Small business underpins our economy and provides a source of income and store of wealth for millions of Australians, writes Campbell Korff. This means that those same Australians also rely on the value realised from the sale of their business to support them in retirement – and that can be a problem.

I have discussed previously how not enough small business owners are making use of the huge tax advantages of superannuation during their working lives. All is not lost, however, if you are in this category. The government anticipated this and has provided small business owners with special tax concessions when they sell their business assets at retirement, provided they then make use of superannuation.

What this all means is that it is critical that business owners maximise the value of their businesses when they sell out or retire.

For most, however, this means seeking offers a few months before they need to sell from their own network or possibly getting a local real estate agent to do some advertising. Having negotiated a quick deal with a competitor or staff member, a short meeting with their accountant and solicitor follows to work out the tax bill and contract.

Where was the planning? Looking before your leap is probably a good idea…

Given most small business owners put their heart and soul into their businesses for most of their lives, this process hardly seems to be doing justice to a life’s work.

Where was the planning? What was the valuation method? What steps did the owner take in the years leading up to exit to maximise that value? Was a sale the best exit or would more value be captured by structuring a succession plan for a promising junior? Were other structures available to entice the buyer to pay more? Was a tax and retirement plan developed beforehand?

Exiting a business successfully is a complex process during which hundreds of thousands of dollars of your wealth can be destroyed if care and, importantly, expert advice is not taken well ahead of time. Indeed, to a certain extent, you should always be buyer ready because you never know when that ‘too good to refuse’ offer might land on your desk.

If you want to contact Campbell Korff of  Yellow Brick Road Ballina go to: www.ybr.com.au/Branches/Ballina

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If you’ve got an empty nest downsizing the family home is an excellent financial strategy, writes Campbell Korff of Yellow Brick Road.

The current debate (or non-debate, if you happen to be a member of parliament) about the exclusion of the home from the aged pension assets test, is a nettle that I will leave those more politically astute than I to grasp. However, it does raise an important financial planning issue for retirees and empty-nesters.

A neat side effect of the ‘great Australian dream’ is that much of middle Australia reaches their 50s or 60s with little or no mortgage and an empty nest. This presents two very effective financial strategies to lock-in a more comfortable retirement. The first is a ‘Transition to Retirement’ strategy.  The second, which we are looking at now,  is downsizing the family home to release equity for investment to help fund retirement.

The logic of the latter strategy is quite straight forward: you release capital from an illiquid, non-income producing asset for investment in asset classes with these characteristics, thereby providing a higher and more effective income stream in retirement.

The first step, and possibly the hardest, is to detach emotionally from what may have been the family home for decades. I have seen many clients and friends go through the angst of this decision over months and years, only to come out the other end wondering why they took so long to do it. Each to their own, however. The timing must be right for you and your family.

From a financial perspective, though, it is very much a case of the sooner the better. This is because of compounding and the tax incentives supporting superannuation. In short, the longer your money is working for you in the friendly superannuation tax environment, the greater your retirement wealth will be. After-tax lump sums of between $180,000 and $540,000 (using the ‘bring forward’ rule) from asset sales can be contributed to superannuation in a financial year, provided you are still working.

So as soon as the kids leave home, it is worth developing a downsizing strategy with your financial adviser. For those intending to take advantage of the current aged pension assets test to keep their home, I would strongly recommend a Plan B.

If you want to contact Campbell Korff of  Yellow Brick Road Ballina go to: www.ybr.com.au/Branches/Ballina

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If you are in or nearing your 50s and unsure of whether you have enough savings to retire on or simply want to accelerate your retirement savings, making use of a Transition to Retirement Pension (TTRP) can be a very effective strategy writes Campbell Korff from Yellow Brick Road Management.

Since 2005, the superannuation rules have allowed people nearing retirement to supplement their income by drawing up to 10% (and a minimum of 4%) as a TTRP. The rationale is to encourage people to work longer by allowing them to reduce their hours and top-up their income from superannuation.

However, for those willing to continue to work full-time through their 50s and 60s, these rules present an opportunity to take advantage of the highly favourable tax concessions applicable to superannuation contributions, earnings and income.

The basic strategy is to salary sacrifice as much as you can into superannuation (up to $35,000 if you are over 50) and draw back out of superannuation only what you need to live on as a TTRP. This strategy can also be used by self- employed persons in a similar manner.

The main benefits of implementing a TTR strategy are:

• Pre-tax income contributed to superannuation (within the Concessional Contributions Cap) is taxed at 15%, instead of your marginal income tax rate if you do not save into superannuation. In many cases, more than halving the income tax rate on the amount contributed;
• Earnings tax paid inside of superannuation can be eliminated by using a TTRP. This effectively adds 15% to the performance of your retirement savings each year;

• Tax friendly income derived from the TTRP will allow you to salary sacrifice more into superannuation than you need to take out. Income derived from a TTRP is generally more tax effective than income received from working, especially after age 60. This can open up an ‘arbitrage situation’ where the amount needed to draw from the pension is much less than the amount needed to replace it via salary sacrifice;

• The TTR strategy can result in lower taxable and assessable income. This can enhance the ability to qualify for tax offsets such as Mature Age Tax Offset (MATO) and Low Income Tax Offset (LITO);

• The strategy can be completely unwound (i.e. funds rolled back to superannuation);
• The level of income received can be adjusted between minimum and maximum levels; and
• This is a tax driven strategy. This means it is not reliant on strong market performances to make it a successful strategy.

If you would like more information on preparing for or implementing a TTR strategy, contact your wealth manager.

If you would like more information on these issues, drop me an email at [email protected]. Or visit the YBR Ballina website on: ybr.com.au/Branches/Ballina

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