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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 Estranged and Deranged - Small Business Owner..................................1 Should You have a Self-Managed Super?..................................................2 Why can’t I say where my Superannuation goes when I die? ............2 A Tax effective alternative to Compliment your Superannuation.....3
Get your estate planning in order!................................................................3 The 10 Second Insurance Checklist!..............................................................3 The 7 Greatest Legal Mistakes that Small Businesses make in a Recession….and how to avoid them............................................................4
Estranged and Deranged - Small Business Owner Question: My wife and I are directors of a small Pty Ltd Company (we also have a service trust for asset protection and to save tax). As directors, we haven’t signed employment contracts - in fact, even our ‘real’ employees haven’t signed employment contracts. Are yours fully compliant with the new Fair Work Act? Answer: Clearly, you must be estranged from your accountant and financial adviser. That, or there’s some peculiar computer virus going around creating serious typos in the emails we receive (just like our friend last week who wanted to lease his SMSF artwork on display to himself). Your email is riddled with so many elements of wrongness. If you act in time, your accountant and financial adviser can fix them up. You’ll thank them when the ATO comes and audits you (or if your company goes insolvent). Wrong # 1 - Don’t brag Let’s assume you get audited -it happens to everyone at some point. The ATO shows up at your front door. Alarmed and exposed in your daggy superman boxer shorts, you blurt out that you set up your service trust for asset protection purposes. Cleverly (or so you think), you are adamant that your service trust is not there to save tax. You are a man of your word - you say the same thing in a suit in court (when the ATO is grilling you). Later on, your business goes bust. Here lies the problem. You now can’t plead in the insolvency court that your service trust was there to save tax. The ATO transcript, where you swore “your service trust is there for asset protection reasons”, doesn’t make good reading in the bankruptcy courts. Pleading either as a reason to operate a Service Trust is fraught with danger. Our litigation lawyer, Nick Oud, states that if you lie in court it is perjury and you risk going to jail, albeit only for a few hours. It is rarely wise to cite tax savings or asset protection as a reason for doing anything. Yes, you might think it, but don’t brag around
town about it. If someone asks, service trusts are great to help your Business Succession Planning and Estate Planning - and they really are. There are many reasons to be in Service Trusts other than to save tax and asset protection. Wrong #2 - You need it in writing - Always. It doesn’t matter whether the people working for you are your best friends or family. They can be the most trustworthy and conscientious workers that you’ve ever had. You still need employment contracts. Employment contracts generally benefit you, the employer. But employees thank you for it too. By setting out the job description, salaries and agreed benefits, you give your employees certainty and stability. All LawCentral employment contracts are fully compliant with the new Fair Work Act 2009. The people that work for you can fall into two categories, depending on your circumstances: 1. Employees You engage employees under a contract of service. This assumes that the employee is an agent of the principal employer. The employer has direct control over the employee (i.e. employees must appear at work from 8.30am until 5.30pm, the employer owns the equipment that they use and workers cannot reasonably refuse work given). You pay the employee for providing their labour, and in turn you pay them a salary/wage; 2. Independent Contractors You engage independent contractors using a contract for services. Contractors act independently, and therefore, the employer has no vicarious liability for the contractors’ actions (in most circumstances). Contractors are engaged to perform a particular task or produce a certain result. They are usually available to provide similar services to the public. Payment is based on the completion of those tasks or results, for example, a tradesperson paid to perform one-off repairs.
In practice it is sometimes difficult to distinguish between a true contractor and an employee. But you need to get it right. It determines whether you will be liable for such things as PAYG tax deductions, superannuation contributions and minimum conditions of employment. Wrong #3 - Don’t trust yourself Directors are “employees”. They get director’s fees. We used to make both mum and dad directors so that we could distribute director’s fees. There is less justification as to what job they really did to substantiate their salaries. However, from an asset protection strategy we would be staring a negligence case full in the face if we allowed both mum and dad to remain as directors. Following the “woman of substance” and “man of straw” asset protection strategy, mum must resign as a director. If the company goes down then the ATO can automatically recover many taxes directly from the directors. Creditors may also be able to prove that the directors traded while the company was unable to pay its debts. It is too risky to have both mum and dad as directors. Your company is old and requires 2 directors. From beginning to end it takes about 6 minutes to convert the company to a single director company. The courts said that it was quite proper for employees (including mum, dad and children) to have some or all of their “incomes” from the company to go towards their Superannuation. Talk to your accountant and adviser about a Self Managed Superannuation Fund. Make sure you have a proper and flexible employment contract that allows such contributions when you want to make them. For example, have bonuses automatically made into the employee’s super, unless the employee directs otherwise. This is because it is too late to put bonuses into Super once earned. Brett Davies, lawcentral.com.au
Should You have a Self-Managed Super? When it comes to superannuation, people generally fall into two categories – those who find it all “too hard” and don’t give it the attention it deserves, and the growing group – those who want to take complete control of their super by setting up a Self Managed or DIY Super Fund. But what does “take complete control” really mean when it comes to your largest asset? Often a superannuation fund will form the core of a financial plan. Choosing a super fund and using it effectively is a vital part of ensuring a secure financial future. With a Self Managed Super Fund you can control all aspects of your super... Investments Your risk profile is determined by considering your current financial position, your needs and goals and how comfortable you are with certain investments and market movements. Investments that suit your profile are then selected. For instance, a fund can hold, •
Direct property. This could include commercial, rural, retail and residential property, though you need to be aware that a super fund
cannot borrow to invest unless done with an instalment warrant. •
Shares in listed companies, in Australian and overseas. You can choose the companies and give the investments your own flavour. You could avoid companies whose business you dislike and favour those of which you approve. Note, however, there are some restrictions about investing in private companies.
Tax Although superannuation is concessionally taxed, it is difficult for commercial super funds to spread the tax benefits fairly over all their members. In a Self Managed Super Fund, the tax can be controlled. By careful planning you can: •
•
•
Defer payment of tax rather than it being taken directly from your contributions to the fund. Reduce tax below 15% by investing in Australian companies paying franked dividends.
Insurance The unexpected does occur and super funds can provide cost effective cover for life, total and permanent disablement and income protection. In a Self Managed Super Fund, you can choose the type and level of cover that suits you. Death benefits With many people living in more complex family relationships, “who gets your super when you die” is a key issue. In a Self Managed Super Fund, you have absolute control and can ensure your wishes are met. Costs Many commercial funds charge fees based on the amount of money you have invested. In a Self Managed Super Fund, fees can be much lower. They will usually be on a time cost basis for any financial planning or auditing advice. A Self Managed Super Fund does not suit everyone but they provide the potential for you to take control of your financial future. Contact your financial adviser for further information.
Minimise or eliminate capital gains tax.
Why can’t I say where my Superannuation goes when I die? QUESTION: I recently asked my adviser what happens to my superannuation when I die. My adviser immediately turned to my Self Managed Superannuation Trust Deed and told me that the trustee of my superannuation fund will decide who will receive my superannuation. This didn’t sit well with me. Although I trust my trustee, I want to decide who will get my superannuation. My adviser told me I should update my trust deed to allow for a binding nomination. What is a binding nomination and what should I know about them? ANSWER: A binding nomination forces the trustee of your superannuation fund to give your superannuation to the people who you want to receive it when you die. Binding nominations have only existed for several years so don’t be surprised if your trust deed doesn’t allow for them. Even now, many new trust deeds (particularly badly
drafted trust deeds) don’t allow for them. Also, you might think you have completed a binding nomination but it may be a nonbinding nomination (that is, you have made a suggestion to your trustee who you would like you superannuation to go to, but your trustee is not forced to follow your wishes). A binding nomination must be current when you die. For your binding nomination to be current, you must ensure not only that you have made a nomination but you have also renewed the nomination every 3 years. This can be difficult if you do not have a power of attorney granting your attorney to renew your binding nomination when you have lost mental capacity. If your binding nomination has expired, (this is probably 90% of the population) your trustee will be required to hand over your superannuation to one of 2 groups: 1.
Your estate; or
2.
Your dependants.
Your “estate” is of course your Last Will and Testament if you have made one. Your “dependants” is a strange legal term but includes your family, some relatives and defactos. If you had a retail or industry super funds the trustees of those funds (mostly in Melbourne) act as god when it comes to your superannuation when you die. Although I have to tell you that the trustees generally don’t like deciding what to do with your superannuation. They would much rather someone else tell them where your superannuation should go. As you have a self managed superannuation fund then your next of kin, or other trustee such as your 2nd wife or children from your first marriage decide who will get your superannuation if you don’t have a current binding nomination. Of course, as you have a self managed superannuation fund then you can do update your trust deed to allow for non lapsing binding nominations Brett Davies, lawcentral.com.au
www.insurancechampions.com.au
A Tax effective alternative to Compliment your Superannuation The introduction of Superannuation contribution caps has created a renewed interest in Insurance Bonds.
investment date and subject to the 125% additional contribution rule, there is no personal tax impact on any withdrawals.
An Insurance Bond is an investment offered by life insurance companies that combines the benefits of a managed fund with the security, tax and estate planning benefits of a life insurance policy.
The Bond is designed for investors seeking to invest tax-effectively in the longer term for themselves or for their children; those in higher marginal tax brackets wishing to minimize taxable income; and investors wishing to defer personal tax on investment growth to future years or seeking certainty in estate planning and wealth transfer.
Unlike a managed fund, where investors pay tax on earnings at their marginal rates, the Bond is a tax-paid investment, because the tax on earnings is paid by the life office at the rate of 30%. It does not affect an investor’s personal income tax or annual tax return obligations, unless a withdrawal is made in the first 10 years. If the Bond is held for10 years from the original
Whilst Bond earnings withdrawn within the first 10 years are usually included in assessable taxable income, the capital component of any withdrawal is free from personal tax. Additionally there is a tax offset of 30% on the earnings, and this may be used to offset tax on other income.
Withdrawals are also free of personal income tax in the event of death, disability, illness and financial hardship. Anyone aged 16 years (10-16 with parental consent) and over may own a Bond. The Bond may also be owned by multiple individuals or by a company or a trust. If the Bond owner is the life insured, the owner may nominate a beneficiary who can receive the Bond proceeds tax free upon the death of the life insured, bypassing the estate and any potential challenges. A bond owner over age 16 can transfer Bond ownership to another party at any time. This maybe done without any personal tax implications to the new owner (if transferred without consideration) whilst retaining the Bond’s tax status. Talk to your financial adviser about the benefits of Insurance Bonds
Get your estate planning in order! 1.
2.
3.
Make a will. A will allows you to distribute your estate according to your wishes. You can also avoid the additional costs and delays that may result if you die without a valid will. Choose your executor wisely. Your executor is responsible for ensuring the administration of your estate is dealt with in a timely and suitable way. Execute a power of attorney. This allows you to choose a person that you can trust to act on your behalf to look after all or some of your affairs while you are still alive. An enduring power of attorney will continue if you lose your mental capacity and need someone to look after your affairs.
4.
5.
6.
Establish a testamentary trust. By including certain conditions in your will, a testamentary trust can be created after your death to protect your estate’s assets and provide for your beneficiaries taxeffectively. Complete a binding nomination or a binding non lapsing nomination. If offered by your super fund, a binding nomination will allow you to specify whether you want your death benefit to be paid to your estate and/or to your dependants. Make sure you keep your nomination up-to-date, as nominations are generally only valid for three years unless it is a non lapsing nomination. Make sure you leave enough money. To enable your family to pay off debts and meet their living expenses, you may
7.
8.
need to take out extra life insurance. This could be purchased through your superannuation fund or you can apply for a personally owned policy. Make the right ownership decisions. When you acquire new assets, such as a house or an investment, it’s important for tax and other reasons to consider whether you should invest in your name, your partner’s name, in joint names or via another arrangement, such as a trust or company. Seek advice. Estate planning is complex and the laws change frequently. Your financial adviser (with the help of tax and legal professionals) can ensure you make the most of your opportunities and provide for your loved ones.
The 10 Second Insurance Checklist! 1.
Does your income protection policy still reflect the income you are currently earning?
2.
Will your house insurance pay you enough to rebuild your house?
3.
Will your life insurance pay off all your debts and be able to support your dependants if you are no longer around?
4.
Has your car been modified in any way?
5.
Have you recently installed security devices or extra locking systems on your home that could reduce your premium?
6.
Have you changed jobs and not informed your insurance adviser that your new occupation is less risk or no more manual work. These changes could reduce your premiums?
7.
Assignment of a personally owned
insurance policy into a DIY super fund is not allowed, This ‘in specie’ transfer could render your fund ‘non complying’ 8.
If you have given up smoking for more than 12 months you could change your policies to non smoking status and save substantial premiums.
9.
Changing jobs, moving home, re-financing or birth of a child are some common Trigger events that should prompt you to review your insurance cover
There are many different choices of insurance and it pays to have a specialist analyse your needs and find the most cost-effective solution for your circumstances. Call your adviser to discuss.
The 7 Greatest Legal Mistakes that Small Businesses make in a Recession….and how to avoid them In a recession businesses lose interest in solving the usual legal issues and put their time and money into more immediate issues such as “keeping the wolf from the door”. However, downturns bring their own serious legal issues. Here are the seven greatest: Mistake 1. You don’t get paid. There are 4 Rules to getting paid: Rule 1. If you are not being paid stop providing the service. Many businesses work on, in the hope that the debtor will do the right thing. Rule 2. Collect aggressively yourself before handing it over to your lawyer but you cannot get blood out of a stone. Rule 3. Get proof of acceptance of the deal e.g. a cheque. Rule 4. Know who you are dealing with and get security e.g. a personal guarantee. Mistake 2. You try to dig yourself out of your problems with a law suit When your business is shaky, sometimes it is possible to find someone else to blame other than your spouse such as your accountant Clients ask if they have a winner and the usual answer is “yes”. In the good times, the issue is how much the claim is worth i.e. what “damages” (money) they will receive if/ when they win. In the bad times, they simply cannot afford it in terms of time and money. So except in exceptional cases, forget it. If, you cannot let go then your lawyer will be happy to fight it to your last penny. Mistake 3. Someone dies and you are not included in the will In the good times, business owners die without wills and leave a mess. In bad times, your death can be a bit of a relief and you are long gone before your will or lack of it, may become an issue. However, you should try to be named as a beneficiary in wills made by others. Even despised ‘ne’er do well’ relatives can leave substantial sums to you providing that you are willing to put yourself out a bit and of course put aside the bitterness of the years. A proven method of improving cash flow is to ensure that your relatives, neighbours and friends make wills. So get on with it. Mistake 4. You don’t manage the end game to a contract properly. Courts expect you to honour your part of
the bargain however lousy the deal that you have made, unfair I know. In a downturn, for every business owner insisting on a contract being performed there is a business owner trying to get out of one. It is important not to pick up your ball and go home too early even where it is obvious that the other person is messing around. As you could be blamed for wrecking the contract, allowing your opponent to either get off “scot free” or worse, claim their loss against you. It is very easy to get sued or let your opponent escape if you spit the dummy. So don’t. Mistake 5. Your business partner turns from best friend to worst enemy Your business is in bad shape and secondly, it is all your partner’s fault. You knew it and so did your spouse. You are fully liable for every wrong move he (or possibly “she”) makes on behalf of the partnership. If you get sued a creditor can claim all the money from your assets and then it is up to you to get the money out of your partner. Not an easy task. If your partner goes bust three things may happen: 1.
You will pay all the debts of the business not just half.
2.
His trustee in bankruptcy may recall any loans that he had made to finance the partnership. You will need to come up with the cash to replace his share.
3.
If you took out a joint bank loan to finance the business the bank could recall its loan as your partner’s bankruptcy is probably a breach of the loan agreement.
So have a partnership agreement, take out separate loans and document loans from your family. Getting rid of a useless, underperforming partner is one positive, feel good thing that you can do in a down turn as to keep them on, can be a liability. Mistake no. 6. You do not have terms and conditions. Writing your own terms and conditions (Ts and Cs) and putting them on the back of your order form enables you to snooker an enemy long before you even meet. Who would not want to set the rules of the game? Well, many small business owners don’t seem to bother. Here are 5 terms that are particularly good in a recession: •
If the customer goes broke the deal is off.
• •
•
•
Only varied in writing. The customer relies on his inspection and not on any representations made by your company especially any of your salespeople. Your customer does not own the goods until you are paid even if they have been delivered. Will a condition like this work, in practice? Who knows? But it is worth a try. You have a right to charge all their real estate and take their kids hostage until they pay up. That’s right they are your Ts and Cs, be imaginative.
Are they petty and nasty? Well yes, but your good customers will not read them and they may avoid you being sued or at least give you the edge in any threatened court action. Mistake no. 7. You go broke and lose everything Creditors are generally very gullible people who will swallow hard luck stories and promises to pay as well as accepting minimal payments. Often, it is only when you stop communicating or tell them to get lost that they “spit the dummy”. Even a small creditor can pull your empire down. When your back is up against the wall here are five things to remember: •
• • • •
Don’t panic and use your credit cards to pay your existing debts, you may need that credit for essential items as the situation gets worse. A threat to be sued is not the same as being sued and sometimes suing or being sued can be a slow process. A court judgment against you is not the end. Be nice to your spouse or they may use this opportunity to clear out the bank accounts and do a runner. As a last resort, rather than putting your head in the sand make a list of all your debts and send it to each of your creditors. Treat them all equally and offer a small sum per week. If the alternative is not to get paid at all, many creditors will accept this offer. This “Open Kimono” approach works.
In a downturn, many small business owners cannot afford legal advice and use gut feeling i.e. the lunatics take over the asylum. So beware. (c) Paul Brennan who is a lawyer practising on Queensland’s Sunshine Coast (www.brennanlaw. com.au) and author of “The Law is an Ass-Make Sure it Doesn’t bite yours!”.
Disclaimer 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. Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
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