‘Overnight’ success requires long-term planning, insist four of australia’s top SME leaders

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There was a time, not very long ago, when working Australians and those operating small businesses regarded superannuation with little more than a passing interest. Indeed, often it was only something many considered at length just before retirement.

That attitude seems to have altered, especially since May 2006, when the federal government announced its new Better Super system, with headlining changes such as the removal of exit taxes on retirement benefits for the over-60s and new contributions limits.

Just to recap, there is an annual $50,000 limit on employer contributions, pre-tax salary sacrifice (and tax deductible contributions from the self-employed) as well as a transitional cap of $100,000 for five years if you’re aged over 50. For after-tax contributions, the cap is $150,000 per person annually. However, under ‘averaging’ rules, a single contribution of $450,000 for individuals under the age of 65 can be made. The stipulation here is that no additional contributions can be directed into super in the subsequent two years.

The government recognised the new super limits could disadvantage those Australians planning a last minute top-up of their retirement savings. Therefore, it allowed investors to make after-tax super contributions of up to $1 million before June 30, 2007. In fact, according to media reports, investors embraced this opportunity unequivocally, with as much as $20 billion flooding into retail super in the June 2007 quarter.

As a result, Iain Rogers, Head of Financial Planning with NAB Financial Planning, suggests Australia is now definitely on the cusp of a new investment era as a result of the super changes.

“There was a lot of noise around the June 30 window of opportunity,” says Rogers. “What it has done is create awareness around superannuation as a tax structure.”

It is equally imperative that investors maximise the opportunities presented by Better Super, particularly the new averaging rules. “For instance, we don’t want people with two years to retirement dumping $450,000 in this year and missing out on a contribution in the year before retirement,” advises Rogers. “For a couple, that could mean another $300,000 plus in their super environment that they otherwise would not have. These are the sorts of mistakes NAB Financial Planning is trying to make sure people don’t make.”

The self-employed have also enjoyed some significant wins from Better Super. First and foremost, small business owners can now claim a full tax deduction against contributions made up to the new limits. Previously, small business operators could only collect a full tax deduction on the first $5000 contributed to super. Make a contribution in excess of that limit and only three quarters of every dollar contributed, up to the age-based limit, was deductible.

“This is a really big change, because of the complaints levelled at the [old] system and the perceived inequity,” adds Rogers. “The new limits are a real motivator for small business owners.”

Moreover, the Super Co-Contribution, where the Government chips in $1.50 for every $1 contributed, up to a maximum of $1500, is also available to small business owners. “In the end, this is really a sweetener and a motivator, along with the new limits, and people are realising that if they don’t plan now, they are not going to get those tax-free benefits in retirement.”

Small business owners, subject to some constraints, can also move the proceeds from active business asset sales into super. There’s a lifetime cap of $1 million and Rogers says the newly enhanced limit is a nod to the fact that many small business owners view their business as their retirement savings. “You can stagger contributions or make a lump sum payment,” he explains.

However, as the sale of a small business is a complex transaction, business owners are advised to contact a NAB Financial Planner
before proceeding. Buying life insurance through superannuation is also more attractive for those running an SME. In addition to claiming a deduction for life insurance premiums paid as part of a super contribution, a payout can now be totally tax-free to a dependant, which is a major improvement, according to Rogers.

“Previously, many life insurance policies established for business reasons, such as a buy/sell agreement between partners, were structured outside superannuation because of the tax levied on a payout,” Rogers explains. “In many cases [these tax implications] have disappeared, so we are now strongly suggesting to all of our clients that they review their insurance arrangements. It can mean big tax savings when paying the premiums, but also at the other end.”

Rogers advises small business owners who think they may have been overlooked by the super changes to think again.

“There are strategies around cash flow to allow you to start investing money into superannuation,” he says.

“For some people, it might be appropriate to back off on something like the mortgage and get some money into the super environment. This way, you’re not only looking after your short-term debt obligations but also your long-term retirement planning.”