18 September 2013

In the business of retiring

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retiringSmall business owners often spend so much time keeping the business afloat, that the matter of superannuation savings goes by the wayside.

 

Building and maintaining a business over time is no easy task. According to the Australian Bureau of Statistics, 42 per cent of small businesses failed between 2003 to 2007 and more than 30 per cent since 2008.1

 

To succeed, business owners need to be open to new ideas, be able to produce a product or service competitively, and constantly review the market they work within to ensure the business model they have today is sustainable tomorrow.

 

Remember Kodak in the 1980s? They successfully sold billions of dollars of film for cameras before digital cameras and mobile phones came on the scene. While innovation and adapting to change are key ingredients to long-term sustainability and success, the reality is small business owners often have to reinvest profits back into the business over time to achieve this. Consequently, superannuation contributions are sometimes sacrificed in this process – at least for certain periods of time.

 

Thankfully the government recognises this and offers generous capital gains tax concessions to people selling their businesses, with the expectation that the money will go towards funding their retirement. You can check with your professional tax adviser to see if you are eligible for these concessions.

 

Super advantages

In many ways, the rationale for providing small business owners with tax concessions when they sell their businesses is similar to the Government making superannuation concessionally taxed for all Australians. Basically, it promotes financial security in retirement.

 

If you are producing genuine profits as a small business owner, you should consider making either concessional (before tax) or non-concessional (after-tax) contributions into superannuation, in addition to reinvesting profits. This enables you to build a nest egg over time, which is outside your business asset. By doing this you can start to achieve diversification.

 

You can contribute $25,000 into super using before-tax concessional contributions each year. This amount increases to $35,000 for people aged 59 and over from 1 July 2013. Importantly, you pay only 15% contributions tax2 compared to your own (higher) marginal tax rate on such income. You can also contribute up to $150,000 per annum in after-tax contributions each year.

 

One of the significant benefits is superannuation earnings are taxed at a maximum 15% each year, compared to your individual marginal tax rates if the investment was held in your own name. This could be as high as 46.5% including medicare levy, or 30% if the investment was held in the company name.

 

While it’s beneficial to think about tax concessions once you sell your business, the best way to maximise the value of your business and your assets in retirement is to plan ahead.

 

Careful planning

If you are preparing to exit your business, then it takes careful planning. You need to consider all the options open to you and which one best suits your needs.

For instance, do you plan to hand the business on to the next generation or will you sell it to a third party through a trade sale? Or maybe you will just wind it up.

Each strategy has a different set of issues and you should start planning at least three years before the actual event to make sure the transition is smooth. In fact, some small business experts would argue exit plans should be in place from your first day of business.

 

In reality many people fail to have exit plans in place. A recent report from BDO found that only 39 per cent of family businesses have a succession plan.3

If you are selling the business, a well-planned exit gives you the time to maximise its value.

 

If you are central to the business, you need to put processes and succession plans in place to reduce the reliance on you.

 

Passing the business on to the next generation requires you to consider specific strategies so you can extract funds from the business for your retirement, without placing unnecessary burden on your children.

 

Unexpected exits

While a carefully planned exit from a small business is always preferred, sometimes circumstances can change the game plan.

And that’s why it’s important to have insurances in place to cover such eventualities.

 

Business overheads insurance and income protection insurance will cover you should something go temporarily wrong, but what if you were to die or have to suddenly sell your business?

 

If your business is a partnership, then it is a good idea to have a buy/sell insurance policy in place so that you or your partner would be able to find the funds to buy the other out.4

 

To make sure your retirement savings are sufficient, it is essential to properly plan exiting your business. Your financial adviser can play a vital role in ensuring you make the most of what you have spent so many years building.

 

1 Individuals whose adjusted taxable income exceeds $300,000 will have their contributions taxed at the rate of 30%.

2 Dynamic Businesses, ‘Why small businesses fail in Australia’, 2 May 2013, http://www.dynamicbusiness.com.au/small-business-resources/managing/why-small-businesses-fail-in-australia-02052013.html viewed 23 July 2013

3 Patrick Stafford, ‘Succession failure for family business BDO Report’, 2013, http://www.startupsmart.com.au/exit-strategy/succession-failure-for-family-businesses-bdo-report.html viewed 28 March 2013

4 AMP, “Planning for the unexpected”, 2011, Viewed 29 May 2013 https://www.amp.com.au/wps/portal/au/AMPAUGuidanceTopic3C?vigurl=%2Fvgn-ext-templating%2Fv%2Findex.jsp%3Fvgnextoid%3D57ec4eca4f852210VgnVCM10000083d20d0aRCRD

 

The author is an employee of Verante Financial Planning in Castle Hill, Corporate Authorised Representative of Magnitude Group Limited, Licence No 221557, Magnitude Group Limited ABN 54 086 266 202.

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