Make a plan for life after business

Nearly every owner of a small- and medium-sized business in Australia would tell you it’s a hectic existence. For many, planning for life after work keeps being put off until tomorrow.

As far as they’re concerned their business is their superannuation, and every spare dollar is shovelled back into it in the hope it will be returned on the day they sell.

“For some, that will be fine,” says Bryan Ashenden, senior manager, advice strategies and knowledge at BT Financial Group. “But for others, what they think their business is worth is not necessarily what somebody else is going to pay for it.”

Expectations of settling back on the proceeds of a sale can turn into bitter disappointment if an exit from work was timed years before entitlement to any Centrelink benefits.

It needn’t be such a gamble. A bit of careful planning within a self-managed super fund (SMSF) can put owners of SMEs on target for a stress-free retirement if they understand the rules. Ashenden says, “It’s not that every small business owner should have an SMSF, but they should at least be thinking about their future and how super can play a role.”

Business owners can pay into a retail or industry fund like everybody else but if they want to hold their business property as an asset in their super they’ll need an SMSF, he adds.

Another benefit of self-managed super for SMEs is that the proceeds of asset sales in some cases can be rolled into a DIY fund without incurring capital gains tax or having it count towards the contribution caps. “That’s a big benefit for small business owners,” says Ashenden. “If they are in a process of winding down and selling these assets then it is a way for small business owners to get a significant amount into super, whereas everyone else is subject to the $180,000 [non-concessional contributions] cap.”

Sole traders who earn less than 10 per cent of their income from other employment sources are entitled to claim a tax deduction for contributions to a DIY fund, he says, “but if you set up a company and employ yourself through the company you have to be careful.” If in doubt, ask an expert.

The lumpy nature of cash flow in a small business may make planning contribution levels into super a delicate calculation, but this is more of an opportunity than an obstacle depending on each individual’s aptitude for diligence. In lean years, contributions can be minimal; when the money is flowing, up to $540,000 can be contributed over three years without paying above the standard 15 per cent in tax.

Remember, it is the concessional tax treatment of super that makes the compulsory savings system so attractive. It’s better to save 85c from every dollar earned before tax than 63c for someone in the 37 per cent marginal tax rate (earning between $80,000 and $180,000).

Timing contributions is simpler with an SMSF than a regular fund, Ashenden says. “If you’re a small business owner getting toward the end of the financial year it might be a lot easier to get it in before June 30 [in a DIY fund].”

Business owners can be a sophisticated bunch and many will be inclined to assemble portfolios of shares, bonds, listed property and cash. A ‘lumpy’ asset such as business premises might be okay in a DIY fund for a while, but as retirement approaches the flexibility of divisible liquid assets makes more sense. The ATO lists the asset allocations of all SMSFs on its website and the average DIY fund is heavy in cash and direct shares, so it’s worth looking at allocations of some large professional funds for a point of comparison.

If life insurance is held inside a super fund the premiums may be claimed as a tax deduction, “so it does essentially make it cheaper,” says Ashenden, who recommends SMEs seek advice on income protection cover and says trauma cover should not be held inside super.

The route to an SMSF should start with a trip to a financial adviser, and Ashenden says a well-oiled fund needn’t be a slog. “If you’re getting the right people to assist you, it might be a couple of hours a month.”

Written by Jeremy Chunn

The articles represent the views of the authors and not necessarily that of the Bank. You should seek independent professional advice before acting on any matters set out in the articles.