Mulcahy & Co Money Matters Newsletter 2016 by getsmartdesign

moneymatters April 2016

TRANSITION TO RETIREMENT

MULCAHY & CO ACCOUNTING Hello and welcome to another edition of Money Matters. Easter has come and gone and we are now well into another calendar year. Are you still on track with the personal and business goals you set as part of your new year’s resolutions? For our business and farm clients it has been a good time to catch up and complete a business health check to ensure everything is on track and set action plans for the future. Look forward to catching up with more clients over the coming months to ensure you are on the path to financial security. With the much anticipated May budget looming there is also a sense of urgency with some areas set to come under the microscope. Superannuation contributions, transition to retirement pensions and negative gearing are among the host of areas identified for review. It is very timely to review your current situation and how any proposed changes could impact on you. We hope you enjoy this edition of Money Matters and as always if you have any questions or comments please feel free to contact us. Sincerely,

Mark Cunningham Director - Accounting

INTEREST RATE CHANGES

WILLS & BLENDED FAMILIES

MAGIC NUMBER In every business there are key numbers that give you information you need to make timely decisions. In business, weeks and months roll by quickly so it is important to know what your key numbers are, and ensure that you have a way of tracking and reporting on these in real time. If you have to wait months for this information it may be too late to take action and you may miss out on opportunities along the way as well.

FINANCIAL NUMBERS It is important that business owners don’t just rely on their sales income as the only measure of tracking how the business is performing. There have been plenty of businesses with healthy sales figures that have not been successful. This is due to the fact that high sales doesn’t automatically make a business profitable or result in a strong cashflow position. There are other key numbers that need to be focused on like gross margins on the sales you are making, and managing your overheads. There needs to be ways of tracking and reporting on the cost of goods sold. In order to monitor these numbers it is important that you have an accounting system that is up to date and accurate so that you can monitor these numbers. Do you know which of your products or services has the best gross margin? Do you have access to up to date and accurate information on your business numbers?

NON FINANCIAL A lot of business owners focus only on the financial information and numbers above. However in order to predict trends and really understand the drivers of a business’s performance, business owners need to dig deeper. For example a car dealerships main tracking measures might be the number of test drives per week, and from there they may be able to forecast the likely sales.

UPCOMING SEMINARS

The magic number for them might be that on average for every 100 test drives they sell 5 cars. This then gives them powerful information that they can use for a number of reasons to help the business. What strategies can they put in place to enhance the test driving experience to boost the average number of purchases up to 6,7,8 cars per 100 test drives. How many test drives can each sales person handle in a week? They can also use any decrease in the number of test drives to predict the future sales drop off for the business and act quickly to ensure cashflow will be sufficient. This is just one example of potential key numbers that are vital to understanding business performance. Other examples could be the number of daily/weekly customers for a Bottle shop, the average spend for each customer at a general store, the number of entrees served by a restaurant, the number of new patients per week for a medical professional. If you would like to discuss your magic number, please contact our office for an obligation free appointment.

TRANSITION TO RETIREMENT ON THE TURNBULL CHOPPING BLOCK The Transition to Retirement Income Streams (TRIS) as introduced by the Howard government are looking likely to be phased out soon as a way for the Government to increase its revenue by ceasing the tax benefits associated with them. Currently if you have met your preservation age and are still working, you are able to access your super as an income stream either to supplement your income whilst working less approaching retirement or just saving more for retirement using the tax advantages of implementing a transition to retirement strategy.

P 03 5330 7200 | info@mulcahy.com.au | 300B Gillies Street, Ballarat

EDUCATION SAVINGS

NEWS

HOW IT WORKS The intention with the TRIS (Account Based Pension) was to encourage people to stay in the workforce past the age they could access their superannuation, even if it was part time. This would allow them to access their super to supplement their part time income. The only rule was that you needed to withdraw from the account based pension and income stream of between the minimum 4% to the maximum of 10% of the account balance. Lump sum withdrawals were not to be made until you had completely retired or reached the age of 65. Since the implementation of TRIS, rather than supplementing income for part time workers approaching retirement, people have implemented this strategy for saving tax by aggressively salary sacrificing to super, whilst supplementing the sacrificed income by drawing an income stream from an account based pension (super balances).

WHAT MIGHT THE GOVERNMENT DO? There are two options available to the government to end the current Transition to Retirement Income Stream. 1. They may implement an end date where current TRIS (where people are still working) will have their TRIS converted back to Superannuation. 2. Existing TRIS may be grandfathered, whilst not allowing any new ones to start. The more likely of the two options.

WHERE TO FROM HERE Many people wait until they are aged 60 to commence a TRIS as the income is 100% tax free once 60, though remember there are still tax advantages for those who have met their preservation age and are under 60.

Table 1 – Superannuation Preservation Age

TRANSITION TO RETIREMENT INCOME STREAM ARE TAX EFFECTIVE BECAUSE:

Date of birth

Investment earnings in super are taxed at 15% (10% discounted capital gains). Investment earnings for funds held in a TRIS are taxed at 0%. The average tax saving is about 1% of the account balance, or $3,000 for a fund of $300,000. People implementing a Transition to Retirement often pair this with aggressively salary sacrificing up to concessional cap of $35,000 (super guarantee, self-employed and salary sacrifice contributions count to this cap). For some high income earners this means they have potential savings of 34% for salary amounts sacrificed to super, normally taxed at 49%, now taxed at 15% going into super TRIS are tax free from age 60, though there are still tax advantages for those aged between 55 and 60. These payments may replace money salary sacrificed to meet current living expenses.

Preservation age

Before 1 July 1960

1 July 1960 - 30 June 1961

1 July 1961 - 30 June 1962

1 July 1962 - 30 June 1963

1 July 1963 - 30 June 1964

From July 1964

Table 2 – Example of Transition to Retirement tax advantages

For most families education costs for children can be a major burden financially. While people generally research the overall costs of putting children through different schooling options along with other non-financial factors, the cost of education is a major factor in deciding where people send their children. Whichever way you go, it is important to have a savings plan in place to ensure that you will have funds available to meet the school fees and additional costs (uniforms, excursions… the list goes on!) as they fall due. We have found that a regular savings plan established as early as possible for each child is a great way to break down the lifetime cost of education. For example a couple recently had their first child and are considering private school for their child. Based on the current costs of the school they are looking at, it is estimated that they need to contribute approximately $150 per week into an investment account in order to cover the school fees as they fall due in the future. By breaking it down into a weekly commitment the family is able to budget accordingly rather than waiting until the child enters school and having to come up with a lump sum each year to cover the cost of the school fees. There is a wide range of investment options available to invest in and flexibility in accessing the money as needed with no funds locked in or withdrawal restrictions. It is never too late to set up an education savings plan and we can work with you to determine the regular investment amount required to meet your expected school fees.

Assumptions Salary

$80,000

Super balance

$300,000

Taxable component - Super

80%

Taxable income Less: Salary sacrifice Plus: TRIS

No TTR

55 - 59

60 +

$80,000

$27,400

$21,264

$17,736

Taxable income

$80,000

$69,611

$52,600

Tax and Medicare Levy

$19,147

$15,562

$9,483

Tax rebate

$2,551

Total tax payable

$19,147

$13,011

$9,483

Net income

$60,853

$4,110

$19,147

$17,121

$13,593

$2,026

$5,554

Overall tax benefit 15% tax - Salary sacrifice Overall tax Annual tax savings

P 03 5330 7200 | info@mulcahy.com.au | 300B Gillies Street, Ballarat

Are you financially secure? Follow our 10 Steps to Success...visit www.mulcahy.com.au

Recent changes to interest rates WHAT’S BEEN HAPPENING WITH HOME LOAN INTEREST RATES?

You have probably seen or read in the news over the past few months that the Australian Prudential Regulation Authority (APRA) has issued guidelines resulting in changes to mortgage lending policy. You may be wondering exactly what the changes meant — and particularly what they meant for you.

BACKGROUND Briefly, the Federal Government and the Reserve Bank had expressed concerns about a potentially overheated property market, especially in Sydney and Melbourne. APRA looked to take the heat out of the market by slowing the growth of investment lending. In its role as regulator of banks and other financial institutions, APRA has issued guidelines designed to do that, as well as ensuring the ongoing strength of Australian banks.

KEY CHANGES APRA has asked banks to cap investment loan growth at 10%. That means that they are only allowed to increase their portfolio of investment loan by 10% on the previous year. A number of lenders where already at, or even over, that limit when the new rules were introduced, so they were under pressure to significantly reduce their investment lending immediately. Predominately Lenders used interest rates to affect their investment lending numbers, they increased rates which decreased demand for many. Some lenders just stopped lending for investment altogether.

WHAT DOES THIS MEAN FOR YOU? If you have an Owner Occupied home loan that includes principal repayments, you may not have be affected. Some lenders have even decreased interest rates on owner-occupier loans. We have also seen some recent reduction in fixed rates loans as well.

investment loan, you may have found that your lender increased the interest rate on that loan. If you are looking at buying an investment property, you are likely to find the lending market more restricted than in the past. This doesn’t mean you won’t be able to find a loan that suits you, just that it may take a little more time. That’s where we can help. With access to a diverse range of lenders in the market we are able to match your needs to the best options available.

TALK TO US Of course, everyone’s situation is different, and the information above is simply an overview. We are always happy to discuss your situation, particularly if you have any queries or concerns.

WILLS AND BLENDED FAMILIES Wills involving a husband and a wife with one or more children of their marriage generally make wills of a fairly standard nature – they leave their assets to each other, or failing that they leave their mutual assets to their children. Blended families occur when two partners come together with one or both partners having children from a previous relationship. However, a standard will may not suit their situation at all particularly for the following reasons: a) Some children within the family may be going to inherit substantial sums from their natural mother or father, whilst their half-siblings may not be in such a fortunate position. Trying to bring equity to the situation requires a lot more thought; b) If one partner is to pass away, there is nothing stopping the surviving partner changing their will to exclude the children of their deceased spouse, given they may not feel the same obligation to care for them financially if they are not their birth children. This is often further aggravated if the surviving spouse should enter into a new relationship where the new partner wishes to be included in a will and does not empathise with the former deceased spouses children;

If you have a variable rate investment loan, or an ‘interest only’ variable rate home or

c) Depending on the relationship between siblings from different relationships, leaving jointly owned assets may not be preferable given they may not agree on keeping versus selling assets, or how to manage them; d) If any of the above occur, it would not be unusual for an aggrieved party to bring a challenge against the Estate of their parent or step-parent, which is always a very expensive exercise and severely drains the asset pool available for distribution. Accordingly, it is important for blended families to ensure that their wills are well thought out and address some of these issues. There is no ‘standard will’ for blended families, as the circumstances are very different in each case, however the following tactics can be employed to assist: e) It is possible for parties to make “mutual wills” where they choose to leave their assets equally between their own respective children and step-children (and any children they might have together) and as such, providing each child (regardless of their parent) with an equal share. The issue with this as mentioned above is that it is possible that a surviving partner may change their will in future thereby removing step-children and the deceased’s children missing out on ever sharing in the assets of their parent’s Estate. Contracts for mutual wills (i.e. a binding agreement not to change the wills) can be done, but these lack flexibility and accordingly are risky for different reasons. Namely, they do not allow any variation despite life dictating the needs for change (i.e. a child becoming an addict where a sizeable sum of money would be the last thing they should be receiving, or alternatively if a child receives their inheritance early for a valid reason and then can’t be removed from the will to take this into account). Regardless of these negatives, quite often partners choose to trust their spouse not to change their will and leave one side of the family out. Unfortunately, trust is often misplaced. f) Instead, where possible, we often provide that should one partner pass away, they leave their birth children with an amount of money (either from their assets or via life insurance taken out specifically for this purpose) firstly under a will with the remainder of their assets left to their surviving spouse to do with what they please. This ensures that regardless of

NEWS

any will alterations made by the survivor, the deceased’s children have received something that cannot be taken away. Whether this might be a possible solution depends on the financial circumstances of the parties. g) Depending on the age and the needs of the surviving partner, life interests in assets can be provided with the remainder interest going jointly between all children (birth and step) of a relationship. This gives the surviving partner the right to enjoy the income of assets for their life, but does not usually give them the power to sell or deal with the assets in any other way. h) A testamentary trust can be instead employed with the trustee of that trust being a family member or friend who can oversee that your assets are used by your surviving spouse in a reasonable way, but also ensures that once also passing on, that they find their way as directed. i) If a child is set to inherit a substantial sum from their other birth parent, then you might choose to leave your assets to those less likely to be financially fortunate. If this is considered, it is important to state that this inheritance is your expectation and your will was made taking that into account. Being

silent to the matter does not provide your Solicitor or the Court with any guidance if challenged as to the reason for their lesser amount or their omission. Stating clearly that you considered their needs and because of their expectance of an inheritance you chose to leave your estate in a different way gives your will a far better chance of being upheld in Court should it come to that. These are purely examples of some techniques we adopt to work through a situation. The combinations of the above and other means are nearly endless, but it is a balancing act between protecting your interests without creating a financial noose for your spouse.

Are You Financially Secure?

At Mulcahy & Co we are in a unique position to provide the expert advice and solutions of accounting, financial planning, lending, legal and information technology all under the one roof. This makes a normally complicated process seamless to help you on your way to becoming financially secure.

WHAT DOES BEING FINANCIALLY SECURE MEAN?

If your family involves children from different relationships, please make an appointment with one of our Solicitors on 03 5330 7200 to talk through the best solution to your family’s needs in making a will.

It means assessing your personal and business goals and developing a plan to achieve them.

We offer a free no obligation meeting to review your situation. Call us today on 03 5330 7200 and take advantage of this valuable offer.

2. Estate plan

1. Goals & objectives

3. Risk plan 4. Asset protection plan 5. Taxation plan 6. Debt plan 7. Retirement plan 8. Business plan

Upcoming Seminars

9. Superannuation plan

•

Preparing Your Business For Sale

•

Are You a Tradie Operating Your Own Business

•

Xero Cloud Accounting

FOLLOW OUR 10 STEPS TO SUCCESS TO ACHIEVE FINANCIAL SECURITY... Visit www.mulcahy.com.au for more information

•

Farm Budgeting & Forecasting

10. Investment plan

Visit our website www.mulcahy.com.au/Seminars or contact us today on 03 5330 7200 or email info@mulcahy.com.au to register your interest.

IMPORTANT DISCLAIMER: This document does not constitute advice. Clients should not act solely on the basis of the material contained in this document. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly and we therefore recommend that our formal advice be sought before acting in any of these areas. This document is issued as a helpful guide to clients and for their private information.

mulcahy.com.au

P 03 5330 7200 | info@mulcahy.com.au | 300B Gillies Street, Ballarat