Generally speaking business owners have different financial planning needs from wage and salary earners caused by inherent financial complexity that simply comes from owning a business.
Over the past few years, there have been a raft of issues that have financially impacted business owners, most notably COVID 19 – who could forget that!
However since then there have been other disruptions including supply chain and staffing issues and not to mention the high cost of borrowing of which which has had a knock-on affect for many business owners’ personal financial circumstances.
While the pandemic era of some five years ago begins to fade into history, the fact remains it was a wake up call for many business owners who had not given adequate attention to the confluence of their business interests and personal financial circumstances.
Among the many issues that became apparent was (and continues to be) a concerning trend for self-employed people to have low superannuation balances or no superannuation at all [1].
An alarming trend for business owners to prop-up up their business cash flow with their personal savings with some relying on unpaid tax and employee superannuation [2] has also emerged.
Conversely for business owners who have enjoyed continuing financial success, there’s nothing like a review and fresh eyes over your financial circumstances to expose opportunities for new and possibly better methods of extracting wealth from your business with potential to bolster your personal prosperity.
Discipline
Starting right now, may I suggest taking a disciplined approach to your personal finances. Just as you do with your business financials, this should include budgeting, cashflow planning and implementing personal risk strategies.
Regularly extract wealth from your business. This would typically include paying yourself a regular salary and superannuation. While this may create tax obligations there are also tax efficiencies that could deliver considerable financial benefits.
Planning
Appropriate wealth strategies should include accumulating assets and creating income streams for when you’ve moved beyond life as a business owner – whenever that might be.
Here at Moiler Wealth we have a 7-step Early Retirement Framework and a strong belief that if you can afford to work less, then you probably should. In fact it’s the first of our ten tenets.
Generally speaking, business owners don’t want to work forever and that requires a sound exit strategy.
I call it their “Great Escape”.
Many business owners have insufficient plans for incorporating future owners in their business or evolving their business to a stage where it doesn’t rely heavily on the principal. This can force them to shut their doors, and prevent them from exacting significant value for their life’s pursuits.
Planning is the key, and considering whether or not their business, if sold, qualifies for the Small business CGT Concessions is important as this could potentially provide tax free sale proceeds for the exiting business owners personal benefit. You can read more about Small Business GCT Concessions here.
Of course, Superannuation is an integral part of the wealth accumulation process and has the dual benefit of offering what can be worthwhile tax-efficiencies.
As mentioned in the previous point, there are numerous opportunities available to business owners for extracting wealth from their business to grow their personal wealth. The most obvious is making regular contributions up to your annual cap which is currently $27,500pa.
Further, if your past super contributions have been low or not at all, it is likely the super ‘catch up’ rule will allow you to contribute surplus cash from your business in the amount of unused concessional contributions. This is particularly worthwhile as it can allow you to top up your current year’s contribution cap with the past five years worth of unused contributions.
It may also be possible to make non-concessional (after tax) contributions of up to $110,000 per year and if available cash permits, you may be able to contribute as much as $330,000 in a single one year in accordance with the ATO’s three year bring forward rule (3 years x $110,000 pa). Both opportunities could give your superannuation as part of your personal wealth, a decent tax effective boost!
It must be noted, there are strict eligibility requirements and superannuation and tax rules that must be observed.
Protection
As a business owner protecting your personal financial circumstances from business related threats should be a priority.
This generally involves implementing appropriate asset protection strategies and business structures that provide a firewall between you and your private or family assets (such as your home) and any legal claims that may be made against your business.
Structures such as discretionary trusts implemented in collaboration with your lawyer and accountant can provide added benefits of tax efficiencies and flexibility for distributing wealth as might be the case in estate planning circumstances.
Which raises the matter of Wills and estate planning.
Generally speaking, business owners need both. This is because important matters such as superannuation and some assets can fall outside the authority of a Will. A properly prepared estate plan provides structures such as trusts for discretionary management of the estate for tax purposes and distribution of wealth to beneficiaries.
Naturally, personal risk insurance is a consideration to protect your lifestyle.
There’s a saying, ‘insure what you can’t afford to lose’ and for many people that boils down to the livelihood that would cease for their nearest and dearest if they were unable to work or were no longer around to provide it.
Personal risk insurance is complicated. Qualified advice and solid experience in insurance products and processes in context of specific circumstances is essential.
As a business owner myself, I understand there can be many personal wealth benefits, but there are also inherent risks. Keeping your personal financial life safe while making the most of tax efficiencies and personal wealth generation usually doesn’t happen by chance. As I mentioned at the outset, business owners have different and usually more complex financial planning requirements than wage and salary earners.
It’s for this reason, the financial planning services I offer include ‘active liaison’ with and between, other professionals and advisers essential to delivering truly holistic financial management that considers all aspects of your business and personal financial life. If you’d like to know more, please contact me.
Moiler Wealth helps high net wealth individuals and family groups, professionals, business owners and pre-retirees to live life, your way!
Learn more about Adam here.
This document contains general advice. It does not take account of your objectives, financial situation or needs. You should consider talking to a financial adviser before making a financial decision.
[1] https://www.superannuation.asn.au/media-release/media-release-26-march-2018/
[2] https://www.afr.com/politics/federal/ato-warns-small-business-to-stop-using-tax-to-prop-up-cash-flow-20231127-p5en3e
