As a kid my parents drilled home the importance of saving money for my retirement. And logic says that is a great idea.
However, the tax system and superannuation system are not fully based on logic. Why? Because the government aged pension actively works to reduce your income as you earn more.
So the value of the age pension increases as you have less money. That is: the less money you have the more money you get from the age pension (so the pension actually becomes more valuable).
In fact – as a couple – you will have the SAME INCOME if you have $1.05m in your superannuation fund than if you have only $400k in your superannuation fund.
Super Balance Age Pension Super Pension Total Income
1,050,000 0 52,500 52,500
400,000 33,511 20,000 53,511
The above calculation assumes that the pension return is at 5%.
So the difficulty for many families in business is that they spend the last of their years frantically slaving away to build up their retirement nest egg and only to find that the tax system and the superannuation regime does not actually benefit them. Alternatively a succession plan, or life emergency plan, is delayed, and hopes and dreams are sacrificed.
Gifting of assets for Centrelink
So what do you do? Well giving the money away to children might seem like a great idea but Centrelink has rules against that. Farming families have an exception so that the farm might be gifted to the next adult working generation (this takes a fair bit of work) and the gift of the family farm might not be counted to the assets test for Centrelink.
The gifting rules are incredibly difficult to understand. But at their simplest the gifting of $10k is the limit.
The other option is to simply spend it. Now that tends to fly against every natural instinct a family in business will think about: but on an asset base of $1,050,000 a spend on $72,500 (compared to $52,500) will not severely impact on the capacity of the asset.
Alternatively, you could apply to Centrelink to see if some amounts paid will be classified as a gift. For example, the payment of private school fees for grandchildren might not qualify as a gift but each case will rest with the facts. Likewise an annual holiday with the family may not be a gift – but in each case approach Centrelink.
While this strategy to reduce assets is sound. The assets test has quite an aggressive “taper” such that a person with say, $750,000 in assets will actually earn less than a person with $400k in assets.
For those in that unfortunate position you have a few options.
Options other than gifting
You can pay down the mortgage on the family home if that has not already been done so – the mortgage repayment is not considered as a gift and the family home is an exempt asset. So increasing the net value of the home (by reducing debt) does not affect the testing.
You can renovate the family home and increase its value. The family is exempt from the means test and a renovation might become a store of wealth in the family home which can be later sold and cash accessed. Further the downsizing of a family home allows a family to access a higher superannuation threshold by injecting surplus cash ($300k) into their superannuation fund.
Normally a person can only inject a limited sum of money without attracting a tax called “excess non concessional contributions tax”. And the downsizing of the family home allows a person to inject more into their superannuation fund and avoiding this taxation impost.
The take away is that the age pension for a couple, which is currently $34,819 for a couple, is an incredibly valuable asset. And if the rate of return you could generate is at 5% the net asset value (by virtue of a guaranteed pension) that each Australian couple has is $696,380.
Impacts for family business succession
So the succession planning of a family in business can have many options to consider. While several families have a wonderfully successful business other business families have had a lower financial return.
The business succession from one generation to the next is always intrinsically linked to the need for the older generation to live. A considered and clear understanding of government support payments, both during the business lifecycle and in the personal life cycle, is critical for an advisor to assist a family.
Careful planning a decade out can assist the structuring of assets and business entities so that a succession takes place without impacting the Centrelink gifting tests. This might be by way of asset transfers more than 5 years out, paying a commercial wage to family members or by understanding special provisions in the law that can help families in business.
Whatever the case a family business advisor, who is able to give tax advice, business advice and Centrelink advice, is the ideal source of information to understand the position and plan for the succession of a business family. Coupled together with an investment specialist (who is independent of the family business advisor) will create a sound outcome for a business family.