Planning for retirement as a business owner
19 Mar 2015
By Shadforth Financial Group
As a small business owner it is important to have a retirement plan in place well before deciding to retire. This is because, in most cases, your major asset is your business. Planning ahead will ensure you have sufficient funds to maintain your lifestyle in retirement.
To ensure you are setup for retirement you should consider developing a business exit strategy. This may include selling the business, transferring business real property assets to a self-managed super fund, passing the business to a family member or winding it up. These considerations will largely depend on the type of structure your business is operating and your personal financial position.
You should also understand the tax implications of your decision and ensure that the most tax effective outcome is achieved. This can be done by taking advantage of certain tax concessions which are available to small businesses however, planning is important to getting it right.
Where your business is operating in a corporate structure, you should consider whether it is beneficial to gradually extract funds from the company via dividends prior to the sale of the business. This could potentially assist you in attaining certain tax concession thresholds upon the eventual sale. However, you also need to consider the amount of excess cash available, the company's ability to maintain working capital if funds were extracted, the potential reduction of the business's value and fully franked dividends paid to shareholders on the top marginal tax rate which is subject to a top-up tax.
Also, where excess cash exists, extracting the cash should also be considered from an asset protection perspective. That is, maintaining the cash within the company structure could expose the cash to inherent risk upon any future business related litigation.
It may not be possible for some business owners to extract funds out of the company via dividends since all the cash may be tied up in the business assets. An alternative way to access the funds would be to sell the assets or the business. In this situation, you need to consider whether it is more beneficial for the company to pay post-sale dividends or to wind up the company. In these instances you will receive a capital distribution since certain capital distributions can be received in a tax effective manner.
Keep in mind that any funds withdrawn from the company in a form other than dividends or capital distribution can result in additional tax consequences, for example where funds are accessed via loans.
If you are operating as a sole trader it is relatively straight forward. The profits of the business are taxed at your marginal tax rate. The distribution available is the after-tax income and cash can be accessed at any time without additional tax consequences.
Winding up a sole business is reasonably straight forward with the sale of the business or business assets subject to capital gains tax (CGT). You need to consider certain CGT concessions to ensure the most tax effective outcome is achieved.
As part of your retirement planning, you should consider maximising your contributions to a self-managed superannuation fund as the income earned is concessionally taxed. Furthermore future pension payments are tax free when you are over 60.
A partnership is taxed similarly to a sole trader. For taxation purposes, each individual partner is taxed on their share of the partnership income and is entitled to take their share of the distribution. This is because a partnership is treated as a flow through on the basis that each partner jointly owns the business assets and liabilities. It is very important that each partner knows their rights, responsibilities and obligations.
For the partners in a partnership it is vital that a retirement plan is in place as succession planning can be difficult and complex when it involves the dissolution or sale of the partnership or upon the death of a partner. Similar to sole traders/individuals there are tax concessions that need to be considered during this process.
Trusts and discretionary trusts have traditionally been the preferred vehicle to achieve asset protection and allocation amongst family members as part of a succession plan. Businesses operating via a trust structure have the benefit of distribution flexibility amongst beneficiaries. All profits however must be distributed to its beneficiaries at the end of each accounting period (usually 30 June).
Each beneficiary is taxed according to their individual marginal tax rate. Although the profits must be distributed to the beneficiaries, the cash can be retained and used to expand or maintain the business. Beneficiaries entitled to the trust's funds can also have access to the funds when they require.
Where trust assets are required to be sold to fund a business owner's retirement, tax concessions should be considered to minimise the CGT impact to the beneficiaries.
If you are a business owner it is important to plan your business exit strategy to ensure you are set up for retirement. With the help of professionals, planning ahead will ensure you take advantage of any tax concessions you are entitled to.
If you are looking for help in aspects of business structuring, tax planning and retirement/succession planning, contact your Shadforth team.