After the Wayne Swan’s rhetoric on his Government being one for small and medium business, the Federal Budget delivered last week turned out to be remarkable in that if contains no new meaningful support to businesses that are not loss making.
If poor business conditions mean you are a loss maker this year (2012), please defer your loss until 2013 because the loss carry back rule to refund overpaid tax does not activate a refund until 2013. You must pay tax in 2012 to play. Only a bureaucrat could come up with such a commercially inastute approach for suffering businesses.
Many business owners who have put in the kilowatt hours and made their way through difficult trading conditions to remain profitable have seen their positions deteriorate under recent budgets. A working family in business may have seen their relative ability to contribute to their annual after tax wealth deteriorate by more than an annual $17,000 in post tax money. Losing that much cash hurts. For someone selling out of their business or retiring in 2012/13 this position could snowball to more than $70,000 if you take into account a clever play to change tax rates to remove the benefit of a higher general tax free threshold from the “wealthy”, the exclusion of the middle to upper middle class in compensation for the effects of the carbon tax, lowering of tax deductible superannuation thresholds for those over 50 and the increase in superannuation contributions tax. One single measure causes most of the damage – the loss of a tax rebate on golden handshakes worth up to a whopping $52,500 if you do not retire before July 2012. Because so many of these measures hit people nearing retirement, some business owners will justifiably feel that the Government is changing the rules of the poker game just as they prepare to take some money off the table.
It is an article of faith in business that win-win deals produce better and more enduring results. It is therefore deeply disturbing for the psyche of SME’s that an increasing focus on means testing full access to fundamental elements of our taxation system, such as the superannuation system or compensation for a scheme such as the Carbon Tax which has a universal effect, is producing winners and losers. Losers often stop playing.
In 2012/13 when your tax deductible superannuation contribution is taxed at an extra 15 percent if your personal “adjusted taxable income” is greater than $300,000, you may feel a desire to throw in the towel and give away the superannuation system entirely. Particularly if you and your spouse have been in business together but an act of history means one of you has all the family income counted mainly to one name only. Take the case where one spouse owns all the shares in a trading company. It is time to pass out some profits to pay the bills. In such a case, let us take the example where there is a family cash income of say $200,000 funded as a dividend (effectively $100,000 for each spouse). An add-back of your super and franking credits will easily take you over the $300,000 limit. So could one-off leave pay-outs and gearing cash losses. This creates what many would call the artificial result of placing you in the over $300,000 category. To have full access to super concessions denied to you feels unjust – why not just withdraw?
Don’t take the bait. Leaving the superannuation system will ultimately do you far more harm than good. Some of the people in Treasury would probably love to see you give away all those compounding tax concessions in a lifetime – they could be worth hundreds of thousands. Instead, look at better ways to level the playing field and change the rules of the game to better protect yourself from any further unfavorable policy changes that this or any future Government might have on you.
Maximise what opportunities remain on the table and in particular at the State Government level with a modest improvement in the NSW state taxes landscape and strengthen your business against the general risks of difficult trading conditions. Put a passive holding company over your trading company to create improved asset protection. Examine shifting your wealth into structures that are separated from your personal names so that the income does not get counted towards your “$300,000” limit. If you and your spouse are in business together and the allocation of equity is actually unfair and articificial based on contribution, look at restructuring this to create an enduring platform that can benefit both you and next generations of the family. The Government has demonstrated its agenda to distribute wealth away from the middle to upper middle class. You do not just have to sit there and take it.
If the Government is not going to help you grow your business, it’s time to take matters into your own hands. There are many constructive and efficient actions that you can take to outmaneuver a “lose” position. Take control.