Tips for Small Business & Taxpayers

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First With The Latest Financial Advice

What is a Transition to Retirement Pension (TTRP)?

A TTRP is an income stream that can be accessed before retirement.  Generally, an individual can only access their superannuation benefits when the following conditions are met:

  1. The individual has reached preservation age (55 or over)
    2.  The individual is retired, or is over age 65.

With the TTR pension, an individual does not need to be retired to access the benefits offered by a retirement income stream.  Importantly, once the second condition is met (being retired), the income stream automatically reverts to a normal allocated pension.  A feature common to both allocated pensions and TTR pension is that no tax is charged on earnings.
The main benefits of implementing a TTR strategy are:

  1. Earnings tax paid inside of superannuation can be eliminated by rolling funds to a TTRP.  This effectively adds 15% to the performance of your retirement savings each year.
  2. 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 then income received from working, especially after age 650.  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.
  3. 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).  It may also increase your eligibility for the government’s co-contribution scheme.

Advantages of implementing a TTR Strategy

  1. No tax on earnings or growth within the TR Pension.
    2.  Access to the 15% pension tax offset between ages 55 and 59 and tax-free income from age 60.
    3.  The strategy can be completely unwound (i.e. funds rolled back to superannuation) without any negative implications on the retirement balance.
    4.  The level of income received can be adjusted between minimum and maximum levels.
    5.  This is a tax structure driven strategy.  This means it is not reliant on strong market performances to make it a successful strategy.

Disadvantages of implementing a TTR Strategy

  1. If the income drawdown from the TTRP is not replaced, the final retirement balance may be less.
    2.  Income from the TTR Pension may be received at different times to your current salary or self-employed income.
    3.  There may be transaction costs involved in establishing the strategy.
    4.  The amount contributed back to superannuation is limited by the Concessional Contribution Cap (CCC) amount.

 

Upon retirement, superannuation fund and Transition to Retirement Pension consolidate into standard Account Based Pension (no maximum limit on annual amount

 

As many of my clients are small business owners I am often asked for advice about insurance planning and ways to ‘protect’ you business. I.E. what measures can be taken to ‘protect’ the business against important issues such as a loss of major business assets or key personnel.

  1. a) The succession plan can cover events such as
  • Could the remaining partners work with the nominated beneficiaries?
  • Would the surviving partners procure the funds to buy out the deceased partner’s interest in the business?
  • How would the remaining partners procure the funds to buy out the deceased partner’s interest in the business?
  • What would be the value of the business in this situation?

To do this the business should take out risk protection on Buy/Sell agreements. If the business owner is unsure how to answer any of these questions – or the thought of the event sends a chill through them, then they need to seriously consider the implementation of the business succession protection NOW in order to secure the future viability of their business.

Such business that has implemented a solid succession plan will have that fact work in its favour when dealing with bankers and financiers in these times of tighter liquidity and greater difficulty in obtaining finance.

If the unthinkable did happen ask yourself these questions:
  • Would you or your family receive adequate payment for the transfer of your stake in the business?
  • Would any loans the business owes to you be quickly repaid?
  • Would you, your family or your estate be released from any personal guarantees given to lenders for business loans?
  • Would your personal assets, such as your home, provided as security for business loans, be released to you, your family or your estate?
  • Would you have sufficient financial resources to protect your income and family’s lifestyle?
  • Would you know what your insurance will cover?

33 per cent of small business owners are aged over 50, posing a real issue of succession planning.

If the unthinkable happened to your business associates or key employees ask yourself these questions:

  1. Would any ownership succession be orderly, equitable and funded?
  2. Would the valuation of your business be maintained?
  3. Would your business maintain the confidences of lenders and trade creditors?
  4. Would your business have enough cash flow to meed its commitments?
  5. Would your retain key employees via confidence in your business?
  6. Would your business have the financial capacity to recruit and train new key employees?
  7. Would your business be able to pay out or reduce business debts to protect the personal guarantees supported by the personal assets of the business owners?
  8. b) Trauma Insurance is for cancer & strokes and paid in a lump sum.
  9. c) Sickness and Accident Insurance is for people who are self employed and do not have sufficient funds or assets.

The income must keep coming or the bills are not paid and bankruptcy ensures.
Life Insurance is the payment of a lump sum on death and can be used by the remainder of the family to pay off mortgages and debts without bankruptcy or a forced sale.

  1. d) Key personal insurance.

ASSET (DEBT) PROTECTION

When asked what their most important assets are, most business owners initially think of physical assets.

Yes, they are valuable to every business, but it’s the intellectual capital and personal exertion provided by the key people, like you and your business associates, that typically makes these assets generate the business’ profits.

Their continued contribution is critical to the long-term success of any business.

The problem – Loss of Assets

Material things can always be replaced or repaired but a key person’s death or disablement can result in a financial loss more disastrous than any loss of, or damage to, physical assets.

When a key person dies, or is permanently disable, they’re lost to the business forever, which can create immediate financial problems.

Without the security provided by the key person, the business may be forced to sell assets to maintain cash flow if creditors press for payment and debtors hold back payment.

The assets of the business and the personal assets of the business owners securing business loans may be at risk.

Customers and suppliers may not feel confident in the trading capacity of the business, and its credit rating could fall if lenders are not prepared to extend credit.

Outstanding loans owed by the business to the key person may also be called up for immediate repayment.

The solution- Asset Protection

This can provide the business with enough cash so it can repay debts to preserve its asset base, protect the owner’s personal assets, free up cash flow and maintain its credit standing if a business owner or loan guarantor dies or is disable.

REVENUE PROTECTION

Most businesses have one or more key persons whose skill, knowledge, experience and leadership generate significant revenue ensuring the success of the business.

These may be business owner or key employees.

A key person in any business may generally be defined as one whose death, disablement or critical illness would have an adverse financial effect on the business.

A drop in the revenue is often inevitable when a key person is no longer there.

The problem- Loss of revenue

If there isn’t a suitable replacement within the business it may take substantial time and financial inducement to find and train a successor; let alone restore any loss of revenue during a very stressful time.

This may, in turn, affect the management of key business relationships, or affect the confidence of lenders or key trade creditors.

For example losses may result:

  • While you’re finding and training a suitable replacement,
  • From the loss of revenue generated by a deceased or disabled key person,
  • From demand that can’t be met,
  • From errors of judgement that can happen due to a less experienced replacement, or
  • Through the reduced morale and confidence of employees.

The solution- Revenue Protection

This can provide your business with enough money to compensate for the loss of revenue and associated replacement costs to replace a key employee or business owner should they die or become disabled.

The aim is to maintain the business in the same, or substantially similar situation as it was prior to any or all of these events.

OWNERSHIP PROTECTION

People don’t plan to fail, but they typically fail to plan.

This age-old truth has particular relevance where the death or disability of an owner can result in the demise of an otherwise viable business simply because of the lack of business succession planning.

The problem- Loss of control

While the owners are alive they can at least negotiate a buy-out amongst themselves; for example, on an owner’s retirement.

But what if one of them dies?

The remaining owners must now negotiate with the deceased owner’s legal personal representative, who may well be more concerned about the needs of the estate then the needs of the business.

Alternately, the surviving business owner/s may find themselves in business with the unwelcome relatives of the deceases, who potentially have no experience or expertise to offer, which could result in a loss of control of the business but a sharing of the profits.

Many business owners mistakenly believe that this contingency has been catered for in the business; constitutional documentation.

Often there is no buy-out provision or, if there is, it’s usually ineffectually drawn up and inadequately funded.

The solution- Ownership Protection

As part of business succession planning Ownership Protection can provide for you, your family and your business associates should one of the owners die, be disabled or suffer a critical illness.

Ownership Protection ensures the continuity of the business through the orderly and certain transfer of ownership and, importantly, that it is funded.

Ownership Protection also ensures the exiting party receives fair value for their equity in the business. While the surviving owner gets certainty about their control of the business, entitlement to profit and their business’ future.

Consider the alternatives- Absorbing the loss into the profits

This can be risky as it assumes your profits will be sufficient to absorb the loss at the time of the event. A reduction in revenue and therefore profit is often inevitable, potentially resulting in a loss of income for owners and a reduction in the value of the business. Profit deterioration may raise concern with lenders and the tightening of credit terms.

Tie up capital in an emergency fund

Creating a contingency reserve or emergency fund would mean locking away critical working capital otherwise available for business growth or distribution to the business owners. It would generally take many years to accumulate an adequate cash reserve.

Borrow the funds if you are able at the time

Borrowing the cash is an option may business could consider, but lenders may not be prepared to extend credit after a key person’s death or disablement because the future of the business and its ability to re-organise is uncertain. Your business may not have the cash flow or security for additional lending. The interest on any lending sees this solution costing more than 100 cents in every dollar.

Realising existing business & personal assets

Stripping the business of hard earned and valuable assets at such a critical time may in fact make matters worse as these assets are generally required to generate the business’s revenue. Often these assets have borrowings against them, or are security for business loans, therefore the owners may not have the discretion to sell them without their lender’s approval. Your personal assets, including your home, may already be encumbered for personal borrowings and may not be readily realisable to cover business needs.

The forced sale of assets may see them sold for only a fraction of their value with taxes and charges incurred representing a significant cost to the business and its owners.

Loss of control of your business

Without a Succession Agreement granting the continuing owners the option to buy a deceased or disabled owner’s interest in he business and at a pre-determined price, continuing owners may find themselves in business with the unwelcome relatives or heirs of the exiting party, and sharing the profits with them. Alternately the exiting owner’s interest could be sold to the highest bidder including your competitors.

Paying off the outgoing owner’s heirs

It might be possible to pay off the spouse or heirs of the exiting party over a number of years but only if they agree to it. Often these parties require full settlement of the purchase to meet their own financial needs making any vendor terms impractical. You might also find it difficult to come to mutually agreeable terms given your business priorities do not align with their personal needs. If terms can be agreed you are still saddled with a debt to repay plus interest, seeing this solution costing more than 100 cents in every dollar.

THE COST-EFFECTIVE SOLUTION

Business insurance can provide a unique and cost-effective solution to fund these problems.

It’s cost-effective because it can provide the right amount of money, for the right person, at the right time, and at only a fraction of the cost of the alternatives which, at a minimum, would cost at least 100 cents in the dollar.

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