End of year strategies and
opportunities for business
owners
Speaker’s name
Title/department
April 2013
Disclaimer
This information was prepared by Securitor Financial Group Ltd, ABN 48 009 189 495 AFSL &
Australian Credit Licence (ACL) 240687 (Securitor) and is current as at January 2013.
Get personalised advice.
Material contained in this presentation is 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 and so you should consider its appropriateness having
regard to these factors before acting on it.
All case studies and examples used in this presentation are for illustrative purposes only and
nothing in this presentation should be construed as an indication or prediction of future
performance or results.
Any taxation position described in this presentation should be used as a guide only and is not tax
advice. You should consult a registered tax agent for specific tax advice on your circumstances.
As the rules associated with the super and pension regimes are complex and subject to change
and as the opportunities and effects differ based on your personal circumstances, you should seek
personalised advice from a financial adviser before making any financial decision in relation to any
matters discussed in this presentation.
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April 2013
Agenda
Your super fund retirement options
The self-managed super fund option
Opportunities for small business
The small business retirement exemption
Other matters
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April 2013
Choose your tax rate!
Individual
45%
Company
30%
Super
15%
Pension
0%
•Up to 45% - Top marginal rate + 1.5% Medicare levy
•Discount of 50% on capital gains
•30% Company tax rate
•No CGT discount
•15% on earnings and deductible contributions
•10% on capital gains
•Tax free earnings within super when drawing a pension
•Tax free pension payments once you turn age 60
•15% tax offset on taxable pension payments if over 55 and under 60
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April 2013
Super is a tax structure, not an asset class
No greater investment risk
when investing through super
Insurance
– you can invest in same
assets
– cash is an option
Cash
Bankruptcy protection
Low tax environment
SUPER
Property
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April 2013
Shares
Fixed
Interest
Who can contribute to super?
Anyone under 65
Between 65 and 74 (‘work test’ required)
Age 75 and older (From 1 July 2013 required employer Super Guarantee and
contributions under an award agreement only).
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April 2013
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% on entry
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April 2013
Maximise your deductible contributions
More important to start salary sacrificing earlier than ever before!
– 9% compulsory super counts towards cap.
Proposed legislation to allow $50,000 cap for over 50s from
1 July 2014 where super balance is less than $500,000
Deductible contribution cap
2012/13
2013/14
Standard cap
$25,000
$25,000
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April 2013
Personal contributions can help plug the gap
500,000
Case Study
Brad (age 55)
450,000
Employed on a
package of $180,000
plus SG
350,000
Was sacrificing up to
$50,000 cap.
From 1 July 12 only
have $25,000 cap
400,000
300,000
250,000
200,000
150,000
100,000
50,000
0
Year
1
2
3
4
5
6
7
8
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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April 2013
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10
Who can make a non-concessional contribution?
Partners in a partnership 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 – taxed as concessional (15% tax).
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April 2013
Maximise your personal contributions
No deduction is claimed
Personal contributions capped at $150,000 p.a.
If under 65 you can bring forward 2 years of cap and contribute up to
$450,000
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April 2013
Your super fund retirement
Lump sum tax on super
Tax free
component
Taxable component
55 to 59
Tax-free
First $175,000: 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 2012/13 financial year
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April 2013
Pension 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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April 2013
The self managed
super fund option
SMSF market*
468,133 funds registered with the Government
33,600 new funds established last
financial year
SMSF Share
of Super
126,000 new funds in last 4 years
31% of total super assets ($1,376 billion)
31%
$418.5 billion under investment
69%
853,700 members
$835,000 average fund size
(average member account size is $440,000)
69% of funds have no more than 2 members
* ATO stats as at March 2012
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April 2013
Age profile of SMSF members
As at March 2012
<25 years,
1.1%
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.
>64 years,
20.6%
55-64
years,
33.7%
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April 2013
25-34
years,
4.4%
35-44
years,
14.3%
45-54
years,
26.0%
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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April 2013
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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April 2013
The fund’s investment flexibility
Shares
Property Trusts
Stocks
Private Trusts
Bonds
Fixed Trusts
Options
Artworks
Futures
Special Objects
Notes
Life Office Policies
Mortgages
Taxi Plates
Rental Property
Abalone Licences
Managed Funds
Stamps etc
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April 2013
Investments you cannot make within an 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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April 2013
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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April 2013
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
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.
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)
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April 2013
Opportunities for
small business
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 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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April 2013
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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April 2013
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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April 2013
Case study
John and Jane are 55, live in their $1.5 million 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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April 2013
Related trust option
John and Jane contribute
$750k to Smith’s SMSF
Smith’s Motel $2.5M
Business loan($500,000)
Equity $2,000,000
SMSF and
couple acquire
units
Distributions
to unit holders
New motel
$2,250,000
Lease tax deductible
Access transition
to retirement
pension at 55+
Smith’s Motel Business
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April 2013
Smith’s Unit Trust
The small business
retirement exemption
Capital gains realised on moving business assets to
super may be reduced
Small business capital gains concession:
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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April 2013
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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April 2013
Super Fund
Other matters
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 & 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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April 2013
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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April 2013
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 ($1M) be paid to children
equally.
Mr Katz died
Linda appoints her spouse as co-trustee and
distributed the death benefit to herself.
Guess what happened???
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April 2013
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.
Review business overheads, key person insurances &
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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April 2013
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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April 2013
Super
Example of transition to retirement
Current
Gross salary
Less tax
$100,000
$ 26,447
Net salary
$ 73,553
Proposed
Plus, benefit of 0% tax on
earnings when in pension phase
* 2012/2013 FY tax rates
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April 2013
Gross Salary (after SS)
$84,000
Net salary
$63,713
Pension income
(age 60 – tax free)
$9,840
Net income
$73,553
Benefit in Year 1
$3,760
Next steps
Next steps
Choose the tax rate you want to pay
Explore super and business opportunities
Review estate planning arrangements
Review business insurances and business succession
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April 2013
Westpac’s SMSFs services/support
Experienced Financial Planners accredited to advise on SMSF
Alliances with professional, specialist administration firms that can assist with
the administration and compliance obligations for SMSFs
Lending products for purchase of Commercial or residential property in a SMSF
under limited recourse borrowing
Investment products for cash, equities, fixed income and insurance
SMSF seminars, information flyers & booklets to assist with trustee education
on SMSFs
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April 2013
Questions?