Home' The Channel Magazine : National Newsagent March 2012 Contents National Newsagent March 2012
CASH IS KING
OR IS THE
The downside comes much, much later in a number of ways.
Usually, the first thing is you need to go to the bank for a loan
or to roll over your existing facilities with the bank. The result
here is you fail to get approval from the bank or the interest rate
you are offered by the bank seems too high. In some cases we
are seeing people pay between 3% to 5% more than they should
for their business funds because their financial accounts from
their accountant do not show a strong ability to service the loan
facilities you require. Consider if you have $1M in loan facilities
and you can save $50,000.00 pa in interest just by having a
stronger looking business.
Another downside is when you want to sell your business
the figures you have from your accountant do not project to the
potential purchaser the profit and the wages to the owners and
the contribution to superannuation for retirement that any future
owners are looking for when they would like to sell some years
down the track. In fact the figures might be indicating at best you
might get the loans you have paid out and there is nothing left for
retirement for you. You have invested all that effort for nothing
over all the years. Imagine that, all you did was give yourself a
job and worked long hours and at the end you may as well have
worked for someone else all that time and not had the worry and
responsibility of running a business.
Well how do you turn this around, what am I doing wrong,
where is the magic?
One of the first mistakes people make with a family or small
business they do not treat the business like a real business.
There are many legitimate ways to use the rules of the
“Australian Tax Office” ATO and make substantially more income
and more value out of your business than just plucking a few
hundred dollars a couple of times a week from the till. In fact
as these funds are unaccounted for you would be surprised how
much this can add up to. Would you believe in some cases over
$100,000 pa? It does get away from you.
In real terms, it is just good business sense to make your
business worth more over time. A process that allows you to
make your business that cash cow that it should be a business
that allows you to build up other assets personally and through
tax effective structures like your superannuation either self
managed or otherwise.
In the coming financial year the tax free threshold is now
at $20,452 effectively. If you are running a business with your
spouse this is $40,904 tax free. This is $786.62 per week as
a couple you can take as wages. Under current legislation
superannuation contribution limits, you are able to invest
$25,000.00 each into your individual superannuation pre tax if you
under 50 years of age. If you are over 50 years of age the amount
you can contribute into superannuation is lifted to $50,000.00
each. The tax that these contributions attract is only 15%, far
less than most business owner’s marginal rate of tax which can
be as high as 46.5%
Just to take the previous paragraph in this means if you are
under 50 years of age you have up to $40,452 pa where 15% tax
is payable only of $25,000 contribution into superannuation.
That is a mere $3,750 total tax! This results in an effective tax
rate of only 8.25%. As a couple of you can earn $90, 904 pa with
$7,500.00 tax and the same effective tax rate of only 8.25%.
If you are over 50 years of age this increases to $70,452 pa
or $140,904 pa as a couple, where 15% tax is payable only on
the $50,000.00 or $100,000.00 contribution into superannuation
respectively. In this case, the total tax is $7,500.00 each. This still
produces a very attractive tax rate of only 10.65%.
Now in many cases small business owners are not declaring
any income and are not contributing to superannuation and
reducing the value of their business by taking cash from the till.
Here is the magic, imagine all your business income goes
through your till and into the bank. Your business is now worth
more with a greater turnover. Now imagine you pay yourself a
proper wage and still pay little or no tax. Also imagine you invest
into super for five years say an average of $40,000 pa each. If you
are cautious and invest in cash a capital guaranteed strategy you
will have approximately $484,000 in superannuation. This is an
amazing turn around with your asset base towards retirement.
You now have the option to invest through a self managed
superannuation funds purchase properties with some of these
funds. Your options are much better and you still have your
As I mentioned earlier, now you have financial accounts from
your accountant that proves your business can service your
business loan easily. How much less in interest will you pay? You
can add this to your additional cash flow as well!
With a few simple changes we can help you earn more
from your business, increase the value of your business and
develop an investment strategy to grow other assets through
superannuation or otherwise. The day has come where cash is
no longer king!
For an individual personalised approach to your future we
welcome your call or email.
The information provided on this article is of a general
nature only. It has been prepared without taking into account
your objectives, financial situation or needs. Before acting
on this information you should consider its appropriateness
having regard to your own objectives, financial situation and
Martin Rambow email@example.com is Director
of Finance For Life (ph: 1300 88 95 11) a fee for service
advice firm who are authorised to provide financial advice
via authorised financial planners through PATRON Financial
Advice AFSL 307379.
For many people in small business the cash over
the counter often fails to make the bank business
account. It seems from an initial perspective that
this cash is beneficial in a number of ways. Yes it
is great to have cash in your pocket with immediate
purchasing power. Whilst this cash can be used
for a bite to eat, buy whatever you need, clothes or
for a short break somewhere. The other point that
validates the taking of the cash is the reduction in
turnover which in turn reduces profit and reduces
any tax due.
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