End of year strategies and opportunities for business owners

End of year strategies and opportunities for business owners

Speaker’s name Title/departmentApril 2013

3April 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.

4April 2013

Agenda

Your super fund retirement options The self-managed super fund option Opportunities for small businessThe small business retirement exemptionOther matters

5April 2013

Choose your tax rate!

Individual

45%

• Up to 45% - Top marginal rate + 1.5% Medicare levy• Discount of 50% on capital gains

Company30%

• 30% Company tax rate• No CGT discount

Super15%

• 15% on earnings and deductible contributions • 10% on capital gains

Pension0%

• 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

6April 2013

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 protectionLow tax environment

SUPERCash

Insurance

Shares

Property Fixed Interest

7April 2013

Who can contribute to super?

Anyone under 65Between 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).

8April 2013

Tax deductions for small business owners

A Company contributing on behalf of employees – 9% SG contributions– Salary sacrifice arrangements

Self-employed PartnershipSole tradersTax deductible contributions are referred to as “concessional contributions” and are taxed @ 15% on entry

9April 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 from1 July 2014 where super balance is less than $500,000

Deductible contribution cap 2012/13 2013/14Standard cap $25,000 $25,000

10April 2013

Personal contributions can help plug the gap

050,000

100,000150,000200,000250,000300,000350,000400,000450,000500,000

1 2 3 4 5 6 7 8 9 10Year

Salary Sacrifice $34,225 (50K Cap)Salary Sacrifice $9,225 (25K Cap)Salary Sacrifice $9,225 plus $15,375 after-tax

Case StudyBrad (age 55)Employed on a package of $180,000 plus SGWas sacrificing up to $50,000 cap.From 1 July 12 only have $25,000 cap

Note: Assumes a return of 7% after fees and tax

11April 2013

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).

12April 2013

Maximise your personal contributions

No deduction is claimedPersonal contributions capped at $150,000 p.a.If under 65 you can bring forward 2 years of cap and contribute up to $450,000

Your super fund retirement

14April 2013

Lump sum tax on super

Tax free component Taxable component

55 to 59 Tax-freeFirst $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

15April 2013

Pension income/payments

Investment returnin pension account

Pension incomethat 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.

The self managedsuper fund option

17April 2013

SMSF market*

468,133 funds registered with the Government33,600 new funds established lastfinancial year126,000 new funds in last 4 years31% of total super assets ($1,376 billion) $418.5 billion under investment853,700 members$835,000 average fund size (average member account size is $440,000)69% of funds have no more than 2 members

31%

69%

SMSF Share of Super

* ATO stats as at March 2012

18April 2013

Age profile of SMSF members

<25 years, 1.1%25-34 years,

4.4%35-44 years, 14.3%

45-54 years, 26.0%

55-64 years, 33.7%

>64 years, 20.6%

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.

As at March 2012

19April 2013

Customer drivers for SMSF

AdvantagesControl of investment decisionsDirect Investments optionsInvestment returnsLower costsAbility to gearTax managementFlexible retirement pension

optionsFlexible estate planning / protection options

Disadvantages Full trustee responsibilities Lack of knowledgeTime consuming to runTough penalties for breaching rules May be uneconomic for low balances Extra legal responsibilities Potentially higher costs Maximum of four members

20April 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

21April 2013

The fund’s investment flexibility

SharesStocksBondsOptionsFuturesNotesMortgagesRental PropertyManaged Funds

Property TrustsPrivate TrustsFixed TrustsArtworksSpecial ObjectsLife Office PoliciesTaxi PlatesAbalone LicencesStamps etc

22April 2013

Investments you cannot make within an SMSF

You cannot:Lend to members/relativesAcquire 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

23April 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

24April 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

Solution/strategyTransfer 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 notesYou 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.

Opportunities for small business

26April 2013

Opportunities for small business owners

The benefits to business owners:Source of income and growth for the SMSFBusiness stability – SMSF trustee is the landlordRental income taxed at maximum of 15%If property sold CGT maximum of 10% or 0% if sold in pension

phaseSMSF may provide asset protectionAssets in super don’t count towards Net Tangible Asset test for Small Business CGT ConcessionsAble to transfer business premises in-specie into the fund

Business owners may hold business property tax-effectively in SMSF

27April 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 purchaseTenants-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

28April 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.

29April 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?

30April 2013

Related trust option

Smith’s Unit Trust

New motel$2,250,000

John and Jane contribute $750k to

Smith’s SMSF

SMSF and couple acquire units

Smith’s Motel $2.5MBusiness loan($500,000)

Equity $2,000,000

Smith’s Motel Business

Lease tax deductible

Distributionsto unit holders

Access transition to retirement

pension at 55+

The small business retirement exemption

32April 2013

Capital gains realised on moving business assets to super may be reducedSmall business capital gains concession:15 year exemption - $0 assessable50% active asset reductionSmall business roll overRetirement exemption

Must meet eligibility criteria:Small business entity or $6M net asset valueActive assetAdditional requirements for company or trustRequirement for each concession

33April 2013

Increase super via CGT exempt contribution

Cost Base

50% general exemption

50% active asset reduction

(optional)

Assessable forCGT

Super FundNon-

concessional contributionUp to $450k for under 65s

CGT Exempt

Component

Up to $500k

Other matters

35April 2013

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.

36April 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.

37April 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 diedLinda appoints her spouse as co-trustee and distributed the death benefit to herself.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.

38April 2013

Review business overheads, key person insurances & succession planningEnsuring 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)

39April 2013

Transitioning to retirement for 55+

Boost your super without affecting your lifestyle, orReduce work hours Make tax deductible contributionsStart a non-commutable income stream

You Super

Pre tax contributions

Tax free income

stream at 60+

40April 2013

Example of transition to retirement

Plus, benefit of 0% tax on earnings when in pension phase

Gross salaryLess tax

$100,000$ 26,447

Net salary $ 73,553

Gross Salary (after SS) $84,000

Net salary $63,713Pension income (age 60 – tax free) $9,840

Net income $73,553

Benefit in Year 1 $3,760

Current Proposed

* 2012/2013 FY tax rates

Next steps

42April 2013

Next steps

Choose the tax rate you want to payExplore super and business opportunitiesReview estate planning arrangementsReview business insurances and business succession

43April 2013

Westpac’s SMSFs services/support

Experienced Financial Planners accredited to advise on SMSFAlliances with professional, specialist administration firms that can assist with the administration and compliance obligations for SMSFsLending products for purchase of Commercial or residential property in a SMSF under limited recourse borrowingInvestment products for cash, equities, fixed income and insuranceSMSF seminars, information flyers & booklets to assist with trustee education on SMSFs

Questions?