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Tax planning for Small Business

When it comes to tax planning for small business it is widely recognised that protecting the cashflow of the business is an essential consideration.

Cashflow not only pays staff and the owners, but must be effectively managed to ensure the business can cover its running costs. Cash is a scarce resource for many businesses and therefore what happens if the cashflow ceases, or is reduced because the business owner is unable to work? Something has to give the longer they are off work.

We all know business owners who work even when they are feeling really ill. But what if it is beyond their control? Yes staff will step-up or a family member can help but for how long? Will they be able to do the same job? Will the relationships the owner has with key clients begin to be affected by their absence? Will the revenue the business generates actually start to decline the longer the primary small business owner is away? Unfortunately for some businesses it will.

For a period of time most businesses will be able to cover these costs, but for how long?

Did you know that small business owners can actually protect the fixed operating costs of their business if they are unable to work due to a sickness or accident?

Items such as rent, the interest on the loans the business has, and utility costs such as electricity, gas, water and rates are covered by business expense insurance. The bills keep coming in regardless, but this type of cover allows the owner to recover from a serious illness or accident knowing a number of fixed costs in the business are covered.

Covering these fixed operating costs is tax deductable. Not only could it be considered tax planning but it could also be good business planning.

I would be happy to provide information for clients on the specifics for their situation. Did you know that this benefit can be added to an existing income protection policy or taken as a stand alone policy?

Why you should have key man insurance if you have a joint and several liability?

Joint and several liability is a contractual obligation where multiple parties can be held responsible for a specific debt or liability as a group or individually.

A business example is where the owners borrow money to fund an expansion, a business project or to purchase equipment. When the loan is established the contract stipulates that the lender has the right to collect the borrowed money from one or several of the parties involved. This comes where the lender requires some form of security in order to provide the funds.

This security may be in the form of business or personal assets. This protects the lender in case something goes wrong. An example of what could go wrong is that one of the business owners, a key man in the business, who is a party to receiving the loan dies. The lender may decide that as one of the parties has passed away that the business is no longer as viable as when both owners were working the business. The lender may decide that they want their money returned because of the perceived reduced viability of the business.

Who do you think the lender will pursue for the money first? The deceased’s estate or the survivor? Probably the surviving owner, being the other key man. Under joint and several liability both parties are equally responsible for the full loan - not just their fifty percent. What happens if the surviving owner doesn’t have the ability to repay all the money? If the security was the family home what do you think the lender will go after first?

To avoid this sort of predicament a cost effective form of protection is that both owners have personal insurance for the full value of the loan (not just 50%) so that upon death or a total disability the proceeds can pay off the loan. As a result the business is protected and so are personal assets of the key people.

As a result - everyone is protected.

Generally in the case of covering debts of the business this type of key person or key man insurance is considered to be for capital purposes. The premiums for these types of cover are not tax deductible and the proceeds are not taxable. CGT may apply where there is a change in beneficial ownership of the policy for consideration or may apply to the proceeds of a total and permanent disability (TPD) when paid to someone other than the life insured or a relative of the life insured.

Specific tax advice may need top be sought before putting this type of insurance in place

Read more about business Insurance.

How much insurance will you need if disaster strikes?

It’s a common question: how much personal income protection should you have and what is it going to cost?

The answer really depends on your age, family status, what you owe and what you need.

Generally a retired person will have less of a need for income protection insurance than say someone with say an average size family with children and a mortgage of say $400,000. A young person living at home who is still at university or starting their first job may in fact have a very small need.

Put yourself in a position for a moment where something happened to you yesterday. That could either be serious sickness or accident that puts you out of action for 6 or 12 months or even longer. Or what if tragically you passed away? What happens to those around you or those left to pick up the pieces? How will you manage with the extra costs and how long will your financial resources last?

We provide income protection insurance advice and guidance on your options so you and your family don’t have to worry financially. We deal with 10 different companies so we can determine the most appropriate option for your every changing needs and those unforeseen events.

Are your prepared for the unexpected? If there is someone in you life that you know that has had an unforeseen event occur, how did they manage? What effect has the event had on their family and close friends? It makes sense to have some kind of plan for it so you are in control when it happens.

Read more about how to get free Income Protection Insurance for you and your family

Most people who have some form of personal insurance protection in my experience don’t sit down often enough to reassess it. That is to examine if the level of cover they have is still relevant to their needs today. As life goes on may things change in peoples lives? Be it their employment situation or level of income they earn to the level of assets they have and the debt they are servicing. It is important to sit down, if not annually at least every couple of years. This will make sure that the cover you have in place is going to deliver to you what you both expect and what you need, should you need to make a claim. In some situations you may also find that some cover may not be relevant to your family situation anymore and perhaps these funds can be directed somewhere else. Changes in the industry and with different products may also mean there maybe some financial savings available to you today. So I encourage everyone to make sure their level of protection is relevant to their needs and to get a regular cover check up.