Business owners commonly fall into the trap of not paying themselves a regular salary and there’s a somewhat worrying trend that they are foregoing superannuation¹ as well. Add to this concerns about business owners using their savings to prop up business finances, it’s important for business owners to implement a strategic financial plan. Your personal prosperity depends on it.
In this article we remind business owners of the importance of applying the same level of care and attention to their personal financial life as they do their business, so both business and business owner can prosper and reap the rewards of their success.
Business owners’ financial needs are usually quite different from those of regular wage and salary earners. This is usually because the nature of being in business adds layers of financial, tax and often legal complexity.
The life of a business owner can be challenging. While you can usually rely on yourself to work hard and achieve goals, there is a litany of variables – pandemics, natural disasters, wars – which can impact your business success.
In short, control is often not yours to have.
But there is plenty you can control and it starts by understanding the convergence of your business interests with your personal financial matters and conversely, where they need to diverge.
Take for example disruptions of recent times that include supply chain and staffing issues and the high cost of borrowing. Each of these have created considerable knock-on affects for business owners’ personal financial circumstances.
Many business owners are themselves making up for labour shortages, while some are propping up operational costs with their personal savings as depleted cashflow is a common result of fewer workers and delayed filling of customer orders.
So too is robbing Peter to pay Paul. The ATO recently revealed a significant number of business owners have resorted to using their unpaid taxes and superannuation liabilities² to meet operational expenses.
Successful businesses (and business owners) have a well considered financial plan that addresses budgeting, cashflow planning, asset protection and personal risk strategies among other matters.
It should include paying yourself a regular salary and superannuation. Extracting surplus cash from your business when it’s appropriate is a business owners often hard earned reward for the effort.
Creating personal wealth through your business profit is a fundamental purpose. While it will create tax obligations there are also tax efficiencies that can deliver considerable financial benefits for both the business and it’s owners.
Appropriate wealth strategies should also include accumulating assets and creating income streams now that will provide financial freedom in retirement.
An exit strategy that doesn’t rely solely on the sale of your business should also be considered.
Selling can be a long and difficult process and even if the business is well established it may not sell and those that do, can fail to realise the value necessary for the retirement of your dreams.
It may be better to consider proceeds from a sold business as a wealth bonus rather than a retirement necessity.
While it is compulsory to pay employees’ superannuation in Australia, business owners have no obligation to pay it to themselves, yet paying yourself superannuation is a win for both the business and business owner.
Regular super contributions up to $27,500 each year will grow your personal wealth while providing a valuable tax deduction for your business.
For business owners whose past concessional (pre-tax) super contributions have been low or non existent (and whose super balance as at the previous 30 June is less than $500,000), the super ‘catch up’ contribution rule is a boon. It allows surplus cash from the business, to the value of the unused contribution cap from the prior rolling five year period, to be contributed in the financial year without penalty for exceeding the usual annual cap amount.
It’s also worth noting, this 30 June marks the last opportunity for catching up any unused contribution cap amount from the 2019 financial year. Back then the cap was $25,000 so if you contributed none or some (say you contributed $20,000) in that financial year, you can catch up the remaining $5,000 of unused cap amount. The catch up is additional to this year’s contribution, even if you contribute this year’s full annual cap amount of $27,500 there is no penalty.
It may also be possible to use surplus cash and make non-concessional (after tax) contributions up to $110,000 per year.
In the event of a financial windfall, such as the sale of your business it may be possible to make a non-concessional contribution up to $330,000. Known as the ATO’s three year bring forward rule it is literally, three times the annual $110,000 non-concessional annual contribution made in a single year.
There are, as you would expect, strict eligibility requirements. Tax compliance and superannuation rules that must be followed.
As a business owner, protecting your financial life is multi-faceted and it too aims to create separation between your business interests and your own including those of your family.
Financial protection includes personal risk insurances, asset protection and a raft of business insurances such as professional indemnity and business interruption insurance and insurance-backed buy/sell arrangements. The latter is important for providing means to pay out a partner if a trigger event causes you or a business partner to exit the business unexpectedly.
A current Will and a well considered estate plan should also form part of your financial protection strategy.
As mentioned earlier, business ownership brings inherent complications. Superannuation and a range of other assets fall outside the control of a Will, and matters such as mitigating legal challenges, flexibility for distributing business and personal assets to beneficiaries and managing tax obligations (yours, and those who inherit your wealth) are among a range of other matters and obligations that need to be managed upon your passing.
Personal risk strategies can be complicated. They require qualified advice and sufficient depth of experience to accurately reflect your circumstances and requirements. You can read more about our approach here.
As business owners ourselves, we understand there can be many personal wealth benefits, but there are also risks. Keeping your personal financial life safe while making the most of tax efficiencies and wealth generation opportunities takes effort that’s usually due to the combined financial, tax and legal complexity that being in business brings.
For more information and to discuss financial planning considerations affecting business owners, please contact Brett Cribb, Steve Nicholas or James Marshall on +61 (0)7 3007 2007, alternatively please email info@stratusfinancialgroup.com.au.
Stratus Financial Group helps professionals, executives, business owners, families and retirees manage their complex financial affairs and coordinate their professional advisers.
Stratus Financial Group and its advisers are Authorised Representatives of Fortnum Private Wealth Ltd ABN 54 139 889 535 AFSL 357306. This is general advice only and does not take into account your objectives, financial situation or needs, so you should consider whether the advice is relevant to your personal circumstances. You should also read the relevant Product Disclosure Statements (PDS) before making any financial decisions
¹ https://www.moneymag.com.au/small-business-owners-cant-afford-underpay
² https://www.afr.com/politics/federal/ato-warns-small-business-to-stop-using-tax-to-prop-up-cash-flow-20231127-p5en3e