As a business owner, you may find yourself investing every spare dollar into your enterprise, with little left to contribute to your superannuation. While this approach might make sense in the short term, relying solely on your business as your retirement nest egg carries significant risks. If you’re approaching retirement age, now is the time to reconsider your superannuation strategy and ensure you’re building a secure future for yourself and your family, independent of your business.
At Wealth Fundamentals, we understand the unique challenges business owners face when it comes to superannuation and retirement planning. This article will guide you through the essential considerations to ensure that your superannuation plan is as robust as your business.
The Risks of Relying Solely on Your Business for Retirement
Many small business owners assume that they will sell their business when they retire and use the proceeds to fund their retirement. However, this strategy is fraught with risks. The value of your business might not be what you expect when the time comes to sell, especially if you are integral to its day-to-day operations. Additionally, market conditions could delay or diminish the value of your sale.
By investing in superannuation alongside your business, you create a more secure and diversified retirement plan. Superannuation offers tax advantages, investment growth, and, most importantly, peace of mind that your retirement savings aren’t solely tied to the fate of your business.
Capital Gains Tax (CGT) Concessions: Boosting Super with Business Sale Proceeds
If you plan to sell your business as part of your retirement strategy, the small business CGT concessions can offer a valuable opportunity to reduce capital gains tax and increase your super contributions. These concessions allow you to contribute part or all of the proceeds from the sale of your business to your super, beyond the usual contribution caps.
There are two key exemptions that can help you maximise your super contributions:
15-Year Exemption: The 15-year exemption is usually the most effective for small business owners wanting to build their super balance using the proceeds from the sale of their business. Super contributions under this exemption are not subject to concessional and non-concessional contribution caps ($25,000 and $100,00 per annum, respectively). Instead they are measured against the lifetime CGT cap ($1.48 million for 2018/19), which means higher contributions than normal are allowed from the sale of your business. Small business owners are able to eliminate all capital gains and contribute sale proceeds (up to $1.48 million) to their super.
Retirement Exemption: Even if you don’t meet the 15-year ownership requirement, the retirement exemption allows business owners to eliminate up to $500,000 in capital gains when they sell their business and contribute an equivalent amount to super. This strategy can help those who may not have had the opportunity to build a substantial super balance over the years.
To determine whether your business qualifies for these concessions and to develop a strategy that suits your retirement goals, it’s crucial to work with a financial planner and your accountant.
Regular Super Contributions: Building Long-Term Security
While selling your business may form part of your retirement plan, regularly contributing to superannuation throughout your working years provides a foundation of long-term financial security. Unlike your business, which may fluctuate in value, superannuation grows in a tax-efficient environment, offering stability for your retirement savings.
As a business owner, you’re responsible for making your own super contributions. You can contribute up to $30,000 per year (from July 1 2024) in concessional (pre-tax) contributions, including salary sacrifices or personal contributions. These contributions are taxed at a lower rate than your personal income, providing immediate tax benefits while building your retirement nest egg.
You can also make non-concessional contributions (after-tax contributions) up to $120,000 per year, further increasing your super balance.
Protecting Your Super and Your Business
Another critical element of planning for the future as a business owner is protecting both your business and your personal wealth. Insurance plays a vital role in this protection. Key considerations include:
● Income Protection: Safeguards your ability to earn an income in the event of illness or injury.
● Business Expense Insurance: Covers essential business costs if you’re unable to work.
● Buy/Sell Insurance: Provides financial protection for business partners if an owner passes away or becomes incapacitated.
Additionally, your estate planning should include a review of your superannuation and business interests. Having up-to-date binding death nominations for your super and buy/sell agreements in place ensures that your assets are distributed according to your wishes.
Superannuation as Part of a Diversified Retirement Strategy
Superannuation is just one element of a diversified retirement plan. Many business owners also invest in other vehicles, such as property or shares, to ensure they have access to additional income streams outside of their super. At Wealth Fundamentals, we work with you to design a retirement strategy that integrates superannuation with other investments to meet your lifestyle goals.
Having a structured retirement plan helps ensure that you have access to the funds you need, when you need them, while taking advantage of the tax benefits that super offers.
The Importance of Expert Holistic Guidance
As a business owner, your financial needs are unique. A comprehensive superannuation strategy requires careful planning and regular reviews, particularly as laws and your business evolve. At Wealth Fundamentals, we offer personalised advice to help business owners build a retirement strategy that protects their wealth and secures their future.
To learn more, please contact Matt Lane or Alec Winter on 07 3720 1299 or email admin@wealthfundamentals.com.au
Lane Moses Pty Ltd ABN 56 092 186 117 trading as Wealth Fundamentals and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306.
The information (including taxation) contained within this document does not consider your personal circumstances and is of a general nature only - unless otherwise stated. Wealth Fundamentals strongly suggests that you should not act on it without first obtaining professional advice specific to your circumstances. This information is based on our understanding of legislation at the time of writing. Such legislation may be subject to change. This publication cannot be reproduced in any form without the express written consent of the author.