A business depends on key people who work within the business to produce the profits and/or manage the business. If there is no viable succession plan, there may be significant financial hardship for the surviving business owners and family members.

Alarmingly, research¹ shows 69% of small business owners do not have income protection, and even less have business expenses protection. As a small business owner, if you cannot work due to illness or injury, it doesn't take long for the business and your income to be severely affected.

Key aspects of protecting your business include:

·         Loan protection;

·         Key person revenue protection;

·         Business succession protection;

·         Business expenses protection.

You should consider your plans in the event of any of the following situations arising within your business:

·         How to fund the repayment of a loan on the death of someone on whom the business depended or who had given a personal guarantee;

·         How to offset the reduction or loss of revenue if a key person within the business dies or becomes incapacitated;

·         How to fund and implement the right for surviving business principals to purchase the outgoing principal's interest. This will ensure that outsiders cannot enter the business and that the deceased or disabled principal, or their beneficiaries, receive a fair price;

·         How to meet ongoing fixed operating expenses if you are unable to work due to illness or accident, so that the business can continue running.

Buy-sell agreement

When two or more parties enter into a business together, they are often so busy setting up the business that they do not put a funded buy-sell agreement in place, thinking there will be time to do that 'sometime in the future'.

A buy-sell agreement involves the business owners entering into a written agreement to plan what they are to do with their respective interests in the business should any one of the owners die, become disabled or suffer a traumatic illness. Just like having a will in place, but it’s for the business.

Case study

In this case, the two business partners hadn't made the time to arrange insurance, or get a legal buy-sell agreement outlining the sale price and transfer terms.

Following the death of one business owner, the surviving owner wants sole control of the business, given they have to do all the work and don't want to share 50% of the profits with the deceased owner's spouse or family.

While the deceased's beneficiary may be willing to sell their interest, the parties may not be able to agree on a price and the surviving business owner may not be able to get financing.

The deceased's beneficiary may look to sell to an outside party or be forced to work in the business to support themselves. As they are unlikely to have expertise in the industry, the surviving owner might resent their involvement and the business and its revenues could suffer.

A Life, Total and Permanent Disability and Trauma insurance policy on both owners' lives could have been purchased, in conjunction with a written buy-sell agreement. The insurance policy would have provided the deceased owner's beneficiary with a lump sum to cover the value of their interest in the business, while the surviving owner would have had 100% control of the business and profits.

For more information on insurance for your business, please call Greg Valentine at VBD Chartered Accountants on 4943 8112. 

¹ IFSA, Small Business: Missing out on valuable tax break, 2006. Additional Sources: CommInsure, MLC.

Borrowing in aSelf-managed Superannuation Fund (SMSF) - Hunter Business Review,  April 2009 page 36., Page 30.

Almost eighteen months on from being passed as law, the changes to the superannuation borrowing rules are being embraced by astute business owners and property investors alike. In these tough economic times, the opportunities available to increase wealth by minimising tax and giving your superannuation assets a boost, are becoming too significant to ignore.

For years, SMSF advisors and commentators have bemoaned the inability to incorporate a responsible level of gearing within an SMSF investment strategy, and when we take at look at the type of benefits it can provide in the current superannuation environment, it’s easy to see why.

Benefits of an SMSF Borrowing Strategy

1) Supercharge your super assets – gearing using the equity in your existing superannuation assets provides an opportunity for exponential returns, as it will magnify both the upswings (and downswings) of an investment in dollar terms.

2) Utilisation of existing superannuation to purchase property – whilst not strictly limited to property investment, the new borrowing rules have enabled many investors who did not have sufficient capital outside superannuation, to purchase a property.

In addition, it allows them to utilise their 9% Superannuation Guarantee contributions to make loan repayments and retire the debt quicker than simply using the net rents derived from the property.

3) Tax benefits now – in accumulation phase, a complying SMSF enjoys concessional income tax rates of 15% on its earnings, whereas investment earnings held outside superannuation can be taxed at as high a rate as 46.5%.

This arbitrage can have significant wealth creation benefits, in particular for business owners who occupy their commercial premises owned by their SMSF. Every $1 of rent paid can save them potentially up to 31.5c in overall net income tax!

4) Tax benefits in retirement – with proper structuring and planning, a SMSF in pension phase is now an effective income tax haven. Investment earnings and Capital Gains are now tax free to the SMSF!

In addition, where the members are 60 years or older, their superannuation assets can also be paid out to them tax free, in the form of a pension or a lump sum.

5) Access to direct property investment – the extreme volatility of the stock market in recent months has sparked a lot of uncertainty with investors, especially the SMSF sector.

The new SMSF borrowing rules now enable investors preferring the comparatively stability of the direct property market, to invest without requiring 1005 of the property price plus costs, up front.

6) Unlock equity in existing commercial property held outside superannuation - One of the most powerful strategies being utilised in the market at the present time involves the transfer of a commercial property to an SMSF and refinance of existing borrowings into a complying SMSF loan.

The strategy provides cash to the existing property owner to retire the original debt, and any surplus can be structured to retire some or all non-tax deductible debt, such as a home loan or credit card debt.

It can also provide access to future tax free income and capital gains on the property.

While the strategy has up front transaction costs in the form of Stamp Duty, and potentially CGT (in many cases this can be minimised or eliminated with the use of the Small Business CGT Concessions), undertaking a feasibility analysis to model the long term tax benefits and enhanced debt amortisation that it creates, in many cases can outweigh the initial cost by tens, even hundreds of thousands of dollars.

For more information about gearing through a Self-Managed Superannution Fund, contact VBD Chartered Accountants on 02 4943 8112.

Plan breaks new ground - The Herald, Saturday September 27, 2008, Page 16.