Tag Archive: assets

All I Want for Christmas…

Posted on December 5, 2019
by Scott Brodie

It’s nearing Christmas, which means it’s 12 months since I wrote my updated article about the need to continue to look back and understand the path traveled, that has brought us to the present when trying to forecast the future. I wrote of the enduring impact of the 2008 financial crisis and the post 2008 financial crisis world of low interest rates, quantitative easing and the impact of this on our preparedness to accept historic low yield on asset acquisitions. My view was that it was a good time to consider liquidating marginal assets as the cycle was turning.

The Present Situation

Well 12 months on and the cycle has not turned. In fact we now find interest rates both domestically and internationally low and going lower. In Australia, we have witnessed three 25 basis point cuts by the Reserve Bank to its rate which now stands at 0.75%. Down from a historically low 1.5% at the start of the year. Further, there is an expectation that the Reserve will drop the rate by a further 25 basis points to 0.5% in February 2020, as the outlook for Christmas retail spending is weak.

Although Australia is not technically in recession, no or low wages growth, high levels of household debt, a drop in residential real estate values and a lack of consumer confidence has pushed the retail sector towards recession. Like most first world western economies, economic activity, economic growth and jobs that flow from it is heavily dependent on consumption.

The outlook is not only for rates to reduce further, but the general consensus is they will remain low for at least the medium term with little confidence espoused by forecasters on when this trend will start to reverse and what will be the driver.

Impact in Europe

I spent time in Italy, Switzerland, France and the UK during the year, and tough economic times are also being felt in Europe. Globalisation, Brexit, disruption and resistance to chance are having a negative impact on these “traditional” and heavily populated European centres.  There is very high unemployment in regional and country areas with the trend worsening over time. This has and will lead to further political instability and the rise of dangerous nationalistic dogma.

Movements in Australia

By contrast, Australia is in a far better position to weather this storm. We have a small population which is growing in excess of 160,000 from our mainly skilled base immigration policy. State and federal governments have committed very large amounts of their budgets to infrastructure projects, to make our major cities and urban areas more liveable, as they cater for larger populations. Though much of this spend should have been part of a systematic program undertaken over the last 30 years, as opposed to the more recent massive, less efficient spread of large scale programs. The upside however, is this expenditure is driving the Australian economy while it is being buffered by international head winds.

Steps You Can Take Now

It is a good time to stress test your business and investment cash flow, and determine how exposed your financial position is to a sudden downturn or even recession. For example, if your income is substantially exposed to the health services sector or infrastructure construction, you should be less effected by a sudden downturn or recession than if your income is substantially exposed to the real estate, financial services or retail sectors.

So unlike “aging” northern hemisphere western economies, Australia is and will continue to grow. In an extended period of low interest rates going lower with no identifiable driver to move rates up in the medium term, if your financial stress test provides you with the confidence to weather short term unexpected downturns, it’s a great time to take on manageable risk positions and acquire quality assets. Property and equities both have limited supply, and as investors, particularly self-managed superannuation funds, reduce their exposure to cash and chase yields, demand and price of property and equities will increase.

Whatever you acquire, it will appear expensive but in these times of extended low interest and inflation, you need to adapt your expectations of risk and return. What remains consistent is you maximise your risk management position by investing in quality assets. If it walks like a duck, quacks like a duck… guess what?

Hope Santa fills your Christmas stocking with exciting opportunities for the new year.

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Estate Planning Step-by-Step – Rest Easy by Protecting Your Assets & Loved Ones

Posted on December 2, 2019
by Luke Bland

4 min 30 sec read

Contents

  • Questions to Ask Yourself in Estate Planning
  • Common Assets involved in Estate Planning
  • Drafting your Will – Who is involved?
  • Who is the Executor?
  • Testamentary Trusts & Asset Protection
  • Where Do You Start?

There are tasks in life that we never really want to undertake but know we need to. Two of these are your Will and Estate Planning, and we all know they really are some of the most important documents you will ever have drawn up.

You work hard throughout your life to buy a house, build a business and maybe even an investment portfolio. The assets that you accumulate mean something to you and the people closest to you. It should be you that decides what happens to these assets.

While most people realise they need to create a Will to distribute their belongings and organise an executor of their Will, they don’t realise how broad and complex estate planning can be. To ensure that your wishes are carried out, and to save your children, grandchildren or other intended recipients a lot of trouble and heartache, thorough estate planning is vitally important.

Questions to Ask Yourself in Estate Planning

  1. Assets – What do you own?
  2. Asset ownership – How are these assets owned? E.g. personally, in a superfund, via a family trust, joint tenants vs tenants in common.
  3. Asset inclusions – Which assets need to be included in your Will and which assets fall outside of your estate/Will?
  4. Asset beneficiaries – Who do you want to leave your assets to?
  5. Asset exclusions – In there anyone (such as an ex-spouse or estranged family member) that you specifically want to exclude?
  6. Unexpected beneficiaries – Have you considered all potential beneficiaries? Failure to do so could lead to your Will being challenged, which can be a costly and traumatic experience for the intended beneficiaries.
  7. Life insurance – Do you have a life insurance policy? Where or who will these proceeds be paid to?
  8. Executor – Who will be the executor (personal representative) of your Will? This can be an individual or multiple people jointly.
  9. Testamentary Trust – Do you want your assets to go directly to your beneficiaries or will you use a Testamentary Trust?
  10. Asset distribution – How can your assets be distributed to the intended beneficiaries in a tax effective manner?

Common Assets involved in Estate Planning

Family Home

If you own your principal residence (home) with your spouse as joint tenants, the title will automatically be transferred to your spouse on your death. If you own your home as tenants in common, your share will form part of your estate, to be dealt with in your Will. If you are the sole owner of your home, it will also form part of your estate.

If your home has never been used for another purpose (as an investment property or business premises) there are no tax implications when the title (ownership) goes to your spouse as joint tenants. If ownership of your home is transferred in accordance with your Will, the new owner(s) have up to 2 years to move in and make it their primary residence, or sell the property, for it to be exempt from capital gains tax (CGT). If they hold onto the property and sell it after more than 2 years, they may be liable for CGT. Their cost base for CGT is regarded as the market value of the property on the date of your passing.

Personal Assets – Cash, term deposits, listed equities, real estate and other investments

These assets will form part of your ‘estate’. In your Will, you can dictate how much should be allocated to each person (beneficiary) and whether specific investments should go to specific beneficiaries. If specific investments are referenced in your Will, it’s important that your Will is updated when these investments are sold or new investments are acquired. It’s common for assets to be allocated on a percentage basis, or to allocate specific amounts to specific beneficiaries.

For assets that have been acquired after September 1985, beneficiaries will inherit these with your original cost base. If any assets were acquired before that date, the cost base for the beneficiary will be the market value on the date you pass away.

Another option is for the estate to sell or realise the investments and instead distribute cash to the beneficiaries. However the estate will need to pay capital gains tax on any capital gains realised, meaning the beneficiaries will receive less value when the proceeds are distributed.

Family Trust Assets – Cash, term deposits, listed equities, real estate and other investments

If you have built up an asset portfolio within a Family Trust, you need to think about what you want to happen to this trust and these assets. The underlying assets will not form part of your estate, but the trust will usually have a trustee company. Your shares in the trustee company will form part of your estate.

You can leave these shares to one or more beneficiaries in your Will. The new shareholders will generally have the combined power to appoint/remove directors. This effectively gives them control of the trustee company and therefore control over the trust’s assets.

You also need to consider who the appointor of the trust is, as they have the power to remove the trustee and appoint a new trustee i.e. ultimate control of the trust. Your trust deed will contain provisions on how to change an appointor.

The trust may continue to operate, and the income and assets of the trust will be able to be distributed to the beneficiaries of the trust, in accordance with the trust deed. There generally won’t be any tax implications upon the shareholders of a trustee company changing.

Private Companies

If you own shares in a Private Company, whether it is carrying on a business, an investment company, or a dormant company, your shares will form part of your estate. Your Will should determine what you want to happen to these shares. The shares may represent a controlling interest in the company, allowing the new shareholder(s) to ultimately control to operations of the company.

The CGT implications and cost base provisions when transferring shares to beneficiaries in accordance with a Will are the same as if transferring listed shares (see Personal Assets above). However in some circumstances small business CGT concessions may be available to reduce the taxable capital gain to nil when the beneficiary or legal personal representative sells the shares. This can happen when the deceased would have been able to access the small business CGT concessions just prior to their death, and the shares are sold within 2 years of the date of their passing. These concessions also apply to other small business assets, not just shares.

Life Insurance

If you hold a life insurance policy, the proceeds will be paid out to the nominated beneficiary. This may be an individual, or your estate. If it’s paid to your estate, it should be considered in your Will. If it’s paid to an individual directly, you should consider the life insurance payment that this beneficiary will receive when you are deciding where to allocate your other assets.

Superannuation

Any superannuation interests you hold will be dealt with outside of your Will. The treatment of your superannuation upon your death will be determined by a combination of your superfund’s trust deed, any reversionary pension nominations you have made, and any binding or non-binding death benefit nominations you have made.

The rules regarding payment of superannuation death benefits are complex, but the key points are:

  • Any superannuation interests in pension phase can revert to another member of the fund (e.g. your spouse), thus remaining in the superannuation system. This is known as a reversionary pension. The recipient must be aware of their transfer balance cap, and may have to roll back some of their existing pension account to their accumulation account.
  • Superannuation interests in accumulation phase will be paid in accordance with a valid binding death benefit nomination (BDBN) if one exists. A BDBN can instruct the trustee to pay the amount to a specific beneficiary, or to your legal personal representative, where it will form part of your estate and be dealt with by your Will.
  • If no valid reversionary pension nomination or BDBN is in place, it is up to the trustee to determine to whom your superannuation death benefit is paid. In a self-managed superannuation fund (SMSF), the trustees (or trustee directors) will usually be the remaining member(s), or your executor if there is no remaining member. In complex family situations, such as your spouse having children from a previous relationship, your spouse could potentially transfer your super to those children, leaving your own children or relatives with nothing.
  • If paid out as a superannuation death benefit, to an individual directly or via your estate, in accordance with a BDBN or otherwise, there can be income tax implications. If paid to a death benefit dependent, the amount is tax free. There are a number of criteria that must be met for someone to be considered a death benefit dependent. Spouses and children under 18 will usually meet these criteria. Adult children often will not meet the relevant criteria, and could lose up to 17% of their payment in tax. In some circumstances, such as the diagnosis of a terminal medical condition, it may be worth considering withdrawing some or all of your superannuation as a lump sum payment, and gifting this to your adult children. This will fall outside of the superannuation death benefit rules.

Drafting your Will – Who is involved?

Any assets that pass to your estate on death will be distributed in accordance with your Will. It is therefore very important that your Will is drafted in a way that is clear and follows your wishes.

It’s wise to engage a lawyer that specialises in Estate Planning to draft your Will. You may want your accountant or business adviser to be present at any meetings with your estate planning lawyer, to ensure your lawyer understands your business and asset holding structures, and can provide for these appropriately within your Will.

Remember that a Will can be challenged. You need to consider anyone that could make a claim on your estate, such as someone who you have provided financial assistance to, or had a close personal relationship with in the past. If you don’t want to leave anything to a person that may expect something, or for your proposed distribution of assets to be viewed as ‘unfair’, you will need to document and justify why you want your assets to be allocated that way.

Who is the Executor?

Your executor will be responsible for administering your Will and distributing your assets in accordance with your Will. Your executor is also responsible for paying any tax liabilities from your estate. They generally have the power to appoint a new director to any companies where you held the sole directorship.

Given the importance of their role and the power they hold, your executor should be a trusted person, such as a relative, adviser or lawyer. You can also nominate a number of people to act jointly as executors.

Testamentary Trusts & Asset Protection

You can choose to set up one or more testamentary trusts in your Will. This means that instead of assets passing directly to a beneficiary, the assets are passed to the testamentary trust and controlled by the chosen trustee – usually a family member, accountant, adviser, solicitor or a combination – on behalf of the beneficiaries of the testamentary trust.

A testamentary trust allows a beneficiary to receive the income and benefits of an asset or group of assets, without having control of these assets. This is particularly useful in situations where you have an adult child that may not be financially savvy, or may be going through bankruptcy or a relationship breakdown, where introducing additional assets may leave these assets exposed to creditors or a recent ex-spouse.

You can also dictate who the beneficiaries are of a testamentary trust. For example, you may specify that all income is to be distributed to your grandchildren rather than your children.

As well as asset protection, testamentary trusts can provide tax advantages. The trustee will usually have discretion to distribute the income of the trust to various beneficiaries. This enables the trustee to take advantage of lower marginal rates of tax of one or more potential beneficiaries. It should also be noted that, unlike a standard discretionary or family trust, income from a testamentary trust that is distributed to minors is taxed at adult rates, including the full tax free threshold.

Where Do You Start?

Estate planning is complex and your needs are ultimately determined by your assets, your family situation, and your interests in any trusts, companies and super funds. In addition to the general rules outlined above, your trust deeds and company constitutions may contain special rules.

To get your estate planning organised, the important next step is sitting down with your lawyer and adviser to map out your assets and your structures, how you picture everything being allocated and who you want to have control over various areas.

If you don’t have a trusted lawyer or adviser, please speak to our team of business advisers who can take you through the process and put you in touch with an estate planning lawyer. We would accompany you to meetings with your lawyer to put in place the required documentation that ensures your assets are distributed according to your wishes with minimal risk of disputes.

While thinking about our death or what happens after is never pleasant, it’s worth planning for so the people you care about are safeguarded. Therefore if you have significant assets and don’t have an estate plan in place, we recommend organising one as soon as you can.

Wishing you every success!

 

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Succession Planning – How to Prepare and Protect Your Business and People

Posted on December 2, 2019
by Cem Ozer

All businesses have lifecycles. From humble beginnings, where your once peaceful evenings capitulate into countless sleepless nights, contemplating how you are going to pay your staff. To the satisfaction of achieving your business goals and helping your employees grow professionally and personally. To the inevitability that one day, your journey within the business will come to an end.

It can be a daunting task to think of the potential hurdles your business may come across in the future, along with what will happen when you are no longer running the business. It is only natural that you want your business to have a life after you. Whether you dream about handing over the reins to your children, consider it a great personal achievement to pass it over to an employee who has been with you since day one, or even if you sell your business to a third party during it’s prime, putting a succession plan in place now safeguards everyone involved in the business, including if the unexpected occurs.

What is Succession Planning?

Succession planning means setting up your business for the future, with strategies in place for when you exit the business.

From an organizational level, this can include developing the skills of the people in your business to more than just the bread and butter of their daily work. This can mitigate the gap in knowledge within a senior role in the unfortunate event a position is vacated unexpectedly. On a larger scale however it develops individuals who can take over at the point that you exit the business.

From a personal perspective, it involves having the necessary foundations, policies and structures in place, to allow for a smooth transition when you exit the business.

Key Components of a Succession Plan

For a business owner, succession planning can vary greatly depending on your individual circumstances. However, there are a few key components that are common and essential for it to be successful:

  1. Start Planning Ahead of Time

It’s important to note that succession planning should not begin at the point you decide to move on from your business. The issues around business succession planning are varied and complex. As such, the earlier this is considered, the greater emphasis you can put on ensuring that the plan suits your intentions and any issues can be resolved.

  1. Structure Your Business for Your Future

One of the key benefits of planning ahead, is being able to review the way your business is structured. This plays an important role in both your personal and business’s future. Business structures are not only important for managing your tax requirements, but your personal assets also need to be taken into consideration.

It’s not uncommon for a business structure to be overlooked, especially upon its establishment. As part of BLG’s review process for new clients, we’ll often find their business structures are not set up in a way that provides the best outcome for their individual needs. Identifying ineffective structures early on can prevent avoidable consequences in the future.

  1. Prepare Your Business for Life Without You

The years leading up to your exit are often crucial. Therefore, deciding what the plans are for your business when you do leave can make this period easier to manage. If you are passing your business onto family or an employee, it’s important those next in line have the complete range of skills and knowledge to keep the business running effectively, and for the transition to be as smooth as possible. Furthermore, if you plan on selling your business, it’s ideal to show a strong financial position for potential external purchasers to maximize your proceeds.

  1. Be Aware of the Tax Implications

For many business owners, the sale or transition of their business will represent the most significant part of their retirement funding. Maximising your after tax proceeds will be a key goal, so it’s critical to get advice on your exit strategy, the tax implications themselves and how to best structure your retirement assets to minimise your tax liabilities.

  1. Safeguard Your Assets

In the unfortunate event that you exit the business because you have passed away, it’s important to form a plan for what happens to your personal assets alongside your business succession plan. This is known as Estate Planning, and is usually established via a Will. It is always beneficial to consult a specialized Estate Planning lawyer to assist in preparing a Will for this purpose, and BLG can put you in touch with our network of professionals if required.

How to Get Started on Your Plan

Succession planning shouldn’t be a reactionary tool. It should be considered through all the phases of your business lifecycle, and requires you to be proactive in your planning.

Do you intend to hand the reins over to the next generation, to someone from within the business, or sell to a third party? To get you started with succession planning here are some of the questions to ask yourself:

  • Who will run the business when you are no longer there?
  • Does the next generation share your passion for the business? Do they have the skills to run the business?
  • How can you maximise the ‘value’ of the business ready for sale?
  • What are the tax and legal implications of selling?
  • What will happen to the business upon an unexpected exit?

Establishing your succession plan can be a daunting task. The amount of information that needs to be considered can be quite overwhelming. As such, we recommend you speak to a trusted accountant or business adviser to guide you through this process. If you don’t have an adviser to help, you may decide our team at BLG can be of significant value to you. Have a talk with our team so you can find out if our approach suits your needs.

Wishing you and your business every success!

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Owning Your Business Premises – Considerations & Buying Options

Posted on May 7, 2019

Have you established a new business and you are on the hunt for a business premises? Is your business growing too big for its current space?

The decision of whether to lease a business premises or buy your own can be a difficult one to make. It depends on your current situation and the long-term goals for your business.

Being the owner of your business premises can offer a number of benefits in the right circumstances. Below we take you through what to consider, the potential benefits and the options for buying.

Buying Considerations

  • Upfront costs – when purchasing a property, the upfront costs are significantly higher than the upfront costs of leasing a property. Ensuring you have the appropriate amount of capital available to invest in a property and run your business is key. You will need to budget for a deposit, appraisal costs and potentially renovation/fit-out expenses depending on the needs of your business.
  • Cashflow – owning your own business premises requires you to have the cashflow for the ongoing associated expenses, including (but not limited to) loan repayments, rates, strata, repairs & maintenance and property insurance.
  • The right size – If your business is in a growth phase then you need to consider the size of the premises you want to buy. In this case, the flexibility of a lease might be more appropriate for you.
  • Start-up business – If you are just starting up then you need to consider whether leasing a small space alongside like-minded businesses, or being able to obtain a more desirable location while you are establishing your image, are more appropriate options than committing to a property purchase and loan.
  • Commercial property loan – As a general guide, banks will only loan up to 70% of the market value of the commercial property that you are looking to purchase, which is known as a 70% loan-to-value ratio (LVR). Plan ahead to understand the deposit required for your intended purchase, plus on-costs such as stamp duty and legal fees.

Benefits of Owning Your Premises

  • Asset & equity – a business premises is an asset that generally appreciates over time. The equity growth in the property gives you an opportunity to seek additional finance for business growth and can lead to long-term capital gains.
  • Flexibility & control – owning your own premises gives you the flexibility to fit-out and make changes to the property at your own leisure – you can make the space exactly what you need.
  • Tax – the costs associated with owning your business premises are generally tax deductible. This includes the interest on your property loan, repairs and maintenance, rates, electricity and any other ownership costs incurred. You may also be able to claim depreciation on the building itself.
  • Security – owning your own premises secures your location. The right location can have a huge impact on the success of your business.

Buying Options

So you have decided that buying a premises is the right direction for you? Here are ways to move forward.

Generally you should try to hold passive assets such as a commercial property in a separate structure to your business, so that the asset is protected if the business faces financial difficulties for any reason.

Some of the options that you could consider when buying a business premises include:

  1. Personally – buying a premises in your name is the cheapest option as there are no fees to set up or maintain a structure. However, property should only be held personally if the individual has a low risk of being litigated. Sole traders and company directors generally do not fall into this category.
  2. Trust – holding property in a Trust offers asset protection. A trust also gives you the flexibility to distribute the rental income earned across your family group. The disadvantage of owning property in a trust is that trusts do not receive a Land Tax threshold. This means that more land tax could be payable compared to holding the property in another structure.
  3. Self-Managed Superannuation Fund (SMSF) – Your SMSF may be able to purchase your business premises, subject to the Deed and Investment Strategy of the SMSF.

A business property purchase in an SMSF may be funded by cash or via a Limited Recourse Borrowing Arrange (LRBA) i.e. a loan to the SMSF. Obtaining an LRBA is becoming increasingly difficult with many banks opting to not offer an LRBA product. LRBA’s generally require higher deposits and shorter loan terms than other loans.

Investing in a commercial property and weighing up your options can be a complex process, so it’s important to seek advice from a trusted business adviser. We have an experienced team available to assist you, whether during or after business hours, depending on your availability. Make your purchase work for you. Get in touch with BLG Business Advisers online or by calling (02) 4229 2211.

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Protecting your Superannuation Benefits for Future Generations

Posted on September 11, 2017
by Glen Bower
Superannuation now often represents a significant proportion of an individual’s assets. A number of factors have contributed to increases in superannuation including compulsory employer contributions (superannuation guarantee), taxation concessions / incentives, the removal of compulsory cashing of superannuation benefits upon retirement and default levels of insurance coverage.
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The Complete New Business To-Do List

Posted on July 21, 2017
by Sonia Spaseski
When setting up a new business or changing your current structure, there is what seems an endless list of things that you need to complete prior to commencing trading. We realise it’s pretty easy to miss some of the important steps, so we’ve taken some of that pain away with a New Business To-Do List of the main aspects to tick off.
Because business structures, activities and incomes vary, please keep in mind that the following list is a guide only and some of the steps may require the assistance of a trusted business adviser.
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Are your assets protected?

Posted on February 26, 2017
by Tim O’Brien

In today’s increasingly litigious society asset protection is particularly important. With so many Australians now engaged as professionals and in small business fields the need to have a sound asset-protection plan in place is vital.

For many of our business clients a key aspect of the work we perform is planning around protecting the assets they have built up in their lifetime. Common concerns include:

  • Protecting assets from creditor claims, bankruptcy and divorce
  • Protecting personal and business assets for future generations
  • Ensuring assets passed to children are protected from creditor claims, bankruptcy or divorce of their children

A traditionally popular method of protecting personal and business assets is through the use of trusts. Often a fundamental element in the planning of business, investment and family financial affairs, trusts are commonplace but repeatedly misunderstood.

A trust is a relationship where a person (the ‘Trustee’) is under an obligation to hold property for the benefit of other persons (the ‘Beneficiaries’). A frequently held, but erroneous view is that a trust is a legal entity or person like a company or an individual. The courts have, however, long recognised that a beneficiary of a Discretionary (or Family) Trust, for example, does not generally have a defined interest in any of the trust’s assets, even though that beneficiary may control the trust. Therefore, if a beneficiary faces claims from creditors, becomes bankrupt or is divorced, in most circumstances the trust assets will not be at risk.

In addition to the utilisation of trusts some other basic forms of asset protection include:

  • Identifying one person in the family as being the ‘at risk’ individual, commonly the person running the business. Often this person will be the director of the company and they are the one providing personal guarantees to lenders etc;
  • Owning significant assets, including the family home, in the name of an individual who is not ‘at risk’; ​
  • Holding valuable business assets in a separate legal entity to the ‘trading’ entity (e.g. valuable equipment and commercial property); and​
  • Carrying on a business through a separate legal entity, e.g. a company or trust.​

To avoid potentially unforeseen and significant losses, it is important to have the right strategies in place to safeguard your assets. It’s important to choose the right trusts, for example, and to implement strategies that are suited to your specific needs. This means not only taking into account asset protection but also tax consequences, functionality, and costs of implementation.

Get in touch with BLG Business Advisers online today, or call (02) 4229 2211 to discuss how we can help protect you and your assets!

 

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SMSF Investment Rules – What is Business Real Property?

Posted on January 30, 2017
by Adam Birrer

While one of the main attractions for current and prospective Self Managed Superannuation Fund (SMSF) Trustees is the ability to manage their own investments and thus gain greater flexibility and control over their retirement funds, a number of rules apply to limit the nature and type of investment that an SMSF is permitted to make.  As a general principle, SMSFs must make their investments on a commercial, arms length basis.

One of these rules is Section 66 of the Superannuation Industry (Supervision) Act 1993 (SIS Act), which imposes a general prohibition on SMSF Trustees acquiring assets from related parties of the SMSF – including fund members and associates.

A specific exception to this rule applies to assets which meet the definition of Business Real Property (noting there are other exceptions that I will not cover here today) – assets which qualify as Business Real Property (BRP) may be purchased from related parties.

Business Real Property Definition

BRP is property used ‘wholly and exclusively in the running of a business’ and the definition is explained further in ATO ruling SMSFR 2009/1. The definition generally precludes any part of the property being used for any other purpose (such as private dwelling) unless that other use is ‘minor, insignificant or trifling’.

It is important to be certain that the asset being acquired meets the definition, as failing to do so will mean it is considered an ‘in-house asset’ which will have detrimental consequences if the 5% in-house asset cap is exceeded.

Common Strategies Utilising BRP Exception

A common and popular strategy for small business owners involves using their SMSF to purchase their business premises (where the premises are BRP) at market value, and for the business to then lease the premises from the SMSF.  The SMSF’s acquisition may be funded with cash/contributions, or by entering into a Limited Recourse Borrowing Arrangement (LRBA) to help fund the purchase.

In such an arrangement it is important that the lease is formally documented on arms length terms, with a market rate of rent charged, and that the terms of the lease are complied with on an ongoing basis.

Assuming the acquisition fits in with the investment strategy of the fund, some of the potential benefits of such a structure may include –

  • Asset protection – the SMSF environment may help protect the business premises, which are often a significant asset, in the event the business or its owners experience financial difficulties.
  • Taxation – earnings on SMSF investments are generally subject to a maximum 15% tax rate (can be lower where fund members are in pension phase). SMSFs are also able to access the CGT discount where an asset is disposed of after being held for a minimum of 12 months. The business can claim a tax deduction for rent paid to the SMSF.
  • Capital – by having the SMSF own the property, the business may use its capital to invest in growth and operations instead.

The SIS Act and ATO rules around SMSF investments are complex and the above is only a very general introduction.  BLG Business Advisers provide high quality taxation and technical advice in relation to SMSF matters – get in touch with us online or call (02) 4229 2211 today to discuss your circumstances!

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Buying a Business – What to Consider

Posted on November 21, 2016
by Phil Grant

Buying a business can be a stressful time that generally doesn’t come without some risk. However, you can gain a lot more comfort by having control over the process.

Below we have compiled a list of considerations and questions to ask when examining a business to buy, so you can head into the buying situation more relaxed and informed.

Business Buying Checklist

I recently had a client who asked me to assist them in buying a business, which was the first time they had considered such an option. During the whole process it highlighted there is so much to think about, a lot of work and research to be done, and a lot of decisions to be made to make sure the business is not only a good deal financially but also a good fit for you.

You should always seek expert advice before deciding to buy a business, but whether you do or not, here are some things to consider and questions to ask those involved:

  • Business for sale

Do you have experience in this business/industry that you can draw on, or do you have the necessary skills that can be adapted to run the business effectively?

  • What are you buying?

It is very important to understand what you are buying. Is it shares in a company or is it a business with assets? If it is a business with assets, then are all assets of the business included in the sale? Is there anything specifically excluded?

  • Historical or past information

You will need to analyse the past performance of the business. Generally you will look at the past two years performance plus the current year-to-date performance. This information should be supplied to you from either the current owner or their accountant.

  • Due diligence

This is the work that needs to be done to verify the above information that you have looked at and more. Information that you would generally ask for would be:

  • Financial statements
  • Income tax returns
  • Business activity statements
  • Proof of ownership of business assets and condition of assets
  • Profit and loss and cash flow projections
  • Existing customer contracts (if applicable)
  • Lease of business premises

There will probably be more information you will need to look at so don’t be afraid to ask for it!

  • Finance

It is probable that you will require finance from a bank or similar to fund the purchase of the business. A few fundamentals you will need to consider (and the bank will insist upon) are:

  • Will the business be able to finance the loan?
  • Do you have enough security between yourself and the business to enable you to get the loan?
  • What is the projected time frame for the loan to be repaid?
  • Do you require an initial interest only period to help with cash flow?
  • Do you need to temporarily finance the GST on the purchase of the business if applicable?

The bank will generally require a lot of information so be prepared!

  • Contract

The business sale contract will need to be drawn up by a solicitor so make sure you have a solicitor who is experienced and competent in this area, and most importantly someone you feel comfortable discussing matters with.

Buying a business is an important decision to make, so it’s always a good idea to discuss opportunities with an experienced financial or business adviser.

BLG Business Advisers have assisted many clients in this situation. Whether you are interested in buying a business or require other advice, get in touch with us today online or by calling (02) 4229 2211.

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Estate Planning – Why is it important?

Posted on November 14, 2016
by Angela Bernardi

It is important for all of us to ensure that the assets we have accumulated over our lifetime are left for the benefit of those people or institutions we wish to support, and left in the way that is most beneficial to the recipient.

Your Will plays a large part in your estate distribution, so you need to make sure it is up to date, valid and correctly reflects your wishes. Having a well drafted and thought through Will can save your beneficiaries a lot of trouble and heartache.

Points to consider when drawing up your Will

  1. What do you own? And will these assets pass through your estate?
  2. Who will be the executor (personal representative) of your will?
  3. Who will be the guardian of your children?
  4. Who do you want to leave your estate too?
  5. Do you want your estate to go directly to your beneficiaries or will you use a Testamentary Trust?

What is a Testamentary Trust?

This is a trust created in a person’s Will, which is activated upon the death of that person. Instead of assets passing directly from one person to another, the assets are passed to the Testamentary Trust and then administered by the designated trustee – usually a family member, a trustee company, accountant or a solicitor. A Testamentary Trust has a number of benefits including:

  • Asset protection
  • Keeping assets within your family line
  • Managing tax liabilities through income flexibility – The trustee of the Testamentary Trust can choose how to distribute income from year to year. This enables the trustee to take advantage of lower marginal rates of tax of one or more potential beneficiaries.
  • Marginal rate of tax for minors – Minors qualify for tax concessions on income they receive from a testamentary trust.

Some items to consider outside your Will

  • Superannuation – Is a Binding Death Benefit Nomination to the trustee of your superfund appropriate? If so, is this in favour of a particular beneficiary or your estate?
  • Life insurance – Have you designated a beneficiary in your policy? If so these funds will not pass through probate.
  • Owning property as Joint Tenants – If you own a property as a Joint Tenant, upon your death the surviving Joint Tenant(s) acquires the whole property automatically and as such the property does not pass through the estate.
  • Small business or partnership – This may be subject to a buy/sell arrangement with the other partners. In these circumstances your share of the business may automatically pass to the remaining partners (usually in exchange for the proceeds).
  • Power of Attorney/Enduring Guardianship – This is a legal document that appoints another person to make legal and/or medical decisions on your behalf. This power is particularly useful should something happen where you are temporarily unable to sign documents.

These are only a sample of considerations surrounding estate planning. Estate planning can be complex and it’s a good idea to seek the professional advice and assistance of both a financial adviser who understands your affairs and a solicitor experienced in such matters.

Contact BLG Business Advisers online today or call (02) 4229 2211 to discuss your estate planning needs.

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