrs Katz had 2 children – Linda & Daniel (adults)
Mrs Katz died a few years earlier and Mr Katz appointed Linda as co-trustee of SMSF
Mr Katz made a binding nomination that death benefit ($1 m) be paid to children
equally
Mr Katz died
Linda appoints her spouse as co-trustee
Guess what happened?
Daniel challenged the appointment of her husband but the NSW supreme court
determined that his appointment was valid under the trust deed and trust law.
Ultimately Daniel received no benefit from the super fund and the court ordered that
the costs of the court action be paid by the fund.
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Review business overheads, key person insurances
and succession planning
Ensuring business stability in the event of death or disability
– Replace revenue
– Pay off loans
– Fund business overheads expenses
– Replace and train key person
Plan business succession and exit
– Legal transfer agreement (buy/sell agreement)
– Provides certainty when an owner leaves the business
– Provide funding for remaining owner to purchase the departing owner’s share
– (Commonly entered into where two or more persons control a business together)
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Transitioning to retirement for 55+
Boost your super without affecting your lifestyle or
Reduce work hours
Make tax deductible contributions
Start a non-commutable income stream
You
Pre tax
contributions
Tax free income
stream at 60+
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Super
Transition to retirement example
Current
Proposed
Gross salary
Less tax
$150,000
$ 46,450
Assessable income
$150,000
Pre-tax contribution
$ 50,000
Net salary
$ 103,550
Net salary
$100,000
Pension income
(age 55)
$40,065
Tax & ML
Super tax @15%
$ 36,516^
$ 7,500
Net income
$103,550
Benefit in Year 1
$
^ Includes Medicare and Flood levy 2011-12 financial year
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2,435
Where to from here?
Choose what tax rate your want to pay
Explore super and business opportunities
Review estate planning arrangements
Review business insurances and business succession
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Asgard Capital Management Limited ABN 009 279 592, AFSL 240695 (Asgard). Information current as at 1 January
2012. This publication provides an overview or summary only and it should not be considered a comprehensive
statement on any matter or relied upon as such. This presentation contains general information only and does not take
into account your personal objectives, financial situation or needs. You should therefore consider whether information or
advice contained in this presentation is appropriate to you having regard to these factors before acting on it. You should
seek personalised advice from a financial adviser and your accountant before making any financial decision in relation to
matters discussed in this presentation. The taxation position described is a general statement and should only be used as
a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual
situation may differ and you should seek independent professional tax advice. Consider our disclosure documents which
include our Financial Services Guide available on www.asgard.com.au. © Asgard Capital Management Limited 2012.
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