Australians have amassed almost $3.5 trillion in Superannuation savings. This represents one of the largest retirement pools in the OECD. Quite an incredible achievement. However, those retirement savings are by no means distributed equally.
Small business owners are one group that has disturbingly low rates of Super savings. About 23% of small business owners have no Super savings at all (compared to 7.5% of salary earners) and of those who do, their average balances are up to 44% lower than salaried employees (ASFA data). This is quite alarming when you consider that there are over 2 million small businesses in Australia. In regional areas, small businesses account for an even higher proportion of the workforce.
So how do small business owners prepare for retirement?
As a small business owner myself, I understand the daily challenges of just ensuring that the rent and wages are paid. Regularly finding spare cash flow for Super contributions just isn’t possible for many small business owners. Fortunately, despite a lot of press suggesting the opposite, most of the recent changes to the superannuation rules have actually increased the flexibility around how much and when you can make contributions to super. Making it easier for business owners with uneven cashflows to save for retirement. These include being able to “catch-up” super contributions and making contributions much later in life, including if you downsize your home (https://www.korffwealth.com.au/downsizing-to-boost-your-retirement/).
Another effective strategy for many small business owners is to hold commercial real estate used in their business within a Self-Managed Super Fund. This can include transferring part or all of the property into a SMSF via an ‘in specie’ transfer. However, there are technical rules to navigate, as well as costs and risks to consider. So, please seek professional advice before considering this strategy.
Boosting super on the sale of your business:
Nevertheless, for many, it is the equity value of the business itself that will continue to represent the bulk of a business owner’s retirement nest egg.
Fortunately, the ATO has recognised this reality, and provided opportunities for retiring small business owners to contribute to super via a series of Capital Gains Tax exemptions on the sale of their ‘active business assets’. However, these provisions have complex eligibility rules attached to them and caps on the amounts exempted. Therefore, early planning and professional advice is required to make the most of this opportunity.
In summary, if you use the Small Business CGT concessions for retirement you may be able to contribute up to a lifetime cap of $1.705m to your super. This amount is separate to your annual concessional and non-concessional contribution limits and any downsizer contributions. Although, like everyone else, you will be subject to the ‘transfer balance cap’ of $1.9m when you convert your super to pension mode. However, under current rules, once in pension mode, this balance will be invested tax free for the rest of your life!
Unfortunately, the complexity of these rules mean that time poor business owners often put their retirement planning in the too hard basket and just hope that the equity in their business will be enough for them to retire on when they sell it. This is a high risk strategy which, based on the statistics above, is leaving a lot of small business owners facing a bleak retirement.
The sooner you start planning, the better the outcome. Contact our advisers on 6686 6678 if you or someone you know would like to explore how I can help.