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Edition 4
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IN THIS ISSUE What is a CFD? Family Trusts can now pay Superannuation to its directors New Super rules, the most common questions! Establish a ‘Will’ for your business Seven common traps to avoid when looking for a mortgage Binding nominations Vs non-lapsing binding nominations
What is a CFD? A contract for difference, also commonly known as a CFD, is an equity derivative that allows users to speculate on share price movements, without the need for ownership of the underlying shares. CFDs are traded over-thecounter (OTC). CFD trading is very similar to normal share dealing in two respects. You deal at the cash price of the share, and pay a commission which is calculated as a percentage of the value of the transaction. When you open a position, however, you do not have to pay for the full value of the shares. Instead you put up a deposit, from just 5% for Australian shares.
Long positions
Geared products like CFDs can help you make the most effective use of your investment capital. It is important to appreciate that the amount you could lose relative to your initial investment is greater for geared products than for non-geared products.
Short positions
Adjustments - Interest and dividend
CFD’s were originally devised by the derivative desk of Smith New Court, a hugely successful London based trading house in the early 1990s. The advantage of CFDs were that they allowed the firm’s large hedge-fund clients to be able to easily short the market whilst being able to benefit from effective leverage as well as the same stamp duty exemptions enjoyed by members of the London Stock Exchange.
CFDs have no fixed expiry date, giving you the ability to close your position when you choose. While your position is open, your account is debited or credited to reflect interest and dividend adjustments.
Estate planning, Top 8 tips
Your account is debited to reflect interest adjustments and credited to reflect any dividends. This mirrors the effect of buying shares in the normal way, where you no longer earn interest on the funds used to buy the shares, but receive dividends instead. Your account is credited with interest adjustments and debited to reflect any dividends. This mirrors the effect of selling shares, where you earn interest on the proceeds of the sale, but cease to receive dividends.
Family Trusts can now pay Superannuation to its directors Many Family Trusts have a company as a trustee. That company has a human being as a director. The director wants to get paid. • Can the Trustee Company pay the director out of the trust assets? • Can the Trust (rather than the Company) claim a tax deduction? • And can the Company claim a tax deduction for the Director’s Superannuation contributions? The good news is that the ATO has answered, ‘yes’ to all of these questions. Traditionally, you couldn’t get money directly out of your Family Trust into your Superannuation. This new ATO approach now gives you a window to do this.
Have a look at ID 2007/145. Thankfully now the Corporate Trustee of the Family Trust can get a deduction under section 82AAC Income Tax Assessment Act 1936 (Tax Act 1936). This is for the contributions made out of the trust estate assets to a superannuation fund.
To do this the Family Trust argues that it is an “allowable deduction” when calculating its “net income”. Therefore, the director has to be an “eligible employee” of the trust: Section 82AAC(1) Tax Act 1936. To be “employed” by the trust you need one of these:
Let’s have a look at the facts the ATO considered.
1. Engaged in producing assessable income of the trust; or
The company was a corporate trustee of a Family Trust. The company had 2 directors (poor asset protection, but there you have it). The directors were automatically employees of the company. The company had no other employees.
2. Be a resident of Australia engaged in the business of the trust.
The directors claimed to be working 30 and 15 hours respectively a week. The Company therefore took money out of the trust to pay their Superannuation.
The ID correctly states that “engaged” is not defined. The usual meaning of “engaged” is “busy or occupied”. Therefore, the ATO say it isn’t a big jump to argue that these directors are “busy or occupied” in the business of the trust. Lawcentral.com.au
New Super rules, The 9 most common questions! 1 How long Can I Keep Paying Into Super? Up to age 75 as long as you satisfy a work test after the age of 65. The test says you have to be gainfully employed and get paid for the work you do. A minimum of 40 hours in a 30 day period in the financial year in which you make the Contributions. The contributions can be concessional or non-concessional. 2 When Can I Access My Super? You can access it from age 55 as a taxconcessional income, under a transition to retirement income stream. Lump sums taken from super are mostly restricted until retirement from work or once you have turned 65. 3 What Tax Will I Pay When I Take a Pension or Income Stream? If you are under 55 years of age, your pension income will be fully Taxable with a 15% tax rebate. After age 60 the income is tax free. 4 How Much Can I Contribute Into My super? If you are under age 50, you can contribute $50,000 a year in tax-concessional contributions. If you are age over 50, in the transition years July 2007 to June 2012 you can contribute $100,000 a year in tax-concessional contributions. All age groups can make a further $150,000 a year in non-concessional or
after tax contributions. You can bring forward 3 years of non-concessional contributions into one year. 5 What Are Concessional & NonConcessional Contributions? Concessional contributions include employer contributions (including contributions made under a salary sacrifice arrangement) and personal contributions claimed as a tax deduction by a self-employed person. Most commonly, non-concessional contributions are the contributions you make for which a tax deduction is not claimed. Unlike employer contributions, the person who makes the contribution is generally not entitled to a tax deduction for that contribution. They are often referred to as undeducted or ‘after-tax’ contributions. 6 Can I transfer my managed funds or shares into my self managed super fund? Yes, in some cases. For example, you can transfer listed shares and units in managed funds to your self managed super fund if they are listed on the Australian stock exchange (or the stock exchanges of some other countries), or if your investment is in a widely held unit trust. The units or shares must be acquired by the self managed super fund at market value. You may have to pay CGT and the fund may have to pay stamp duty on the transfer of ownership.
7 What happens if my fund doesn’t have my tax file number? From 1 July 2007 it is important that your super fund has your TFN. If your super fund doesn’t have your TFN, your fund may have to pay additional income tax on certain contributions (most commonly employer contributions and personal contributions claimed as an income tax deduction). 8 Can I Transfer My Investment Property Into My Self Managed Super Fund? No. You cannot transfer or sell your residential investment property to your self managed super fund. 9 What Are The Investment Restrictions In a DIY Superfund? You cannot lend money to, or provided financial assistance using the resources of the fund to a member or member’s relative. You cannot borrow money or acquire assets from ‘related parties’ of the fund, related parties include all members of the fund and their associates and all employer sponsors of the fund and their associates. You cannot lease, loan or have invested more than 5% of the fund’s total assets in related parties of the fund – these assets are known as ‘in house assets’. With the recent changes to Super, it could be time take another look at your retirement plans. call your financial adviser to discuss further.
Binding nominations Vs non-lapsing binding nominations What are non-lapsing binding nominations and how do they differ from binding nominations? Both binding and non-lapsing binding nominations allow you, as a member of a self managed superannuation fund (SMSF), to force the trustee of your SMSF to give your superannuation to the people you specify when you die. The main difference between binding and nonlapsing binding nominations is that non-lapsing binding nominations do not need to be renewed every three years. This means that if you lose mental capacity, you can rest assure knowing that your superannuation will still go to the people who you want it to go to. Non-lapsing binding nominations work in two stages. Stage 1: The first stage requires the member obtaining the trustees conditional consent to the non-lapsing binding nomination. The
trustee will only withhold consent if it appears that the member does not understand the consequences of making the nomination.
The factors which your trustee will consider before giving absolute consent are:
Stage 2: If the member dies with a nonlapsing binding nomination the trustee must then decide whether to make the initial conditional consent absolute (that is, follow the nomination).
2. Has the member entered into a de-facto or similar relationship?
The trustee of you SMSF gives “conditional consent” when you make the non-lapsing binding nomination and then can give “absolute consent” when you die if he is satisfied that your situation has not changed since making the nomination. If your situation has changed, your non-lapsing binding nomination may be void.
1. Has the member married?
3. Has the member permanently separated from their spouse or partner? or 4. Has the member had a child with someone who is not their spouse or partner? If any of the above factors are true for the member, the non-lapsing binding nomination will be void. Consequently, it is important to understand what factors will make your non-lapsing binding nomination void. Although you are not required to ‘renew’ your non-lapsing nomination, this is only if your situation has not changed. If your situation does change it is essential that it is renewed otherwise your trustee may not give absolute consent when you die. Lawcentral.com.au
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Seven common traps to avoid when looking for a mortgage 1.No research and choosing opinion over expertise It is very important to not be too influenced by what you hear from family and friends, who may be in a completely different financial or lifestyle situation to you. Going direct to your current lender for your new property loan and not researching loans offered by other lending institutions may seriously disadvantage you. We are living in an increasingly competitive mortgage landscape that sees new products and new lenders becoming available every day. Can you guarantee your current lender will provide the loan arrangement that best suits you? You had better be sure because you will be paying it off for quite a few years! You may feel a certain loyalty to your current lender but this should not distract you from finding the most suitable property loan for you and your circumstances.
2. Making decisions based on honeymoon rates and giveaway offers Don’t make you decision based on a honeymoon (introductory) interest rate because you will be paying the ‘normal’ interest rate before you know it. A 0.5 percent discount on the interest rate for the first year or so will only benefit you in the short term and may end up making you much worse off over the long term. It is a good idea to pay at the ‘normal’ rate from day 1. This way you will be prepared for the end of the honeymoon period and you will have paid off more off your loan! Also, when deciding between variable, fixed or split rate, remember that just because the rate is the cheapest in the market doesn’t mean that loan will end up the cheapest in the long run. We all know a variable loan’s interest rate changes over time and a fixed loan’s rate has a limited timespan. Another short-sighted mistake is to take giveaway offers, such as petrol or holidays, into consideration. For example, that higher interest rate on a giveaway offer loan will soon outweigh the benefit of the year-long discount on fuel that was offered.
3. Not thoroughly considering the loan features you need Upon deep consideration, you may be surprised to find that you need more loan features that you first realised. If the loan you choose does not have the facilities you need, e.g. allowing you to redraw on any money you have paid over and above
your regular repayments, then you may be sorely disappointed. Features to consider are: • Variable, fixed or split interest rate • If fixed, the loan period for which it is fixed • Redraw facility • Offset facility • Internet/branch access • Extra repayments availability • Penalties • Ongoing fees • Overall flexibility
4. Ignoring associated fees and costs Although it may be tempting to let your judgment be overshadowed by the standalone interest rate you should consider other fees such as application, deferred establishment, rate lock, monthly, break, switch and redraw. Comparison rates are often of assistance when looking at different loans’ overall ‘true cost’. Each loan’s comparison rate includes the interest rate plus fees and charges relating to it, reduced to a single percentage figure so you can easily compare. However, note that different amounts and terms will result in different comparison rates. Costs such as redraw or early repayment fees and cost savings such as fee waivers are not included but obviously may influence the cost of the loan, as will the changeable nature of variable interest rate loans.
5. Stretching yourself to the limit with repayments Although a lender may have approved the loan amount and term you applied for, you really need to make sure you can make those monthly repayments fairly comfortably for at least the next few years (when you may think about refinancing). If you haven’t done so already, create a budget that lists every cost you incur over the year and break down those costs as per the timeframe of your expected loan repayments, which will usually be fortnightly or monthly. Include everything from vehicle maintenance to haircuts to magazines and morning coffees. You might be surprised at how much you actually spend over each period and how much you really have to put towards a mortgage.
6. Not factoring in interest rate rises Every savvy borrower factors in at least a 0.25 percent interest rate rise because mortgage interest rates increase and decrease at times over the lifetime of the loan. You don’t want to get caught out by not budgeting for those rises! ‘Factoring in’ might mean you pay that little bit extra from the time you start repaying or you already have it in your budget for when a rise occurs. If you can factor in even more than 0.25 percent that will really help in the long run. Any extra money you put into your mortgage will reduce the amount owing and should also reduce your eventual loan term. Even if you are paying off a fixed rate loan, that fixed term will eventually end so why not pay a little extra if you can afford to and the loan allows it. You will be grateful you have done so.
7. Thinking property investment is a short term strategy Property investment is an exciting and life-changing decision that can set you in good stead financially, given the right choices and commitment to its long-term nature. A reliable short-term investment strategy is difficult to achieve for the average person. Sensible borrowers should consider property investment as a longterm strategy especially now house price growth is at a much slower pace in most states. Over the long term, there are many regions of Australia where good gains can be made if the buyer researches the area well and identifies the strengths and weaknesses involved. Investors should be aware that to gain a healthy profit they should think at least five to 10 years ahead before considering selling it, whether it is a home or purely an investment. Many investors looking for capital gain prefer long term interest only loan products such as lines of credit with split facilities, particularly where there is still some owner occupied debt to be repaid. This gives them flexibility and breathing space to afford managing loans on two or more properties. Resolving the confusion of comparing loans can often be as easy as speaking to a reputable mortgage broker. Reputable mortgage brokers typically have specialised software that assists them to compare multiple lenders and home loan products to help you choose the most suitable fit.
Establish a ‘Will’ for your business A ‘Will” for a business can be created through a Buy Sell agreement, of which there are two components: • A transfer agreement determines what will happen to a business owner’s share of a business upon their death or disability. Usually, it will be transferred to the remaining owners. • A funding agreement determines how the money to buy the departing owner’s share will be provided. Usually, it is through taking out life insurance on each business owner.
A Buy Sell agreement provides: • funds to purchase a departing owner’s share of a business • a guaranteed market for a business interest at an agreed price • peace of mind for continuing partners, shareholders and creditors • a reduced chance of disputes between continuing business owners and a deceased owner’s estate
Case Study Alex and Bill each own 50% of an engineering business. The business is thrown into turmoil when Bill suddenly dies. Fortunately, Alex and Bill had the foresight to enter into a Buy Sell agreement. Without a Buy Sell Agreement
With a Buy Sell Agreement
Bill’s share of the business was left to his wife Lynn, and Alex would not have had the funds to buy her share of the business. Alex would have been trapped in the situation where he is doing 100% of the work yet only receiving 50% of the profits.
Backed by a Buy Sell agreement, Alex is able to buy Bill’s share of the business from his estate. Alex gains full control of the business and Lynn, as beneficiary of Bill’s estate, receives the full value of Bill’s share of the business.
Tips & Traps • A Buy Sell agreement should always be prepared by a Solicitor with experience in this field • Ownership of insurance policies can be structured in various ways with different tax and legal implications • It is prudent to make sure all family members are aware of arrangements made • Insurance cover should be updated in line with the value of a business • Insurance policies that allow you to increase the level of cover without medical evidence should be considered • Insurance may be taken taxeffectively through a super fund
Estate planning, Top 8 tips Here are eight tips to help you get your estate planning in order 1. 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.
2. Choose your executor wisely. Your executor is responsible for ensuring the administration of your estate is dealt with in a timely and suitable way.
3. 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. 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.
5. 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.
6. Make sure you leave enough money. To enable your family to pay off debts and meet their living expenses, you may need to take out extra life insurance. This could be purchased through your superannuation fund or you can buy it separately.
7. 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.
8. 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.
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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