End of year strategies and opportunities for business owners Who is presenting, where are they from? Date? 2012

2 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

3 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

4 4 45% - Top marginal rate + 1.5% Medicare Levy Discount of 50% on capital gains 30% Company tax rate No CGT discount 15% on earnings and deductible contributions 10% on capital gains - CGT discount of 33-1/3 % Tax free earnings within super when drawing a pension Tax free pension payments once you turn age 60 15% tax offset on pension payments if over 55 and under 60 Individual 45% Company 30% Super 15% Pension 0% Choose your tax rate!

5 Super is a tax structure not an asset class  No greater investment risk when investing through super –you can invest in same assets –Cash is an option  Bankruptcy protection  Low tax environment Super Cash Shares Insurance Fixed interest Property

6 Who can contribute to super?  Anyone under 65  Between 65 and 74 (‘work test’ required)  Age 75 and older (only Mandated employer Super Guarantee contributions)

7 Tax deductions for small business owners  A Company contributing on behalf of employees –9% SG contributions –Salary sacrifice arrangements  Self-employed  Partnership  Sole traders  Tax deductible contributions are referred to as “concessional contributions” and are 15%

8 Deductible contribution cap2011/122012/13 Standard cap$25,000 *Transitional (Over 50’s until 30 June 2012)$50,000$25,000 Maximise your deductible contributions  More important to start salary sacrificing earlier than ever before! –9% compulsory super counts towards cap  *Transitional arrangements for over 50’s  Proposed legislation to allow continuation of $50,000 cap for over 50’s where super balance less than $500,000

9 Personal contributions can help plug the gap Case Study Brad (age 55) Employed on a package of $180,000 plus SG Was sacrificing up to $50,000 cap. From 1 July 12 may only have $25,000 cap Note: Assumes a return of 7% after fees and tax 0 50, , , , , , , , , , Year Salary Sacrifice $34,225 (50K Cap) Salary Sacrifice $9,225 (25K Cap) Salary Sacrifice $9,225 plus $15,375 after-tax

10 Who can make a non-concessional contribution?  Individuals within the partnerships can – treated as personal after tax contribution (nil tax applies on contribution)  Sole traders can – treated as personal after tax contribution (nil tax applies on contribution)  Employees can – treated as personal after tax contribution (nil tax applies on contribution)  A Company cannot – always taxed as concessional (15% tax)

11 Maximise your personal contributions  No deduction is claimed  Personal contributions capped at $150,000 pa  If under 65 you can bring forward 2 years of cap and contribute up to $450,000 $150, June June June June 2014 $450,000 $0 $450,000 $0 30 June 2015 $150,000

12 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

13 Lump sum tax on super Tax free component Taxable component 55 to 59Tax-free First $165,000: Tax-free* Balance: 15% tax, plus Medicare levy 60 and overTax-free Note: Applies only to withdrawals from a taxed fund and only to the taxable component of the payment * For Financial Year 2011/12

14 Pensions – income/payments Investment return in pension account Pension income that you receive 55 to 59Tax-free Assessable – 15% rebate 60 and overTax-free Note: Applies only to withdrawals from a taxed fund and only to the taxable component of the payment

15 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

16 SMSF market*  450,498 funds registered with the Government  33,600 new funds established last financial year  126,000 new funds in last 4 years  Total super assets are $1,280 billion  SMSF assets $400 billion (31%)  853,700 members  $835,000 average fund size (member account size is $440,000)  69% of funds have no more than 2 members * ATO stats as at June 2011

17 Age profile of SMSF members As at March 2011 More than half of SMSF fund members are age 55+ (nearing and post retirement age). These members would have higher average balances and as they move into pension draw down the growth in assets will slow years years years years < 25 years > 64 years

18 Customer drivers for SMSF AdvantagesDisadvantages  Control of investment decisions  Direct Investments options  Investment returns  Lower Costs  Ability to Gear  Tax Management  Flexible retirement pension options  Flexible estate planning / protection options  Full trustee responsibilities  Lack of Knowledge  Time consuming to run  Tough penalties for breaching rules  May be uneconomic for low balances  Extra legal responsibilities  Potentially higher costs  Maximum of four members

19 The investment strategy  Trustees are required to prepare and implement an investment strategy, and regularly review it  As trustees you must consider: –Risk involved, likely returns and fund objectives –Composition of a fund’s investments, diversification –Liquidity requirements of the fund –Ability of the fund to discharge present and future liabilities –Penalties : $220,000 and possible 12 months gaol for trustees

20 The fund’s investment flexibility  Shares  Stocks  Bonds  Options  Futures  Notes  Mortgages  Rental Property  Managed Funds  Property Trusts  Private Trusts  Fixed Trusts  Art works  Special Objects  Life Office Policies  Taxi Plates  Abalone Licenses  Stamps etc

21 Investments you cannot make within a SMSF You cannot:  Lend to members/relatives  Acquire assets from a related party however: –Few exceptions include; listed shares, widely held unit trusts, business property  Exceed 5% in-house asset rule –An investment in a related party –A loan to a related party –A lease to a related party

22 How can a SMSF acquire an asset? 1.Outright purchase from a member if SMSF has sufficient cash or SMSF could borrow – not treated as a contribution 2.Transfer asset in-specie to SMSF trustee – will be treated as a contribution 3.Purchase from a third party Issues to consider:  Asset locked into super until retirement  CGT implications on transfer of ownership  Stamp duty  Contribution caps for in-specie contribution method  Financial planning strategic advice will be critical

23 Case study – shares in-specie transfers  David, aged 59 (self-employed) wishes to make contributions to his SMSF.  He does not have cash but...  Owns $200,000 worth of listed shares Solution/strategy:  Transfer shares In-specie to the SMSF trustee.  Realises personal capital gain of $20,000 (after claiming the 50% discount).  Meets eligibility to deduct personal contributions to super  Claims a tax deduction for $20,000 of the amount contributed.  Remaining $180,000 is a non-concessional (limited to $150,000 pa or $450,000 'bring forward' 2 years contributions) Important notes You need to take into account the appropriate value for the purposes of the contribution caps that apply under super Legislation at the time Note that a self managed superannuation fund is only able to accept an in specie contribution if it is allowed under the trust deed of the fund.

24 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

25 Opportunities for small business owners The benefits to business owners:  Source of income and growth for the SMSF  Business stability – SMSF trustee is the landlord  Rental income taxed at maximum of 15%  If property sold for either business succession or retirement CGT maximum of 10% or 0% if sold in pension phase  SMSF may provide asset protection  Assets in super don’t count towards Net Tangible Asset test for Small Business CGT Concessions  Able to transfer business premises in-specie into the fund Business owners may hold business property tax effectively in SMSF

26 How an SMSF can acquire property Purchase at arm’s length (or deemed market value)  Via contribution (business real property only)  Combination of contribution and purchase  Tenants-in common option – where fund has insufficient assets to purchase outright residential or commercial  Related unit trust structure which is ungeared  Unrelated trust or company (geared or ungeared)  Borrowing option - where fund has insufficient assets to purchase outright residential or commercial

27 SMSF borrowing rules  Loan must be used to purchase a single acquirable asset  The asset must be held in trust for the SMSF- SMSF has beneficial interest in that asset  SMSF has the right to acquire the asset following the SMSF making one or more payments  Lender’s recourse is limited to rights relating to the asset in the event of default or exercise of rights by the trustee  Rules are complex and extreme care should be taken in setting up properly

28 Case study  John and Jane are 55, live in their $1.5 million dollar home.  They have $750,000 in cash and shares.  The couple have a motel business.  Their motel ($2.5 million) is security for business loans ($500k).  The couple wish to purchase another motel at $1.2 million and do  Repairs and improvements - spend $1 million.  Strategy: Purchase motel via SMSF and lease the property to their business for $200,000 pa What are their options?

29 Related trust option Smith’s Unit Trust New motel $2,250,000 John and Jane contributes $750k to Smith’s SMSF SMSF and couple acquire units Smith’s Motel $2.5M Business loan( $500,000) Equity $2,000,000 Smith’s Motel Business Lease tax deductible Distributions to unit holders Access transition to retirement pension at 55+

30 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

31 Capital gains realised on moving business assets to super may be reduced  Small business capital gains tax concessions –15 year exemption - $0 assessable –50% active asset reduction –Small business roll over –Retirement exemption Must meet eligibility criteria: –Small business entity or $6M net asset value –Active asset –Additional requirements for company or trust –Requirement for each concession

32 Increase super via CGT exempt contribution 50% general exemption 50% active asset reduction (optional) Assessable for CGT Cost base Non- concessional contribution Up to $450k for under 65s Super fund CGT Exempt Component Up to $500k

33 Agenda 1.Overview of super rules and legislative changes 2. Your super fund retirement options 3.The self-managed super fund option 4.Opportunities for small business 5.The small business retirement exemption 6.Other matters

34 Review asset & family protection  Providing insurance cover (Super or Non-super?)  Insurance in super is owned by the fund and covers the life of the members  The fund can insure members for: –Life Insurance as a result of death –Total & permanent disability –Income protection  Provides cover where your cash flow is short  Life and total permanent disability premiums are a tax deduction for the fund  Provides cash liquidity for payment of disability and death benefits to members and beneficiaries  Provides protection for any borrowings within the fund

35 Review SMSF & estate planning  In the event of death of a member the SMSF can pay death benefits in the form of: –A lump sum to beneficiaries –A pension to a SIS spouse dependant or child dependant beneficiaries –A reversionary pension to spouse for existing pensions  Super death benefits do not form part of your estate unless the estate is nominated as beneficiary under binding or non-binding death benefit nomination form  If structured correctly the SMSF can be an efficient way to pass assets to beneficiaries bypassing the estate

36 Katz v Grossman [2005] NSWSC 934  SMSF with $1m of assets  Mr and Mrs Katz had 2 children – Linda & Daniel (adults)  Mrs Katz died a few years earlier and Mr Katz appointed Linda as co-trustee of SMSF  Mr Katz made a binding nomination that death benefit ($1 m) be paid to children equally  Mr Katz died  Linda appoints her spouse as co-trustee Guess what happened? Daniel challenged the appointment of her husband but the NSW supreme court determined that his appointment was valid under the trust deed and trust law. Ultimately Daniel received no benefit from the super fund and the court ordered that the costs of the court action be paid by the fund.

37 Review business overheads, key person insurances and succession planning  Ensuring business stability in the event of death or disability –Replace revenue –Pay off loans –Fund business overheads expenses –Replace and train key person  Plan business succession and exit –Legal transfer agreement (buy/sell agreement) –Provides certainty when an owner leaves the business –Provide funding for remaining owner to purchase the departing owner’s share –(Commonly entered into where two or more persons control a business together)

38 Transitioning to retirement for 55+  Boost your super without affecting your lifestyle or  Reduce work hours  Make tax deductible contributions  Start a non-commutable income stream You Super Pre tax contributions Tax free income stream at 60+

39 Transition to retirement example Gross salary Less tax $150,000 $ 46,450 Net salary$ 103,550 Assessable income$150,000 Pre-tax contribution$ 50,000 Net salary$100,000 Pension income (age 55) $40,065 Tax & ML $ 36,516^ Super $ 7,500 Net income$103,550 Benefit in Year 1$ 2,435 CurrentProposed ^ Includes Medicare and Flood levy financial year

40 Where to from here?  Choose what tax rate your want to pay  Explore super and business opportunities  Review estate planning arrangements  Review business insurances and business succession

41 BT Portfolio Services Ltd ABN (BTPS) operates Wrap including Wrap Essentials (Wrap) and administers SuperWrap including SuperWrap Essentials (SuperWrap). BT Funds Management Limited ABN is the trustee and issuer of SuperWrap. Your Dealer Group may also operate a Wrap offering, otherwise its role in relation to Wrap and SuperWrap (Wrap Products) is limited to distributor only. This document has been prepared and is provided solely for the general guidance of advisers and has been prepared without taking into account any individuals objectives, financial situation or needs. The information in this publication provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and our interpretation. This disclaimer is subject to any contrary requirement of the law. Information current as at 1 January © BT Funds Management Limited 2012.