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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 The Secrets To Becoming Wealthy................................................................1 Top Tips On Investment Properties...............................................................2 Dealing with Will Resistance............................................................................2 Protect Your Business from the loss of a Keyperson...............................3
Taking Care of Your Loved Ones....................................................................3 Thanks for your support!...................................................................................3 Get serviced by your trust!...............................................................................4 Your Business, Your Overheads......................................................................4
The Secrets To Becoming Wealthy While the Global Financial Crisis has meant that many of the rich have become less rich (it’s really a bit of a stretch to say they are becoming poorer); those who have grown their wealth through property have done comparatively much better than most and in fact many have substantially increased their wealth over the last year by buying distressed property at bargain prices. Examining the Rich 200 List we can see that more of Australia’s wealthiest people have made their money through property than by any other means, and interestingly many of those who initially make their money in other businesses still invest their money in property. Are there any shortcuts to get into the BRW Rich 200 list?
Number 4. Invest counter cyclically
6.
Many of those who have become very wealthy in Australia, and around the world for that matter, are at times considered a bit crazy because they don’t invest when everyone else is investing; more importantly, they invest counter cyclically when everyone else is saying it’s the wrong thing to do.
They recognize that there is no such thing as a self made millionaire, and have attracted a team of good people and trusted advisors around them.
7.
They are confident and “just do it.”
Interestingly, many of them are out buying assets now. They are buying undervalued shares and good properties. We can learn a lot from Australia’s richest people, so let’s quickly look at some of the common traits of the people in the BRW Rich 200 list; 1.
The answer is yes and here they are:
1: Choose your parents very carefully.
2.
While many of the Rich 200 took big risks early on in their investment careers, once their wealth was established they stopped taking risks and preserved their wealth. Interestingly, others who kept on speculating or taking risks lost a significant portion of their wealth.
3.
In general the wealthy do not diversify. They have one good idea and repeat it, or specialise in one business or investment niche.
4.
They tend to invest in growth assets (more than for cash flow.)
5.
They are good at picking trends or cycles. They know when not to invest, they hold back near the peak of booms. And they also understand the power of investing counter cyclically when properties or shares are “on sale.”
Many of the people in the rich list are there because of the wealth accumulated by their parents. If you don’t have wealthy parents………
2: Marry somebody who is already wealthy… and then the trick is to stay married. Or…
3: Understand the Magic of Compounding: One lesson to take from the millionaires and billionaires who have used property to accumulate their wealth is that most are long term investors. They buy well located assets and add value, often through development, and use the power of leverage and compounding to grow their asset base. They do not try to trade or speculate their way to wealth.
When they have made their millions they don’t go off and spend their money, but tend to reinvest it in their area of expertise.
One of the major lessons I believe you should take on board is that of counter cyclical investing. Buying at or near the bottom of a cycle. Buying when people are saying you’re mad to buy. But of course, you don’t buy just anything, You need to buy extremely selectively, based on clear-sighted analysis. You will need the ability to see beyond fads and fashions. You’ll need to analyse and model long-term potential and probability of a capital gain. Your Financial Planner can help on the road to wealth creation.
Top Tips On Investment Properties Creating wealth through property investment is a well-established practice in Australia, with many homeowners having reaped positive capital gains in past property booms.
seek professional advice from their financial planner, accountant or solicitor before deciding on a strategy.
However, purchasing an investment property can be quite different from buying an owner-occupied home, and there are a few key factors to consider.
With the previous housing boom and increase in property prices, many homeowners will have a significant amount of equity in their homes that they can tap into to purchase an investment property.
When people purchase the home of their dreams they look for things like: Will the location fit their lifestyle? Is the size of the house suited to their needs? Do they like the interior decorating?… Things that are practical and will make them feel comfortable living in the house. When purchasing an investment property, investors should be looking at different aspects: Is the area going to achieve good capital growth? Is the demand for rental properties strong in the area? Will the house need a lot of maintenance?… Things that indicate the investment will produce a reasonable return and not become a burden ”. Seek independent financial and legal advice There are a number of tax and legal ramifications associated with property investment, and it is vitally important for potential investors to
Use the equity in your home to purchase an investment property
Consider borrowing 110% to cover the purchase price and costs If you have enough equity in your home you may want to consider borrowing the full purchase price of the property and associated costs – you won’t have to save for a deposit and you can claim any rental short-fall on a negative gearing basis. Carefully consider the options of positive vs. negative gearing Consult with your financial adviser before purchasing an investment property as to whether positively or negatively gearing a property is of greater benefit to your financial needs and you have sufficient reserves to hold the property long term. Choose the most suitable loan There are a number of different types of loan available to residential property
investors, and the most suitable loan will depend on your investment strategy. Consult with a mortgage broker or lender to determine which is the most suitable loan option for you. Consider interest only vs. principal and interest loans When deciding on what loan type to take out for your investment property, think carefully about interest only vs. principal and interest options. Although interest only loans will not reduce the loan amount, they will result in less monthly repayments and allow you to make greater contributions to your principal place of residence. Take a long-term approach to investment properties As with all investment strategies, a longterm approach should be taken when purchasing an investment property. Unlike the gains achieved on investment properties in the past property boom, borrowers can still expect good returns per year, and depending on market conditions and personal circumstances, may look at holding on to the property for a minimum of 7-10 years. Well researched, properly financed investment property held long term can give you excellent results!
Dealing with Will Resistance In 1957, Eastbourne GP, John Bodkin Adams was acquitted of murder, despite being found to be the beneficiary of 132 patients’ wills. Having identified someone who may leave you an inheritance; you may encounter “will resistance”. You may need to pay for the will yourself. If you are not a generous person, look on it as an investment. However, do not make it too obvious as to embarrass wealthy relatives and friends, is to risk all. Consider a “Will Gift Certificate” as a Christmas present. If your own lawyers do not offer these, you may find that they will start doing so shortly after you put the idea in their minds. Alternatively, buy a will session and tell your relative that you won it in a raffle. If you use your own lawyer, you may find that they are prepared to put in a good word for you, especially if you make regular referrals.
If a free will, accompanied by the economic and/or duty arguments, cannot entice your relatives to make a will, explain wills can be fun too. For instance, there was once a miser in a small village in Germany. He was so mean that everyone hated him. However when he dies he had made a will. In that will he had left something to everyone in the village. He provided in his will that there would be a wake with a generous allowance for food and drink. All the villagers trooped up to his house. He had provided in his will to be laid out on his bed in his best suit. The villagers went upstairs to his bedroom and stood around his bed. They started to say that he wasn’t such a bad old guy after all, when “crash” the floor gave way and three villagers were killed. He had sawn away the joints below the floorboards of his
room. Once you tell this story your aging wealthy relatives will look upon you as a helpful conspirator rather than a grasping beneficiary and you may find yourself further up the list. In persuading your rich relatives and friends to make wills, try to be creative. It can be worth it.
Extract from “The Legal Guide to Dying… Baby Boomers Edition” © paul.brennan@brennanlaw.com.au published at www.lawanddisorder.com.au/books.html.
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Protect Your Business from the loss of a Keyperson A keyperson is a business owner or employee who is critical to the ongoing revenue and profitability of the business. The keypersons typically have a direct impact on company earnings or whose expertise and talents are crucial to the continuity or growth of the business. What is keyperson insurance? It is a simple, cost effective and flexible solution in the event of a potentially devastating event in your business. There are two types of keyperson policies. One is to protect the business cashflow, while the other is to protect business capital. Keyperson revenue This policy can ensure that your business continues to operate by compensating your
business for loss of revenue following the disability or death of the keyperson. The sum insured can also include the costs of finding and hiring a suitable successor in terms of experience, ability and education. Keyperson capital This policy can help to pay out any loans or debts of your business following the disability or death of the keyperson in the business. Up to 6 people can usually be insured under the one policy.
Taxation Generally, for keyperson revenue policies, the premium may be tax deductible to the company (IT155). It may also be assessable at the time of benefit paid to the business (IT 155). You should refer to your accountant for tax clarification. The benefits: •
Offset a drop in your business revenue
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Provide your business with the time and resources to find a suitable replacement
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Continue with your business plans without significant interruption
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Provide capital to repay loans
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Protect your business from a forced sale
Ownership structure We can assist clients to construct a keyperson policy so as to ensure that the ideal amounts of insurance are established for the business along with correct ownership structures. Depending upon the purpose of the keyperson policy (ie. revenue or capital), then we will discuss how the policy should be owned.
Call Your Insurance Specialist to discuss this strategy for your business.
Taking Care of Your Loved Ones Life insurance provides a lump sum on death or diagnosis of a terminal illness, where you are unlikely to survive for 12 months. It is designed to provide financial security to your surviving dependents. To achieve that you need to insure for an adequate amount of cover. This lump sum should take into account the: • Clearing of Debts • Replacement of lost income • Final expense • Any financial legacy for loved ones To calculate a lump sum to cover the loss of income you can either: • provide for a lump sum that reduces each year by the amount of income required for a set period of time, eg 10years x $60,000 = $600,000 or • you can insure for a lump sum that can be invested at a return that will replace your lost income, eg 1,000,000 invested at 6% to produce an income of $60,000 a year. A common addition to life cover is Total & Permanent Disability (TPD). It is designed
to pay you a lump sum if you are totally disabled and unlikely to return to work in the future. The Lump sum you insure should take into account an amount for: • Clearing of debts • Medical costs • Alterations to your home, if required, due to your disability • A special vehicle if required
Modified definition of TPD for a Homemaker: Normally states that you are unable to do normal physical domestic duties (cleaning, cooking, meals , shopping, and taking care of dependent children). See your insurance specialist or financial planner for more information.
There are different definitions of Total & Permanent Disability: (i) Any Occupation, (ii) Own Occupation, (iii) Modified definition for a Homemaker Any Occupation: TPD normally states that as a result of your disability you have been continuously off work for a period of at least 3 months and with some companies 6 months. You are unlikely ever to be able to work at your usual or any other occupation you are reasonably suited to by the way of education, experience or training. Own Occupation: Similar wording to the above with one important difference - You are unable to work at your own occupation and not be working in any occupation for a period of at least 6 months.
Thanks for your support! Thank you again to everyone who has referred their family, friends and business associates to us in the last financial year. We really appreciate your support and
confidence in us to give the referral. We are always looking for ways to improve our services to you, and want to make sure you are getting what you want from us and would appreciate your feedback.
Please take a minute and consider if there is anyone you know who would benefit from our services.
Get serviced by your trust! Do you own a business? Are you constantly searching for ways to impoverish our friends at the ATO? If you answered yes, consider a service trust. Do they sound novel, strange and scary? Perhaps. Other than accountants, financial advisors and tax lawyers, few people understand how flexible and valuable service trusts are. But we know our LawCentral readers are a smart bunch, so we’ll spill the beans. Why would you want to set up a service trust? Well, let’s say you run your business through a company: which is fine for some people. You make plenty of money. But the money is trapped in the company. The Corporations Act 2001 is very strict. You can only get that money out of the company in 4 ways: 1) Dividends - but you and your husband own all the shares. You are already both on a 46.5% tax rate. You don’t want any more income. 2) Employees - your children and grandma are all employees. But your accountant keeps telling you that you have to prove that they are really genuine employees. You need proper Employment Contracts . The ATO is coming and will ask - “is your 12 year old son really spending 26 hours a week cleaning your factory?” - and we all know the answer to that. 3) Loan - profit in the company is taxed at 30%. In the good old days (pre-1997), we use to just “lend” ourselves the money from our company. We never paid any interest. In fact, we never even paid the loan back. Apart from the 30% tax the company paid, it was free money in our hands. The government is
trying to expose all those loans as fakes. You can easily fix that up by doing a Statement of Recognition. You don’t need to pay back those loans, at the moment. What about post 1997 Loans? For “loans” made after 1997, you must do a Division 7A loan agreement . You only need one Div 7A loan agreement per person per company. It is a once in a life time purchase for each shareholder. It never needs to be updated. The same Div 7A loan agreement works for each year irrespective of the interest rate that the government sets every year. You need to pay yearly interest on these post 1997 Div 7A loans. You also have to pay back the capital over 7 years. Be careful! The Federal Government has announced the tightening of Division 7A rules in the recent Federal Budget. License agreements and the right to use property or chattels at under market rates are also counted as a Division 7A loan. The fourth and best way is: 4) Service Trust. Now we’re talking. Anyone can use a service trust. It is especially useful to professions such as doctors, dentists, auditors and lawyers, who can’t share profit with their family and spouses. Or to anyone that is frustrated with their money locked away in a company. So how does a service trust work? You set up second business. You then have 2 businesses - the old business and the service trust. The service trust provides all the administrative and non-professional “services” and “products” that the professional or “main business” needs. For example, managing the office, cleaning and letterheads. The professional business pays a ‘fair’ dollar value for those services. To prove that the professional business and the service trust
Your Business, Your Overheads Business expense insurance will pay a monthly benefit to assist with the day to day running expenses of your business if you are unable to work due to sickness or injury. Examples of expenses that can be covered under a business expenses policy include: • • • • • •
Accounting and audit fees Bank charges Electricity, property/water rates Equipment hire and motor vehicle leases Interest payments Business related insurance premiums
• • • •
Office leasing fees Rent or mortgage payments Salaries of staff not producing revenue Fees for memberships of prof. associations • Net cost of locum. The benefit period: Usually 12 months. This gives you time to determine whether you are able to return to work or make new arrangements for the running of the business. By ensuring your business is kept afloat while you are disabled, you are given an option of still having a business to sell.
have a true arms length relationship, you need a Service Trust Agreement. You need this because the ATO has rightfully and successfully attacked Service Trusts that were non-commercial and not documented. The Service Trust Agreement is the ‘glue’ between the professional business and the service trust. For tax reasons, agree on the terms of engagement for the service trust, and details of the services provided in writing before you use your service trust. You can build a LawCentral service trust agreement . Its advantages include that it is: 1.
Completely ATO compliant
The service trust itself is completely compliant with ATO guidelines. It also helps your accountant operate your Service Trust within the Commissioner of Taxation’s guidelines. This means it can become legal to provide superannuation benefits, workers compensation benefits and the like to partners. In addition, your professional entity can pay salaries to people working for the service trust. However, salaries paid must be reasonable considering the amount of time involved in the administrative tasks. 2.
Completely flexible
We keep the fees, mark ups and charges as flexible as possible. We put in “as agreed”. This allows your accountant to always have “fair” fees that reflect the true market value for your area. The “as agreed” is as simple as doing an email, letter or minute to say what rates and fees you agree from time to time. Very nice. Brett Davies, lawcentral.com.au
Tip: The premium you pay for business expense insurance is tax deductible. Due to the cost effective premium for this type of cover you should look at a waiting period of 14 days, so you will be paid a claim sooner. Trap: Business expense cover is an indemnity policy that covers what your business expenses are at the time of claim. Because of this you should review your monthly benefit on a regular basis to make sure you are not over insured or under insured. See your insurance specialist or financial planner for more information.
Disclaimer
Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constitute advice of any kind. The information has been prepared without taking into account the objectives, financial situation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it is designed for you to contemplate whether you should obtain professional advice if an issue may be of relevance, having regard to your objectives, financial situation, needs and circumstances. 2009 Copyright Market Dominance
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