End of Year Strategies
and Opportunities for
Business Owners
Speaker’s name
Title/department
Month, 2015
Agenda
• Your super fund retirement options
• The self-managed super fund option
• Opportunities for small business
• The small business retirement exemption
• Other matters
Choose your tax rate!
•
Individual •
49%
Company
30%
Super
15%
Pension
0%
Up to 49% - Top marginal rate (including 2% Medicare levy and 2%
Budget Repair 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
3
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
– cash is an option
Shares
SUPER
• Bankruptcy protection
• Low tax environment
Property
4
Fixed
Interest
Who can contribute to super?
• Anyone under 65
• Between 65 and 74 (‘work test’ required)
• Age 75 and older - required employer Super Guarantee and contributions
under an award agreement only
5
Tax deductions for small business owners
• A Company contributing on behalf of employees
– 9.5% 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
6
Concessional Caps Increased
Concessional Cap
2012-13
2013-14
2014-15
Under age 50
$25,000
$25,000
$30,000
Aged* 50 – 59
$25,000
$25,000
$35,000
Aged* 60 +
$25,000
$35,000
$35,000
* Age at 30 June of preceding financial year
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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).
8
Managing Contribution Caps
Non-concessional – No Deduction Claimed
• Personal contributions capped at $180,000 pa
• If under 65 you can bring forward 2 years of cap and contribute up to
$540,000
$150,000
30 June
2013
$180,000
30 June
2014
$0
$180,000
30 June
2015
$180,000
$180,000
30 June
2016
$540,000
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$180,000
30 June
2017
$0
$0
Your super fund retirement
Lump sum tax on super
Tax free
component
Taxable component
55 to 59
Tax-free
First $185,000*: 0% tax
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.
* Lifetime cap, rate applicable for 2014/15 financial year.
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Pension income/payments
Investment return
in pension account
Pension income
that you receive
55 to 59
Tax-free
Assessable income –
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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The self managed
super fund option
SMSF market*
• *528,701 funds registered with the
Government
• *33,194 new funds established last 12
months
SMSF Share of Super
• *1,006,975 members
• *92% of funds have no more than 2
members (2011-2012)
31%
69%
• **$1.62 trillion - total of all super assets
• **$506b – total SMSF assets (31.1%)
*Self-managed super fund statistical report – March 2014, ATO
**Statistics – Annual Superannuation Bulletin, June 2013 (revised 5 February 2014), APRA
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Age Profile of SMSF Members
< 25
years,
1.1%
25 - 34
years, 4.0%
SMSF Age Profile*
> 64
years,
25.9%
58.2% 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.
35 - 44
years,
12.8%
55 - 64
years,
32.3%
*8 July, 2013 (Self-managed super fund statistical report – March 2014 – ATO)
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45 - 54
years,
23.9%
Customer drivers for SMSF
Advantages
Disadvantages
• Control of investment decisions
•
Legal liability as trustee
• Direct investments options
•
Understanding responsibilities
• Investment returns lower costs
•
Time consuming to run
• Ability to gear investments (e.g.
property)
•
Tough penalties for breaching
rules
• Tax management
•
• Flexible retirement pension
options
May be uneconomic for low
balances
•
Potentially higher costs
•
Maximum of four members
•
Members must be trustees
• Flexible estate planning/
protection options
16
The Fund’s Investment Strategy
SIS Regulation 4.09
As a Trustee 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
• Providing insurance cover for members within the fund
17
The fund’s investment flexibility
•
•
•
•
•
•
•
•
Shares
Bonds
Options
Futures
Notes
Mortgages
Rental Property
Managed Funds
•
•
•
•
•
•
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Property Trusts
Private Trusts
Fixed Trusts
Artworks
Life Office Policies
Stamps etc.
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
19
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 subject to access/preservation rules of super
• CGT implications on transfer of ownership
• Stamp duty
• Contribution caps for in-specie contribution method
• Financial planning strategic advice will be critical
20
Case Study – Shares In-specie Transfers
• David, aged 59 (selfemployed) wishes to make
contributions to his SMSF.
• He does not have cash but...
• Owns $200,000 worth of
listed shares
Important notes
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 nonconcessional (limited to $180,000 pa
or $540,000 'bring forward' 2 years
contributions)
• 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.
21
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
23
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
24
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.
25
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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Related trust option
John and Jane contribute
$750k to Smith’s SMSF
SMSF and
couple acquire
units
Smith’s Unit Trust
Smith’s Motel $2.5M
Business loan($500,000)
Equity $2,000,000
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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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
• Retirement exemption
• Small business roll over
Must meet eligibility criteria:
• Small business entity (< $2M turnover or < $6M net assets)
• Active asset
• Additional requirements for company or trust
• Requirement for each concession
29
Increase super via CGT exempt contribution
Assessable for
CGT
50% active
asset reduction
(optional)
50% general
exemption
CGT Exempt
component
Up to $500k
Non-concessional
contribution
Up to $540k for
under 65s
Cost Base
30
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 personal cash flow is limited
• 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.
32
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 Act dependant (spouse or dependant child)
– 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.
33
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 non-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???
34
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
35
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+
36
Super
Transitioning: Let’s take Ian, for example
Ian would like to boost his super without affecting his lifestyle
Salary $100,000 p.a.
Receiving $9,500 superannuation guarantee
Age 60
Ian
$25,500 salary
sacrifice
$15,803
income
Super
37
Ian’s super accumulates much quicker
Current
Gross salary
Less tax
$100,000
$ 26,947
Net salary
$ 73,053
Proposed
Gross Salary (after SS)
$74,500
Net salary
$57,250
Pension income
(age 60 – tax free)
$15,803
Net income
$73,053
Plus, benefit of 0% tax on earnings
when in pension phase
Benefit in Year 1
Includes Medicare levy
38
$5,873
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
40
Westpac’s SMSFs Services/Support
• Experienced Financial Planners accredited to advise on SMSFs
• 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 arrangements
• Investment products for cash, equities, fixed income and insurance
• SMSF seminars, information flyers and booklets to assist with trustee
education on SMSFs
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Disclaimer
QUESTIONS
Disclaimer
This information was prepared by Asgard Capital Management Limited ABN 009 279 592, AFSL 240695
(Asgard). The information in this presentation is current as at August 2014.
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 publication 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.
“Thanks”