5. Maximise your salary-sacrificed or personally-deductible super contributions: With the halving of the annual cap on concessional super contributions cap from 2009-10, fund members should consider contributing the maximum amount, if possible.
The concessional contributions cap has been halved to $25,000 for most members.
The tax-savings alone from making these contributions – which include salary-sacrificed by employees and personally tax-deductible contributions by the self-employed – are substantial.
These contributions are only taxed at 15% upon entering the funds (much lower than most marginal tax rates), fund earnings are taxed at a maximum of 15%, fund assets supporting the payment of a member’s pension are not taxed, and lump sums and pensions are not taxable to members over 60.
6. Employ your spouse part-time and pump money into their super: Business operators can employ their spouses on a very part-time basis yet the spouses can make SG and salary-sacrificed contributions up to the annual caps on concessional contributions.
The tax commissioner has agreed not to use his anti-avoidance powers where a business – including a personal services business – run through a company or trust makes salary-sacrificed super contributions to associates such as spouses that are in excess of their value of their services.
This is perhaps the smartest and quickest way for business owners to make up for the halving of the annual caps on concessional contributions.
7. Split investment income: The shock halving of the annual caps on concessional super has triggered a search for extra investment tax breaks. And one strategy for high earners in particular is to split investment income with a spouse with little or no other income, suggests Sydney tax lawyer Robert Richards.
The splitting of investment income generally involves holding investments in partnership with a lower-earning spouse or through a discretionary trust that includes low-earning adult beneficiaries. Beneficiaries of a discretionary trust are taxed at their marginal rates on distributions, and are eligible for discount CGT and franking credits.
8. Build investments outside your business: If your business is beginning to produce higher returns as the threat of the GFC eases, this may be an excellent opportunity to begin building assets outside your business.
“It’s all about diversification,” says Sue Prestney, Mellbourne-based director of MGI chartered accountants. “The GFC highlighted how risky it is to have all of your eggs in one basket.”
“Trying to extract assets from your business to somewhere safe like a super fund is more important than ever,” she adds. “It is really tempting, no doubt, to keep reinvesting in a business because it is hard to get alternative sources of finance.”
Prestney says that another GFC, recession or any sort of financial setback could leave business owners particularly exposed if all of their wealth is in the business.
Another point is that family businesses are often passed to younger generations for no charge or at a discount rather than sold to finance the retirement of the current owners. This is another reason why it is crucial for business owners to have their own investment portfolios.
Prestney says that before agreeing to pass a family business down to the next generation, business owners should calculate how much they need to finance their retirements. “Make sure you can afford to give your business away or to discount it.”
9. Don’t hold all of your investments in your own name: When you are building up assets outside your business as one of your strategies for 2010, consider whether you are vulnerable to being be held responsible for the debts of your business or sued in relation to your business.
If you are vulnerable in this way, Prestney agrees that it is a fundamental asset-protection strategy is not to hold all of your assets in your own name.
Many lenders and trade creditors, for instance, require personal guarantees from business owners and directors. Prestney says personal guarantees often “come back to bite” business owners.
10. Don’t forget bear market lessons: Most have been covered already in this feature. In short, ensure in 2010 that your investment portfolio is adequately diversified, keep your investment and tax costs low, do not take risks outside your personal risk tolerance – and be ready to seize investment opportunities such as the rising sharemarket.
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