End of year strategies and opportunities for business owners Who is presenting, where are they from?...

End of year strategies and opportunities for business owners

Who is presenting, where are they from?Date?

2012

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

Agenda






6. Other matters

44

• 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 - 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

Individual

45%

Company

30%

Super

15%

Pension

0%

Choose your tax rate!

5

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

Super

Cash

Shares

Insurance

Fixed interest

Property

6

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)

7

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%

8

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

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

9

Personal contributions can help plug the gap

Case StudyBrad (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

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

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

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

10

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)

11

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 $150,000 $150,000 $150,000

30 June 2011 30 June 2012 30 June 2013 30 June 2014

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

30 June 2015

$150,000

12

Agenda






6. Other matters

13

Lump sum tax on super

Tax free component

Taxable component

55 to 59 Tax-freeFirst $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

14

Pensions – income/payments

Investment return in pension account

Pension income that you receive

55 to 59 Tax-freeAssessable –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

15

Agenda






6. Other matters

16

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

Total super assets are $1,280 billion

SMSF assets $400 billion (31%)

853,700 members

$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

SMSF Share of Super

31%

69%

17

Age profile of SMSF members

14.3%

1.1%

4.4%

26.0%33.7%

20.6%

As at March 2011

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.

55-64 years

45-54 years

35-44 years

25-34 years

< 25 years

> 64 years

18

Customer drivers for SMSF

Advantages Disadvantages

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

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

19

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

20

The fund’s investment flexibility

Shares

Stocks

Bonds

Options

Futures

Notes

Mortgages

Rental Property

Managed Funds

Property Trusts

Private Trusts

Fixed Trusts

Art works

Special Objects

Life Office Policies

Taxi Plates

Abalone Licenses

Stamps etc

21

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

22

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

23

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.

24

Agenda






6. Other matters

25

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 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

Business owners may hold business property tax effectively in SMSF

26

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

27

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

28

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?

29

Related trust option

Smith’s Unit Trust

New motel$2,250,000

John and Jane contributes $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+

30

Agenda






6. Other matters

31

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

32

Increase super via CGT exempt contribution

50% general exemption

50% active asset reduction

(optional)

Assessable for CGT

Cost base

Non-concessional contribution

Up to $450k for under 65s

Super fund

CGT ExemptComponentUp to $500k

33

Agenda






6. Other matters

34

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

35

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

36

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.

37

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)

38

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+

39

Transition to retirement example

Gross salary

Less tax

$150,000

$ 46,450

Net salary $ 103,550

Assessable income $150,000

Pre-tax contribution $ 50,000

Net salary $100,000

Pension income

(age 55)$40,065

Tax & ML $ 36,516^

Super tax @15% $ 7,500

Net income $103,550

Benefit in Year 1 $ 2,435

Current Proposed

^ Includes Medicare and Flood levy 2011-12 financial year

40

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

41

BT Portfolio Services Ltd ABN 73 095 055 208 (BTPS) operates Wrap including Wrap Essentials (Wrap) and administers SuperWrap including SuperWrap Essentials (SuperWrap). BT Funds Management Limited ABN 63 002 916 458 is the trustee and issuer of SuperWrap. Your Dealer Group may also operate a Wrap offering, otherwise its role in relation to Wrap and SuperWrap (Wrap Products) is limited to distributor only. This document has been prepared and is provided solely for the general guidance of advisers and has been prepared without taking into account any individuals objectives, financial situation or needs. The information in 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. 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. This disclaimer is subject to any contrary requirement of the law. Information current as at 1 January 2012. © BT Funds Management Limited 2012.

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