As a fellow business owner, I understand the undulated effect of cash flow in business. I also recognise that if I work hard and things go well, it’s possible that in certain years I may gain a better return through my business than perhaps the share market, the property market or superannuation. But what about the long-term?
Building wealth is a combination of strategy and investments, but people often fall short because they forget about strategy. A luxury, as a business owner, is having access to strategies that everyday employees don’t – particularly when it involves ‘selling’. Your accountant and financial advisor should work together to guide you with their knowledge of capital gains tax concession strategies. Then there’s the little tricks to boost your wealth effortlessly like expense write-offs, employing a partner who could benefit from further strategies such as co-contribution, super splitting and spouse contribution. As you move the puzzle pieces, you can better frame the overall position.
Playing catch-up
My favourite strategy is ‘catch-up’ legislation, which allows you to go back and capture up to five years of contributions. This is great for offsetting capital gains from the sale of an investment property or other investments, and it works perfectly for business owners who have had a bumper year and wish to invest those funds into a neglected superannuation account. Check with your financial adviser first as the devil is in the detail.
Superannuation is a tax structure just like a trust or a company. Superannuation doesn’t go up or down; the investments inside do and you get to choose those. Providing you aren’t doing anything deceitful, your superannuation is protected against bankruptcy and creditors. Therefore, if your business happens to go south, you have a back-up plan (an alternative source of wealth) that will help pay out a mortgage, carry out plans to renovate or simply retire with a comfortable nest egg. So don’t think silos; think overall picture.
Businesses evolve at speed these days. COVID-19 has shown us how businesses can go bust overnight. Then there’s the risk of overseas resources jamming your supply chain or your business, being taken over by technology or being outsourced. I know of many businesses that have gone bust due to ill health, business partner issues and divorce. Some were forced to sell for less than expected, and some ‘bought themselves a job’.
Income is taxable provided a business has an ongoing income stream through salary or profit distributions. Superannuation can eventually turn into a pension structure that allows you to receive a tax-free income stream when you reach 60 years old. So, even if you don’t sell your business and you keep it as an income stream, you can still have a lower tax bill and stretch your money further; that is, you can draw less on your investments or out of your business because tax is reduced.
Risks of neglect
We all know the phrase, don’t put all your eggs in the one basket. When you place all your focus, energy and finances into your business and not as much (as you should) into your superannuation, your business is at risk of becoming obsolete. The risk is less if the time frame to your retirement is short. The further you are out from retirement, however, the bigger the risk – think nurseries in drought, floods and bushfires, blockbuster franchises.
At the moment, the share market is booming, property prices are at an all-time high and many businesses are going well. But if we think as far back as the early 2000s, we’ll recall the highs and lows of a property boom and the global financial crisis. And now with COVID-19, the world has changed forever.
Having monies in superannuation enables you to diversify your funds into other investments. It allows you to grow your wealth in a tax-effective structure, locked away to work hard while being somewhat protected from creditors and bankruptcy. Superannuation really is super.
Helen Baker is a licensed Australian financial adviser and author of On Your Own Two Feet: Steady Steps to Women’s Financial Independence and On Your Own Two Feet Divorce: Your Survive and Thrive Financial Guide.
Note this is general advice only and you should seek advice specific to your circumstances.
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