Buy your Business (Premises) through your SMSF

Are you a business owner?

Do you have an SMSF?

Did you know that unlike residential property, you can purchase commercial property that is in use by a fund member through your SMSF?

What does that mean?

If you’re a business owner you can buy the commercial property in which you do business.

Why would you want to do that?

To put the asset into a lower tax environment. And to put your asset into a protected environment to provide income for your future retirement.

What you’ll need

You’ll need a fair amount in you super fund. Banks will usually require a 35% deposit for your own commercial premises. As mentioned earlier, you’ll also need some solid advice as to whether or not this particular strategy is right for you.

What are the benefits?

Well as with any asset in your super, there are potential long term tax and superannuation benefits. Aside from this, within an SMSF the interest on the loan may be claimed, capital gains when you sell may be significantly minimised. Also if you are in pension phase the fund will pay no tax on the rental income.

The door might be closing

An interim report of the Australian government’s inquiry into the financial system is calling for a review of guidelines around leveraging this strategy source: http://fsi.gov.au/files/2014/07/FSI_Report_Final_Reduced20140715.pdf

So time may be of the essence. If this is an opportunity that you think might be good for you contact us today so we may assist you looking after your all round financial health.

30 June 2015 superannuation contribution rates

The superannuation contribution thresholds for next financial year (30 June 2015), have been amended and it is worth considering your contribution strategies in the lead up to 30 June 2014 and how you might best maximise the amounts you can put into superannuation over the coming years:

 

For the current year (30 June 2014) we have:

 

- $25,000 concessional (deductible) contributions

- $35,000 for those over 59 on 30 June 2013

- $150,000 non-concessional contributions, and

- $450,000 bring forward non-concessional (3 year bring forward)

 

For next financial year (30 June 2015) the amounts will be:

 

- $30,000 concessional (deductible) contributions

- $35,000 for those over 49 on 30 June 2014

- $180,000 non-concessional contributions, and

- $540,000 bring forward non-concessional (3 year bring forward)

Which year to contribute or trigger the bring forward rules is now well worth reconsidering with these changes.

The superannuation co-contribution is paid for those that contribute non-concessional amounts to super. There are certain conditions that you need to meet importantly, you need to meet the 10% work test.

The rates for 30 June 2014 are:

Co-contribution to your super acount by the government of up to $500 if your income is below the lower threshold $34,488. The rate of co-contribution paid drops as your income reaches up to $49,488.

Many children starting out at work, or those working reduced hours nearing retirement can often find this to be an option worth considering.

30 June 2013 tax-free threshold is $18,200

We are now 6 months into the 30 June 2013 financial year and we are starting to see a lot more talk about the change to the tax-free threshold this year.

In past years, the tax-free threshold was $6,000. Most people remember that pretty well, it meant you could pay an employee about $115 and not worry about having to withhold tax.

There was also a low-income tax offset that boosted this up to around $15,000 before a normal taxpayer was actually required to pay any tax.

This has changed now for the year ended 30 June 2013 and it seems to be a lot easier to explain and apply now.

The tax-free threshold for a normal taxpayer is now $18,200. This equals $350 a week that can be paid and no tax to be withheld. There is also a smaller low-income tax offset which boosts this up to around $20,540.

For a number of people, usually the non-working spouse, the strategy was employed to make sure you earned around $6,000-$10,000 a year in passive income. The strategy should be reconsidered. You could target $20,000 of income in your own name from passive investments now.

When a cancelled tax cut may be a blessing

A lot has been publicised about the dropping of the promised company tax rate cut in the 2012 budget and the negative effect of this on small business. But does the company tax rate really matter to most small business owners?

First we need to look at the fact that the vast majority of small business owners cannot afford to leave all the profits of the business in the company. Funnily enough they need to live so they pay themselves through dividends and/or salary. The interaction of the dividend imputation system and the tax system then, assuming that both the company and the owners are Australian tax residents, negates the effect of the corporate tax rate in favour of the individual tax rates, rendering a change in the corporate tax rate meaningless.

But what about  those small business owners that have left profits in their company in the past to pay out dividends in retirement, surely a cut in the corporate tax rate would be a be win for them?

Not necessarily. Whilst a drop in the corporate tax rate may mean more money left in the company to re-invest in the future, there is a negative effect on the payout of retained earnings that are already in the company and taxed in prior years at higher rates (the current 30%, or even prior corporate rates of up to 49% as the rate peaked in 1988). Surely this cannot be true? The reasoning comes in the imputation system and how the company tax paid on earnings is “credited” to the shareholder. The example below looks at $100 earned in a company when the corporate tax rate is 40%, meaning $60 is retained after $40 tax paid. This $60 is then paid as a fully franked dividend in a future year when the tax rate is 30% to a shareholder/taxpayer on the 31.5% personal tax rate.

The shareholder would need to include the $60 dividend plus the franking credit in their taxable income. The franking credit is worked out based on the tax rate when the dividend is paid rather than when the income was earned and as such the franking credit would, in this case, be $25.71. So $85.71 would be added to the taxable income of the shareholder, tax at 31.5% being $27.00 less the franking credit of $25.71, leaving an extra tax bill of $1.29. So although the company earned $100, the shareholder gained net only $58.71, paying over 40% tax despite being on a modest tax rate.

What if the corporate rate had not reduced to 30% but stayed at 40%, we must pity the poor “battler” here mustn’t we? Well maybe not. Keeping all the numbers the same for the above example except the changing corporate tax rate, whilst the shareholders taxable income increases by $100 rather than $85.71, they have $40 of imputation credits attached rather than $25.71. Tax on $100 at 31.5% being $31.50 less $40 in imputation credits, leaving the shareholder with a refund of $8.50 rather than a payable of $1.29. Here the shareholder gains net $68.50 after tax rather than the $58.71 in the reducing corporate tax rate example above.

By reducing the corporate tax rate by 10% our poor “battler” lost 14.3% of their after tax dividend.

I know that in the lower rate example the franking credits stay in the company to pay out later. But in a small business this is not always practical, and in the absence of an increasing corporate tax rate or untaxed income in the company (rare in small business), these “extra” tax credits end up being stockpiled, never able to be used and often lost on eventual wind up of the company.

Yet another example of the importance of discussing your financial affairs regularly with your Accountant at Jacoby Cameron & Co.

Martin White FCA