Business guide to Coronavirus

Think carefully before withdrawing from your super

The economic crisis as a result of COVID-19 has hit so swiftly that it has sent many sound businesses into a spin as they seek to maintain cashflow and stay afloat. 

The Federal Government has announced a stimulus package which provides some good news for business. The problem is, on its own, it’s simply not enough. 

The purpose of this article is to share guidance on options for accessing cash to help your business continue, including considerations you should take before accessing your superannuation.  

Managing cashflow 

Your cash flow is a key ingredient in the mix, and so before we talk about ideas for accessing lump sums of money, I want to talk briefly about managing cash flow. The question you need to ask yourself is this: “what can I do to protect money in and minimise money out to improve my net cash flow?” 

Let’s start by looking at how you may be able to decrease and defer expenditure. Here are five ideas: 

1. Be ruthless on spending. Don’t spend money on anything you don’t absolutely need. Cancel newspaper and magazine subscriptions, memberships, etc. 

2. Buy on sale. If you do need to buy something – for example additional technology gear or support – then be ruthless in getting the best price. You may be able to access a 30-day software trial with little trade-off in functionality. Be prepared to buy little rather than big brand names – do your research of course, but you may find that you can secure great product at a lower cost – and support another small business in the process.  

3. Negotiate on everything. None of us knows how long this is going to take to play out. Talk to your landlord, lenders, employees and suppliers and clients about reducing costs. Perhaps you can vary contract terms.  

4. Defer payments. If you must buy essential items, then see if you can arrange a deferment of payment. You may be able to negotiate with suppliers to pay in instalments which could help buy you time. 

5. Take advantage of the government initiatives in relation to allowing businesses to vary Pay as you go (PAYG) instalment amounts to zero for the full year – including getting a refund for instalments you have already paid. Visit the ATO’s website more information

The other side of the equation is inflow 

  • Many businesses are doing what they can to continue earning income. Can you offer products or services online? Can you partner with other businesses to offer a needed new product or service? 
  • Ensure you apply for the government’s cash flow boosts for small and medium businesses. This means eligible businesses (including not-for-profits and charities) which employ staff and withhold tax from their wages can plan to receive cash refunds of 100% of the tax withheld up to $50,000 (or a minimum of $10,000) until July 2020 and up to $50,000 (or a minimum of $10,000) from July to October 2020. The payments will be tax-free to the business. Eligible employers should ensure they lodge their business activity statements (BAS) on time as payments are delivered as a cash refund within 14 days of the lodgement date. Visit the ATO’s website for more. information. 

A framework for prioritising access to lump sum cash 

Many people are asking whether they can – and if it’s a good idea – to access their superannuation to top up their cash through this challenging period. 

In normal conditions, it’s unlikely you would be able to withdraw funds from super – and that this is not ideal anyway. This is not, of course, normal conditions. And so the answer is different.  

Consider the circumstances  

The biggest reason for not drawing from your superannuation is it is meant for your retirement. Under normal circumstances, you normally can’t withdraw from your super until you’re at least 60. Other circumstances for being able to withdraw super are: 

  • you have a terminal illness 
  • you have less than $200 in your super fund 
  • you’re a temporary resident permanently leaving Australia 
  • you are in severe financial hardship 
  • you meet ‘compassionate grounds’ 
  • you’re temporarily or permanently incapacitated. 

If you absolutely need to then dip into your super to get by. But if you just want some cash for non-essential items – or even to repay small debts – there are other options and it is probably better to leave your super untouched. 

Let me explain it in the context of a broader framework – using a hierarchy based on ease of access and cost of redeeming – for prioritising access to lump sum cash.  

1. On-call cash accounts: these are clearly the easiest and lowest cost source of funds. Cash should be readily available and with interest rates so low there is little cost of withdrawing funds. 

2. Cash in super: as discussed above, normally the conditions under which you can access super are very restrictive. However, the Federal Government has announced a short-term initiative which enables eligible individuals to withdraw from their super fund up to $10,000 this financial year, and another at the start of next financial. The lump sum payment – unlike usual ‘hardship’ payments – is free of tax. So, if you have cash inside your super fund – and you don’t have to sell any assets to get it – then this is low cost and relatively easy to access. 

3. Home mortgage offset or redraw facilities: if you have a home loan and either has money in your offset account or funds available within your credit limit, you may be able to draw on these monies. With interest rates at historic lows, this could be a very low-cost source of funding. It is advisable to talk to your tax accountant about how best to structure any transfer of funds between personal accounts and your business. 

4. “Family bank”: do you have family members who have significant cash savings who may be happy to act as your bank and provide you with a loan? This can be an attractive arrangement for both parties – particularly where the lender gains a better rate of interest than having cash in a bank account or term deposit, and the borrower (you) gains access to funds to tide you through. It’s usually a good idea to have a solicitor assist you with drawing up a loan agreement, and again, gain advice from your tax accountant on any tax implications. 

5. Credit cards, car finance and other unsecured loans: the cost of the borrowing is very expensive – credit cards can have annual interest rates as high as 20% and car finance as high as 15%. I would usually recommend always paying credit card debt within the interest free period. However, we need different strategies for difficult times. Talk to your bank about options for a line of credit for your business. Consider applying for additional credit limit on your credit card, or seek a new card. It could just buy you time. If you have a vehicle that you own, you may be able to finance it to free up lump sum cash. 

6. Personal or trust fixed interest (bond) investments: if you have a personal or trust investment portfolio, you may be fortunate enough to have a financial adviser who has separated your fixed interest (or bond) investments from your equity investments. Because fixed interest investments are more stable, these investments are less likely to have devalued with the market shock. They are likely to be relatively liquid, and so easy and low cost to sell. You should be aware this strategy will tilt your portfolio to a higher weighting in riskier assets like shares which may be okay in the short term – but maybe a position from which you wish to rebalance in future. 

7. Super fixed interest (bond) investments: the same applies as in point 6 – except this time it relates to your money in super. Being aware of course of the restrictions that apply to withdrawing money from super as noted in point 2 above. 

8. Personal or trust share investments: with share markets having taken a significant tumble, it is generally not a good time to sell your share investments – as you make real the losses (which really only exist on paper if you can hold onto your shares until they recover). However, if you need cash, then it may make sense to sell down some shares. Perhaps you have some shareholdings that have withstood the downturn better than others. The silver lining is that you may have less capital gains tax – or even a capital loss that you can carry forward and use to offset future gains. Again, talk to your financial adviser and accountant before selling. 

9. Super share investments: ditto point 8 for your money in super, again noting the temporary conditions for withdrawal. 

10. Residential or commercial property: this is one of the last things that you want to have to sell. Property is a highly illiquid asset, and it’s not divisible – you can’t sell off a bedroom or the kitchen, you have to sell the whole property. What’s more, typically selling a property takes time – not days or even weeks but months – and involves significant cost. The key challenge with illiquid assets in times of distress is that it can be hard to find a buyer – and if you can, it’s often at a depressed price. 

Think of these 10 ideas in our framework as pieces in a puzzle – you can rely on some or one. The best answer is what works for you and your business. And of course, do seek advice from your tax, financial advice and legal professionals at this critical time.  

 

Business Australia is on hand with a range of resources to help businesses navigate this difficult time, with practical advice and information to help you develop strategies to maintain and sustain. Visit our resource hub to find out more

 

The views expressed in this article are those of the author and do not necessarily represent the views of Business Australia. 

Kate McCallum

Director & Advisor – Multiforte Financial Services

Kate is an award-winning financial adviser. She co-founded Multiforte Financial Services after working in executive roles at Westpac and Commonwealth Bank. She is co-author of The Joy of Money: The Australian Woman’s Guide to Financial Independence.

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