Investing
Insurance
Lending
Tax
Legal
Wealth Creation
Wealth Brief The Wealth Brief is brought to you by
Suite 1/36 Sunshine Beach road, Noosa Heads, Queensland 4567 T: 1300 761 236 E: advice@insurancechampions.com.au W: www.insurancechampions.com.au
In this issue End of year tax tips for 2008 / 09....................................................................1 Home loans - to fix or not to fix?....................................................................1 When the Income Protection cover wasn’t quite enough...................2 It’s your tax refund...what are you going to do with it?.........................2
The 6 Most Common Errors In a Will!............................................................3 What’s the future for your family business?...............................................3 The Guide to Investment Terms.....................................................................4 Superannuation All Goes to the Oldest Son..............................................4
End of year tax tips for 2008 / 09 The end of the tax year is edging closer. If you haven’t planned how you will maximise your income and save some tax, take note! The most effective strategies are often the simplest and can be applied before 30 June this year whilst others should be considered for next year. Here are both lists to consider: Action Pre 30 June •
Defer non-essential income until the new financial year.
•
Review your investment portfolio prior to 30 June to determine whether investments should be sold to offset any capital gains or losses made throughout the year.
•
Ensure you get capital gains tax concessions by holding assets for more than 12 months.
•
Maximise tax deductions through super contributions. Alternatively, make a contribution into super for your spouse – this could provide you with a tax offset.
•
Borrow to invest through home equity loans, margin lending or protected equity loans and pre-pay the interest.
•
•
Ensure you review income distributions from family trusts. You can lose franking credits in some circumstances if a family trust election is not made.
Take care with “tax-effective” investments
What about next financial year •
Make sure you hold assets in the most appropriate tax structure. Individuals, companies, trusts and super funds are all taxed differently on their capital gains and income.
•
Use franking credits to reduce tax on lower taxed entities like super funds and lower income earners. Remember that excess franking credits are refundable.
Income split wherever possible to take advantage of the progressive tax system.
Take care with “tax-effective” investments The golden rule when considering any investment is to focus on the quality and prospects of the assets and treat any tax advantage as a bonus. Remember that over time a good investment will be much more valuable than a tax break this year. In an ever-changing and complex world, seeking professional advice can help you make the right decisions.
Home loans - to fix or not to fix? As interest rates come down, the question most mortgage holders ask themselves is - “when is it time to fix all or part of our home loan?” For most people, it’s the $64,000 question!
But what are the disadvantages? In most cases, when you fix the rate it is generally higher than the standard variable rate and sometimes set-up fees are charged. Alternatively, if you do take the fixed option and then break the loan before the set period has expired, you will usually be hit with penalties.
Before you act, carefully consider both sides - the advantages and disadvantages.
Focus on the average
The obvious advantage is that when you fix, repayments will not increase with rising interest rates so you know in advance what your repayments will be for a fixed period, and you can usually choose one to five years. This can be helpful if funds are tight.
Many borrowers will automatically think it’s best to pay a bit extra and tie in to a fixed rate than gamble with potential rate increases. But you should never just compare the fixed rate to the variable rate… it’s the average of the variable rates over the coming three years that is your best indicator.
Unfortunately, nobody will know what the variable rates will be over any lengthy timeframe, but to give you an indication based on past results, there have only been three periods since 1990 when fixing for longer than two years has been a positive move. This occurred in 1993/94, in 1998 and in the second half of 2001 (following September 11). So if you’re thinking of changing to a fixed rate, think carefully and do the sums. Life is about choices and nobody should make this decision for you. The only suggestion we make is to keep paying your mortgage off regularly and making additional payments when you can afford to.
When the Income Protection cover wasn’t quite enough David is a dental technician. He rents rooms in a city office and builds bridges, crowns and dentures for a number of local dental practices. He employs Amanda as an administrator to manage the front desk, collections, deliveries and office management. David is married with two children. His business is thriving and after an assessment with an adviser he learned how vulnerable he and his family would be if he could not work. He arranged to take out income protection insurance. This cover would pay 75% of his normal income whilst he was unable to work and because he had some savings, he decided on a 90 day waiting period. It would ensure he could feed his family, pay the mortgage and other bills and maintain a close-to-normal lifestyle as he recovered. Months later, David had a water skiing accident and received a neck injury that left him hospitalised. He
undertook intensive rehabilitation over four months and used up his cash reserves. After the 90-day waiting period, the income protection policy started to make payments and everything seemed under control. When the rent account for his business premises arrived and Amanda asked about her holiday pay, he realised he would have to use his personal resources to keep the business open until he could return to work. The income protection cover he had wasn’t enough to protect his business as well.
The Solution David could have covered this risk by also purchasing a business expenses protection policy. This would have paid the ongoing expenses incurred by the business – such as rent, electricity, phone and Amanda’s salary. It will normally cover these expenses for up to twelve months and the cost is tax deductible. He should also have given more thought to a 90 day wait on Income Protection and why using up your savings during the waiting period for this length of time might not be the smartest idea. Contact your advisor for more information.
It’s your tax refund...what are you going to do with it? Many Australians have received tax refunds in the past and it seems more are likely over coming years. So what do you do with the extra money in your pocket?
b) Regular investment plan
If you go out and spend it, all you are doing is giving part of it back to the government in the form of GST. Now is the time to plan to use it to improve your lifestyle in the future
While a certain amount of money in the bank is helpful for emergencies, now is the time to consider a longer-term plan with assets such as property or shares. By using managed funds, you can access these investment types with modest contributions as low as $200 a month, and you could start the investment with your lump sum tax rebate. While such investments are subject to fluctuations in value, you will see them grow over the longer term. There are also likely to be tax benefits from franking credits and reduced tax on capital gains.
In making your decisions, consider these options:
a) Reduce your mortgage By putting a lump sum into your mortgage, you are acquiring more equity in your home and reducing the interest and, later on if you sell your home, you will not have to pay capital gains tax on the profit you make. Having more equity in your home also means that you can re-borrow that money again for investment, gearing, or to purchase other assets. If you re-borrow to invest and have it set up as a separate investment loan you can claim the loan interest as a tax deduction.
Consider a regular savings investment plan. This will help you meet future objectives such as a new home, family education or retirement.
c) Superannuation contributions Your superannuation fund will surpass any other investment vehicle simply due to the law of compounding and because it is only taxed at a maximum of 15%. Whilst superannuation funds remain the most tax-effective haven and probably the best way to grow your investments, the downside is that once
your money is contributed it is usually not accessible until you retire or suffer a total & permanent disability. If you’re sure you won’t need to access your tax gift or rebate until you retire, it is probably the best place to invest it. Where will your tax gift or rebate work best for you? Talk to your advisor about your options.
www.insurancechampions.com.au
The 6 Most Common Errors In a Will! 1. Invalid or no Will
3. Failing to minimise death taxes
If you don’t have a valid Will, the Court will impose one on you. This fails you in two ways:
You are taxed long after you die. Although death taxes have been abolished, your estate is reduced by the three defacto death taxes - income tax, capital gains tax and stamp duty. Failure to plan allows these hungry taxes to eat away at your estate’s value. There are protection mechanisms, including:
5. Failing to include both intended and unintended beneficiaries
(iii) Mutual Powers of Attorney
Carefully consider who you want to be a beneficiary in your Will. Ensure that any witnesses to your Will do not receive anything under it. At Brett Davies Lawyers, we also encourage you to expressly name any unintended beneficiaries (for example an ex-spouse or estranged child) in your Will. This shows the Court that you have not ‘forgotten’ that person. This is a ‘considered person clause’. This does not stop them from challenging, but makes it harder.
2. Will is out of date
(iv) Cascading Power of Attorney
6. Failing to dispose of all assets
The right time to update your will is now. Not tomorrow, not after the weekend, not ‘when things quieten down’. Now. You should update Your Will every 12 months with your adviser, and every 4 years with Brett Davies Lawyers.
4. Appointing an unsuitable executor
Carefully consider your assets. You should provide for all assets that you wish to distribute. You should also include a provision that covering any beneficiaries that cannot inherit as you intended.
1.
the wrong people may receive your assets; and
2.
the three defacto death duties take a cut. These are income tax, stamp duty and Capital Gains Tax.
You should consider a 3 Generation Testamentary Trust to reduce and postpone (often forever) these defacto death duties.
You should reconsider your Will after any major change in your life or financial circumstances. For example, a birth, death, divorce, marriage or new business venture. Failure to do this can result in unintended bequests and inheritances. It can also leave your estate in a mess.
(i) Three Generation Testamentary Trusts (ii)
Superannuation Testamentary Trusts
You need to appoint an executor in you Will. They handle your affairs after you die. Most people appoint their spouse as the executor. After they both die, they appoint all of their children. Be careful in appointing professional trustees and lawyers as your executors. They generally charge high fees to administer your estate.
Include a residuary clause in your Will. This allows you to keep control over any leftover assets. If there is no residuary clause, the state can decide where your residuary assets go. Your Will is one of the most important documents you will ever sign. You worked hard for the assets you have. Make sure you have the final word on where they go. Brett Davies (lawcentral.com.au)
What’s the future of your family business? A succession plan is absolutely essential for every family business to ensure continuity. It is an issue the family must deal with whether it owns a small business, family farm or a global empire. Most businesses in Australia are familyowned and business operators are often too busy dealing with today’s operations to worry about tomorrow. However, putting off establishing a clear-cut succession plan in a family business will lead to future problems and can drive a deep wedge into the closest of families.
2.
3.
History shows that succession is the Achilles Heel of the family business. Most do not make it past the first generation, with only three out of ten making it into the second generation.
Here are six steps that should be followed to ensure that your family business succession is a success! 1.
Board Meetings or formal family meetings should be held regularly. There must be a defined business agenda and open discussions encouraged to ensure no break-down of communication between all of the family members involved in the business.
4.
5.
Plan for the exit of the older generation by setting dates and establishing retirement funds to ensure that they are well provided for. If you fail to have the total support of the older generation they are unlikely to relinquish their position. Who replaces the older generation at the helm of the family business is a vital issue because in order for the business to succeed it may not always be appropriate for the eldest son to automatically take the lead (whether he expects to or not!!) There must be full and frank discussions on this issue and firm decisions made. Seek professional advice. It is crucial that all-important planning issues are discussed with your accountant, solicitor and financial planner. Dates for future meetings must be set so that discussions continue until a plan that provides for all family members in the business has been completed.
6.
It is imperative that you keep your plan current. Succession plans require periodic revision and updating to ensure that what you have agreed upon remains relevant.
There is an old saying. “One generation will build an empire, the second generation will fight over it and the third generation will sell the empire and spend what is left of it.” Times have not really changed much, but the simple and commonsense approach of preparing in advance, seeking professional advice and sound, unemotional management, can certainly turn the tide. Don’t let your grandchildren spend what you’ve dedicated your life to. Your financial adviser can help create a plan of action with clearly defined goals and objectives.
The Guide to Investment Terms Asset Class: These include shares,
Dollar Cost Averaging: When you
Capital Gains Tax: The tax you pay
Growth Assets: These normally include
property, fixed interest and cash. They are unique in return to risk, return and liquidity.
invest a set amount of money at regular intervals over a period of time.
on the increase in capital value of most investment assets. It’s payable when the asset is sold and a gain is realised.
shares and property and are expected to show capital growth over a longer time frame.
Compound Returns: This involves earning returns on returns on the initial money invested. You compound by reinvesting income from your investment.
Investment Risk: The Fluctuation in value of an investment and generally shows the higher the return the higher the level of risk.
Default Fund: The SGC Super contributions are paid into a default fund when an employee has not chosen a fund.
Investment Strategy: A plan that takes into account your risk tolerance, your time horizon and your financial goals.
Defensive Assets: Normally cash and fixed interest that produce lower but more stable returns than growth assets
Market Sentiment: The general mood of the investment community as to the direction of the share market.
Diversification: When you spread
Market Volatility: The amount of
investments across a range of asset classes, where you hope to reduce risk and increase returns.
fluctuation in interest rates, share prices, and currency etc. The greater the volatility the less certain an investor is of returns.
Realise: To sell an investment.
Recession: As currently witnessed in Australia and the world. A major slow down in the economy. Redemption / Redeem: To sell or
withdraw an investment.
Risk: In general the higher the level of risk you are willing to accept, the higher the potential return over a period of time may be. Salary Sacrifice: An amount of pre tax salary that you decide to contribute to super or receive as a fringe benefit instead of taking as cash salary. This can help in reducing your personal tax rate. Spouse Contribution: A contribution
to a super fund for your spouse. This could result in taxation offsets being claimed for the contribution.
Switching: When you transfer units
between a managed investment by selling in one and then buying units in another. It could trigger capital gains.
Superannuation All Goes to the Oldest Son then the terms of your Will won’t be of any assistance in sorting out any problems.
Question: My adviser suggests that I make a binding nomination for my superannuation. This is to ensure that my Super goes to my three children equally when I die.
As your child is a co-trustee of your fund, there is all the more reason to have everything clearly and unequivocally set out. You may trust that child implicitly, but death and grief can do strange things to people. After you’ve died, that child could appoint someone who is not a sibling (i.e. their partner) to be the other trustee of the fund. They could direct the proceeds of the superannuation not according to your wishes. Your non-binding nomination only operates at the discretion of the trustees.
I have a Self Managed Superannuation Fund (SMSF). My eldest child is the cotrustee of the SMSF. I have made a nonbinding nomination that the fund is to be distributed between my children when I die. Surely, if there are any problems, my Will (which also leaves everything equally to my children) deals with this? Answer:
Have a look at the unhappy case of Katz v Grossman [2005] NSWSC 934 (16 September 2005). In this case, the father left his superannuation to his daughter and son equally, via a non-binding nomination. The daughter was the co-trustee of the fund with her dad. Dad died. Instead of appointing her brother as a second trustee, the daughter appointed her own husband. They then happily directed all of the proceeds of the deceased’s superannuation to her alone. The court was powerless to
Your adviser is right to be cautious. He has provided good advice. Your superannuation does not automatically form part of your estate assets when you die, unless you direct the Trustees of your fund to pay your benefits to your estate. Therefore, if you have made a nomination for your death benefits to a person (or persons) and not your estate,
stop the greedy daughter and her husband as they were the trustees of the Super Fund. As the Dad had not made a binding nomination and had not made a Brett Davies Lawyers’ SMSF Will, the daughter and her husband were able to give themselves everything in the fund. The brother received nothing. I don’t know how the daughter and her husband can sleep at night - probably in silk sheets. Brett Davies (lawcentral.com.au)
Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
Disclaimer The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constituteadviceofanykind.Theinformationhasbeenpreparedwithouttakingintoaccounttheobjectives,financialsituation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it isdesignedforyoutocontemplatewhetheryoushouldobtainprofessionaladviceifanissuemaybeofrelevance,havingregard to your objectives, financial situation, needs and circumstances. 2009 Copyright Market Dominance
©
Produced by Using The Net. Website www.usingthenet.com.au