In Part 1, we looked at how you can use the proceeds from the sale of your business to purchase the commercial property from which you ran your business.
Now we are going to look at the benefits of using your own Superannuation fund to potentially reduce the capital gain you made from the sale of your business through this strategy and how the income received from the property can be taxed at a lower rate.
Potentially reducing the capital gain from the sale of your business
When you buy and subsequently sell an asset, you hopefully make a gain; that is, you receive more money from the sale of the asset than you bought the asset for.
This applies when you sell a business. Without going into too much detail, one of the strategies you can take advantage of in Australia upon the sale of your business is to roll over (or contribute) some of the money you received from the sale of the business into your superannuation fund (a Self Managed Superannuation Fund or SMSF in this case). The money you rollover comes off the total amount that is used to calculate your ‘sale price’.
Income received from the property is taxed at a lower rate
When a property (in this case the premises you were running your business from) is owned by a superannuation fund, the business will continue to pay rent to operate in the premises. This rent will be paid to superannuation fund.
Superannuation funds pay tax on income at 15%. This is a lot less than up to 49.5% that individuals can pay tax at. This saving in tax is money right back into your wallet and helps you grow your asset base.
Case Study – Having your cake and eating it as well
Let’s use an example of Andrew, Terry and Jim.
They received $6,000,000 from sale of their business, so $2,000,000 each. Their Accountant has estimated that the purchase price plus the capital costs of running the business come to $2,000,000, so they have a gain on the business of $4,000,000.
Speaking with their financial planner, they decide to use the superannuation rollover option and contribute $500,000 each into their superannuation funds. The total they contribute to their superannuation funds comes to $1,500,000.
This figure comes off the total gain they made from the sale of their business reducing the gain to $2,500,000.
While they still need to pay tax each on the sale of their share, their share of the gain is now only $833,333 each. Previously it was $1,333,333, which is a reduction of $500,000. At an individual marginal tax rate of 49.5%, this strategy alone has just saved them potentially up to $247,500.
But it gets better.
After they purchased the property, their former business continues to pay rent to the new owner – their superannuation funds.
Let’s say the rent paid if $75,000 annually. The tax rate within their superannuation funds on this income is 15%, so they pay a total of $11,250 in tax. If they owned this asset in their personal names, they would pay 30% tax on this, which is $22,500. So this strategy has saved them $11,250.
If you would like a full run down and template of this strategy including assumptions and formulas so you can plug in your own figures, please email me firstname.lastname@example.org
Adopting this strategy would help Andrew, Terry and Jim continue to enjoy their new found financial freedom.
They are having their cake and eating it to.
In fact, they are now in a position to start to make some pretty exciting decisions that will impact them for the rest of their lives.