I am 62, self-employed, and divorced with no children. I draw $60,000 plus from my business, which earns around $200,000, own my own home worth $600,000, plus an investment property worth $700,000 and have $500,000 in an SMSF that includes property. I also have $550,000 post-tax profit from my business sitting in a bank account. I have been trying to increase my SMSF and pay the maximum annual contribution. What would be the best way to manage the $550,000 business profit so that I don’t have to pay tax on it again? Options I’ve considered include buying a property outright that I then live in. I would then rent my current home and keep it as an investment. Alternatively, use my business funds to buy my current home at its original purchase price to avoid CGT and then depositing that personal income in my SMSF.
It sounds as though you run your business through a company and there is $550,000 in undistributed profit that could be paid out as dividends, which would be taxable.
If so, then yes, your company could buy your home, but it would have to take out a mortgage, which could be difficult given this is a non-arm’s length transaction and, being a company, it wouldn’t receive the 50 per cent CGT discount when sold. It’s a silly proposition.
Once you cease your business, your income will presumably drop. You could then draw $84,000 a year in franked dividends a year from the company. After grossing this up you would pay tax on $120,000, thus staying below the 37 per cent tax bracket, then reducing your tax by the 30 per cent or $36,000 franking credit. Your net tax would thus be less than 2 per cent plus Medicare.
Having too much income is a problem that most people wish they had!
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW, 2026. All letters answered. Help lines: Australian Financial Complaints Authority, 1800 931 678; Centrelink pensions 13 23 00.
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