The Wealth Brief - Edition 1 by Philippe Vipathkun

Investing

Insurance

Lending

Tax

Legal

Wealth Creation

Wealth Brief The Wealth Brief is brought to you by

Edition 1

Contact us 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

Preparing now for tax time... just do it! Tax planning is often viewed in a contradictory way – a last minute dash to arrange reduction of the year’s tax bill or maximise the refund. Why not take the opportunity to do something different this time... like start planning now! Two of the simpler ways of managing tax include:

Preparing now for tax time... just do it!

1. deferring income until the following tax year – such as arranging a fixed deposit or other investment so that the income from the investment is paid after the end of this tax period; or

Consolidate your debts to save money Only people with no money should be directors Managing your home equity

2. bringing forward expenses that won’t accrue until the next tax year, by paying them this tax year. This option is most often achieved by taking out a loan or loans where interest is paid in advance.

Teaching your kids about money

Alternatives for reducing tax are available and may result in an overall better return in the long term. Different options are available depending upon your employment status, ie. if you are selfemployed as opposed to being an employee.

The modern-day fairy tale: Anna Nicole and her will

Broadly speaking, some of the options include converting part of your income into superannuation

Protect Your Most Important Asset

contributions (salary sacrificing). This has the added advantage of building a valuable asset and an income for your retirement. In addition, don’t forget the tax breaks for making a contribution toward a superannuation fund in your spouse’s name. Another method commonly used is gearing. This allows you to borrow funds to increase your asset base and obtain tax relief on the costs of doing so. Gearing can be positive, neutral or negative. Positive gearing occurs when the income from the asset/s exceeds the expenses, including interest, attached to the asset. Neutral gearing is when the expenses equal the income. Which leaves negative gearing where the expenses exceed the income, and are in some cases tax-deductible. These strategies are in no way exhaustive. It all depends upon your personal situation and needs, but one thing that’s common to everyone is the longer you leave these plans, the less benefit you receive.

Act now and reap the benefits!

Consolidate your debts to save money Consolidate all inefficient debt into a loan with the lowest interest rate. By maintaining previous loan repayments, debt is reduced more quickly. Case Study Steve (aged 37) and Karen (aged 35) are married with a home worth $450,000. They have the following debts: Liabilities

Outstanding Balance

Interest Rate

Current Repayments (pm)

Home Loan (20 yr term)

$200,000

7.5%

$1,611

Personal Loan (5 yr term)

$25,000

12%

$556

$5,000

17%

$66

Credit Cards Total

$230,000

$2,233

Separate loans*

Consolidated loan*

Outstanding loan(s)

$230,000

Monthly repayments

$2,233

Remaining term

14.3 years

13.8 years

Total interest payments

$153,064

$139,894

Interest saving

$13,170

Tips and Traps • There may be a cost in re-financing loans • Surplus cash can be used to reduce personal loans or credit card debts • Taking out income protection and life insurance will guarantee the strategy is not affected by sickness, accident or loss of life

Only people with no money should be directors Let me tell you why From time to time, I find people that are willing to debate with me the dangers of directorships. I say that the director generally goes down with the company. They say that the directors have to actually trade insolvent to be liable for the debts of the company.

section 222AOC Income Tax Assessment Act 1936. This was because the company had entered into a deed of company arrangement.

Consider the Supreme Court case of Eaton v DCT. Under section 222AOC if the company doesn’t pay certain taxes, then the directors are personally liable. The ATO can attack the directors, even bankrupt them and leave the company chugging along.

The Court held that even the powerful deed of company arrangement did not extinguish the director’s tax liability.

Now in this case the directors wanted the ATO to discharge their tax liabilities under

The directors argued it was a shocking abuse of process. (Which actually it is, but

A deed of arrangement is a powerful agreement to stop people attacking the Asset Protection demands company. It actually releases I say that is only the company from its debts. that “safe houses” are However, ATO merely attacked one way to get at the directors. never directors or trustees the directors individually.

The directors were also upset that each of them is liable for 100% each of the tax debt. This is joint and severable liability.

Managing your home equity

sadly, the penalty regime allows joint and severable liabilities). So here we have very damaged and wounded directors who have a company that is still whistling away. Asset Protection demands that “safe houses” are never directors or trustees. Only the person of straw in your family should be a director or carry other risky positions of trustees. This is the first rule in Asset Protection. Brett Davies, Lawcentral.com.au

A Home Equity Loan can be a powerful tool to build your wealth. Here is an example to show you how:

When setting up a home equity loan there are four important points to remember:

Michael and Denise purchased their home in 1995 for $220,000 with a mortgage of $180,000. By 2001 the house had increased in value to $320,000 and they had reduced their mortgage to $160,000, giving them equity in their home of $160,000.

• Obtain professional assistance to choose the most appropriate loan and to structure it to ensure the interest is tax deductible.

At that time they borrowed a further $80,000 against the value of their home, as a deposit on an investment property. Over the coming years the value of both properties increased giving them a combined equity now of $320,000.

• Obtain professional assistance to set up a diversified investment portfolio suitable to your needs.

When recently reviewing both loans with their mortgage broker, Michael and Denise discussed using their equity for further investment. However, with some economists suggesting house prices may remain flat over the next few years, they decided they should diversify their investments. Their mortgage broker referred them to a licensed financial planner who designed a portfolio of Australian and overseas shares funded by a further tax-deductible loan of $100,000.

• Only borrow an amount that still leaves a comfortable margin if house prices fall or there is a change in your circumstances.

By building an investment portfolio, Michael and Denise are now comfortable that they are well on their way to meeting their future objectives of funding their children’s secondary education and growing their own retirement nest egg.

Your mortgage broker can assist you with restructuring your loan.

• Make sure you have income protection insurance cover in the event of serious illness or accident. Call us if you would like further information on this strategy.

1300 761 236

www.insurancechampions.com.au

Protect Your Most Important Asset “It’s great to hear how John is recovering from his accident, it must have been such a traumatic time” said Pauline. “It has been very stressful but the results have been very promising and James is expected to make a good recovery”. “The doctors said that because he has been able to focus on his recovery without money worries his rehabilitation has been sped up” commented Julie. “not worrying about money has enabled us to focus on John’s health”. “John must be employed by a great company for his income to continue” commented Pauline. “Oh no” Julie replied “John had arranged income protection insurance many years ago and we have been receiving a monthly payment since the Accident”. Many people believe because they are employees they will automatically receive an income if something should happen to them. In most cases they are wrong! The reality is that the majority of disabilities come from illness related conditions (over 80% at age 40) and only a small portion of accident claims are work related.

If you are a 40yr old earning $50,000 a year and looking to retire at 65, you are putting over $1,500,000 of future income at risk by not insuring your income!

We all insure our cars which could be worth $30,000 or our homes that may cost $250,000 to replace, however we neglect the very Taking out income protection asset that enables could be the smartest decision us to enjoy our cars, homes and lifestyles.

How would you survive if the income for your you family suddenly stopped? Could you afford to pay for your mortgage, your car repayments or feed the family? In many cases the answer is no.

make!

By arranging an income protection policy you can protect your future income. The cost of the insurance will vary on your age and occupation however in many cases the cost will a lot less than you think, and the premiums are tax deductible.

You can rely on your family, the Government or friends to provide for all your future financial needs. Or you can be independent, by arranging income protection insurance and you will ensure your financial future, quality of life and self esteem. In assessing the best policy for an individual it is necessary to assess the conditions of a policy. Some important conditions to consider are: • • • • • •

Level of income to insure Agreed or Indemnity contract Rehabilitation Benefits Offsets in event of claim Waiting Period Maximum benefit Period

Teaching your kids about money Teaching kids a sense of thrift in today’s world is not easy. From their earliest days they see money pouring out of machines and their parents slapping a piece of plastic on the counter to obtain whatever they want. The thought as to where it all comes from is unlikely to even cross their minds unless they are trained at an early age. Some children like to hang onto money when it comes into their possession – others cannot spend it fast enough. Whilst teenagers and young people can enjoy their money, if they are not taught to manage it effectively when they’re young they are highly likely to have problems when they come to handling adult responsibilities. So how do you teach them? The answer is to start young and be firm. Children who get everything they ask for will never learn the value of money. As soon as they are old enough to understand, generally four or five years old, children should be given a basic weekly allowance – something the parent can easily afford. When the allowance is spent they get no more for the rest of the week. As they get older the amount should be increased each year in line with extra responsibilities to be fulfilled.

Other hints include: • Talk to your children about money – discuss saving for particular objectives. You may wish to match their contributions dollar for dollar to keep them motivated. • Let them make their own decisions – if they spend it on something frivolous and then cannot buy something they really want, this is a good lesson. • Set up their own bank account – even if they have little in it, they will learn from the exercise by watching it grow. • Give them a clothing allowance when they are old enough – even if you need to supervise how that particular allowance is spent. • Help them shop for an interest-bearing account when they start to accumulate some savings – and teach them the value of compounding interest.

Being tough with money in the early years may create a few hassles but your children will thank you for it in their adult lives, particularly when they are ready to buy cars and homes, and are raising their own children.

The modern-day fairy tale: Anna Nicole and her will Once upon a time, there was a very, very old billionaire named J. Howard Marshall. One day he met a beautiful topless model named Anna Nicole. J. Howard Marshall fell in love with Anna Nicole because of her wonderful personality. Anna fell in love with J Howard Marshall because of his chiseled good looks. Because they loved each other so much, they got married. Sadly, J. Howard Marshall died unexpectedly. The terrible tragedy in their family continued with Anna Nicole also dying, leaving an inheritance worth hundreds of millions of dollars. Sorry, but we don’t think this story will have a happy ending. Why? Because Anna Nicole didn’t do her Will at Brett Davies Lawyers. Anna Nicole’s Will is apparently out-dated. Everyone wants custody of her infant daughter. Her advisers are being threatened for not addressing her Estate Planning. The people most likely to end up with Anna’s estate are the lawyers. Nicole’s Will surfaced last week. Her Will resolves nothing. It states that her entire estate goes to her son Daniel. Sadly, Daniel died in September of 2006. Who gets the dosh now? The Will is poorly drafted and is deficient in many areas. There is nothing regarding her new-born baby Danneilynn. Anna’s boyfriend “Stern” is not mentioned at all even though Anna joined in a “commitment ceremony” with Stern late last year. Adding to the confusion, Smith’s will contradicts itself. In one section, it includes a curious provision which appears to specifically disinherit future spouses and children, which would include Danneilynn. It reads: “I have intentionally omitted to provide for my spouse and other heirs, including future spouses and children and other descendants now living and those hereafter born or adopted”. However, in other sections, it specifically instructs the executor of Smith’s will to manage the estate to provide for her “children.” This language appears to provide a portion of the estate for the care of Dannielynn. If there is still any chance that a husband and wife (or de factos) might have children a Will should include “unborn children” as beneficiaries. That’s how I would have done it.

The next issue is Guardianship. Money does not follow the Guardian. Money follows the Executor. The Executor generally keeps the money in trust for the minor. That money is protected by the financial planners and accountants. Often you may want the Guardian and Executors separate. 1. Unlike Anna, who included a great deal of contradictory and confusing stipulations in her Will, you should cut out the jargon. Your Will is a working document. It has to go off to the Probate office where they read every word. It then goes to the local titles office where they transfer the real-estate. Finally, as a now public document the ATO attempts to squeeze as much tax out of it as they can. 2. You need to deal with your beneficiaries. This includes unborn children and defactos. If you don’t want to leave anything to a defacto then say so. The best way is through a “considered person” clause. The considered person clause usually reads something like: I have considered my obligation towards …………. I expressly declare myself completely satisfied that all proper provision has been made for ………. during my lifetime and in this Will. I express the belief and wish that no further provision for ……….. be made from my Estate. The considered person clause is nonthreatening. If you have gossip, accusations and ammunition against the person you want out of your Will keep it elsewhere. It doesn’t belong in your Will. Give the material to your Executors. Your lawyers may not want to lead such evidence - but your Will becomes a public document after death (if you apply for a Grant of Probate). Write a letter and keep it with the Will explaining your reasons. Keep your reasons out of the Will. Keep your powder dry.

Who can challenge your Will? NSW has the widest laws. For NSW it is anyone that you owe a maintenance duty to. This may include your live-in cleaning lady. The most restricted state is WA. For WA the answer to who can challenge your Will is: up one, down 2 and across (parents, children and grandchildren and people you sleep with). On this last category it is spouse, ex-spouse still being paid maintenance and sleeping partners that you maintain (not just live-in defactos, mistresses also get a look in). Can you do anything in any state to stop someone from challenging your Will? No you can’t. You can, however, move all your assets into a Family Trust etc... but this creates other problems (Capital Gains Tax and Stamp Duty). Well, is there anything at all we can do to make the Will harder to challenge? Yes, there is. You can put in the above considered person clause. Use the above considered person clause to the letter. Don’t change it. It is based on the wording of a court case. Considered Person Clauses go at the end of the Will - just before the signing clause 3. Keep your Will updated. Circumstances such as a divorce or the death of a beneficiary or guardian affect your Will. Make sure to revise it to reflect those changes. You should keep your unsigned copy with your tax returns and review it every year. Every 4 years you should have your Will reviewed with your lawyer. If you did your Will with Brett Davies Lawyers then you get free reviews for the rest of your life. 4. Your Will is made to work for today. However, you can easily extend its life by dealing with situations if a child dies. For example, you may wish to leave everything to the children. But if a child dies then their children get what the dead child would have got. Brett Davies, Lawcentral.com.au

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 Shares Pty Ltd AFS licence no 222138