The Wealth Brief by Philippe Vipathkun

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Edition 8

In this issue New Financial Year Checklist ................................................. 1 Don’t forget the dividends! ..................................................... 1 Income Protection Vs Workers Compensation................. 2

Super as your child’s piggy bank – sole purpose test .. 2 Leave farm to brother or wife? .............................................. 3 Your Business!... Planning for sucession ........................... 3

How to best use your time in the market .......................... 4 What are the Key Statistics on Health & Insurance ...... 4 Tax planing for businesses......................................................... 4

New Financial Year Checklist As we move into the start of yet another financial year, and realise how fast it has come around, many of us find ourselves thinking about the coming financial year and our aspirations for the future. Let’s face it, we have worked hard in the last financial year and now is the time to reflect on what we have achieved, where we want to go and what we need to get there. These times of reflection are critical to our lives whether we run our own business, are employed or retired. A financial checklist is an excellent tool to check on how you are progressing towards your goals, and to also help identify any specific areas you might need to focus on in the immediate future. The key issues to consider are: • Home loan review If you’re still making loan repayments, is it time to revisit your progress? Are you able to increase your payments or frequency of payments to save interest?. Are you able to re-finance to a better loan? • Other debts The amount of hire purchase, personal loans, credit card or other debts currently

being paid off. If the total of all loans is causing you some concern, you need to implement a plan to reduce them as a matter of priority or even consolidate to a better rate. • Savings and superannuation What is the current value of your retirement savings, including superannuation? It is estimated that by the time you reach 65, your nest egg will need to be at least 10 times your annual household income, to maintain a decent standard of living. Are you on track or do you need to start putting more away? • Annual savings How much money did you save this year? Are you spending first and saving what’s left, or are you saving first, and then spending what’s left? If your savings aren’t as healthy as you’d hoped by this time of the year, it’s time to remember to pay yourself first and allocate up to 10% of your income to a regular savings plan.

• Insurance When accidents or illness strike, most people are caught insufficiently protected. It is important to regularly review your insurance policies to ensure that you and your family have adequate cover. • Your Will Everyone has heard of the importance of making a will and keeping it up to date. Making a will itself is not particularly difficult or even expensive. It is a fact of life that people get divorced, form new relationships, change old relationships, or establish new interests. Any of these may result in a will being challenged through the legal system and create long-term animosity, anger, resentment, and considerable delay in finalising the estate. Estate planning matters should be regularly reviewed in addition to your will. You don’t have to wait until January 1st 2009 to review your financial situation and set some goals... do it today!

Don’t forget the dividends! Share market investors tend to think primarily of their capital gains and in recent years these have been very positive. However, with the current market conditions and an uncertain outlook, your attention should start to focus on dividends. In Australia, unlike many other countries, we are fortunate that most of our companies pay an excellent rate of dividend. These usually include credits for tax paid by the company, referred to as “imputation” or “franking” credits.

As an example of the benefit, if you deposit your money in one of our major banks normal accounts you will probably receive an interest rate, if you’re lucky, of 2-3% (although some online accounts will provide a better return). If you buy shares in that bank you are likely to receive a dividend in the region of 4-5%. It is even better if the dividend is fully franked, as this would be equivalent to a pre-tax rate of 6-7%. And even when there is a downturn in market prices, and capital values fall, most companies continue to pay a steady dividend. For this reason, amongst others,

shares that pay a relatively high dividend also tend to suffer less in market downturns. Not all Australian shares are fully franked or have as high a yield as the example above. However, if you look at the average dividend yield for the All Ordinaries Index it is still in the region of 4- 5% with an average franking rate of 80%. This can give you a pre-tax return of some 6%. The moral to this story is when planning your share portfolio don’t focus entirely on the growth aspect – don’t forget the dividends.

Income Protection Vs Workers Compensation Workers have often questioned the validity of having income protection insurance, especially if their employer provides Workers Compensation cover. There have been occasions where debate has existed in respect of benefits provided to employees through Workers Compensation cover. There are some who believe that the cover provided by Workers Compensation will be sufficient. This view may well be misguided in light of the benefits available to employees around Australia. The biggest issue with Workers Compensation is that there is no consistency between the states. Benefit amounts and benefit periods vary considerably depending upon the state the work related injury occurs in. Workers compensation will normally provide four types of benefits for an employee incurring a work related injury: income replacement, permanent impairment, death benefits and medical expenses. In some instances, a worker may receive all four benefits, depending on their circumstances. Weekly benefits Depending upon the state the benefit varies from $602.35 per week (Tasmania) to $1,722.60 per week (Western Australia). These benefits may be paid from 13 weeks to 9 years, depending upon the state, but are normally subject to the maximum limits under the lump sum (impairment) benefit. Lump sum (impairment) benefit Depending upon the state the benefit varies from $118,903 (Australian Capital Territory) to $230,983 (South Australia). Lump sum benefits are paid after specific medical evidence is presented to a tribunal which decides the amount due based on the level of

impairment incurred and it is in addition to the weekly benefits. Under some legislation, weekly benefits previously received will be deducted from the lump sum awarded.

as cancer, depression, stroke, diabetes, asthma, or back problems (just to name a few). In most cases, these conditions would not be covered by Workers Compensation.

Death benefits

Most Income protection insurance provides cover for individuals, 24 hours a day, anywhere in the world for sickness & injury. The other great thing about income protection cover is that it can provide benefits in excess of AWOTE, which is normally the limit for most Workers Compensation payments. The limitation with income protection is that it normally replaces 75% of pre-disability income, and has a waiting period of between 14 to 240 days depending upon the options selected. Some companies now offer a reduced waiting period on accidents where you can be on claim after 3 days.

Depending upon the state the benefit varies from $178,354 (Australian Capital Territory) to $374,625 (Queensland). Medical Expenses In most states, Workers Compensation covers all reasonable medical surgical and hospital care for work related injuries. It should be noted that in Western Australia, these benefits are capped at $48,813. The most significant concern for anyone who relies solely on Workers Compensation to protect their income, is what happens in the case of illness or an injury that occurs away from work? Simply, the employee is not covered by Workers Compensation. The risk to the individual is significant, especially considering only 25% of injuries occur at work, while 27% of all injuries occur while a person is undertaking a leisure activity, 11% while playing sports, and the remaining 37% occurred around the home. Although almost 700,000 people sustain work related injuries each year, only 216,000 received Workers Compensation benefits.1 Illnesses and Chronic Disability There are currently 4 million people with a disability and 1.2 million people with a severe disability, which may include conditions such

Unlike Workers Compensation benefits, income protection benefits do not have a maximum benefit payment, and benefits can continue through to age 65 (rather than being limited to a maximum of 4 to 9 years). When examining the lifespan of the average worker earning approx $50,000 per annum (Australian Bureau of Statistics Average Weekly Earnings) and working to age 65, there is a potential of $2,000,000 of earnings over 40 years. If you don’t insure this correctly you are putting these future earning at risk. Make an appointment to discuss the many benefits of income protection with your adviser, or maybe it’s time to review your current cover. 1 ABS, 2003 ‘Work related injuries’.

Super as your child’s piggy bank - sole purpose test? I’ve seen a couple of times the idea of a 30 year old child putting money into Super in their 60 year old Dad’s name. When the child needs the money in a few years time, it can be drawn out again (being in Dad’s name). Large amounts of tax have been saved due to the concessional rate of tax on super. My question has always been, what about the sole purpose test? It would be hard to argue that the $50,000 drawn out of the Son’s bank account, placed

into Super in Dad’s name and later drawn out and paid back to the Son’s bank account will satisfy this test. The sole purpose is clearly not to provide retirement benefits for Dad.

REPLY: I agree. Sole purpose is a major consideration. However, if you speak with the child and the father, they will tell you that the son is allowed

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Super as your child’s piggy bank - sole purpose test? (continued) to gift money to dad. They will also tell you that dad is allowed to gift money to his son. Both take place outside of the Super.

it is out of Super, it is his to do with as he sees fit. This is without reference to the SIS Regulations.

Also, much of the Superannuation that is being pulled out is going to the children anyway. (This is the case even though the children never gave dad a cent.) Once at retirement age, dad is entitled to spend or gift his Superannuation as he sees fit. Once

I haven’t seen an auditor yet argue a breach of sole purpose in this piggy bank approach. Perhaps it is something that may take a bigger place for the auditors and ATO’s minds as it is becoming more common place.

It needs a watching brief. However, I am less worried because I have seen money put in by a clever son lost to an even cleverer stepmother when dad dies. The strategy is not without risk to the son. The father may have a change of heart and just keep the money. Brett Davies, Lawcentral.com.au

Leave farm to brother or wife? QUESTION: I am a farmer who lives in country New South Wales. I recently had an accident whilst driving my wheat header. Although I wasn’t hurt too badly, I certainly could have been. This has made me start to wonder what would happen to my farm if something happened to me. I assume my brother, who I run the farm with, would automatically take it over. But I wouldn’t want my wife and kids to end up with nothing. Is this a common problem? I have been searching the internet to try and find some information but I am not really sure what I am looking for. Should I just put a note in my Will? Do I need to go and see a lawyer? I have left everything in my Will to my wife. ANSWER: You are right to be concerned about what would happen to your farm. Presumably, your farm is registered as a business in the names of both you and your brother as

tenants in common. If so, your interest in the farm goes to your wife should anything happen to you. Your brother would have to run the farm with your wife or buy out her share of the farm at great expense.

A BSP is an agreement between business partners or owners. It details what happens to the business in the case of certain events. Those events generally include:

Likewise, if anything happened to your brother his interest would pass to his wife or children. You would find yourself trying to run a business (the farm) with someone else who is not necessarily up to the challenge. The worstcase scenario is that you may have to sell the farm. Many carefully nurtured businesses have disintegrated under similar circumstances.

• Total and Permanent Disability;

There is a solution. The requirements of a farm are basically the same as for any other business. What you need is something called a Business Succession Plan (BSP). Most astute business-owners have one in place (although plenty of poorly run businesses don’t).

• Death; • Trauma Event (heart attack, cancer) • Retirement; and • Bankruptcy. Generally, a ‘Put/Call option’ is used. This agreement allows your remaining partners to buy your interest in the business. Alternatively, your wife can demand that your interest be bought by the remaining partners. This is all backed up by insurance policies that mean the cost of the buy-out is not crippling. Brett Davies, Lawcentral.com.au

Your Business!…Planning for succession It’s not uncommon for business owners to take short, irregular holidays because they don’t have the backup to keep the business running without them. Have you considered what would happen if you were forced to take six months off work due to a serious illness or injury? Would the business survive and how would the bills be paid? Or if you were to die, can you be sure that your business partners would give your family a fair deal? For these reasons, it is important for all businesses to have in place a properly prepared succession plan. It’s a bit like having a Will for the business, but there are often a wider range of scenarios and considerations involved. Just like personal Wills, what needs to be included in a good business succession plan can vary from one situation to the next, however here are some key areas that should always be considered: • Business structure – in the event of death or retirement, the ownership and control of the business may need to be transferred to the owner’s family or to the surviving business partners. How easily this would occur will often depend on how the business operates,

such as through a trust, or a company, or without a separate entity at all. • Succession agreements – if something happened to an unrelated business partner, would you want their spouse or children to take over their share of control in the business? Or if the same happened to you, would your own family have the skills and desire to step into your shoes? If the answer is no, then a succession agreement can assist the remaining business partners to carry on operating the business whilst allowing for adequate compensation for the former partner’s family. • Insurances – just like personal insurances, business insurance can provide a variety of protection such as temporarily meeting the normal costs of running the business (business expenses cover) or paying for a short-term replacement manager (eg. trauma or disability cover). You might also need a life insurance policy linked to the succession

agreement, so that the deceased partner’s family would receive suitable compensation for the transfer of business ownership to the surviving partners. • Powers of Attorney – many small businesses can’t do much without the authority of the key decision-maker, so a Power of Attorney is integral to the succession planning process. It helps the business to physically operate if you are incapacitated through illness or injury. There is a range of professionals that may need to be involved in setting up a succession plan, including your financial / Risk adviser, lawyer and accountant. Even if you already have a plan in place, it is a good idea to regularly review the agreements and your insurance policies to make sure they are upto-date and reflect the current value of the business. Like a Will, don’t leave this to when it’s too late.

How to best use your time in the market Many of us who own a portfolio of shares are eager to switch on the 6 o’clock news or read the financials of the morning paper to see how much profit we made the day before. But it might be argued that those prices are really only important if you are about to sell your portfolio. To this extent, property can sometimes be a more peaceful investment simply because it is more difficult to follow how much your property value changes over the short term. In practice, and with shares in particular, it’s easy to be distracted from the big picture by short-term noise – temporary market down turns and sensational media headlines.

A look back at history

You just can’t time the market In turbulent times it may be tempting to change strategy to protect yourself from short-term losses. Unfortunately, being out of the market may mean missing out on the market recovery and subsequent gains.

Remember 2001? The ‘dot-com’ crash, September 11, Iraq war and threats of terrorism caused share markets to head down and they stayed that way until March 2003. Some investors baled out into the security of cash and bonds. Secure, yes, but with low returns. Cash and bonds may provide psychological comfort in turbulent times but a change in strategy can destroy your ability to generate long-term wealth.

Share prices are driven by supply and demand. Good economic or company news attracts buyers who push prices up. Conversely when the news is poor, prices fall. The major traders of shares are fund managers, banks, superannuation funds and other large institutions. They focus on the future and try to predict where share prices are heading – and as we all know, predicting the future is difficult.

Putting your faith in just one asset class is also a danger. Some investors saw direct property investing as a secure strategy. Then the property boom came to an end and the resources boom took over. Not surprisingly, with many of the big miners in the top 200 companies, the Australian share market has roared ahead for the last three years.

Over the long-term the trend is definitely up but predicting when is not easy. In theory, you should buy in the troughs and sell at the peaks - but you only know that in hindsight. Timing the market is difficult. It is very difficult to pick the turning points. A better strategy is to stay invested to benefit from the upward surges. The dangers of short-

term speculating are clear. Share markets reward the patient investor.

Back to the future Another wealth damaging strategy is to switch to an asset class that is performing well. This often means investors are buying in close to the top of the market. Chopping and changing strategy can destroy wealth creation plans. The best wealth creation plan is to: • Assess your goals, • Set a strategy, • Invest according to the strategy, • Stick to the strategy, and • Review periodically to ensure your goals haven’t changed and your investments still suit your strategy. Setting up a long-term strategy is one of the many ways an adviser can assist you in order to benefit from the market over time.

What are the Key Statistics on Health & Insurance! cancer (12%), and skin cancer (10%) are the most prevalent.

• 1 in 4 Australian women will suffer depression at some time in their life.

• For females with cancer related trauma claims, breast cancer (54%), skin cancer (7%), and bowel cancer (5%) are the most prevalent.

• 1 in 6 Australian men will suffer depression at some time in their life.

• Stoke is the leading cause of long term disability in adults and is the cause of almost 25% of all chronic disability in Australia.

• Lifetime risk of an Australian female obtaining various types of cancer: Breast (1 in 11), Bowel (colorectal) (1 in 26), Melanoma of the skin (1 in 35), Lung (1 in 48)

• Cost of antidepressants to the Australian Pharmaceutical Benefits Scheme each year - $300 million

• Of the Australians who retired early, 41% did so because they were too sick or too injured to return to work (6.6% had the financial resources to retire, & 52% could not find work)

• Five year relative survival rate for various types of cancer in females - Breast (79%), Bowel (colorectal) (56% colon & 59% rectum), melanoma of the skin (95%), Lung (12%).

• For males with cancer related trauma claims, bowel cancer (17%), prostate

• The chance a person will survive for at least 12 months after suffering from heart attack, cancer, stroke or bypass is greater than 72%, even at the older ages!

• Hypertensive disease (high blood pressure) affects 1 in 10 Australians. • One in four adults currently smoke (28% of males & 21% of females). • For a woman aged 40, 1 in 3 chance of suffering coronary heart disease during their life

• Number of antidepressant prescriptions in Australia each year - 10 million.

• One third (31%) of Australian adults aged 18 to 59 do not have any life insurance • 1 in 3 Australian say a lack of understanding is a reason for them not having life insurance. Over half believe they do not need it • Less than 10% of the working population has income protection • 1 in 4 households in Australia do not have any home or contents insurance at all

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