Super strategies for tougher times

As the economy slows, smart SME owners can turn to their super funds to provide immediate benefits that will help cushion their business’s and their personal finances from any economic fallout. MICHAEL LAURENCE reports.

By Michael Laurence

As the economy slows, smart SME owners can turn to their super funds to provide immediate benefits that will help cushion their business’s and their personal finances from any economic fallout.

Under superannuation law, super funds must be maintained for the sole purpose of providing for the retirement of members. Nevertheless, there are a series of side benefits that can be legitimately gained from your super fund long before retirement.

And these benefits will not breach the so-called sole purpose test, nor be detrimental to your finances in retirement.

You can use super to gain unlimited asset protection from creditors in the event of some serious financial setback in the future. And super can be used as an unbeatable means to shift money out your business in a highly tax-effective way.

The separation of your private and business capital, using super, helps ensure your personal financial fortune is not exclusively tied up in the fate of your business.

Further, your super provides the smartest way to insure your income in case of illness or accident – a precaution that most astute SME owners would see as essential.

Consider these four strategies, prepared with the guidance of superannuation, legal, investment and SME professional advisers:

ONETake advantage of the unlimited asset protection of super

Many SME owners would be unaware that all super savings are now protected from being accessible to bankruptcy trustees – provided contributions were not made in an effort to bypass or cheat creditors. This follows amendments to superannuation and bankruptcy laws last year.

The explanatory memorandum to the amendments to the bankruptcy act is unmistakably clear: “A bankrupt’s entire interest in superannuation is protected from being divisible among creditors.”

Philip de Haan, a partner of Sydney solicitors Cutler Hughes Harris, says super fund members should put themselves in the position of being able to show that their super contributions were made for the primary purpose of saving for retirement, not to “defeat” creditors.

“A smooth pattern of contributions will give the greatest asset protection if things start to go wrong with your business,” de Haan says. He warns that sudden, extra-large contributions could suggest the possibility that a person was attempting to avoid their creditors, depending upon the circumstances.

“There should be substantial reasons for making extra-large super contributions,” de Haan advises. “The contributions [for example] could be made as part of a well-thought-out retirement plan to achieve retirement goals,” he says.

“A financial planner could formulate a retirement plan, articulating a capital target. This evidence would counter the presumption that large contributions were made to defeat creditors.”

The bankruptcy act contains provisions enabling trustees in bankruptcy to recover super contributions that were made in an attempt to escape creditors.

And de Haan points out that members of self-managed super funds can consider contributing listed shares and business real estate to their funds as an alternative to cash. (Under superannuation law, listed shares and business real estate are among the few non-cash assets that funds are allowed to acquire from their members.)

However, members should be aware that the contribution of non-cash assets may produce a capital gains tax liability, depending upon the circumstances.

Once the listed shares or business real estate is within a super fund, the assets would gain the full asset protection provided by super, again unless the assets had been contributed to beat creditors.

Contributions should be within the annual superannuation contribution limits; otherwise substantial amounts of extra tax are payable.

In 2008-09, so-called non-concessional contributions – no tax deduction is claimed on these contributions – have an indexed cap of $150,000, or $450,000 if contributed over a three-year period.

And concessional contributions – these are contributions on which tax deductions are claimed and include salary-sacrificed contributions and contributions by eligible self-employed – have an annual indexed contribution cap of $50,000 for 2008-09 or a non-indexed cap of $100,000 until 2011-12 if members are aged over 50.)

Under the corporations act, de Haan emphasises that company directors have certain personal responsibilities that could trigger attempts to gain access to their personal assets; and in turn lead to their possible personal bankruptcy. This should act as a powerful additional motivator – apart from saving for retirement – to shift assets into super, where they would be untouchable except in circumstances already outlined.

Directors, for instance, who allow a company to continue trading when there are reasonable grounds for suspecting that it is or may become insolvent, can be held personally liable for company debts after a certain stage. And losses and damages arising from misleading and deceptive statements may be personally recoverable from directors.

As well, company directors and principals of unincorporated businesses often provide personal guarantees for their business’s debts – making them particularly vulnerable.

TWOSeparate your private finances from your business finances

This should make you personally less exposed if your business is badly hit by the economic downturn.

And superannuation contributions are the most tax-effective way to extract value from your business, says Sue Prestney, a Melbourne director of chartered accountants MGI Boyd and the writer on small business in the Australian Financial Planning Handbook, published by Thomson Reuters.

Incorporated businesses can claim tax deductions on salary-sacrificed contributions, and the self-employed have been entitled to full tax deductions for their super contributions since July last year. (Contributions on which tax deductions are claimed should be within the annual caps on concessional contributions, referred to earlier.)

And as Prestney says, future earnings on cash or assets contributed to super will be concessionally taxed instead of at the 30% corporate rate.

Prestney describes the ability for those over 50 to make $100,000 concessional contributions until 2011-12 as a window of opportunity that is unlikely to be repeated.

THREEMake large super contributions for a spouse who works part-time in your family business

This is an excellent, but probably much-overlooked, opportunity to extract money from a family business – and to further separate personal and business finances as a protection from business setbacks.

Sydney tax and superannuation lawyer Robert Richards, principal of Robert Richards & Associates, says that SME owners who employ their spouses part-time in their businesses can arrange for them to receive extremely large salary-sacrificed super contributions.

Richards says the size of salary-packaged contributions for, say, spouses working part-time, can far exceed the market value of their work for a business. The combined salary-sacrificed contributions and Superannuation Guarantee contributions could be as high as the annual cap on concessional contributions of $50,000 (or $100,000 if over 50).

The tax commissioner has stated that he will not use his anti-avoidance powers to attack such arrangements, says Richards, apart from in exceptional circumstances.

The lineup of immediate advantages of this strategy includes that the contributions are deductible to the business, a family’s private assets are further separated from their business assets, and the spouse receives salary-packaged contributions on a pre-tax basis.

Richards warns that small business owners who are considering this spouse contribution strategy should ensure that their business passes the alienation-of-personal-income tests in tax law. Small businesses that do not pass these tests are limited in the tax deductions that can be claimed, including for salary-sacrificed contributions made for spouses.

However, Richards says, a business would not be caught, for example, under the alienation-of-personal-income rules if it received less than 80% of its income from a single client and used business premises that are separated from the family home.

FOURObtain income-protection insurance through your super fund

Perhaps the most cost-effective way to gain income-protection insurance is through a large super fund.

Income-protection insurance is particularly crucial in tougher economic times when small businesses – such as in building or consultancies – are under added financial pressure and have less flexibility than a larger business if the principal is forced to take time off work.

Heavyweight superannuation funds can use their tremendous buying power to obtain fund members with particularly low premiums.

Related stories:

• Super-boosting strategies for small business
• Six super tips and traps for 2008
• 10 best tax strategies for SMEs
• Seven strategies for making extra-large super contributions
• Super regulation