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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
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
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
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
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
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
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
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
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
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
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
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
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.