5 Facts You Need To Know When Building Your Retirement Nest Egg
Given the demands of everyday life, planning for your retirement and more specifically, building a retirement nest egg, may be a relatively low priority. You may think that you still have plenty of time, but before you put off planning for your retirement any longer, here are some key facts you should consider.
Your retirement could last 30 years or more
A male, currently aged 65, has a future life expectancy of 19 years and for females, currently aged 65, it’s 22 years. But these are just the averages, (so half of us should live longer) and they are increasing steadily. As these trends continue, your retirement could stretch to three decades, or maybe even longer.
You shouldn’t rely on the age pension
The full single rate age pension only provides around 25% of average weekly male earnings. That will only give you a very basic existence. What’s more, qualifying for the age pension may become more difficult in the future. Given that our population is ageing, statistically there are more people who are of pension age. With limited government resources, one would imagine that the rules will get tougher and they already have.
You shouldn’t rely on an inheritance
Your parents may end up spending all of their savings and may even need to downsize their home to help make ends meet. We are finding this more and more common as aged care costs continue to climb and as people live longer their wealth is eroding fast. So, if you’re relying on an inheritance to fund your retirement, you could be disappointed.
You might not have enough super either
With some of your money going into super through compulsory employer contributions, you’re off to a good start. But if you are assuming that those employer compulsory contributions will mean you will have enough super to get you through your retirement, then you could be in for a nasty surprise. Research conducted by Rice Warner Actuaries revealed that Australia has a shortfall in super of close to $1 trillion.This means that many Australians will not have enough super to fund their retirement.
Start planning now
Thankfully, with a bit of preparation, it’s possible to plan for a long and comfortable retirement. Strategies like salary sacrificing into super, making lump sum contributions, spouse contributions, or using a transition to retirement strategy are all smart strategies to consider, to help boost your super. Some of them may have some immediate tax benefits too. Once you reach preservation age (currently 57yo) it’s also possible to use your super to start a pension that pays you a regular income. Some pensions even guarantee to pay you an income for the rest of your life, negating the risk of outliving your savings.
Talk to a retirement planning expert
If you want to start building your nest egg, or if you want to see if you are on track to having enough for retirement, you should speak to a financial adviser. They can help you set realistic goals and put a plan in place to achieve them.
Call Potts & Schnelle now Ph 02 60332233 and make an appointment to discuss your personal situation with one of our financial planners.
Picking a retirement date is influenced by age, savings and holiday plans, but what many people don’t realise, is that the taxation outcome can vary greatly from case to case.
Age Pension Entitlements
For those born before 1 January,1954, the qualifying age for the Centrelink Age Pension is currently 65½ yo, and is increasing so that for those born after 1 January 1957, the qualifying age is 67 yo. For many people, this is the date that they choose to retire because a full or part age pension will help to supplement their living costs, therefore reducing and/or removing their need to work for an income.
However, at this age, taxpayers also become entitled to a “senior age person tax offset” which lifts their effective tax-free threshold to approximately $29,000 pa. This additional tax free amount can work very nicely hand-in-hand with the timing strategies mentioned in the coming paragraphs to help reduce tax payable.
When you retire from the workforce you will most likely be entitled to receive accumulated unused long service leave and/or annual leave. The taxation payable on these amounts will differ depending on what time of year you retire. Essentially, since 17 August 1993, there are no concessional tax rates applicable to these amounts, they are taxed at your marginal tax rate. Given that our marginal tax rates increase as our taxable income increases, it makes sense to receive these lump sums in a financial year when you have less, rather than more, other taxable income.
As an example, if you retire on 30 June, given that you will most likely have already received 12 months’ work income, your marginal tax rate will be considerably higher than if you receive the lump sum on 1 July and have little to no other income for the upcoming year ahead. Consequently, the financial advantages of working a few extra days, weeks, or months, to enable the accrued lump sum to be received in a new financial year can be substantial. For example, 10 weeks’ worth of termination payments at $1,500pw received prior to 30 June, could incur tax of approximately $5,000 compared to $nil if received on/or after 1 July.
Week by Week
However, another consideration with regard to termination payments, is to consider having the entitlements paid out to you week by week, rather than as a lump sum. When receiving the entitlements week by week, you are at the same time accumulating additional entitlements, resulting in a larger dollar payout. For example if you have six months annual and long service leave owing to you and you arrange to have that paid to you week by week before choosing to retire/terminate, then during that six months period you will accumulate an additional 2½ weeks annual leave/long service leave worth say $3-4,000. This strategy might be able to be combined with the taxation strategy mentioned in the previous paragraph to push your ultimate retirement date and the receipt of some of the termination payments into a new financial year.
If, on retirement, you plan to utilise superannuation to pay for your living costs, then you need to consider the taxation applicable to the future withdrawals from your superannuation fund. If you are aged 60yo+, then in most instances any withdrawals that you make from superannuation either as a lump sum or as a pension will be tax-free. However, if you are <60yo, there are a variety of taxation outcomes ranging from tax-free, through to a marginal tax rate which could be as great as 49%. Withdrawing as a lump sum when you are <60yo is generally a better tax outcome for small amounts than taking a pension. However, there are rules that limit the taxation concessions on the amounts withdrawn.
Superannuation Fund Taxation
Taxation paid by your superannuation fund on your share of the earnings differs depending on whether your superannuation is in accumulation phase or pension phase. On the assumption that you have permanently retired from the workforce, if you’re superannuation balance has been converted to a pension, then your share of the superannuation fund’s income will be tax-free. However, if you are still in accumulation phase, drawing lump sums from time to time, then your share of the superannuation fund’s income will be taxed at 15%. This can be quite a considerable amount on larger balances. For instance an accumulation fund with a balance of $600,000, earning 10% pa will pay tax of $9,000 pa, whereas the same amount in a pension fund will pay $nil. That’s a business class airfare to Europe each year!
The timing of your retirement can significantly affect the taxation payable on your personal income and on the tax paid on your superannuation savings. We highly recommend that you consult with your financial planner or taxation adviser before locking in your retirement date.
If you would like to talk to the specialists at Potts & Schnelle about this, please mention this article for a FREE initial consultation. Phone (02) 6033 2233 for an appointment.
How Much is Too Much? – Working out the Ideal Price
We are entering an era where businesses such as Amazon and other large, online retailers are providing serious price competition to existing businesses. To remain viable, small businesses need to focus on the value they, as a small business, can add to the sale, and then profit from that additional value.
Most of us, as consumers, have a fairly good idea of what we are prepared to pay for a product/service. But, as a business operator, the question is, how can we find out what that price is? And why is that price different from customer to customer?
So, how do we determine what that ideal price is and if our customers are prepared to pay more than the current price?
Factors that affect this include:
1. Determine what you are actually selling. Is it just a basic product/service, or is there more to it than that? Does your product/service come with other benefits? Are there some intangible benefits or feelings that massage the ego of the customer or improves their overall life? What are they?
An example of this is that we know people will pay more for a vehicle from Mercedes, or BMW, compared to a similarly featured vehicle from Hyundai, or Kia. Sometimes the benefits can’t be seen, but as a business, you have the ability to price in a difference based on the perception of the customer.
2. Who is your ideal customer and where does your product/service sit in their personal value chain? Are they prepared to sacrifice other products/services in order to buy yours? If so, to what extent?
An example would be, if you sell mattresses, then a customer who is buying for themselves will be more focused on the comfort of the mattress vs the price. Whereas, the same person buying a bed to furnish an investment property would be more focused on the price, rather than the quality. You should be able to extract a higher price from the first scenario.
Most small businesses initially determine their prices by making comparisons to products and services sold by other similar businesses, with scant regard to their costs or desired profit. This is a good starting point but nothing else.
To maintain market share, or to at least maintain profitability, in this changing world, it is important to review what you are selling and what value-adds are attached to your product/service. By determining what your value-adds are, you can then highlight them in your sales process. You need to justify your customer’s purchase decision to buy from you, rather than an online dealer. These value-add items mean that you may also be able to justify a price that is higher than the online retailers, which ensures that your business remains viable and profitable.
Often the value-add is as simple as the face-to-face relationship that you can establish with the customer, reinforcing that what they are buying is exactly what they need/want. For example, a clever shop assistant in a clothing outlet can highlight that an outfit being sold to a customer will be perfect for the upcoming occasion and help them visualise the wonderful experience that the customer will have at the occasion because they are wearing this particular, unique, personalised outfit. Whereas an online website can never achieve that level of personal interaction, focusing rather on colour, size, delivery time and price. That personal service is worth paying for!
Obviously, to run a profitable business, we need our sales revenue to be higher than our costs. For long term success, we need the sales revenue to be repeatable. Therefore, we need to have happy customers who will return to buy from us again and again and who will recommend us to other new customers.
As a business owner, the ideal price is the highest price you can charge a customer and still have the customer feel as though they’ve received value for money. This means that they will happily return because of the perceived value that they have received, but also means that you have maximised your revenue and therefore, hopefully your profit from the transaction as well.
At Potts and Schnelle, we are happy to talk to you about your business model and your marketing ideas. Call us for an appointment on Ph 02 60332233.
Insurance – How much is enough?
We had a case recently of a client who was in severe pain from her knee, and needed a replacement. The dilemma for her was that if she took off the 4 months required to recover from a knee operation, then how would they meet their home loan repayments and keep up with their other household costs? She was the primary earner in her family as her husband was suffering from a long running illness and only earning sporadic part time income. She did have 4 weeks of personal leave owing to her, but that wasn’t enough to get them by. They had little in savings, surviving with a growing family on essentially one income.
The good news was that she had taken out Income Protection Insurance many years ago and had maintained the cover even though it was getting quite expensive. The problem was that although she was in pain, she was still functional at work and so the surgery was effectively “elective”. Consequently, she was still capable of earning an income and it was questionable, whether the insurance company would cover her for “lost income”.
We queried the insurance company and they agreed that they would pay her under the policy, even though the operation was effectively elective. She had her operation, the insurance company paid up and she is now back at work pain free and the family finances are no worse off.
The moral of the story is that good quality insurance policies with good quality companies are worth the few extra dollars.
With the New Year upon us, we are recommending that you review your insurances to make sure they are adequate and suitable to your personal needs. Researchers commonly find that most Australians are “chronically under-insured”. That means that they don’t have enough cover and consequently, in the event of their death or illness, they will not only leave an emotional hole in the heart of their family, they will also leave a financial hole in their future.
Most of us have no idea how much insurance is enough so we let someone else make the decision for us. The most common amounts covered are, firstly, to pay out loans (because the bank said it was a requirement) and secondly, the default amount provided by our superannuation funds (because we didn’t make a choice).
There is nothing wrong with that, as something is better than nothing, but really, what is the right amount and will the insurance company pay up when you lodge a claim?
The answer is, it all depends! Answers to the following questions will help you decide how much is right for you:
- How much debt do we have?
- How much savings/superannuation do we have?
- What other financial costs do we have?
- What can we afford?
When determining affordability, remember that generally, premiums get higher as you get older, so consider taking out a level premium option if you think you will need the cover for a long time. Level premiums start out more expensive, but work out cheaper over the long run. Consider splitting the policy with a level premium for long term needs and a stepped (cheaper) premium for short term needs.
Living Well with a Living Will
Christmas is traditionally a happy time to catch up with family and good friends, so talking about death and tragedy is a bit off-side, but if you don’t take the opportunity to discuss it now, time can quickly move on and the opportunity lost.
Here is a list of questions to table at Christmas Dinner, or at least over a Coffee and a piece of Christmas Cake. These are guaranteed to get the conversation flowing:
To your brother/sister
- Have you got an up to date Will in place?
- Who will look after your kids if you die?
If it is you who gets the kids …also ask
- Will there be enough money or should you top it up with Insurance?
To your adult children
Repeat questions 1 – 3 above except also ask
- How can we do that caravan trip around Australia in retirement if we also have your kids (that’s your grandkids) and you are underinsured?
If that stopped the conversation try:
- If you were on life support, what would you want to happen to you medically?
- Who would make those medical decisions for you if you are incapacitated?
- What about financially, who will have the power to pay the bills until you get better?
- Will there be enough money or should you top it up with insurance?
If that goes well, try the same questions 1-4 to
your brother/sister, parents, spouse, next door neighbour!
On a roll….. now go to group loitering around the esky and ask…
the brother-in-law who has his own business
- Have you got any key employees at your business?
- If you or the key employee weren’t able to work for six months, would that cripple your business financially?
- Did you know you can insure against that?
……. If you take our advice and use these questions over the Christmas functions, chances are you may not get invited next year! Nevertheless, we’re sure you agree that they are topics that deserve consideration and topics that should be openly discussed with caring family and friends.
In our financial planning business we help clients with these matters every day. Wills, Power of Attorney, Living Wills (Advanced Directives) and Personal Insurance are important discussion points on our review checklists. Our job is more than just tax and superannuation.
If you would like to meet with us and allow us to help you sort out your personal affairs, we have referral partners that we regularly work with to help you get “your ducks in a row”. Call us and make an appointment to turn over a new leaf in the new year and get these important issues addressed and have peace of mind.
Contact us NOW: 02 6033 2233
Finally, the team at Potts and Schnelle would like to wish you all a very happy and healthy 2018 and thank you for supporting our business over the past year.
Compounding to Success in 3 Easy Steps
The power of compounding never ceases to amaze me. Whether it’s a snowball rolling down a hill, a small seed growing into a large tree, or a chant at the MCG during a Richmond game, the way that a small effort to get something started can gain impetus and grow into something huge is fascinating.
From a financial point of view, compounding works the same way. A small and regular effort can grow exponentially if given enough time. The numbers are easy to explain and the message is that the earlier you start, the longer that compounding has a chance to make a difference and therefore the better the result.
Let’s look at an example of two school leavers, just finished Year 12, both 18yo. Let’s call them Jim and Jane.
Both Jim and Jane worked hard at Maths, so they know about compounding. They know that if they can invest some money and earn some interest and reinvest that interest back into the investment that it will grow quicker. That’s because after the first year, they then earn interest not only on the original investment, but also interest on the interest, then the next year interest on the interest on the interest etc.
Jim sets up a spreadsheet and he works out that if he can earn 8%pa interest on his investment and reinvest it, the investment will double in size in approximately 9 years. Jane works out that at 18yo they have approximately 50 years to go before they will likely retire from the workforce, so if they can double their money every 9 years, an investment made today will double 5.5 times. That means it will be 47 times bigger in 50 years’ time.
Both Jim and Jane start working soon after leaving school and find that after 6 months, they have each saved $10,000. Jim sees a really nice car he likes and spends his $10,000 buying it. Jane also buys a car, but finds an older car that belonged to her grandmother, and spends $2,000. She invests the remaining $8,000 into her superannuation fund which she estimates will earn 8%pa based on past performance. Over the next 50 years, Jim and Jane have similar investment habits. But, because Jane put that $8,000 into Superannuation at the start, when they retire it will have multiplied by 47 times, meaning she will have $376,000 more than Jim.
That’s quite a difference at the end, caused by the power of compounding. What’s really interesting is how the numbers change with a little tweaking. For instance, if the investment can earn 10%pa instead of 8%pa, the growth over 50 years is 117 times. That means that Jane’s extra $8,000 would be worth an extra $940,000 at retirement……. Crazy!
Now this is all just simple maths, but the reality is that it is easy to re-create in real life. It only requires three things.
Firstly, save some money in an investment vehicle like superannuation or a managed fund.
Secondly, choose an investment option that will generate a healthy return over the long term (don’t panic over short term fluctuations). Shares and property are the most likely investments that will give you a higher return. Look to diversify the investment by pooling with other investors to reduce the risk of permanent losses.
Thirdly, reinvest the earnings and give it time to grow. The longer the better. In the example above, the difference between Jane and Jim after 32 years was only $94,000. The next 9 years produced another $94,000 and the last 9 years another $186,000. It is the power at the end that counts. If you don’t start early enough, you never get there.
We are always keen to help young people establish a savings plan to help set them up for future financial security. It’s not the size of the pay packet that counts, it what you do with it. If you want some help to set a path to financial security, give us a call at Potts & Schnelle on 02 60332233 and come and see one of our financial planners.
2 key questions when passing on the Family Business
When is the ideal time to pass on the reins of the family business to the next generation? We’ve picked out 2 key questions to help with Family Succession Planning. Often it’s simply a case of getting it done before it’s too late.
If passing on the business to your children is high on your agenda, you should be contacting us at Potts & Schnelle to talk through the process. We have helped numerous families through this transition from a wide variety of backgrounds.Trying to pick the best time often raises more questions than answers. Let’s look at two of the key questions.
Firstly, are the kids capable of running the business?
This is often the first hurdle that needs to be overcome by the parents. Passing on the business means handing over the reins of control. So, you want to be confident that the next generation can handle the task.
The best solution to this is to start early in educating the children. Encourage them to learn from you, from others and even to gain experience and/or qualifications from afar. Then actively mentor them into the role by sharing decision making responsibilities and trusting their judgement, massaging their involvement into the managerial role. Once they are competently managing the operations, it’s easier to confidently hand over financial control too.
At the end of the day, if you don’t think they are up to it, better to make that call and send them off on a different path and support them in a different endeavour, rather than risk the loss of the business and the inherent wealth that you have built up.
If you are the child and your parents are not giving you the chance you feel you deserve in the family business, then, maybe you should set off on your own and ask for some financial support. Alternatively, actively encourage them to let you be involved more in the managing and decision making of the business operations, whilst still giving them space to gradually let you build their trust.
It is important, if the children are keen, to give them a go, but it is also important to ensure that they get good training and mentoring to ensure a greater chance of future success.
Secondly, how much should they pay me for handing over the business/farm?
The starting point on this one is to determine what you could realistically get if you were to sell to an independent third party. Then you need to decide what, if any, you expect the child(children) to pay you instead.
A factor that may influence this is whether you have been paying them proper market value wages for the work they have put in to date and for how long that has been happening. If you have underpaid them, then arguably, this amount should be deducted from the purchase price.
Another factor is to consider other children in the family and how the passing on of the business will impact your ability to help them financially in the future. It is a good idea to keep some resources personally that can be shared amongst other children either now, later or via your Will.
Of course, a major influence is to decide how you are going to pay for your own ongoing living costs if you pass on the business. You may have already set aside enough wealth in, say, superannuation to cover your future needs, but if not, the children may give you a lump sum now, or pay you off over time. Alternatively, they may agree to pay you a wage, or rent, or to contribute to your super on an ongoing basis into the future.
At the end of the day, whatever Family Succession Planning arrangement you come to needs to be affordable to the children and sufficient to you to justify the decision to pass the business on to the children instead of selling out to an external party.
If you want expert advice about passing on your Family Business contact us on: 02 6033 2233
“There were almost 30,000 new self-managed super funds (SMSFs) established in Australia during 2016”, said David Potts, Chartered Accountant from Potts & Schnelle, Corowa. “SMSFs are now the largest sector in the superannuation industry with $654 billion invested as at December 2016. This is larger than the retail sector (eg. AMP, MLC) and the industry sector (eg. Australian Super, Hostplus) and represents a significant pool of investment money to fund the future retirement of its owners.”
“The number of SMSFs using an accountant increased by 30% over the last decade, highlighting the important partnership between accountant and client with regard to managing this important asset.”
“David and I have just returned from the National SMSF Conference, held in Sydney last week,” adds Paul Schnelle, Chartered Accountant and Certified Financial Planner, “the information that we received at the conference was highly technical and added to our competency levels, to enable us to continue to confidently fully service this sector. There have been significant rule changes in the past six months and it is important that SMSFs don’t breach the new rules and risk significant taxation and financial penalties.”
“SMSF’s are a highly valuable component to the taxation and retirement strategies of our business and high net worth clients. An SMSF enables clients to invest directly into real estate and is a significant reason why many are established,” continued Paul. “We have many clients who own their business premises or farms via their SMSF enabling them to manage their cash flow while still maximising their superannuation contributions and substantially building their wealth.”
“Also,” added David, “the costs of maintaining an SMSF is relatively fixed, so, unlike retail and industry funds, as your balance increases the costs to not go up proportionally. This differs greatly from other superannuation funds who charge their fees on a percentage basis and consequently, the larger the balance, the larger the fee.”
“We are using the latest accounting technology to maintain the books of the SMSFs. We are working towards being able to provide fully up-to-date information throughout the year, not just as at year-end. This will assist with the management, strategic and investment decisions going forward. Our in-house financial planners can provide investment advice if required, or the client can make their own decisions, whatever is right for them. Borrowing for land purchases is also a common strategy.”
“From a strategic point of view,” said Paul, “by timing the contributions appropriately, investing in a mixture of short and long term assets and by utilising pension structures when available, we have been successful in achieving fully tax free income for our retiree clients, together with a valuable nest-egg to be passed on, tax-free, to their dependents.”
“Superannuation does not automatically form part of your deceased estate, so it is also important to ensure that your SMSF is considered when discussing your Will with your solicitor. The SMSF structure can provide some clever estate planning strategies to assist with Centrelink and disjointed family situations if desired. These should be incorporated into your overall estate plan.”
As you can see, self-managed super funds provide their members with significant advantages that are not available through typical retail or industry funds. This is why they represent such a growth sector.
If you would like to talk to us about whether an SMSF is suitable for you, please contact us on (02) 6033 2233 and mention this article for a FREE first appointment.
“Aged care is a complex area and one that requires a solid understanding of how the rules impact on social security and the tax system” says Demelza Lister, Senior Financial Planner from Potts & Schnelle Financial Planning.
“The costs to enter an aged care facility can be quite high and as such, clients need financial advice that enables them to:
Manage these costs
- Maximise their social security benefits
- Manage tax
- Choose suitable investments
- Plan for the distribution of their assets
- Understand the payment options and implications available to them
- Or, simply assistance with the form filling”
The costs associated with entering and residing in an aged care facility, is summarised into four parts. These rules commenced from 1st July, 2014;
- Basic Daily Fee – This fee applies to everyone and is calculated by taking 85% of the single aged pension amount. It is currently $49.07 per day and covers daily living costs; such as nursing, personal care and meals.
- The Accommodation Payment – This may be payable if the resident’s assets are over $47,500. The accommodation payment is a lump sum payment known as a Refundable Accommodation Deposit (RAD) which is fully refundable on departure (This used to be known as a bond and was not fully refundable). The RAD is calculated on entry to the facility. The maximum that can be charged is $550,000 and is published on each facility’s website. Local RADs are usually in the order of $350,000. Rather than a RAD, the resident may instead choose to pay a Daily Accommodation Payment (DAP) which is effectively interest on the RAD amount (currently 5.73%), but enables the resident to keep their assets. The interest rate is fixed on entry.
- Means Tested Care Fee – this is based on an income and assets test undertaken by Centrelink. This test is a complex calculation and is impacted by any income of the resident, their financial investments and other assets (sometimes including their home).This test has generous concessions and cannot be more than $26,176.80pa. This fee is regularly re-assessed as the resident’s financial circumstances change.
- Extra Services Fee – this fee is charged by the facility for additional services provided, or for a higher standard of accommodation. Examples include pay TV, a larger room, extra therapies eg. Massage
“Most of the clients that meet with us have already had their health situation assessed by an aged care assessment team (ACAT) and as such are seeking assistance in completing the paperwork required by Centrelink to determine their means tested fee”, adds Paul Schnelle, Partner and Certified Financial Planner.
“Everyone’s situation is different, so the strategies end up being different for each client. That’s the nature of Aged Care advice, there is no one fits all solution!”
“I think what differentiates us from other providers is that we are dealing with people who want a financial outcome. They want you to hold their hand, walk them through the process and help them to understand the rules”.
“One of the most important questions we ask of our financial planning clients is ‘How are your parents?’” adds Demelza, “All sorts of retirement plans are often put on hold whilst clients care for their elderly parents. The financial planning process has to make allowances for these situations and they are best addressed earlier on, rather than in an emergency.”
“The early stages of care are usually non-financial. Most carers wish to look after their loved ones for as long as possible in their own home. There are all types of assistance packages available. A phone call to the My Aged Care contact centre on 1800 200 422 will get things started, or visit their website at myagedcare.gov.au”.
“It is a very tough call to place a loved one into an Aged Care Facility. It is never an easy decision and families need to work through emotions such as guilt and fear and of course the logistics of the variety of choices available. Eventually, the decision is made and that’s when we usually get involved, to help with the financial side of things.”
Should you require advice in this area please do not hesitate to contact Potts & Schnelle. Phone 02 60332233, to make an appointment to talk about your financial needs with someone who cares.
Simple strategies for your Business………What are you doing this for?
Does every day in your business feel like you are just putting out spot fires? Dealing with the next phone call. Wondering where your next customer is going to come from? Have you got enough stock? May be you have too much stock? What are your staff doing?
With the new financial year now upon us, here are a few things to review to set up your business for the next 12 months and beyond.
Review your Vision:
- Have a think about how you want your business to look in five years time.
- If that vision is substantially different to what you currently have, start taking steps to move in the new direction
- Review your expenses and determine what your overhead costs will be for the next 12 months
- Work out how much you will have to sell to pay for those overhead costs (after allowing for the direct cost of goods sold of course)
- Work out how much more you need to sell to give you an adequate return as the owner of the business
- If you’re a farmer, do you have several sources of income or are you relying on one main activity e.g. cropping. What works best for you? Is this the best/safest option?
- What external factors could affect your plan and what steps are you taking to mitigate those risks? E.g. should you be fixing interest rates? Do you have adequate business insurance? Do you need to find new customers? Where are they now? Do they need your existing product or do you need to adapt to suit them?
- If you are intending to retire in the next few years, you should be taking steps to pass the business on to the next generation now, or setting it up for sale.
Review your loans:
- You should negotiate with your banker to see if they are offering you their best interest rate
- Review your loan repayments to make sure that they align with your cash flow. Loans to purchase long-term assets (e.g. land) should be repaid over the longer term whilst loans to purchase short-term assets (e.g. motor vehicles) should be repaid over the shorter term
- Surplus cash flow should be used to minimise your interest expense, rather than sitting idly in a non-interest bearing account
- Ensure that you are paying off private debt before business/investment debt in order to maximise taxation benefits.
- Sell surplus, idle assets to provide funds to repay loans
Review your motor vehicle expenses:
- Changes introduced last year have meant that the taxation advantages on private vehicles, available to business owners and to employees who have salary packaging options, are no longer as attractive
- The available choices to determine the private use component of a packaged vehicle are now quite limited
- A logbook for 12 weeks, recording business travel, is now highly recommended.
- Motor vehicle claims to inspect rental properties are no longer deductible
Review your superannuation:
- Remember for 2017/18, the amount of superannuation contributions that you can claim as a tax deduction has been reduced to $25,000.
- Personal contributions can now be claimed to in your tax return even if you are receiving contributions from an employer
- Lower contribution caps, means that superannuation now needs to be accumulated over longer periods of time. So start early!
- Tax-free super pensions are still available to retirees. Investment income in superannuation funds is still concessionally taxed. It is a sensible tax strategy to place your savings in super.
- Self-managed super funds still provide significant advantages to those who wish to own business real estate and to those with larger balances who can minimise ongoing fees
At Potts & Schnelle, we are passionate about business. Whilst a large part of our business is focused on tax, we can’t help but get involved in the business strategies and day to day affairs of our clients.
If you would like to talk to us about your business, please give us a call 02 60332233