SAVING $8,000 A MONTH BY BUYING AN OFFICE (IN OUR SMSF)
6 Quick wins buying a business property in your family SMSF
I’ll start off by saying that as a serial entrepreneur, I was fairly “Anti-Super” for a very long time. That was until my best mate, business partner and tax wizard Ben Walker showed me how easy it was to become a SMSF Millionaire.
He’s an accountant, I’m not. So he’ll chime in every know and then during this blog with the technical bits.
Before we get started: this is not advice – personal or general – just what we’ve done, and sharing because people were asking!
For the busy reader, here are the 6 quick wins I experienced by buying our business premises in the family SMSF.
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Did you know you can make voluntary contributions to superannuation to save thousands in tax?
Our family contributed about $100,000 to super to buy a commercial property and in so doing saved $32,000 in tax.
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Did you know you can have 4 members in a Self Managed Super Fund?
This saved us thousands in retail super admin fees because we had literally 10 funds between the four of us.
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Did you know you can pay for your life insurance premiums from super?
This put thousands a year back in our pocket as we switched our insurance premiums to come from the super fund instead.
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Did you know you can have your SMSF buy your business premises and essentially become your own landlord?
This strategy saved us $8,000 a month in lease expenses and turned a common business expense into a family wealth stream.
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Did you know we borrowed 75% LVR in our SMSF?
This meant we only put in around $150,000 cash plus a few expenses (from our super fund) to buy a $580,000 commercial property.
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Did you know you can pay 0% tax on capital gains when a super fund is in ‘pension’ phase?
This could save us up to $136,300 in tax if our property doubles in value in the next 10 years.
That’s the quick summary. Now if you want to go into detail on these strategies, read on….
Paying Too Much Tax? Learn the 12 strategies that have proactively saved our business clients $3M+ in tax at the next 12 Tax Saving Strategies workshop coming up this month in BNE, SYD & MEL – www.inspireca.com/SaveTax
The little (coffee) shop of horrors…
Funny story, when we first launched Inspire CA 4 years ago, we also launched the Inspire Cafe. An accounting firm in the middle of a cafe, to break the mould on what a model accountant could look like. The idea was great, but the numbers didn’t really add up.
We were paying a GIGANTIC amount of rent each month for 250 square metres in Doggett st, Newstead.
12 months ago we managed to get out of our 7 year lease with 4 years to go (don’t ask how … ) and used that time to save up and buy our own office.
See, you can use your Self Managed Super Fund to purchase a Commercial Property and have your own business rent it off the SMSF as your business premises.
We bought a ‘renovators delight’ (aka complete dump) in the valley and after an extensive fitout, we’re aiming to move in in March 2018.
Best thing is, we’ll go from paying an eye watering amount of rent each month (to someone else) for 250 squares to paying our own super fund less than half of our previous rent for 160 squares, just 2 streets away. It works out to about a 7% return for the SMSF and we’ll pay ZERO tax on the capital gain when we sell it in 15 years.
That’s a win-win-win-win.
Crunching the Numbers
Saving almost half a million dollars in lease expenses
Right now, we’re in the shoes of our business – looking at the saving in rent.
Doggett St lease (250 square meters) – $11,500 plus GST / month
Ann St lease (160 square meters) – $4,000 plus GST / month
Monthly savings – $7,500 plus GST / month or $8,250
Annual savings – $90,000 plus GST / year or $99,000
Savings over 5 years – $450,000 plus GST or $495,000
Buying your business premises using your SMSF
So you’ve probably heard that you cannot use your SMSF to buy an apartment and have your family member rent it – that’s breaking the ‘sole purpose test’.
But did you know under certain conditions, you can use your SMSF to buy a commercial property and have your own business rent it from your SMSF. It’s amazing.
In our case not only were we paying a GIGANTIC amount of lease expense each month, but 100% of it went to the owner of the building.
Now the business pays a reasonable amount of lease expense each month and 100% stays in the family by being paid to the SMSF.
Put another way, by purchasing our business premises in our family SMSF we turned an business operations expense into a family wealth stream.
Before – Paying a commercial lease to someone else.
After – Buying our Business Premises in our Family SMSF.
[Watch] Buying Your Business Premises Using Your SMSF
What is 0% tax on a lot of money?
Around the Inspire office you can often hear Ben Walker saying “it’s impossible to get Cashed Up, if you’re giving half your profits to the tax man!” So let me tell you about the 2 x tax saving strategies we’re using in this deal.
1 – Additional Super Contributions – Saving us $32,000 a year in tax
One of the best ways you can reduce your tax legally is through making voluntary contributions to superannuation.
4 x members of the Pene Family Super fund contribute $25,000 each into super.
How much tax do we save?
$25,000 super contribution x 32% tax saving (47% tax rate outside of super minus 15% tax rate inside of super) = $8,000 tax savings each.
That’s a huge $32,000 per year tax saving for the 4 x members of the SMSF!
Woohoo, but that’s not the best part.
In the strategy corner with Ben Walker – Be careful to not exceed your ‘Contribution Cap’ for deductible superannuation contributions.
For the 2017 Financial Year (ending 30 June 2017) the Cap (or maximum you can put in, without additional tax) is based on your age.
If you’re 48 years or younger, the limit is $30,000 in the financial year.
If you’re 49 years or older, the limit is $35,000 in the financial year.
For the 2018 financial year (from 1 July 2017 onwards) both of these caps reduce to $25,000 regardless of age.
Going over the caps mean you pay an effective tax rate of 47% in tax. Ouch!
2 – Zero Tax in Pension – Paying 0% tax on $500,000 profit
Another killer tax saving strategy is that you can pay 0% tax on capital gains in a super fund if it’s in ‘pension mode’. How does it work?
We mentioned before that the tax rate in super is a flat rate of 15%. That’s how we saved 32% in tax (47% tax rate outside of super minus 15% tax rate inside of super) by making voluntary contributions into super.
What you may not know is that super funds have two tax rates. One for each phase it’s in –
15% tax when it’s in accumulation phase.
0% tax when it’s in pension phase and the member is over 60 years old.
What is the difference between pension phase & accumulation phase?
‘Accumulation phase’ is what we refer to when you’re working or running a business, and you’re actively accumulating a superannuation balance. Basically this is the phase you’re in, until you start taking a pension – then you switch to ‘Pension phase’.
‘Pension phase’ is when you start drawing down on the money in your superannuation. You can only do this once you’ve reached ‘preservation age’ (current 56 years old, and heading up). And pensions become tax free in most conditions once you’ve reached 60 years old!
Note: The following is a hypothetical assumptions (that we hope come true!)
The Pene Family Super Fund bought 915 Ann st for about $580,000 in 2018.
If in 10 years time we can sell it for $1.16M that will be a $580,000 capital gain or profit – aiming to double our money!
If we owned the property in my personal name I’d pay $136,300 tax.
$580,000 Capital Gain
Less $290,000 CGT Discount (50% is CGT free because we held it longer than 12 months)
Equals $290,000 Profit
Multiplied by 47% Tax Rate (because it’s in my own name, and I’m already a high income earner as a business owner)
Equals a whopping $136,300 tax payable.
Because we own the property in a Self Managed Super Fund, we’d pay $0 tax.
$590,000 Capital Gain
Multiplied by 0% Tax Rate on the most of the gain (because the members with the largest balances in the fund at that time will be in pension phase as 2 of its members reach 60+)
Equals a whopping $0 tax payable.
Have I got you excited yet? I sure am!
Check out the ‘BEFORE’ photos.
At 7% return it’s positive cashflow
I’m no property investment guru, but I bought my first property at 17. I’ve always worked on a simple ROI model that if I can get at least $100 of weekly rent for every $100K of Property Value, then it seemed like a good deal.
For example –
- A $500,000 Property, gets at least $500 / week rent.
- A $300,000 Property, gets at least $300 / week rent.
- A $180,000 Property, gets at least $180 / week rent.
That rule of thumb worked ok for me when investing in residential property but I was amazed to see how did it stack up in this commercial deal?
Ann St is about a $580,000 Property plus $100,000 for fitout and additional purchase costs.
So let’s call it $680,000 max to get it ready for rent.
And it gets $4,000 / month rent or just over $900 / week rent. Not bad. In all my years of investing I’ve struggled to find a deal like that.
Making 7% return by becoming our own landlord
$580,000 purchase price + $100,000 fitout = $680,000.
$4,000 / month x 12 months = $48,000 / year.
$48,000 rent / $680,000 Purchase Price = 7.06% return
Pay your Life Insurance premiums from Super – and get double tax benefits.
Life Insurance is money your family will receive in the event of you kicking the bucket.
Interestingly the premiums you pay for Life Insurance are not tax deductible, unless they’re paid from your superannuation.
Let’s say the premiums for your Life Insurance are $5,000 per year.
Option 1 (Without Tax Planning): Pay the $5,000 Life Insurance premium outside of super.
No tax deduction applies. If you’re on 47% tax rate you’d have to earn $9,434 before tax to then pay the tax and have $5,000 leftover to pay your Life Insurance Premiums.
Option 2 (With Tax Planning): Pay the $5,000 Life Insurance premium from your super fund.
First of all we need money into your super fund to pay the premium.
Business contributes $5,000 into Super.
This alone saves $2,350 tax, when compared to paying 47% tax in your own name.
Super fund pays 15% tax on $5,000 in super = $750 due.
Super fund pays $5,000 Life Insurance premium.
Super fund get 15% tax deduction for premium expense = $750 refund.
By paying your Life Insurance Premium from super, you’d save $2,350 in tax on the super contribution IN (when compared to paying tax in your own name) AND you’d receive a tax deduction for the $5,000 premium paid.
Any information and content on our website or social media property is general in nature only. It does not take into account the objectives, financial situation or needs of any particular person. So before acting on anything to do with your finances, you need to consider your financial situation and needs before making any decisions based on this information.
Benjamin Walker of Inspire SMSFS Pty Ltd (ASIC Authority 1243433) ABN 38 879 130 483 is an Authorised Representative of
Finance Wise Global Securities Pty Ltd ABN 60 146 708 045. Finance Wise Global Securities Pty Ltd holds Australian Financial
Services License No. 397877.
YEAR IN REVIEW 2017
We are numbers people and
WE BELIEVE THAT FAMILY IS NUMBER ONE
Our model is simple
Proactive Tax & Accounting that pays for itself in tax savings
then
Help to make the 7 Smart Financial Decisions of a Cashed UpTM Business.
Perfect for
Founders of 6 & 7 figure business owners
WHO ARE IN BUSINESS FOR A PURPOSE HIGHER THAN PROFIT
In TWENTY SEVENTEEN WE –
HIT $3M IN PROACTIVE TAX SAVINGS
FOR OUR SMALL BUSINESS CLIENTS.
That’s a whole lot of money back in the hands of the hard working families, that otherwise would have gone to the ATO. You don’t really think the tax-man deserves a tip do you?
WE GAVE 3 MILLION DAYS OF LIFE CHANGING HELP
TO FAMILIES IN NEED, IN 16 COUNTRIES.
(Food, Water, Health & Nutrition)
n Feb we launched the #GIVE1MDAYS campaign – a bold giving target to give one million days worth of access to water in 2017, in partnership with Global Giving Initiative B1G1 or Buy One Give One.
In the end we gave 3 million Days of access to not just water, but also food, health & nutrition services – a day of help for every dollar in tax saved.
We call it ‘Day for a Dollar’ – Inspired by how TOMS One for One initiative gives a pair of shoes for every shoe bought or how Zambrero feeds the hungry through ‘Plate 4 Plate’.
Why? As Accountants we love numbers, but when we found out that almost a billion people live on about a dollar a day, we knew we had to do something.
We believe that every business has the power to change lives by integrating giving into its everyday activities.
‘Day for a Dollar’ is a simple but powerful example of how together we can end global poverty, for good.
In Jan 2018 I’m hitting the ground in Kenya – and my business partner Harvee Pene is heading to Cambodia – to see first hand the impact we’re making thanks to your support of Inspire.
Wanna join us in the developing lands? Follow the Inspire CA – Life Changing Accountants for live project updates from the field.
WE STARTED A MOVEMENT FOR GOOD
WE INSPIRED 87 OTHER BUSINESSES TO GIVE 1,000,000 DAYS OF LIFE CHANGING HELP TO FAMILIES IN NEED.
After being nominated for Top 10 Global Business for Good at the Buy One Give One annual conference on the gold coast, Ben Walker was asked to share the magic and the mechanics behind our game changing #GIVE1MDAYS campaign.
At the end of the riveting TED style talk, the challenge was given to the audience. “I challenge you to pledge to Give 1,000,000 Days of life changing help to families in need?’ 87 Business Owners stood and said “YES!”.
That’s a huge 87,000,000 impacts pledged.
Since then the total B1G1 Giving Impact have reached record highs of 136,025,405 days and over $1,000,000 has been donated to fight global poverty in the developing lands.
DANIEL FLYNN CAME ONBOARD WITH INSPIRE
THE FOUNDERS OF THANKYOU JOINED THE INSPIRE FAMILY
We are pretty proud to be able to welcome Daniel Flynn to the Inspire Family this year, along with the other founders of Thankyou. Thankyou has long been idols of ours, so you can imagine our excitement when Dan not only came to speak at one of our team retreats (weeks before speaking with Barack Obama), but when he said –
“Inspired by our friends (& personal accountants) from Inspire. This is the most inspiring accounting firm you will come across. There (sic) vision and execution is world class. Watch this space.”
WE REBRANDED
DROPPING THE CA – AND BECOMING JUST INSPIRE.
Remember that scene from the social network when facebook was called “THE Facebook” and Justin Timberlake said “drop the THE, just Facebook”.That’s what was going through our minds when we moved to just Inspire. It signalled the move from a focus on just tax (which is how we first started) into a broader focus into Helping Young Families Use their Small Business to get Cashed Up. Speaking of which ..
WE LAUNCHED CASHED UP
HELPING BUSINESS OWNERS MAKE 7 SMART FINANCIAL DECISIONS
In working with thousands of business owners over 5 years we found that most were financially drowning, just keeping their head above water or seriously Cashed Up. Upon reviewing their numbers we found there 7 key mistakes that business owners were making that we’re keeping them Cash Poor. That’s when the Cashed Up Book & 7 Smart Financial Decisions were born.
If you’re in business and you want to pull more money, time and happiness from your business you need to start making smarter financial decisions.
The top 7 Smart Financial Decisions of a Cashed Up Business are –
- Cut Tax
- Capture Profit
- Control Cashflow
- Check Numbers
- Crank Biz Value
- Cover Assets
- Create Lifestyle
The Cashed Up Book is launching in March 2018 in partnership with Commonwealth Bank, Xero and Buy One Give One.
WE DOUBLED THE TEAM
“THE TEAMWORK MAKES THE DREAM WORK”
In our mission to become Australia’s Most Impactful Accounting Firm we welcomed Chloe McKie, Regnier “Reggie” Alexander Guzman Silva, Ali Alajmi and Ethan Paraha-Cutts to the Inspire team of Life Changing Accountants.
AND WON A BUNCH OF AWARDS
Including B1G1 Top 10 Global Business of the Year, Anthill Online 30 under 30 Awards (Honourable Mention), Dent Global Partnership Award (pictured) and probably the most significant of them all.
Anthill Top 100 Companies in Australia 2016 & 2017 – 2nd year in a row. These are the coveted cool company awards and coming from an industry where most accountants are considered ‘boring’ we thought this was pretty cool.
WE SOFT LAUNCHED IN SYDNEY & MELBOURNE
STARTING OUR 10 YEAR 10 CITY VISION
Off the back of our uber-popular Save Tax Workshops (to share the 12 strategies behind how we saved our clients $3M in tax) we set up our satellite offices in Sydney and Melbourne in partnership with WeWork.
Currently we have about 20% of our clients in Sydney and Melbourne.
This was the first step in realising our “10 Cities & 10 million Freedom Days” vision.
And what’s a Freedom Day you ask?
A Freedom Day (calculated as Net Wealth / Cost of Living per day) is a day where you can do what you want, when you want, with whom you want.
Money isn’t the most important thing in the world but it can be the key that unlocks one’s ability to put the family first, and make a difference in the world.
Every piece of advice we give you will not only help you get Cashed Up, but also build your Freedom Days.
WE BROUGHT AN OFFICE
USING OUR SMSF TO BUY IN FORTITUDE VALLEY
Funny story, when we first launched Inspire CA 4 years ago, we also launched the Inspire Cafe. An accounting firm in the middle of a cafe, to break the mould on what a modern accountant could look like. The idea was great, but the numbers didn’t really add up.
We were paying – wait for it – $11,500 plus GST a month for 250 square metres in Doggett st, Newstead.
12 months ago we managed to get out of our 7 year lease with 4 years to go (don’t ask how … ) and used that time to save up and buy our own office.
See, you can use your Self Managed Super Fund to purchase a Commercial Property and have your own business rent it off the SMSF as your business premises.
We bought a ‘renovators delight’ (aka complete dump) in the valley and after an extensive fitout, we’re aiming to move in in March 2018.
Best thing is, we’ll go from paying an eye watering $11,500 plus GST per month (to someone else) for 250 squares to paying our own super fund $4,000 plus GST a month for 160 squares, just 2 streets away. That’s a great 7% return for the SMSF and we’ll pay ZERO tax on the capital gain when we sell it in 15 years.
That’s a win-win-win-win.
WHERE TO FROM HERE
WHAT’S THE PLAN IN 2018?
- We’re heading to Cambodia and Kenya to visit some of the projects we’ve supported through our Day for a Dollar Campaign.
- We’re launching the Cashed Up book in March.
- We’re running the Cashed Up workshop in May and September in Sydney.
- We’re hiring 4 x more Life Changing Accountants (we’d love an intro if you know any inspirational accountants)
- We’re on track to save another $3M in Tax for small business (and therefore give another 3M days of life changing help to families in need)
- We’re running our Save Tax Workshops in BNE, SYD & MEL every 2nd month and are even running a few sessions in Tasmania and The Barossa Valley (Tax Deductible Holiday anyone??)
- We’re trying to get Jeff ‘The Hornet” Horn on board as a client.
- We’ll continue to work towards becoming Australia’s Most Impactful Accounting Firm.
Thanks for all your support and remember:
Dream Big. Make an Impact. Remember Your Roots.
Ben Walker & Harvee Pene
Co-Founders of Inspire
Make BAS work for you
Learn how to turn a BAS Deadline into a BIZ Lifeline.
A common mistake in thinking for business owners is that “BAS time sucks.” And while paying tax isn’t everyone’s favourite pastime, BAS lodgements do give business owners an awesome opportunity to review the business numbers that matter, every quarter.
This webinar will teach you both how to make BAS time easier (making sure you aren’t paying too much or too little tax) and how to review the business performance reports that are in your Xero Accounting system, now that your accounts are up to date.
Think of the 4 x BAS you lodge in a year, like how a game of AFL has 4 quarters. At the end of each quarter, a successful team will sit down with their coach for a moment to review the score, the game plans and check in with the performance of each of the key players. In this context, your business is the game, BAS is the quarter time bell and we are your coach reviewing your business performance.
It’s my bet bigger businesses will overpay millions in tax this financial year
If you’re business turns over between $2M and $10M, make sure you read this!
Why do you need to read this?
The reason why?
What concessions are now available?
Lower company tax rate of 27.5%
$20,000 Instant Asset Write Off
Small Business Accelerated Depreciation
Prepaid Expenses
- Rent on your premises
- Memberships
- Interest on certain loans
- Software subscriptions (most will give you a discount for paying annually)
- Accounting fees (had to say it)
What do you do if you turn over more than $10M?
Are housekeepers Tax deductible?
“If not, why not? Bookkeepers are. Not doing my washing gives me more time to work in / on the business = more profit = more tax. So I believe it should be tax deductible”
Answer:
Cleaning definitely is tax deductible, assuming that you have a home office (dedicated, not just a laptop on the lounge).
I definitely see your argument about if you’re leveraging your time, you can do more in the business (more profit, therefore more tax) – but I haven’t heard you can.
Doesn’t mean you can’t!
Playing devil’s advocate (or rather the “ATO” advocate) – where does this stop?
For instance, could I claim my gym membership because it gives me energy & health to then do more in the business?
I would very highly argue this, but I know that gym memberships are not allowable to people (apart from police officers / army etc who are required to be fit for their role).
I believe the ATO would call on Section 8-1(2)(b) of the 1997 Tax Act, you cannot deduct something if “it is a loss or outgoing of a private or domestic nature;”
Domestic expenditure relates to the taxpayer’s household or other domestic affairs, which a housekeeper would fall under.
Unless it was home office as mentioned above.
Hope that helps! 🙂
P.s. I never makes sense to spend $1 in order to save 40c, which is what is happening if you’re buying things / paying for stuff JUST to get the tax deduction.
P.p.s here is a great housekeeper job ad that we used to help us find an amazing housekeeper in 24 hours.
Ad for Housekeeper
Hola!
Do you happen to know anyone who could help us around the house a day a week?
This might be a great opportunity for a hard working student looking for an easy $100 – $200 (cash).
We’re a young couple who have a lot on our plate – running a business, family, health and fitness, volunteering and study.
Time has become really precious to us, so we’re looking for a hand to make our house a home.
- You would be trustworthy, naturally clean and organized .
- You would love to cook healthy and nutritious meals – recipes and ingredients provided.
- You would be known by your friends as someone who is very hospitable and homely.
In between your studies could catch the bus to right outside our apartment in Hawthorne while we’re at work.
You’d make our lives easier, while earning a bit extra cash by –
Washing the dishes, clothes and car.
Cleaning up the place – it’s only a small 2 bed apartment.
🙂 Maybe grabbing some groceries.
😀 Preparing a few clean meals – we love vegetables!
Making some cold pressed fruit and veggie juices – trying to be healthy!
Moving forward, if you wanted to earn more there are other things we can get your help with in time – e.g. baby sitting or picking up our little girl from school – and other families who could use your help.
So if this is of interest to you or someone you know, I’d love a SMS to 0422 845 277 to introduce yourself and explain why you think this would suit you perfectly.
Thanks
Harvee
$5M Profit Tax Free? | Selling your business without selling your soul to the ATO
“Hi Ben, I’m about to sell my business after building it for the last 10 years. I’ll probably pocket $5M from the transaction (woo-freaking-hoo!). How do I keep the tax man’s sticky little hands off my gains? Please help…”
Ben: First of all congratulations. Wow!
So, broadly speaking you’re looking to make capital gains or a sale of business assets or investment assets and just like any Australian, your intention is not to pay any more taxes than is needed on the gain on those when you do sell them.
Great question.
There’s three main ways, or tax concessions, I see to pay little, less or no tax:
- The General 50% CGT Discount;
- paying 0% tax in your superannuation fund; and
- the Small Business CGT concessions.
What is CGT?
‘CGT’ is ‘capital gains tax’.
Basically, that’s the tax that you pay when you sell an asset like a house, or business, or a portfolio of shares and you make a gain.
You buy a house for $500k, you sell it for $600k – that means you’ve made a ‘capital gain’ of $100k.
Tax might be up to $47,000.
The tax you pay on that capital gain depends on who owned the asset, and any concessions or exemptions you may be eligible for.
You pay CGT on gains you make on things like investment properties, business sales, sale of shares, managed funds (there’s more, but that’s an example).
The “General 50% CGT discount”
There is a ‘general discount’ for Capital Gains Tax.
This is available is assets are owned by individuals (people) or trusts (like family trusts, discretionary trusts or even Self Managed Super Funds are classed as a type of trusts – although Super Funds only get 33% discount, not 50%).
The general discount allows an individual or a trust a 50% discount on the tax they pay on their capital gain, so long as they’ve held an asset for more than 12 months.
You buy the same house above in January – then you sell in February the following year (13 months later), still making the same $100k capital gain.
The 50% discount means that you’ll only pay tax on 50% of the gain, or only tax on $50k.
Tax has now halved, and you may pay up to $23,500.
Good stuff!
Paying 0% on Capital Gains made in Super
So in your superannuation fund, when you’re drawing a pension, the ATO gives you a tax break.
If you’re over the age of 60 and drawing a pension from your super balance (Note: not the transition to a retirement pension), then that tax rate is currently 0% on any income including capital gains. You need to be 60 years old, and your pension balance is taxed at 0%. (There are also other requirements and maximum balances too.)
So, say for instance that today you were to buy a commercial property that your business was renting. You do that through your self managed super fund, or SMSF.
Now, if you held onto that investment until you were 60 years old, and you were drawing down a pension at the time, then any gain on sale of that asset would be taxed at 0%. (This would be assuming your SMSF was 100% pension in your name – or other members also over 60 drawing a pension.)
Let’s put some numbers behind that.
Say you buy a commercial property worth 1 million dollars today, then 30 years later you sell that for 3 million dollars. So you’ve made a 2 million dollar capital gain.
Now, outside of super, if you purchased it in your own name you’d be up for quite a bit of tax, rough numbers $470k in tax.
But if you held the property inside your self managed super fund, you’d pay 0% and $0 in tax. (Again assuming you were 60 years or more, drawing a pension.)
That transaction would save you hundreds of thousands of dollars in tax by careful structuring.
Now, that applies to other investments like a residential investment property sale. Same with shares that you own in listed companies or other people’s businesses. So it’s pretty significant.
It’s like you’re having your own legal tax haven in Australia.
So, that’s the superannuation pathway of paying no tax on sale of assets.
Small Business CGT Concessions
Now, I mentioned at the start the small business capital gains tax exemptions were the other option.
This one applies to capital gains made from selling all or part of a business.
There’s also 4 concessions that are available for small businesses – so they’re pretty powerful tax saving strategies!
The four concessions are:
- 15 year exemption
- 50% active asset reduction
- Retirement exemption
- Rollover
The great thing about the concessions is that you can apply multiple concessions on the same transaction or ‘sale’.
Eligibility for Small Business CGT Concessions
Now, first we need to make sure that you’re eligible for those exemptions, and there’s three main tests that are looked at.
The first test is ‘does your business and any connected businesses turn over in total less than 2 million dollars in sales’. That would look at any connected entities. So, if you’re into two businesses, you need to make sure that turnover of total annual sales does not exceed 2 million dollars. If it does exceed that, all is not lost.
The second test is that you hold an asset as an investment (like a property), and it’s used in a ‘small business’ of a connected entity. Note: this one is not available to property held by Self Managed Super Funds.
The third test, and I would say the most heavily relied on, is the ‘$6M net assets’ test. This says the business owner selling the business has to have less than $6M in business and investment assets, less any debt (and not including some assets such as the family home or your superannuation).
So let’s say the business owner has $10M of assets – including debt of $3M, superannuation of $1M and a family home of $1M. Rough figures, the business owner would have $5M in net assets under this test, and be eligible for the concessions.
Running the numbers on the concessions
Let’s assume for all four concessions that we have a business sale of $1M. And you started it from scratch 16 years ago, so there was no original cost for you buying the business.
That means you have a capital gain of $1M, and without the concessions, assuming you held it through a trust or individually, you’d pay upwards of $235,000 in tax on that sale. ($1M x 47% tax rate x 50% general CGT discount.)
I might just mention as well those small business CGT concessions are only for business assets, they’re not for passive investment assets like listed shares or residential rental properties – but it can include commercial property that was used in the running of your business, unless held by an SMSF.
Let’s look at the concessions now.
15 year exemption
The first of the four concessions is the ‘BIG KAHUNA’!
This exemption says if you have been running the business for more that 15 years, and you’re over 55 years of age and are retiring, you can disregard the capital gain COMPLETELY!
$1M gain.
$0 tax.
No tricks!
50% active asset reduction
Under this exemption, you get an additional 50% discount on top of your first 50% general CGT discount.
So you’d pay upwards of $117,500 in tax. ($1M x 50% x 50% = $250,000 x 47% tax)
Still a fair bit, but less than $235k!
Retirement exemption
This allows you to disregard a capital gain of up to $500k in value over your lifetime.
Now if you’re under 55 years old at the time, the money you disregard has to be put into super.
If you’re over 55, there is no requirement to put it into super.
The good thing about this is that you can apply the other reductions or concessions first.
$1,000,000 gain x 50% general discount x 50% Active Asset reduction = $250,000 gain.
If you’re under 55 years old and put the remaining $250,000 into your super fund, then you pay $0 in tax personally!
Rollover
Now, the next one is the rollover relief. I’ve actually used this myself personally.
What it says is if you sell a business asset, then you can elect to rollover the money that you received from that to buy another asset, and you’ve got up to two years to do that.
So, if you receive $1,000,000 from a sale of a business, you can apply the 50% general discount, then the 50% active asset reduction. So you’ve got $250,000 in capital gain left.
You can then buy a $250,000 replacement asset (must be a business or an asset used in business) within two years and pay no tax!
Wrap up
Now, I think that wraps up the three main things that come to mind when you’re looking to pay as least tax as possible on business and investment gains.
Keep in mind I’ve skimmed over reams of pages of legislation here and wrote it based on today’s rules.
So this is very general help and we always say get personalised advice before planning or going through any big transactions like this. If you mess these up, it may cost you $100’s of thousands in tax that you didn’t expect to pay. So don’t say I didn’t warn you to get the advice!
Hope that was helpful.
You’ll be able to ask me any tax question you like at the upcoming 12 Tax Saving Strategies Workshop | BNE, SYD & MEL. You can get a ticket at no cost as my guest.
50 ways to Save Tax & Keep More of Your Hard Earned Cash | Checklist
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Paying little, less or no tax when you sell a business or large investment
So, broadly speaking you’re looking to make capital gains or a sale of business assets or investment assets and just like any Australian, your intention is not to pay any more taxes than is needed on the gain on those when you do sell them.
Great question.
There’s three main ways, or tax concessions, I see to pay little, less or no tax:
- The General 50% CGT Discount;
- paying 0% tax in your superannuation fund; and
- the Small Business CGT concessions.
What is CGT?
‘CGT’ is ‘capital gains tax’.
Basically, that’s the tax that you pay when you sell an asset like a house, or business, or a portfolio of shares and you make a gain.
You buy a house for $500k, you sell it for $600k – that means you’ve made a ‘capital gain’ of $100k.
Tax might be up to $47,000.
The tax you pay on that capital gain depends on who owned the asset, and any concessions or exemptions you may be eligible for.
You pay CGT on gains you make on things like investment properties, business sales, sale of shares, managed funds (there’s more, but that’s an example).
The “General 50% CGT discount”
There is a ‘general discount’ for Capital Gains Tax.
This is available is assets are owned by individuals (people) or trusts (like family trusts, discretionary trusts or even Self Managed Super Funds are classed as a type of trusts – although Super Funds only get 33% discount, not 50%).
The general discount allows an individual or a trust a 50% discount on the tax they pay on their capital gain, so long as they’ve held an asset for more than 12 months.
You buy the same house above in January – then you sell in February the following year (13 months later), still making the same $100k capital gain.
The 50% discount means that you’ll only pay tax on 50% of the gain, or only tax on $50k.
Tax has now halved, and you may pay up to $23,500.
Good stuff!
Paying 0% on Capital Gains made in Super
So in your superannuation fund, when you’re drawing a pension, the ATO gives you a tax break.
If you’re over the age of 60 and drawing a pension from your super balance (Note: not the transition to a retirement pension), then that tax rate is currently 0% on any income including capital gains. You need to be 60 years old, and your pension balance is taxed at 0%. (There are also other requirements and maximum balances too.)
So, say for instance that today you were to buy a commercial property that your business was renting. You do that through your self managed super fund, or SMSF.
Now, if you held onto that investment until you were 60 years old, and you were drawing down a pension at the time, then any gain on sale of that asset would be taxed at 0%. (This would be assuming your SMSF was 100% pension in your name – or other members also over 60 drawing a pension.)
Let’s put some numbers behind that.
Say you buy a commercial property worth 1 million dollars today, then 30 years later you sell that for 3 million dollars. So you’ve made a 2 million dollar capital gain.
Now, outside of super, if you purchased it in your own name you’d be up for quite a bit of tax, rough numbers $470k in tax.
But if you held the property inside your self managed super fund, you’d pay 0% and $0 in tax. (Again assuming you were 60 years or more, drawing a pension.)
That transaction would save you hundreds of thousands of dollars in tax by careful structuring.
Now, that applies to other investments like a residential investment property sale. Same with shares that you own in listed companies or other people’s businesses. So it’s pretty significant.
It’s like you’re having your own legal tax haven in Australia.
So, that’s the superannuation pathway of paying no tax on sale of assets.
Small Business CGT Concessions
Now, I mentioned at the start the small business capital gains tax exemptions were the other option.
This one applies to capital gains made from selling all or part of a business.
There’s also 4 concessions that are available for small businesses – so they’re pretty powerful tax saving strategies!
The four concessions are:
- 15 year exemption
- 50% active asset reduction
- Retirement exemption
- Rollover
The great thing about the concessions is that you can apply multiple concessions on the same transaction or ‘sale’.
Eligibility for Small Business CGT Concessions
Now, first we need to make sure that you’re eligible for those exemptions, and there’s three main tests that are looked at.
The first test is ‘does your business and any connected businesses turn over in total less than 2 million dollars in sales’. That would look at any connected entities. So, if you’re into two businesses, you need to make sure that turnover of total annual sales does not exceed 2 million dollars. If it does exceed that, all is not lost.
The second test is that you hold an asset as an investment (like a property), and it’s used in a ‘small business’ of a connected entity. Note: this one is not available to property held by Self Managed Super Funds.
The third test, and I would say the most heavily relied on, is the ‘$6M net assets’ test. This says the business owner selling the business has to have less than $6M in business and investment assets, less any debt (and not including some assets such as the family home or your superannuation).
So let’s say the business owner has $10M of assets – including debt of $3M, superannuation of $1M and a family home of $1M. Rough figures, the business owner would have $5M in net assets under this test, and be eligible for the concessions.
Running the numbers on the concessions
Let’s assume for all four concessions that we have a business sale of $1M. And you started it from scratch 16 years ago, so there was no original cost for you buying the business.
That means you have a capital gain of $1M, and without the concessions, assuming you held it through a trust or individually, you’d pay upwards of $235,000 in tax on that sale. ($1M x 47% tax rate x 50% general CGT discount.)
I might just mention as well those small business CGT concessions are only for business assets, they’re not for passive investment assets like listed shares or residential rental properties – but it can include commercial property that was used in the running of your business, unless held by an SMSF.
Let’s look at the concessions now.
15 year exemption
The first of the four concessions is the ‘BIG KAHUNA’!
This exemption says if you have been running the business for more that 15 years, you can disregard the capital gain COMPLETELY!
$1M gain.
$0 tax.
No tricks!
50% active asset reduction
Under this exemption, you get an additional 50% discount on top of your first 50% general CGT discount.
So you’d pay upwards of $117,500 in tax. ($1M x 50% x 50% = $250,000 x 47% tax)
Still a fair bit, but less than $235k!
Retirement exemption
This allows you to disregard a capital gain of up to $500k in value over your lifetime.
Now if you’re under 55 years old at the time, the money you disregard has to be put into super.
If you’re over 55, there is no requirement to put it into super.
The good thing about this is that you can apply the other reductions or concessions first.
$1,000,000 gain x 50% general discount x 50% Active Asset reduction = $250,000 gain.
If you’re under 55 years old and put the remaining $250,000 into your super fund, then you pay $0 in tax personally!
Rollover
Now, the next one is the rollover relief. I’ve actually used this myself personally.
What it says is if you sell a business asset, then you can elect to rollover the money that you received from that to buy another asset, and you’ve got up to two years to do that.
So, if you receive $1,000,000 from a sale of a business, you can apply the 50% general discount, then the 50% active asset reduction. So you’ve got $250,000 in capital gain left.
You can then buy a $250,000 replacement asset (must be a business or an asset used in business) within two years and pay no tax!
Wrap up
Now, I think that wraps up the three main things that come to mind when you’re looking to pay as least tax as possible on business and investment gains.
Keep in mind I’ve skimmed over reams of pages of legislation here and wrote it based on today’s rules.
So this is very general help and we always say get personalised advice before planning or going through any big transactions like this. If you mess these up, it may cost you $100’s of thousands in tax that you didn’t expect to pay. So don’t say I didn’t warn you to get the advice!
The best tax outcome for Putting Money away for the Children
A question we get from time to time is about parents wanting to set up a bank account or a share investment portfolio for their children.
We love this idea as it’s a great way for the kids to get ahead. Whether the money goes to education in time, or helping them with their first house – it’s a great head start!
The two things we need to consider about putting money away for the kids’ is:
-
Who pays the tax on any earnings, and also
-
How we structure the holding of those assets
We know that what structure that those investments are held in will determine, firstly, who owns the asset when considering asset protection, but also who pays the tax on the earnings from the investments.
In Australia, children under 18 aren’t actually seen as legal entities, and so they cannot hold bank accounts or share portfolios directly in their names.
What the banks or the share portfolio providers will want to do is set up the parents or parent as trustee for the child, so it’s very similar to a discretionary trust we talk about, where you’ve got this trust account with a trustee or the guardian of the trust making decisions for it.
In the case of children, if you go to a bank and set up a bank account, if it was my child, it would be Ben Walker As Trustee for Monkey. (That’s the name of one of our dogs, no human children yet!)
What will happen is say I put $10,000 into the account, and over the course of year it earns $500 in interest. The unfortunate thing about it is that interest will actually be taxable in my personal name.
Sometimes we don’t want that, especially if the parent is a high income earner, and they’re already paying a high amount of tax, and also the other spouse may also be on a high tax bracket. Any interest earned in the name of the child’s trust account is actually taxable to the parents, and usually is not desirable.
The alternative to that is to actually set up a discretionary trust or a family trust for your children.
We’d have a clean trust for holding assets beneficially for you and your children. You would still need ‘you’ as an individual or a company you own to be a trustee of their trust. But the difference is set up correctly, it wouldn’t all be taxed in your name.
Let’s use the same scenario that $10,000 in cash was put into the discretionary trust account and it earned $500 of interest. The first $416 per child of income that that trust earns can actually be distributed to them tax free.
Why $416? That’s the number that the ATO has set that minors (under 18 year olds) can earn from investments without paying the top rate of tax.
In previous years, that distributable amount has been thousands of dollars per child, so that dropped down the limit that a child can receive tax free significantly.
If you had more than $416 in income per child, then that would have to go to another family member. It could be paid to you, but it all depends on your family situation – retired parents or lower income family (who are over 18 years old) are best. It could also be paid to what we call a “bucket company”. There’s actually another article where I’ve written all about bucket companies and how useful they can be.
The best ‘tax time’ for this type of investment is when your child turns 18. They then get taxed like an adult – so the first $20,000 or so they earn is tax free!! This can be very helpful so they pay little or no tax on the investments you’ve put away for them, while they might be studying or travelling after school.
That’s a bit of an overview on setting up a savings account or a share portfolio for your children.
Again, if you’re looking to build up quite a significant balance over the years, then getting the structure right from the start will mean you don’t need to change it down the track, which could cost you a fair bit of money in capital gains tax.
Also in the meantime, if it just stays in your name as trustee for your child, then you might be paying 34.5 cents in the dollar, or 39 cents in the dollar, or even worse, 47 cents in the dollar in tax, which is usually not great.
Learn how to turn a BAS Deadline into a BIZ Lifeline.
Of course, there’s more to “getting BAS right” than merely satisfying the minimum requirements set out by the ATO.
The BAS process offers the in-the-know business owner valuable insights into:
Growth building profit drivers – their effect and where they are coming from
Vital course corrections – what’s going right and what’s costing too much and what to do next
The state of play – are you winning, are you behind and why?
In this 90 min interactive webinar, you will learn –
5 common BAS mistakes and how to avoid them
How business structures affect the BAS / Tax you pay
Save Tax, Boost Profit and Accelerate Cashflow using using your own:
– Profit and Loss or P&L
– Balance Sheets
– GST report
– Cash flow summary
– Business budget
Getting the most value from your business advisory board
– Your Bookkeeper
– Your Accountant
– Your CFO (chief financial officer)
If you hate BAS Time it’s probably because –
* You feel you are paying too much tax, and it is chewing in to your cashflow.
* You don’t have enough set aside to pay the BAS, and your accountant is of little help.
* You don’t really know how the business is performing, or how to turn things around.
Learn how to turn things around this BAS season with Inspire.
“The big difference between winning occasionally and winning almost always is not only knowing the score but understanding the factors that can and will influence it.”
– Ben Walker
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