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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 Queen of Mean leaves everything to dog..................................................1 Would You Pass The Risk Test?........................................................................2 How Does a Line of Credit Home Loan Work?..........................................3
Is an Overdraft an effective form of finance?.............................................3 Beginners guide to share trading..................................................................3 Apathy - the greatest cause of the Partnership structure.....................4
Queen of Mean leaves everything to dog When the notorious “Queen of Mean” Leona Helmsley died and left $12 million to her dog Trouble - trouble indeed ensued. Her surviving family, left distraught and penniless, were not pleased. But regardless of Helmsley’s reasons, it does pose an interesting question. Our Will should reflect our will. So, why can’t we just leave what we want to whom we want? Unfortunately, it is a bit more complicated. Who can challenge my Will? It doesn’t matter who you are - your Will can be challenged. But only by certain people. Potential challengers can only come from 5 types of relationships: 1. Your parents 2. Your spouse 3. Your children (adopted children but not children born from sperm or egg donation) 4. Your grandchildren 5. Anyone that you are ‘maintaining’ (but not in all States). Who is your spouse? It’s not as simple as it sounds. Of course, the person you are married to is your spouse. But the ‘spousal level’ also includes your de-facto. In some States, it also includes your gay partner. The government now allows for such bigamy. You owe spousal obligations to your wife, de-facto and gay partner - all at the same time. How do I stop people from challenging my Will? Sadly, you can’t stop anyone from challenging your Will. You’re dead, so I guess you can’t really do anything anyway. If the challenger falls within any of the categories above, then they have a right to challenge. Nothing you can do can take away this right. For example, you can’t say, “I give $20,000 to Bertie White, but if she challenges my Will then the gift is void.” That’s the Court’s job to decide, not yours.
What is the silver lining? Just because someone can challenge your Will, doesn’t mean that they are successful. How do I stop people from vulturing my money? 1. Instruct a specialist lawyer to prepare your Will. The benefit? Your Will is explained by a lawyer. It’s not like you bought some $20 penny-dreadful Will kit from the Post Office and signed it blindly. Your lawyer keeps contemporaneous file notes about what you say. Your lawyer explains the effect of your Will before you sign it. This is about the strongest indicator that you can give the Court. Where required, Brett Davies Lawyers, drafts a ‘considered person’ clause into your Will. It shows the Court that you haven’t merely ‘forgotten’ about the person you decided to disinherit. It’s a non-offensive clause that confirms that you have considered your obligation to the person and have decided that they should not receive anything further from you. Some people want to put in the gory details such as infidelity. While perhaps an enjoyable read to the public, it’s not a good idea to put in any reason why you’ve disinherited them. Why? Well, once your executors lodge the Will to get a Grant of Probate, it becomes a public document. Anyone can see it -including Ms Busybody next door. There is no reason to air your dirty laundry. What are the other ways to stop the vultures? 2. Give away legal ownership of assets - while you’re still alive . If you’re really worried that someone might challenge your Will and vulture at your dosh, then you have another option - move all of your assets out of your name. Your Will only deals with assets you own (not the assets you
control). Some strategies we have seen are: • Make a binding death nomination for superannuation - this gifts your superannuation directly to the person you choose. They pay tax at 15% (if they are a spouse or dependant). The disadvantage of this is that if your Will uses testamentary trusts, then your beneficiary might end up paying more tax than they otherwise would have. • Transfer all of your assets into a discretionary trust. You still control the assets by making yourself the appointor (and your beneficiary the appointor when you are dead), but you don’t legally ‘own’ the assets anymore. The disadvantage of this? Well, you pay lots of state transfer duties and capital gains tax. The other problem is the challenger may still have recourse with the Supreme Court (although, it is considerably harder). • Gift all your assets while you’re still alive. There still may be duties payable though. You don’t really want to spend your last breathing days penniless. I want to leave it all to my dogs You can’t just leave money to an animal. You need your Will to set up a trust for the benefit of your pet. You would appoint someone that you trust as the appointor and trustee of the trust. That person can only use the money for the benefit, happiness and upkeep of your pet. You’ve got to be careful - unconventional Wills like these are a shining red beacon to the Court. The Court scrutinises your Will. That’s why you should get it drafted by a lawyer who is an expert in this area. In these cases of unorthodox gifts, it is common for family to attack the state of your mental health at the time of making your Will. A lawyer can also vouch for your mental capacity. Most people would rather see their dentist than see a lawyer. But when you sign your Will, the more lawyers in the room the better. Brett Davies, lawcentral.com.au
Would You Pass The Risk Test? We all face risks in our life and hope that a financial catastrophe will strike somewhere else. This is why it is critical to review your insurances regularly and ensure they still meet your needs. Can you cope with the risk of inadequate cover? Have you got too much cover? If your circumstances have changed, have you adjusted your cover? You can be systematic in looking at the risks you face. Firstly, identify the risk, secondly analyse how significant the risk is and lastly decide how you will handle the risk. Your choices are: •
To reduce the risk in some way
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Build up sufficient financial reserves so you can manage a loss if it occurs, or
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Buy protection in the form of insurance.
Everyone is different and for that reason we recommend a periodic review with a risk management expert like your financial / risk adviser. To start with try this risk management test.
Make sure you consider issues such as: •
The rising costs of re-building and replacing lost assets.
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Debts secured against assets such as mortgages and investment loans.
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Providing for people who are dependant on you. If you have fewer people dependant on you than in the past, you may have more insurance cover than you need.
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Changes in marital status. Accumulated leave from your job (sick leave, long service leave and annual leave)
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Your health and those of your dependants.
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Capital gains tax issues, if your dependents are forced to fire sale assets.
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Medical costs or rehabilitation expenses if suffering a trauma or disabled.
Use this grid as a starting point and make an appointment to see your financial / risk adviser who can ask the questions you have not thought of and advise you on possible solutions. Even if the analysis shows you have managed your risks effectively today, it will be worth reviewing on a regular basis to keep up with any changes to income, debts and investments. There are many policies available that come under the ‘life insurance’ umbrella. Trying to sort out the best policy to protect you and your family can be daunting and Time consuming. Seek professional advice when choosing an insurance policy.
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How Does a Line of Credit Home Loan Work? Firstly what is a Line of Credit Home Loan? It’s also known as an Equity Loan or a Revolving Credit Line. Its similar to a credit card or an overdraft, in that a credit limit is granted, based on the equity available in your home, which you can draw down on at any time and you don’t have to use the whole amount at one time. You can usually use the funds for any purpose. The major difference is that your home is used as collateral. What can I use the money for? Normally you can use the Line of Credit funds for any purpose, such as purchasing another property, consolidate other debts, purchase a car, and pay for child’s education. However many people use this Line of Credit to grow their personal wealth by using the available cash for investing into property or shares. They use this available equity, instead of not working for them, to produce a return from investments that gives a higher return that the interest rate charged for the Line of Credit.
normally prohibitive. In addition to this the interest rate charged maybe more than your standard home loan. The interest rate for a Line of Credit Home Loan is normally variable, although it maybe possible to find a fixed rate.
Some Pro’s and Cons to consider. Some of the advantages to a Line of Credit Home Loan:
What’s the cost? Normally lenders will charge an arrangement fee for this service, but the charges aren’t
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Readily available funds, that can be used for many purposes
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Lower interest rates than other comparable forms of credit, such as credit cards
Only pay interest on funds used
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Once minimum payment paid per month, then this can be reused if necessary
Some Disadvantages:
Borrowers normally repay a minimum monthly interest payment and can chose to repay all or any amount above the minimum repayment at anytime. So as repayments are made the funds become re available again. But a word of warning. Don’t forget that your property is used as collateral for this and should you default you may put your home at risk, as well as face hefty penalties.
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As loan is usually variable, then subject to interest rate fluctuations
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Requires borrower to be disciplined in using Line of Credit, after all it is “credit”
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It normally requires a property as collateral
Line of Credit Home Loans offer a relatively low cost, flexible alternative to other forms of credit, which allows you to utilize the equity you may have built up in your home. This may allow you to consolidate or to invest to create wealth, but discipline is required and the realization that it is secured against your property. Talk to a qualified finance adviser to see if it is suitable for you.
Is an Overdraft an effective form of finance? An Overdraft is a form of credit offered to businesses and individuals to provide short term working capital. It allows an individual or business to access extra funds in a flexible way once all their normal funds in a nominated account have been used up. An overdraft is most commonly used in business, to help manage Cashflow shortfalls during its everyday operations or seasonal fluctuations and to help cover unexpected expenses that may occur. This is in place of a business loan with a fixed amount loaned for a fixed period and for a fixed amount of interest for the lifetime of the loan. An overdraft only charges interest on any cash drawn from it and for the period that it’s drawn until paid back or the balance reduced.
advantages and disadvantages before applying.
hefty fees for breaking conditions, such as going over pre-set limit.
The benefits of an overdraft include: •
Easier to take out and usually less security required, than a traditional personal or business loan.
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Ability to manage Cashflow fluctuations.
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Only pay interest on amounts used and not the whole amount as you would with a normal loan, potentially saving money against a traditional loan, if used correctly.
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Provides piece of mind for those unforeseen expenses.
Some of the disadvantages may include: •
Set limit, usually lower amounts available than traditional business loan. Normally due to security requirements against the loan.
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Higher interest rate charged as well as
But is it an effective form of temporary finance? Business owners and individuals that look to take out an overdraft must consider all of the
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Normally higher arrangement fees to set up facility.
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Security can still be demanded by bank, even on nominal amounts.
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Bank can cancel very quickly if conditions are broken.
So is this a good form of finance? It certainly is an option to very carefully consider, especially in business where Cash flows can fluctuate during the year. However it needs to be viewed with caution and used appropriately. It is not a long term finance option for capital purchases or for fixing long term Cashflow issues, for example. But it will help to solve short term issues and give piece of mind, should the unexpected arise.
Beginners guide to share trading To help make this type of investing more profitable and to enhance the trading experience here’s some tips to help and protect you when trading, especially online: •
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Have a plan. Set out what you want to achieve with a realistic timescale. This will help you keep track of how well you are doing. Use it wisely and it’ll keep you on the straight and narrow, just in case you’re tempted to risk more than want to.
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Protect yourself. Put in stop losses, this will give you added protection with your investment.
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Diversify. Look at spreading your risk. Consider putting funds into different classes of investments. Again this gives you added protection. Just think about it, if you had
always know exactly where you stand. Know how much you can afford to have in the market at anyone time, how much you have “at risk”. This will help you monitor your investment, profits and losses from the market and that you don’t over extend yourself.
all your funds in one class of investments and that industry was adversely affected by something, it would affect all of your investment.
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Always use real time market figures. Some investors rely on “news time” figures which can be out of date. You need up to date “live” information to make decisions on. A few seconds in the market can make all the difference. Take control. You don’t always need to use a broker to make the decisions for you. Education is a key factor here, know your stuff and If you are confident to trade on your own, this can deliver added profit as you wont have to deal with a middle man. But if you are unsure always seek professional advice. Manage your money. Always be in control,
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Finally, discipline. Are you disciplined enough? When the temptation is there but the plan says no, can you say no? This is the corner stone of investing, knowing when to stop and sticking to your plan.
These are just some of the rules that should help you invest with more certainty and allow you to enjoy the experience a little more. Remember Discipline, Control and Clarity.
Apathy - the greatest cause of the Partnership structure A person has to take a formal decision to create a Family Trust, Hybrid Trust or a Company. Not so with a Partnership. Partnerships, much like many defacto relationships, come out of apathy. If you buy a house with your brother to rent out – you are in a partnership. If you enter into a joint venture with another business to share profit, you are in a Partnership. (Sure, you call it a JV but it isn’t. It is a partnership.) The use of a partnership, as a device for splitting income between the various members of a family, has declined because of the greatly increased use of (discretionary) Family Trusts. Family Trusts have 100s of beneficiaries, which can absorb tax. Partnerships can only use the partners to absorb tax. (However, a partner in a partnership can be a Family Trust.) Unlimited Liability Another disadvantage of a partnership is that partners have unlimited liability. Shareholders in a company aren’t responsible if the company can’t pay its debts. (This “limited liability” does little to protect the Directors or de facto Directors of the insolvent company.) For a partnership, if your business partner borrows money for a Rolls Royce and disappears you are left having to pay the whole debt. How do I establish a Partnership? A verbal or written partnership (very common) has become a delight to the ATO. It is easy to have a lawyer prepare a written partnership Deed. However, written partnerships between the members of a family may not be effective to create a partnership for income tax purposes. At the very least, you need an intention to conduct the business as a partnership. The intention must be borne out in the way in which your business is in practice conducted. Partnerships don’t have to be equal - otherwise Dad may lose control of the business. Dad can have 51%. The children can have the rest. Another method for control is providing in the partnership agreement for the appointment of a managing partner with full power of management and control. Does a Partnership need its own tax accounts and tax return? Yes, but it is the partners who end up paying the tax. When the partnership accounts are prepared, regard should be had to the terms of the partnership agreement (the failure to do so had unfortunate consequences in Schultz’s
case (1964) 111 CLR 482. A partnership doesn’t have to distribute income based on your interest in the partnership. For example, you may have only a 50% interest in the partnership but get 80% of the income because your “silent partner” wants to reward the extra time you spent working. If mum and dad are the sole partners in a Partnership, seek written advice if you distribute income other than 50/50. Don’t even think about doing this unless you have a written trust deed. Division 6AA - Does the Tax Commissioner hate children? Division 6AA imposes penalty tax rates on “unearned income” derived by minors (Income Act 1936). If your 17 year old son works at McDonalds then the tax rate is just what you and I suffer. That is “earned” money. Nevertheless, if the child gets “unearned” money from, say a trust, then the tax rate is often 66%! Diverting income to children may be ineffective in reducing tax. You can lock income away from wayward adult children in the partnership. However, this “uncontrolled partnership income” often suffers penalty tax. Accordingly, income producing partnerships are often only of benefit in tax planning for partners over 18 years and people you trust with money. Can a partnership contribute to Super? A company or trust can claim deductions for all superannuation contributions made on behalf of employees. This is a specified limit each year. This depends on the employee’s age. However, the maximum deductions of Superannuation available to a partner (self employed) is less than an employee. This seems unfair. Can a partnership get CGT reduction? If you are an individual then you reduce your Capital Gains Tax bill by 50% - if you comply with all the conditions. Family Trust companies lose this advantage. However, the Partnerships do get this reduced 50% CGT rate. If the asset is also the business asset (“active asset”) then you may get another 50% CGT relief. (Only if you are under $5 million in business assets.) You may also roll over up to half a million dollars into Super and defer the CGT bill. Do you have to share profit equally? Most partners allow for unequal distribution of profit provided all partners agree. A partnership may also be so constituted that
one of the partners has the power to direct the net partnership profit among the partners. Partnerships so formed are uncommon. This is because the joint and several unlimited liability leads partners to require certainty as to their respective rights. Income derived by a partner as a result of such a distribution is not subject to additional tax under section 94. This is because that provision applies only to an uncontrolled share in partnership income; i.e. the question is not whether the determination of the amount of the share is controlled, but whether the share of partnership income, once ascertained, is effectively controlled by the partner. A net partnership loss may be subject to allocation in a similar fashion. Care must be exercised in drafting the partnership agreement to ensure that the income is not derived by the partner having the power of direction but is merely dealt with as he or she directs (Jones (1963) 109 CLR 342; 13 ATD 6). Can one partner get income and the other get losses? Profits cannot, for tax purposes, be allocated to one partner and another incurs a share of partnership loss. There is only one net amount. Either net income of the partnership or a partnership loss is available under section 92. The practice of the Tax Commissioner in assessing partners who receive distributions in the form of salaries, as well as in the form of shares of net profit or loss after payment of salaries, where there is a net loss, is concessionary only and not one which the partners could oblige the Commissioner to adopt. Mr & Mrs McDonald had a house … Have a look at McDonald’s case 87 ATC 4541. Mr & Mrs McDonald acquired a rental property as “Joint Tenants”. They agreed that any net profit is apportioned 75% to the wife and 25% to the husband. On the other hand, they agreed that the husband wholly absorbs any loss. (Mr McDonald, we assume, was making a bucket of money and paying a lot of it in tax. Mrs McDonald we assume was paying tax at a lower rate. Consequently, Mr McDonald wanted losses to reduce his tax. Mr McDonald wanted income because her tax rate was less than her husbands.) The court held that there was no partnership at general law. Therefore, the husband was entitled to claim only half of the losses (not all of the loses). His wife could only have half the profits. Importantly, the position may have been different had there been a written partnership deed. (see Case 12/95 95 ATC). 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 Financial Intelligence Ltd AFSL: 312478
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