End of Year Strategies and Opportunities for Business Owners

Speaker’s name Title/departmentMonth, 2014

Agenda

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

Choose your tax rate!

Individual45%

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

Company

30%•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

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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

SUPERCash

Insurance

Shares

Property Fixed Interest

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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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Tax deductions for small business owners

• A Company contributing on behalf of employees – 9.25% 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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Concessional Caps Increased

* Those aged 59 on 30 June 2013 eligible for $35,000 (2013/14) Those aged 49 on 30 June 2014 also eligible for $35,000 (2014/15)

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*

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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Managing Contribution CapsNon-concessional – No Deduction 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

$180,000 $180,000 $180,000

30 June 2013

30 June 2014

30 June 2015

30 June 2016

$450,000 $0 $0 $540,000 $0

30 June 2017

$180,000

Your super fund retirement

Lump sum tax on super

Tax free component

Taxable component

55 to 59 Tax-freeFirst $180,000: 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 2013/14 financial year 12

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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

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SMSF market*

• 509,362 funds registered with the Government• 35,776 new funds established last 12 months• 139,915 new funds in last 4 years• $1.62 trillion - total of all super assets • $504b – total SMSF assets (31.1%)• 963,852 members• 69% of funds have no more than 2 members

* APRA & ATO stats as at June 2013

31%

69%

SMSF Share of Super

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Age Profile of SMSF Members

25 years, 1.0% 25 - 34 years, 3.4%

35 - 44 years, 11.2%

45 - 54 years, 22.8%55 - 64 years, 33.4%

> 64 years, 28.1%

SMSF Age Profile

61.5% 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.

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Customer drivers for SMSF

Advantages• Control of investment

decisions• Direct investments options• Investment returns lower

costs• Ability to gear• Tax management• Flexible retirement pension

options• Flexible estate planning/

protection options

Disadvantages• Full trustee responsibilities• Lack of knowledge• Time consuming to run• Tough penalties for

breaching rules• May be uneconomic for low

balances• Extra legal responsibilities• Potentially higher costs• Maximum of four members

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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 for members

The fund’s investment flexibility

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SharesStocksBondsOptionsFuturesNotesMortgagesRental PropertyManaged

Funds

Property TrustsPrivate TrustsFixed TrustsArtworksSpecial ObjectsLife Office PoliciesTaxi PlatesAbalone LicencesStamps, etc.

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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

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.

Opportunities for small business

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Opportunities for small business owners

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

Business owners may hold business property tax-effectively in SMSF

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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 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?

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+28

The small business retirement exemption

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Capital gains realised on moving business assets to super may be reducedSmall business capital gains concession:• 15 year exemption - $0 assessable• 50% active asset reduction• Small business roll over• Retirement exemptionMust meet eligibility criteria:• Small business entity or $6M net asset value• Active asset• Additional requirements for company or trust• Requirement for each concession

Increase super via CGT exempt contribution

Cost Base

50% general exemption

50% active asset reduction

(optional)

Assessable forCGT

Super FundNon-

concessional contribution

Up to $450k for under 65s

CGT Exempt componentUp to $500k

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Other matters

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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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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.

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??? 35

• 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 & 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 Super

Pre tax contributions

Tax free income

stream at 60+

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Ian’s super accumulates much quicker

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) $74,250

Net salary $57,459Pension income (age 60 – tax free) $16,094

Net income $73,553

Benefit in Year 1 $5,794

Current Proposed

Includes Medicare levy

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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Westpac’s SMSFs Services/Support

• 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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QUESTIONS

Disclaimer

Disclaimer

This information was prepared by Asgard Capital Management Limited ABN 009 279 592, AFSL 240695 (Asgard) and is current as at March 2014. A Financial Services Guide (FSG) is available for all Asgard accounts and services and can be obtained by calling 1800 998 185.  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”