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Cashflow problems an imputation bond could solve

Cashflow problems an imputation bond could solve

Any business has to plan its cash flow, but it is often difficult for small business to properly ration capital for large one-off and/or recurring expenses. The need to reserve money for large or lumpy future expenses can mean that it is kept in low interest bearing term deposits. Or worse, is funded at the last minute

from high interest overdraft facilities.

A seemingly old-fashioned approach is to fund an imputation bond which invests the money in a range of equity-based or term deposits or a mix of investments inside an insurance bond that pays tax at a maximum rate of 30 per cent. The money is not locked away for 10 years as is supposed by many business people; the bond can be broken at any stage – in part or for the whole amount.

Business owners need simple-to-use tools to manage cash flow and manage tax outside of the usual annual horizon. A five-year or 10-year objective (like an employee’s long service leave) requires a different mindset to meeting wages or holiday pay.

Several common business strategies for funding large future expense are outlined below:

SUCCESSION FUNDING AND BUYOUTS

An imputation bond can be established in conjunction with Buy-Sell agreements as a flexible funding structure to buy out a business or property venture partner, or to handle succession of farm interests.

The transferability of an imputation bond without personal tax or CGT implications can be an obvious benefit in succession planning applications.

LONG SERVICE LEAVE PROVISION

Business owners can use an imputation bond to build a capital sum for draw-down to finance long service leave or extended sickness leave for you or your staff. Long service leave is a 10-year ‘future’ cost and a tax-paid imputation bond (invested in growth assets or term deposits) matures tax-free after 10 years.

EMPLOYEE RETENTION SCHEME

Another useful application is to establish a bond (or a series of bonds) earmarked for transfer to key or trusted employees as a long-term retention incentive. The benefits of this approach over employee share schemes are simplicity of transfer and retention of assets if employee doesn’t achieve agreed trigger conditions. Retained bonds are more tax effective after 10 years and can be used for other employees/ other purposes.

BUSINESS LOAN SECURITY

Where a loan secured by an imputation bond is used for business purposes (such as for working capital and normal business outgoings) tax deductibility of interest will generally apply.

The bane of many small businesses is regular cash flow. Compared to larger enterprises, cash often has to be reserved for future events more diligently. Simple structures that are easily arranged and administered reduce the time cost of planning those future cash outlays. If the tax is managed internally in the structure as with imputation bonds, then the issue of annual tax reporting disappears as well.

ARE THERE SITUATIONS THAT ARE NOT SUITABLE FOR AN IMPUTATION BOND?

An imputation bond would not work well for someone looking for a transaction account similar to a CMT.

Bonds have many applications but the investor always needs to evaluate their circumstances and seek appropriate advice.

COST STRUCTURE FOR ESTABLISHING AN IMPUTATION BOND

Setup costs: Nil

Investment fees: 0.25 per cent – 1.3 per cent a year. depending on choice of fund manager

Ongoing costs: 0.3 per cent – 0.9 per cent a year of underlying funds

Break fees for early redemption: Nil

 

*Original Article: http://www.brw.com.au/p/business/cashflow_problems_an_imputation_btZiM8Ok7KNaJFfSiODagM

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