The Wealth Brief by Luke Peake

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Wealth Creation

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 Don’t sue me but… You’re fired!....................................................................1 Mortgage tips to help you own your home sooner................................2 Income Protection Or Workers Compensation?.......................................2

What is a Lease/Option and how can you use it?.....................................3 What is a Joint Venture Agreement?.............................................................3 Parents v’s Dead Son’s Lover – Superannuation fight............................4

Don’t sue me but… You’re fired! contracts on LawCentral are for employees and contractors; and are fully updated with all the new Fair Work Act 2009 changes. They set out the scope, nature, rights and responsibilities of both employers and employees. The contract is legally enforceable, which gives everyone greater certainty. If the time comes, a clear written contract is essential. It makes it easier to prove that an employee failed to comply with their employment contract. It gives you a solid reason to fire them.

Question: I need to fire some employees. One employee doesn’t do any work because he spends all day on Facebook. And given the downturn, I just don’t have enough work for another one of my employees. I can’t afford to keep either of them. I’m worried about them bringing a claim of unfair/unlawful dismissal. How do I protect myself by sacking them lawfully? I’m covered by the National Employment Scheme. Answer: Some Christmas puddings ago, we looked at how employers protect themselves by having written employment contracts. This week we’ll look at other ways to protect yourself, notice periods and who you need to deal with before hell descends. Who decides unfair dismissal claims? Fair Work Australia (FWA) decides unfair dismissal claims. When FWA assesses a dismissal, they look at whether it was unjust, unreasonable or harsh. If the answer is yes, then the employer is in some hot water. When does the ex-employee need to bring their claim against the employer? For unfair dismissals, the ex-employee brings the claim within 7 days of being terminated. However, this time period can be extended by FWA. For unlawful dismissals, the ex-employee can bring their claim within 60 days of termination. What happens after a claim is made? From bitter experience, our friends at FWA seek to control everything. There is usually a hearing to ascertain the facts. You only need to worry about getting a lawyer if: •

You really want one; and

•

FWA allows you to have one.

How does the employer protect themselves? •

Make sure you have fully compliant employment contracts in writing. Our Brett Davies Lawyers’ employment

•

Have a procedure in place for dismissing employees. Follow it strictly. If you follow the same procedure for everyone, then no one can claim that you were picking on them. Brett Davies Lawyers can help you put the procedures together.

sure the records are contemporaneous - have a pad and make notes. Even if you rewrite neatly or type up those notes (don’t waste your time doing this) - do not destroy the hand written rough notes. They are more valuable than the typed or rewritten notes. What are good defences to an unfair dismissal? Show that the dismissal was made according to the new Small Business Fair Dismissal Code. (Unfortunately for you, the Small Business Fair Dismissal Code does not apply to you as you are covered by the National Employment Scheme). See the Fairwork explanation for who is caught by the National Employment Scheme. 1.

Let your employees know, in writing, that a support person can join them at any discussions about their dismissal.

Prove that the dismissal was for “genuine operational reasons”. If the dismissal is for proper operational reasons, the employee can’t sue you for unfair dismissal on these grounds alone.

Document everything relating to the employee’s dismissal meticulously. Record what is said in dismissal discussions. Record surrounding circumstances. Record that you conducted the dismissal process according to your procedures. Make

Prove that there was serious misconduct by the employee. If the employee’s actions cause a serious and imminent risk to the health or safety of a person or the reputation, viability or profitability of the employer’s business, then this goes towards proving serious misconduct.

Brett Davies, Lawcentral.com.au

Mortgage tips to help you own your home sooner 1: Is your current mortgage still the most suitable for you? Circumstances change, as do your needs. Consider how competitive your lender’s interest rate is, what features you are paying for and aren’t using, the fees you’re forking out for and what kind of costs are associated with switching loans and/or lender. A reputable mortgage broker can offer a nocost home loan health check to compare your loan to others currently available. 2: Are there ways to pay off your mortgage quicker? Have you been throwing money into the loan account wherever possible e.g. your yearly tax return or bonus or leftover monthly wage? Every cent counts. Is it possible for you to repay at a faster rate via other methods e.g. paying fortnightly instead of monthly or making the loan a partial offset?

4: Is refinancing an option? If you are struggling with your repayments, consider refinancing the loan over a longer term than you have left. Or, if you’ve been making extra repayments to reduce your loan amount, you could always refinance the loan so your repayments reflect what you owe on the loan, not the original loan amount. 5: Have you looked at your spending habits? Are you spending more money than you need to e.g. transport, entertainment, fast food? Continually list your expenses to see where you can save money and contribute more into your mortgage. Once you have revisited

all of the above steps, re-do your budget so you really are beginning the year ahead. 6: Consolidate your debts. As interest rates rise on mortgages, so too do they on personal loans and credit cards. Consider rolling all your debts into your mortgage, so instead of paying up to 17 per cent on other debts such as cars, credit cards and personal loans, consolidate them all into your home loan, so you are paying only the mortgage interest rate instead. Talk to your finance or mortgage broker for further information

3: Are you interest rate savvy? Have you been repaying your mortgage as though its interest rate was at least two percentage points higher, preparing yourself for rate rises and in the meantime reducing your loan term and the amount owed? This will encourage a good savings habit and make adjusting to rate rises less burdensome.

Income Protection Or Workers Compensation? There has long been debate on the benefit of having income protection insurance, especially if an employer provides Workers Compensation cover. 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. 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? 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 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. 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. Unlike Workers Compensation benefits, income protection benefits do not have a maximum benefit payment, and benefits can continue through to age 65. 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 benefits of income protection with your adviser, or maybe it’s time to review your current cover? 1 ABS, 2003 ‘Work related injuries’.

www.insurancechampions.com.au

What is a Lease/Option and how can you use it? A Lease/Option simply describes the coupling of a standard residential tenancy lease with a call option contract. The option will be a legal document signed by two parties, a prospective purchaser and a vendor, for the possible acquisition of the given property.

A Lease-Option simply combines a standard Lease (Tenancy Agreement) with an Option, allowing the prospective purchaser to control and possibly occupy the property for a given period before he elects to exercise his option to purchase or not.

An option will provide the prospective purchaser the right to purchase the property within a given period, but will not bestow on him the obligation to do so. The purchaser simply has the option to purchase, whereas the vendor will have the obligation to sell at the agreed price should the purchaser exercise that option.

Advantages a buyer:

An option has three primary components: 1.

A Premium – paid by the prospective purchaser to the vendor when the option contract is entered into. This will be kept by the vendor, irrespective of whether the purchaser exercises the option to purchase or not

•

provides you with a means of controlling and eventually purchasing property for little or no money down

•

allows you to cash in on the capital growth in an up market, or walk away from the deal if the market drops

•

allows you to build up equity far faster than with a P&I loan if structured properly

•

allows you to cash in on the “disgruntled landlord” market and provide them a valuable alternative

Advantages a seller:

An Exercise (or Strike) Price – the agreed price the purchaser will pay for the property if he chooses to exercise the option

•

provides you with a means of obtaining top dollar for your property

•

allows you to tap into a much larger pool of potential purchasers

An Expiry Date – the period for which the Contract is valid

•

provides you with positive cashflow

where it might have previously been negative •

provides an alternative to holding onto a vacant property whilst you wait for a purchaser or tenant. You can find both much quicker and drastically minimise the period during which you would be holding a cash draining liability

Advantages as an investor: •

provides the ability for the investor to set-up “sandwiches”, whereby you lease/ option to purchase and lease/option to sell all at once, creating a margin for yourself in the process. You really don’t need any funds to do this, as the option premium you receive from the buyer will cover the option premium you had to pay to the seller.

•

Setting up sandwiches allows you to control vast amounts of property for no money and without the need to qualify for any finance. All you need to put in is time and skill. There is real money to be made using sandwiches!

Make sure you do the research and speak with a property savy lawyer about any option contract.

What is a Joint Venture Agreement? Where property investment is concerned, a Joint Venture occurs where two or more parties associate themselves for the purchase of real estate. The JVA, or JV contract, defines the ownership rights and obligations of each party to the contract. For example, a JVA could comprise two parties: a.

An Equity Partner

A Debt Partner

When purchasing a property, a lender will generally require a minimum 20% cash deposit in order to finance the property without LMI, or a 10% deposit (5% for owner occupiers) with LMI (Lender’s Mortgage Insurance). Let’s use the example of a JVA comprising two parties: •

An Equity Partner, who is responsible for putting up the initial 20% deposit

•

A Debt Partner, who is responsible for borrowing the 80% balance from a financier

The Debt Partner could be entitled to all the rental revenue from the property as well as being responsible for all of the loan repayments, property maintenance and management costs.

The JVA contract would include trigger clauses. For example, it might state that 5 years from the date of purchase either party has the right to trigger a sale of the property, but that in that case, the other party to the contract legally has the first option to buy. The sale price could be agreed upon to be the median of three independent valuations. Once the property is sold, each partner would be entitled to 50% of the appreciation in value (capital growth) of the property since the purchase date. The variables are entirely up to the parties to agree upon prior to their entering into a JVA together. The Equity partner may be the vendor of the property, or it may be another investor with spare cash. Either way, they put up the 20% equity required for you to obtain an 80% loan from a financier. In this case, if you are using a JVA to purchase property on a “No Money Down” basis, you become the Debt partner. The advantage to you is that you won’t have to come up with any deposit money. The number of properties that you can buy is only limited by the number of equity partners that you can find and by your borrowing capacity. If you wish to be the debt partner, it shouldn’t be hard to find equity partners. You need only offer the vendor of the property that interests you the option of being the equity

partner and offer him his full asking price. The vendor has nothing to lose. He gets 80% of his money now, plus a share of the future capital growth when you later sell or buy him out. Advantages: As an equity partner, allows you to realise the benefit of capital growth without assuming any risk, negative cashflow or debt burden As a debt partner, allows you to obtain 100% finance quite easily and to get in on deals with no money down! Disadvantages: You’ll be restricted from accessing the capital gains until the trigger date defined in the JVA (unless you achieve mutual agreement with your partner to sell before the trigger date) An unreliable debt partner could cause problems as the debt partner is responsible for servicing the loan and covering all property expenses. Get your solicitor to thoroughly check out your prospective partner. Include caveats, charge clauses, and personal guarantees into the JVA and on the property title. The caveat will ensure your partner can’t sell without your consent. Speak to a lawyer with experience in this area.

Parents v’s Dead Son’s Lover – Superannuation fight In the Post super Case a young man died at 25 years of age in a car accident. His Mum and Dad wanted their son’s Super to go to them and their grandchild. A young lady “known to the son” wanted the money. Mum and dad claimed the young lady was a flat-mate. However, the flat-mate and the son had a child together. Not surprisingly, the young lady argued that she was something more than a flat mate. Mum and dad claimed that the woman was an impostor; that their son was just sharing a house with this woman (and his son). Well, you can have a one-night affair without calling the young lady your defacto-wife the next morning. The Super fund, in the first instance, decided to give the Super to the flat-mate. Whether or not the court made the right decision, the important thing is that the whole battle could have been avoided. The son died “intestate”. This is a fancy expression for dying without a Will. Under the SIS Regulations a dead person’s Super can only go to their “dependants” or “legal personal representative”. So why did the Super go to the flat-mate? Unusually, the Superannuation deed defined the word “Dependant”. It was defined in the deed as the member’s spouse or child, or any other person who was in any way dependent on the member at the time of death. This meant that the Court really had no choice who to give the money to. Check your own deed. It is best not to have such narrow definitions. It is best to have your deed “permissive” rather than “regimented”. Our Self Managed Super Funds would never result in a Postsuper challenge. All of our deeds are flexible and permissive. However, many SMSFs, Industry Super Funds and Retail Funds may need to consider looking at their trust deeds in light of this case. In the case of Edwards v Postsuper Pty Ltd, a young postal worker died in a car accident at the young age of 25. He was a member of the Australia Post Superannuation Scheme. Under that scheme, a payment was available upon death. The young man had not nominated who gets his Super if he dies. The trustee of the scheme decided to pay 75% of the son’s $221,510 death benefit to his lover. He had a child with his lover and he was living with her. Despite Mum and

Dad’s protests the court said it was a defacto relationship. The remaining 25% went straight to the daughter. Mum and dad got nothing. Such matters are first looked at by the Superannuation Complaints Tribunal (Tribunal). The Tribunal is a toss and tumble court. You don’t need to have a lawyer present. The Tribunal affirmed the decision of the trustee: SCT Determination D05-06/121, dated 17 January 2006.

Had the Tribunal said that it would only consider mum and dad if they were “financially dependant”? According to the Court, the Tribunal did not. They would still have considered mum and dad even if they weren’t financially dependant. In fact, the Court felt that the Tribunal had proceeded on the basis that mum and dad could be potential beneficiaries. This is irrespective of the facts that mum and dad were, in the eyes of the Tribunal, not financially dependent on their son.

It always interests me as to what the Tribunal say that are looking at. This time the Tribunal said the relevant considerations were the: 1.

Wishes of the dead son

Financial circumstances and needs of the potential beneficiaries; and

Nature of the deceased’s relationship with the mother of his child

Mum and dad argued that they were financially dependent on their son. They were seriously disabled. The son gave them $50 per week. They also claimed to be emotionally dependant on their son. Mum and dad argued the woman was not in a defacto relationship with their son. Mum and dad argued that their son only shared a house with the mother of his child. Mum and dad dug up the son’s old tax returns. The son did not nominate this woman as his spouse in his tax returns. Tellingly, she was also receiving the sole parent pension. That is, she told the SCT she was in a de facto relationship, but told Centrelink she was a sole parent – trying to keep her cake and eat it, perhaps? The SCT held that mum and dad were not financially dependent on the son. There was no evidence that he had provided them with any money. Sure, the son had made many gifts to his family. However, the Tribunal did not accept this as sufficient evidence of “financial dependency”. The Federal Court: As is often the case, if you don’t like what a Tribunal says you appeal to the Federal Court. On appeal, the Federal Court upheld the SCT’s decision. It dismissed the parents’ claim that the Tribunal misconstrued the term “dependant” in the trust deed. For the court it was unnecessary to determine whether, as a matter of construction, the word “dependant”, and notions of dependency in the trust deed, concerned only financial dependency.

In all of this there was no mention of what this young man might have wanted to happen to his Super. Sadly, he either couldn’t afford, or had no inclination, to sort all of this out through some basic Estate Planning. Where to now? What can we take away from this case? 1.

Speak to your accountant and adviser about completing nomination forms for your Super in case you die.

Speak to your accountant and adviser about completing binding nominations.

If you have a Self Managed Super Deed think about amending the deed to force the trustees of your SMSF to pay out your Death Benefit where you want it. (Generally only SMSFs get this privilege. Sadly, few take advantage of it.)

Keep your fund permissive. Stop trying to create your own definitions of words. The SIS Regulations define words – use those definitions.

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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