Sam Rubin
Technical

Small to Medium Enterprise (SME) – Opportunities with the New Work Bonus Scheme

By Sam Rubin

Michael Forer’s article discussed the changes to the social security rules announced in the May 2009 Federal Budget which became effective from 20 September 2009. His article focussed on the abolishment of the Pension Bonus Scheme and the introduction of the Work Bonus Scheme (WBS).

This article will focus on SME advice opportunities for individuals still running their business post age 65 and trying to maximise the age pension entitlement under the incomes test.

It is estimated that approximately $3.6 trillion in Australian wealth is tied up in SMEs. The average age of SME owners is 56 with 20% already over the normal retirement age of 651 . Many of the businesses are structured as sole traders producing regular income from their business activities.

The maximum income allowed under the age pension income test before your client will lose their age pension entitlement is around $59,124. Note that the taxable income of a business structured as a sole trader or a partnership is included in the incomes test for social security.

Given the introduction of the WBS which disregards half of the first $500 of fortnightly employment income there is a lot to be said for incorporating your business and receiving employment income versus receiving taxable income from business activity which doesn’t receive concessional social security treatment under the WBS.

Below is a case study which will examine the opportunities for SMEs.

Case Study One – Handyman Greg

Greg aged 68 has been running his Handyman business as a sole trader for the last 15 years. Greg is not planning to retire any time soon and is happy to keep working for the next 5 years looking after his regular customers. Greg and his wife Betty aged 65 only requires $30,000 p.a. to cover living costs. The business has minimal assets and believes he will not be able to sell the business when he does retire.

Over the last few years the business has generated an average taxable income of $60,000 p.a. Greg’s other assets include:

Assets $
Home 450,000
Content 15,000
Car 10,000
Bank account 5,000
Superannuation 50,000

Greg would like to gain access to the age pension and would like advice regarding how to maximise his entitlement as he hasn’t been receiving any age pension due to his business activity.

Greg’s current income test assessment for the age pension is:

Business Income $60,000
Deemed Assessed Income ($5,000* 2%) $100
Total Combined Assessable Annual Income for Social Security $60,100
Age Pension eligibility is $0

If Greg was to incorporate his business he could improve his age pension entitlement whilst accessing the benefits of the WBS. Greg withdraws $15,000 as a salary for him and his wife each from the business their age pension entitlement would be:

Salary income per fortnight
Income Test assessment

Greg > $15,000/26 = $576- $500= ($76 + $250) $326
Betty > $15,000/26 = $576- $500= ($76 + $250) $326
Combined Employment Income after WBS $652
Deemed income from company
- Assessed as financial asset ($30,000*.02) $600
Deemed Assessed Income ($5,000*.02) $100
Total Combined Assessable Fortnightly
Income for Social Security $1,352

Their combined Age Pension eligibility for each is now:

($1,352- $248)*0.5 = $552 Fortnightly reduction rate
$928.40 – $552 = $376.40 p.f. age pension entitlement combined

By incorporating the business, Greg and Betty have increased their Age Pension entitlement from $0 to $9786.40 p.a.

Even with the additional costs of business incorporation, administration and accounting costs over the next 5 years that Greg will continue to work, they will receive approximately $50,000 in age pension just by talking with a financial planner. Note that Greg will also have the option of retaining the additional funds within the company and payout dividends in retirement.

Summary

Financial planners can provide business advice to SME owners to help meet their objectives like maximising their social security entitlements and retirement planning that many accountants are not supporting. This means that there are many business opportunities for financial planners to support the SME market and provide specialist advice that will enhance their objectives that few other professionals are offering.

1 Australian family and private business survey conducted by RMIT University, Victoria, ABS & MYOB survey of business owners 2006.