End of year strategies and opportunities for business owners

2. End of year strategies and opportunities for business owners Speaker’s nameTitle/departmentApril 2013

3. Disclaimer • This information was prepared by Securitor Financial Group Ltd, ABN 48 009 189 495 AFSL & Australian Credit Licence (ACL) 240687 (Securitor) and is current as at January 2013. • Get personalised advice. • 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 presentation 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. April 2013

4. Agenda • Your super fund retirement options • The self-managed super fund option • Opportunities for small business • The small business retirement exemption • Other matters April 2013

5. Choose your tax rate! April 2013

6. 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 Insurance Shares Cash Fixed Interest Property April 2013

7. 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). April 2013

8. 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% on entry April 2013

9. Maximise your deductible contributions • More important to start salary sacrificing earlier than ever before! • 9% compulsory super counts towards cap. • Proposed legislation to allow $50,000 cap for over 50s from1 July 2014 where super balance is less than $500,000 April 2013

10. 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 only have $25,000 cap Note: Assumes a return of 7% after fees and tax April 2013

11. 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). April 2013

12. Maximise your personal contributions • No deduction is claimed • Personal contributions capped at $150,000 p.a. • If under 65 you can bring forward 2 years of cap and contribute up to $450,000 April 2013

13. Your super fund retirement

14. Lump sum tax on super Note: applies only to withdrawals from a taxed fund and only to the taxable component of the payment. * For 2012/13 financial year April 2013

15. Pension income/payments Note: applies only to withdrawals from a taxed fund and only to the taxable component of the payment. April 2013

16. The self managedsuper fund option

17. SMSF market* • 468,133 funds registered with the Government • 33,600 new funds established lastfinancial year • 126,000 new funds in last 4 years • 31% of total super assets ($1,376 billion) • $418.5 billion under investment • 853,700 members • $835,000 average fund size (average member account size is $440,000) • 69% of funds have no more than 2 members * ATO stats as at March 2012 April 2013

18. Age profile of SMSF members As at March 2012 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. April 2013

19. 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 April 2013

20. 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 April 2013

21. The fund’s investment flexibility • Shares • Stocks • Bonds • Options • Futures • Notes • Mortgages • Rental Property • Managed Funds • Property Trusts • Private Trusts • Fixed Trusts • Artworks • Special Objects • Life Office Policies • Taxi Plates • Abalone Licences • Stamps etc April 2013

22. 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 April 2013

23. How can a SMSF acquire an asset? • Outright purchase from a member if SMSF has sufficient cash or SMSF could borrow – not treated as a contribution • Transfer asset in-specie to SMSF trustee – will be treated as a contribution • 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 April 2013

24. 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) 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 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. April 2013

25. Opportunities for small business

26. Opportunities for small business owners Business owners may hold business property tax-effectively in SMSF • 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 April 2013

27. 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 April 2013

28. 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. April 2013

29. 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? April 2013

30. Related trust option SMSF and couple acquire units John and Jane contribute $750k to Smith’s SMSF Smith’s Unit Trust New motel $2,250,000 Smith’s Motel $2.5M Business loan($500,000) Equity $2,000,000 Distributions to unit holders Lease tax deductible Access transition to retirement pension at 55+ Smith’s Motel Business April 2013

31. The small business retirement exemption

32. Capital gains realised on moving business assets to super may be reduced • Small business capital gains concession: • 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 April 2013

33. Increase super via CGT exempt contribution Assessable for CGT Super Fund CGT Exempt Component Up to $500k 50% active asset reduction (optional) 50% general exemption Non-concessional contribution Up to $450k for under 65s Cost Base April 2013

34. Other matters

35. 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. April 2013

36. 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. April 2013

37. 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. 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 ($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??? April 2013

38. 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) April 2013

39. 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 Pre tax contributions You Super Tax free income stream at 60+ April 2013

40. Example of transition to retirement Current Proposed Plus, benefit of 0% tax on earnings when in pension phase * 2012/2013 FY tax rates April 2013

41. Next steps

42. 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 April 2013

43. Westpac’s SMSFs services/support • Experienced Financial Planners accredited to advise on SMSF • Alliances with professional, specialist administration firms that can assist with the administration and compliance obligations for SMSFs • 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 April 2013

44. Questions?