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Edition 7
In this issue End of Financial Year strategies.................................. 1 Protect a key person in your business..................... 2 Your estate planning checklist..................................... 2
The Golden Rules of investing..................................... 2 What type of loan is right for you?........................... 3 Attractive options for all................................................ 4
What options are there for challenging a will?.... 4 Investing & the Lily Pond............................................... 4 Tax planing for businesses............................................ 4
End of Financial Year Strategies 1. Defer asset sales to manage capital gains tax If you need to sell a profitable asset, you should consider delaying the sale until after 30 June 2008. CGT is generally only payable by individuals after they lodge their tax return for the financial year in which an asset is sold. By selling an asset after 30 June 2008, you may be able to delay paying tax on your capital gain for up to 12 months – in some cases longer. If you expect to earn a lower taxable income next financial year (eg because you plan to retire or intend taking leave), the marginal tax rate you have to pay on realised capital gains in 2008/09 may decline considerably. But even if your taxable income stays the same, you may find your marginal tax rate is lower in the 2008/09 financial year. This is because, from 1 July 2008, the income thresholds at which the 41.5%1 and 46.5%1 marginal tax rates apply will increase. Note: It may also be a good idea to hold assets for more than 12 months to take advantage of the 50% CGT discount. CGT is only payable on 50% of the capital gain if an asset is held by an individual for more than a year.
2. Boost savings and save tax via salary sacrifice If you’re likely to receive a bonus before 30 June 2008, you should consider asking your employer to salary sacrifice your payment into superannuation. When you salary sacrifice a bonus (or salary/ wages) into superannuation, the contribution is taxed at a maximum rate of 15%. If taken as cash, your bonus will be taxed at your marginal rate (which could be as high as 46.5%). Depending on your circumstances, a salary sacrifice strategy could reduce the tax rate payable on your bonus by up to 31.5%.To be effective, the salary sacrifice arrangement needs to be in place before your employer determines your bonus entitlement. When sacrificing regular salary or wages, the arrangement should commence on the first day to which the next pay period relates. With any salary
sacrifice arrangement, it’s important to have the agreement thoroughly documented and signed by yourself and your employer.
3. Pre-pay 12 months interest on an investment loan Pre-paying your interest bill for up to 12 months before 30 June 2008 may enable you to bring forward your tax deduction and pay less income tax this financial year. If you take out a fixed rate investment loan and pre-pay up to 12 months interest before 30 June, you can bring forward an expense that would otherwise be tax-deductible in the following financial year. This is despite the fact the majority of the interest payment may relate to servicing your loan after 30 June 2008. This additional tax deduction could help you to reduce your taxable income and result in some significant tax savings this financial year.
4. Use losses to reduce capital gains tax If you have to pay capital gains tax (CGT) this financial year, you should consider selling poor performing assets that no longer suit your circumstances before 30 June 2008. By selling a poor performing asset, you can use the capital loss you incur to offset a realised capital gain from another asset in the same financial year – including capital gains received as part of a unit trust distribution. This can enable you to manage your CGT liability. By using this strategy, you could save on CGT this financial year and free up money for more suitable investments.
5. Make personal deductible super contributions If you earn less than 10% of your income from eligible employment (eg you’re self-employed or not employed), you should consider making personal deductible super contributions before 30 June 2008. If you invest in super, you may be eligible to claim your contribution as a tax deduction. This tax deduction can then be used to reduce
your taxable income (and the amount of income tax you are required to pay). While the personal deductible super contribution will be taxed at 15% in the fund, the net tax savings can still be quite significant, Contributing to superannuation can help ensure you ‘don’t put all your eggs in the one basket’ (ie your business). Through superannuation you can select a mix of assets(including cash, bonds, property and shares) to help you achieve your lifestyle and financial goals. Note: When using this strategy, you should keep in mind that personal deductible super contributions (and certain other amounts) will count towards your concessional contribution (CC) cap. From 1 July 2007, the CC cap is $50,000 pa or, if you’re aged 50 or over, $100,000 pa for five years until 30 June 2012. If the cap is exceeded, excess contributions will be taxed at 31.5%, in addition to a contributions tax of 15%.
6. Top-up your super with help from the Government Do You Qualify for a Government cocontribution? If you make a personal after-tax super contribution of $1,0002, the Government may add up to $1,500 to your super account. That’s a return of up to 150% on the amount contributed. To qualify for the full co-contribution, you need to earn $28,9801 pa or less and a reduced amount may be paid if you earn less than $58,9801pa. The Australian Taxation Office will determine if you qualify based on the data received from your super fund (usually by 31 October each year for the preceding financial year) and the information contained in your tax return. As a result, there can be a time lag between when you make your personal after-tax contribution and when the Government pays the co-contribution. Includes assessable income plus reportable fringe benefits. Your personal after-tax contributions (but not Government co-contributions) will count towards the non-concessional contribution (NCC) cap. From 1 July 2007, the NCC cap is $150,000 a year (or $450,000 in one year if you’re under age 65 in that year and don’t make further contributions in the following two years). If you exceed this cap, excess NCCs are taxed at 46.5%.
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Protect a key person in your business The most valuable asset in any business, whether a newsagent or a multi-national corporation is the key people who run the business. But while material assets such as plant and equipment can be replaced relatively easily, this is not the case with human assets. The loss of the managerial skills, expertise and leadership of a key person can have a substantial impact on revenue and profitability. Considerable costs can be incurred in recruiting and training a suitable replacement and there may also be an adverse impact on the business’s goodwill and its ability to repay debts or other expenses. By taking out key person insurance, you can help fund the loss of a valuable employee (including a business owner in certain circumstances) by providing an injection of cash for a revenue or capital purpose.
How does the strategy work? A key person is someone whose contribution is considered vital to the ongoing success of a business. The purpose of key person insurance is to protect the financial position of the business by providing a lump sum payment to offset the estimated losses that would arise upon the death, total and permanent disablement (TPD) or critical illness of a key person. Key person insurance may be used for a revenue purpose (to protect against loss of income and profits), or a capital purpose (eg to provide capital to repay business debt). Other options may be available to protect your business, such as drawing on savings, borrowing money or selling assets. However, all of these options are costly and some may not be feasible. Key person insurance can be a less expensive and more convenient alternative.
The Golden Rules of investing While markets are performing well it’s easy to sit back and watch your investments rise in value. Today, the markets are not performing so well and uncertainty is all around! In times like this, it’s easy to lose your nerve - so how do experienced investors handle this? Here are nine tips: RECOGNISE THE CYCLE: Financial markets are all prone to move in cycles. Sometimes the troughs feel like they will last forever but they do eventually end and invariably move on to higher levels. AVOID CROWDS: The worst time to invest is when everyone else is rushing in. Become a contrarian, whilst still applying fundamental quality tests. BUY AND HOLD: Buy quality investments and hold them, at least until they have had time to achieve their expected return. Very few investors make money through speculating. THIS TIME ISN’T DIFFERENT: When the market goes dramatically up or down, there is a tendency to cry “this time it’s different”. This time is definitely not different.
DIVERSIFY: One of the most important rules for successful investing. Diversify across different markets, geographical regions, managers or companies. DON’T BE TAKEN IN BY HIGH RETURNS: Last year’s winner is often this year’s loser. Apply the proven test, “if it looks too good to be true -- it probably is”. INVEST REGULARLY: Implement a disciplined savings plan, often referred to as “Dollar Cost Averaging”. CONSIDER TAX IMPLICATIONS: If you are a wealth builder, seek capital gains in preference to income. If you need income, look for investments with a tax effective income stream. HAVE A REGULAR CHECKUP: Review your investments and strategy on a regular basis. Your adviser will work with you to help you achieve your goals and objectives.
Your estate planning checklist Consider the following questions: • Do you have a valid Will? • Has it been reviewed/updated since the last significant event in your life? • Does your Will provide adequate protection to ensure your assets are not diminished? • Do you know how much money your family would need if you were to die today? • Do you have a funding strategy in place? • Are you and your family financially protected if you were to suffer a serious illness/injury? • Are you and your family financially protected if you were to become totally and permanently disabled? • Do you know how much money you and your family would need if you were unable to work, or you suffered a serious illness/injury? • Do you have income replacement cover? • Are the protection measures you have in place sufficient for your family’s needs? • Have you appointed someone to look after your affairs if you die or become incapacitated? • If you are a business owner, have you considered exit strategies from your business? • If you are a business owner, have you planned for the future of your business if you pass away? If the answer to any of the above questions is ‘No’, then it’s possible you have a gap in your estate planning needs. Contact your adviser to get professional advice.
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What type of loan is right for you? In today’s home loan market, there is certainly no shortage of packages to choose from to fit everyone’s circumstances. Here is the list of each package in details. Basic Home Loans One of the simplest ways to own your home sooner is to pay the lowest rate possible and as few bank fees as possible. If you don’t need the ‘bells and whistles’ that come with many loans (at a price), then a basic home loan could be the answer. Popular with first home buyers, basic home loans typically offer interest rates of half to one per cent below the standard variable rate. Many also have lower ongoing fees. In return for a lower interest rate, basic home loans have fewer features and can be less flexible. Some lenders may offer the option to pay for extra features when you need them. There may also be fees and charges if you decide to switch loans or lenders, or pay off the loan sooner.
Standard Variable Rate Home Loans A standard variable rate home loan is one of the most popular mortgages around. For many borrowers, a standard home loan offers the right mix of features, flexibility, interest rate and fees. This type of loan is particularly suitable if you want to make extra repayments without penalty, split your loan or access a line of credit. In return for these benefits, a standard variable rate mortgage will have a higher interest rate than a basic home loan.
Fixed Rate Home Loans If you’re worried about rising interest rates, then a fixed rate home loan may be the solution. Fixed rate home loans offer a fixed interest rate for a set period of time. Because of this, repayments remain the same for the duration of the fixed rate period, usually between one and five years. At the end of the fixed period, you can switch to a variable rate loan or negotiate a new fixed rate or even opt for a split rate loan.
Split Rate Home Loans If you need the security of a fixed rate home loan but want the flexibility of a variable rate loan, then a split loan may be the answer. A split or combination loan brings together the benefits of variable and fixed interest rates into a single home loan. What makes this type of loan attractive for first time and existing borrowers is the ability to customise the loan and add as many features as required. The loan can be split many ways: 60% variable, 40% fixed or 50/50 splits are most common. Split loans are useful in times of economic uncertainty, particularly
when interest rates are rising. By splitting a loan, borrowers can hedge against the risk of higher rates whilst still keeping part of their loan at the lower variable rate.
Interest Only Home Loans If you’ve ever purchased an investment property, chances are you’re familiar with the concept of an interest only home loan. Offering lower repayments and many of the same features as traditional loans, interest only loans are particularly suitable for investors. However interest only loans are also suitable for general home buyers, refinancing an existing loan, as bridging finance or to pay for home renovations. How it works? A principal and interest loan is still the most common type of home loan. Loan repayments include interest and principal, allowing home owners to repay the loan in full by the end of the loan term, assuming they make the minimum repayments. With an interest only home loan, repayments only cover the interest component. The principal is repaid in full at the end of the loan term. Because borrowers only repay the interest component, interest only loans have lower repayments than principal and interest loans.
Line of Credit Home Loans Today’s home loans let you do more than simply buy a home. Consider a line of credit loan for example. Also known as a revolving line of credit, these loans have become popular due to their flexibility and features. A line of credit home loan is a credit facility secured with a first mortgage on a residential property. Similar to a credit card, they allow you to withdraw funds up to a set limit at any time. Repayments can be made in full or on a monthly basis. This type of loan can be used to purchase most types of property, from the family home to an investment property. As long as you make the minimum monthly repayments, you can use the line of credit to carry out renovations, invest in shares or pay the bills.
Lo Doc Home Loans Having trouble finding the right loan? Don’t despair. Today, many lenders offer alternatives for self-employed people and others with no traditional proof of income. Lo-document loans are quick and comparatively trouble-free finance product or lo-doc loan for short. This type of loan caters mainly for self-employed borrowers who are unable to provide full financial
statements and other evidence of their income. There is a growing range of lo-doc products on the market with many lenders offering standard and premium lo-doc loans with the choice of fixed or variable interest rates. Borrowers also get access to a range of loan features and options never previously available. However, most lenders require lo-doc borrowers to take out lenders’ mortgage insurance when borrowing up to 80 per cent of the property value. Some lenders also charge a higher interest rate for these products. These rates may be reduced after a certain time period or when you are able to provide tax returns.
No Doc Home Loans For many self-employed people, the biggest barrier to buying a home is gathering all the documents necessary to qualify for a home loan. In most cases, self-employed applicants must provide several years of tax returns, financial reports and/or pay slips. This can be very time consuming and costly. However with a no-document home loan (or no-doc loan for short), applicants simply fill out an income declaration form stating their income and assets. This process is called self-verification.
Professional Packages Home Loans When it comes to home loans, there is often more than meets the eye. This is particularly the case for professional packages. In an effort to attract people on higher incomes or those regarded as low-risk borrowers, lenders offer special loan deals known as professional packages. Once restricted to professionals such as doctors, lawyers and accountants, these packages are now available to a wide variety of purchasers with sufficient income and/or assets. If you think you qualify, it pays to apply. Professional packages generally offer discounts of 0.5 per cent off lenders’ standard variable interest rate and up to 0.25 per cent off fixed interests rates. Depending on the size of the loan, bigger discounts may apply. Typically lenders require the borrower to bundle all their personal banking into the one package. Most charge an annual fee ($300 is common) but offer a range of range of discounts on accounts such as credit cards, transaction, margin loans and insurance. Some will even waive account fees in order to get your business.
Attractive options for all Many companies currently face great difficulty in attracting and retaining staff. One effective way to deal with this issue, while keeping wage and salary costs down, is to use an Employee Share Option Plan (ESOP). This is an important advantage which law firms that are part of the listed Integrated Legal Holdings Ltd have got. Under an ESOP, a company issues options
to an employee (generally over un-issued ordinary shares). Through the careful design and implementation of an ESOP plan, companies can foster executive and employee loyalty and, at the same time, focus on the ‘bottom line’ at relatively little tax cost to the company and the employee.
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1. There are doubts about the testator’s mental capacity at the time he or she made the will.
3. There are suspicions of forgery.
Imagine a small pond big enough to hold 512 lily pads. The lily flower grows rapidly and produces a new lily pad every day. This means from small beginnings, the number of lily pads doubles every day. 1 1
There are many reasons why you might be able to challenge a will. For example:
2. Someone might have pressured the testator into leaving their assets to certain people.
Brett Davies, Lawcentral.com.au
Investing & the Lily Pond
Days Lillies
What grounds are there for challenging a will?
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8 128
9 256
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You can see how growth speeds up over time. The pond is quarter full on day eight, half full on day nine and full by day 10. Amazingly 75% of the growth happens in the last two days. This lesson is just like compound interest. If every day represents four years of our working life, you can see that someone who starts investing on day one ends up with four times as much as someone who puts off investing until day three. The moral is to start early and get a pile of growth assets working for you so that one day it will earn more than you do.
4. There are doubts about whether the will was signed and witnessed properly. 5. You are doubtful about whether the testator understood the effect of a clause in the will. 6. There is concern that the testator has not provided adequately for dependants. 7. A later will that comes to light. If you have any questions about a will, call your solicitor
Tax planning for businesses A checklist of tax planning initiatives you should consider for your business. If the following events have occurred this year, or you are anticipating similar changes, you need to address taxation implications immediately. Has your business: • Made asset acquisitions or purchases? • Undertaken restructuring or are you considering changes? • Made changes to its ownership? • Expectations of a higher than normal taxable income? • Started up any new businesses under a different entity? Tax planning is simply arranging your affairs, both personally and for your business, to legally minimise taxation liabilities. However, it is important not to pursue tax reduction strategies if it upsets the “balance” or workings of your business. Not all tax strategies are suitable to all businesses. You should always measure the tax strategies available against the needs of your business to ensure the optimum result is achieved.
The following are some broad tax planning techniques that could be adopted for your business this financial year:
Deferred Income It is possible to minimise income by deferring receipts. Large receipts expected close to the end of the financial year should be closely looked at.
Maximise deductions Special consideration should be given to the prepayment of expenses (including borrowing expenses). Other deductible expenses to review include superannuation contributions, some bad debts, depreciation on business assets, and devaluation of your trading stock.
Tax offsets (rebates and credits) Investigate how your business accounts for dividends received or to be distributed to shareholders and beneficiaries such as trusts.
Capital Gains Tax Strategies for handling asset purchases and sales have a marked effect on your
taxation position. If you have CGT liabilities you may benefit from having the receipt determined to be capital in nature rather than revenue. This could be attractive if you have unused capital losses .If selling your business focus on the best way to transfer ownership and receive the proceeds with minimum CGT implications.
Which tax vehicle? The correct structuring of your family group can significantly improve your tax position. The channelling of income to a family trust might be an excellent way of minimising overall tax liability. Group structures should be reviewed each year to ensure you remain ahead of the game with your business. As a business owner, there is a multitude of options available to you to minimise your personal and business tax… the right one for you will depend upon your specific circumstances. Make an appointment to talk to your adviser before June 30th.
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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