UNLOCKING THE VALUE IN YOUR BUSINESS Presented by Rowena Thiele FCPA Registered Tax Agent Qualified Financial Planner

ABOUT US Financial Affairs was acquired by AB Phillips in March 2016 and is 100% owned by AB Phillips. From May 1 2017 all of our Financial Planning and Life Insurance business will be managed by Financial Affairs. The Financial Affairs team are located in our Moorabbin office and work closely with other areas of our Financial Services team to provide clients with holistic financial solutions. Financial Affairs AFSL 222154.

DISCLAIMER This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from a financial adviser. You should obtain and consider a copy of the Product Disclosure Statement available from your financial adviser, before you acquire a financial product. Examples are illustrative only and are subject to the assumptions and qualifications disclosed.

SMALL BUSINESS CONCESSIONS What are the Small Business CGT concessions? Tax concessions available on the sale of your business to reduce your final tax payable to nil in some cases. It may be that you do not have to pay any tax at all! Gives you options for your retirement. You have the ability to contribute to superannuation some/all of the proceeds of the sale of your business (subject to rules).

WHAT IS A “SMALL” BUSINESS ENTITY “SBE” If you have a business, how do you know if it’s small? Aggregated turnover of less than $2m (including connected entities) Turnover is measured as: Aggregated turnover in previous year, or Estimated turnover in current year, or Current annual turnover Maximum net value of CGT assets is $6m (test for eligibility) Includes all CGT assets of individual and connected entities unless specifically excluded Sum of market value of CGT assets – liabilities related to those assets

SMALL BUSINESS CONCESSIONS To access CGT concessions, you need to: Meet the basic conditions for relief (Satisfy at least one) Be a small business entity; or Meet the maximum net assets test ($6 million) Dispose of an active asset And meet one of the following: 15 year exemption – ignore whole gain and no need to apply any further concessions Active asset discount – additional 50% discount Retirement exemption – disregard up to $500k of gain

WHAT IS AN ACTIVE ASSET? What is an active asset? A CGT Asset that: Is used or held ready for use in the course of carrying on a business that is carried on by the taxpayer, their affiliate or an entity connected to the taxpayer, or Is an intangible asset (goodwill), a share in a company or an interest in a trust Must have been held as an active asset for at least: 7 1/2 years, if owned for more than 15 years, or Half of the period of ownership if owned < 15 years. Business real property is an active asset if main use of property is not generating rent.

WHAT ARE THE CONCESSIONS? What is the active asset discount? If basic conditions are met, a further 50% discount is available No special conditions Applied after general 50% discount Effective 75% discount on gross gain Optional to apply active asset discount

WHAT ARE THE CONCESSIONS? Cont. What is the active asset discount? Cont. If you do not qualify for the small business 15-year exemption (Will discuss this further in presentation), the small business 50% active asset reduction may apply to reduce the capital gain. You must have satisfied the basic conditions to apply this exemption.

WHAT ARE THE CONCESSIONS? Cont. What is the active asset discount? Worked example Lana operates a small manufacturing business and disposes of a CGT asset she has owned for three years and used as an active asset of the business. She makes a capital gain of $14,000 from the CGT event and qualifies for the CGT discount and for the small business 50% active asset reduction. Apply CGT discount (general discount after holding asset for more than 12 months): $14,000 – (50% x $14,000) = $7,000

WHAT ARE THE CONCESSIONS? Cont. What is the active asset discount? Worked example cont. Apply the small business 50% active asset reduction: $7,000 – (50% x $7,000) = $3,500 Lana’s net capital gain for the year is $3,500. Lana may then go on to choose the retirement exemption (Will discuss this further in the presentation), some or all of the remaining capital gain would be disregarded.

WHAT ARE THE CONCESSIONS? Cont. 15 year exemption Disregard entire gain if: Basic conditions are met. You continuously owned the asset for 15 years If the asset is an interest in company/trust – the company/trust had a significant individual for at least 15 years At the time of the CGT event, either You are over 55 and the same happens in connection with your retirement You are permanently incapacitated at the time of the event

WHAT ARE THE CONCESSIONS Cont. 15 year exemption cont. If the owner is a company/trust, a significant individual meets either criteria above In connection with retirement Substantial winding down of working activities Can be part of a longer term plan (e.g. sell the business on the basis of working two year etc.) If the owner was a company/trust payment can be made to stakeholders within two years If 15 year exemption available – must be used Since whole of gain disregarded, other exemptions do not apply

WHAT ARE THE CONCESSIONS Cont. 15 year exemption cont. The entire capital gain can be disregarded. You also do not have to apply any capital losses and these can be used for other gains. The 15 year exemption can be contributed to super without counting towards your non concessional caps. Up to $1.415m of the proceeds from the sale can be contributed to super as your cap.

WHAT ARE THE CONCESSIONS Cont. 15 year exemption cont. CAPITAL GAIN DISREGARDED Ruth and Geoff are partners in a partnership that conducts a farming business on land they purchased in 1990 and have owned continuously since that time. The net value of their CGT assets for the purposes of the maximum net asset value test is less than $6 million. Ruth and Geoff are both over 60 years of age and wish to retire. As they have no children, they decide to sell the major asset of the farming business, the land. They sell the land in December 2010 for a total capital gain of $100,000. Both Ruth and Geoff qualify for the small business 15-year retirement exemption in relation to the capital gain.

WHAT ARE THE CONCESSIONS Cont. Small Business Retirement exemption - $500,000 (lifetime limit) You may choose to disregard all or part of a capital gain under the small business retirement exemption if you satisfy certain conditions. You do not need to terminate any activity or cease business. Not connected with your retirement! This concession allows you to provide for your retirement. You may choose the retirement exemption if you are not eligible for the 15-year exemption.

WHAT ARE THE CONCESSIONS Cont. Retirement exemption - $500,000 (lifetime limit) Cont. Can disregard up to $500,000 of net gain if Basic criteria met If under age 55 at the time, amount exempted if contributed to super If over 55 the payment may be received directly without a requirement to contribute this to super. This is optional relief, applied after the following: Mandatory retirement exemption Mandatory standard 50% discount (CGT) Optional 50% active asset discount

WHAT NEXT? CONTRIBUTE TO SUPER Small business contributions summary The 15 year exemption and retirement exemption can be contributed to super without counting towards the Non Concessional Contribution cap (NCC) 15 year exemption – up to $1.415 million of the proceeds from the sale (life time cap) Retirement exemption – up to $500,000 of the gain from the sale (life time cap) Form must be lodged at or before the contribution is made.

CONTRIBUTIONS TO SUPER Cont. Small business contributions summary Contributions must be made within certain timeframes Generally within 30 days of receiving funds, or the day you are required to lodge your tax return in the CGT event year. If contribution being made by a significant individual (more complex) Limited to stakeholder percentage of original entity Contribution needs to be made within 30 days of receiving payment. For retirement exemption, payment from company to individual generally must be made within 2 years of CGT event

SUPER CHANGES OVERVIEW Objective of Government and enshrined in law To provide income in retirement to substitute or supplement the age pension. All future changes will be compared to the objective. All decisions will be linked to the Social Security system.

SUPER FUNDS - REDEFINED

GETTING MONEY IN – CONTRIBUTION RULES Pre tax contributions Examples are compulsory employer contributions, salary sacrifice contributions and personal deductible contributions. From 1 July 2017, the maximum amount you can put in is $25,000 each year. Make sure your salary sacrifice arrangements are modified.

GETTING MONEY IN – CONTRIBUTION RULES Tax deductible contributions From 1 July 2017 there is an opportunity to improve salary sacrifice for employees whose employers deduct weekly/fortnightly but only pay quarterly Everyone will be able to claim an income tax deduction for personal superannuation contributions Regardless of your employment arrangements. Abolishes the 10% self-employment test. Individuals aged 65 to 75 must meet the work test to be able to make personal contributions.

GETTING MONEY IN – CONTRIBUTION RULES After tax contributions Currently can put in up to $180,000 (or up to $540,000 if under 65) From 1 July 2017 the limit reduces to an annual cap of $100,000 or three year bring forward of $300,000 (if under 65) From 1 July 2017 ability to put into super constrained by your total super balance as at prior 30 June. Eligibility thresholds: Total super balance >$1.6m then no further non concessional contributions

GETTING MONEY IN – CONTRIBUTION RULES Exemptions for small business Existing exemptions for contribution eligibility still apply to: Small business CGT contributions (SEE EARLIER SLIDES) Personal injury and structured settlement payments

TRANSFERRING WEALTH Self Managed Super Funds (SMSF) and Family Trust Structures Advantages of an SMSF Greater control of managing your super and your investment options. Tailor an investment strategy that suits your circumstances. Wide range of investment options including shares and direct property. Tailor an estate plan with your family with no more than 4 members in the fund. Tax rate of 15% on earnings in the accumulation phase.

TRANSFERRING WEALTH Self Managed Super Funds (SMSF) and Family Trust Structures Advantages of a family trust Super money is locked away until retirement whereas family trusts are not subject to preservation rules when taking money out. Distributions from the trust don’t have to be made equally and can benefit members with lower income tax brackets. Tax advantaged for wealth creation. Can hold assets such as the holiday home as well as a business. Ideal for intergenerational wealth transfer. Both structures can be used in combination when no further super money is able to be contributed to the SMSF as a result of the new caps.

TRANSFERRING WEALTH Self Managed Super Funds (SMSF) and Family Trust Strutures Advantages of a family trust and SMSF in combination: Wealth can be moved from the family trust as retirement approaches with regular contributions of excess cash to the SMSF. Any extra wealth that cannot be contributed to the SMSF (with new rules effective 1 July 2017) can be deposited into the family trust. In retirement, pension payments from the SMSF can be banked into the family trust and added to the investment portfolio. Upon death, the family trust can continue on as control is passed to the next generation. Upon death, death benefits are generally paid out of the SMSF.