October 8, 2012
Financial Strategy, Superannuation
In Australia, some 700,000 small businesses are owned and managed by a single person.
The number of sole traders continues to grow and the largest group of entrepreneurs in this country are now people aged over 50.
People in their 50’s have generally accumulated a significant amount of wealth with most of their personal assets tied up in their residential home and superannuation accounts. However, many business owners have baulked at superannuation on the basis that their business is their superannuation. In fact, research suggests that at least half of our small business owners plan to use the sale proceeds of their business as their primary source of retirement funding. One in eight business owners could be totally dependent on the lump sum sale proceeds to generate income in retirement as they have no other income producing assets.
There are some logical reasons why this is the case. Firstly, many of these business owners operate as sole traders and they are not caught in the compulsory superannuation guarantee net. Secondly, many small business owners shy away from superannuation because in the event of a cash flow crisis they can’t withdraw their contributions unless they satisfy the stringent conditions of release. Finally, small business owners like to be in control of their finances so putting their money into superannuation means relinquishing the investment decisions to fund managers (unless they’re using a Self Managed Super Fund).
Business owners shouldn’t underestimate the power of superannuation because it not only provides a tax effective method of saving for retirement but it also offers a degree of asset protection in the event of bankruptcy. Not only that, with sole operators there is always a risk that the business could devalue quickly due to the fact that so much of the business value is attributable to their personal knowledge and skill. Of course, the attraction of a Self Managed Superannuation Fund is that it lets you retain control over the investment decisions but it also comes with added responsibilities.
To assist our business clients who are looking to plan for their retirement, we provide the following general guidelines:
- Make Superannuation Contributions - Self managed super funds provide business owners with the opportunity to use their contributions to purchase their offices or factory. In addition, as long as you make regular contributions your superannuation funds are protected from bankruptcy. You need to carefully monitor your cash flows each year to assess your level of contributions and be mindful of the fact that once the funds are inside a superannuation fund you will not have access to them until you are 55-60 years of age, depending on your birth date.
- Buy your Business Premises - A key benefit of a Self Managed Superannuation Fund isthat they can acquire real business property from the business owner (and related parties) and lease the premises to the business (subject to certain conditions). You can borrow (subject to certain conditions) within your own super fund and obviously the right property will appreciate over time and build wealth.
- Don’t put all your eggs in one basket – Reinvesting in your business is an important strategy but you also need to extract some of your profits so you build wealth both inside and outside of the business. This is particularly important as you head towards the retirement years.
- Plan your Retirement - Many people reach a point in their working lives when they ‘hit the wall’ and become so tired they just want to stop work there and then. At that point they don’t even have the energy to work on the sale of their business and they often fail to maximise the price. They give themselves a short time frame to sell the business but what happens if their timing coincides with a recession or a glut of similar businesses selling at the same time? For this reason, business owners should plan the sale several years ahead while they still have the energy, focus and passion. If you are burnt out the business value can fall quickly as the service, quality, care and marketing all fall away. Customers are affected, profits drop and the business value diminishes.
Surprisingly, very few business owners take the necessary steps to prepare their business for sale. Less than a third of business owners have a succession plan and if you are planning to sell your business it is vital that you seek advice regarding the changeover process and how to maximise the after tax value. If you qualify for the small business capital gains tax (CGT) concessions, it is possible to minimise the CGT implications on sale. In addition, the retirement exemption offers qualifying business owners a maximum lifetime rollover limit of $500,000 into a qualifying super fund. Because it is treated as a rollover rather than a contribution, proceeds from the sale of your business can effectively be used to build a superannuation balance at any age which can, in turn, fund a retirement income stream. Finally, after sale, many business owners contract their services back to the buyer either as a consultant or employee. For a person aged 55 and over, the transition to retirement provisions can create a tax-effective situation which enables you to draw a pension to meet lifestyle needs while sacrificing employment income to build a superannuation balance for future income requirements.