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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 Tips for 2010 / 2011 Financial Year.................................................................1 How Much is Enough Cover?..........................................................................2 What about Franked Dividends and Franking Credits...........................2
Is Deprecation working hard for you? A must know for Property Investors..................................................................................................................3 What is an Anti-detriment payment from superannuation.................3 Division 7A rears its ugly head!.......................................................................4
Tips for 2010 / 2011 Financial Year 1. Get started now So what are you waiting for? We are now half way through 2010 and the years are flying by. Take control of your finances and investments and look at the real reasons why you are delaying. If you’ve had some bad experiences in the last financial year then work through them, learn from them and get started! 2. Get a plan of Action Write down everything you want to achieve. When do you want to retire? How much money will you need? Put a time deadline on achieving certain goals and review these often. If you want to retire on $100,000 a year after tax and inflation you will need approx $2,000,0000 invested. Will Superannuation be your retirement vehicle, property, shares or a mixture of investments? 3. Get Professional Advice Good information and advice can come from a variety of different sources. This could be a licensed financial planner, an accountant, lawyer or insurance specialist. Don’t wait until after the event to seek professional advice, the delay could result in you paying too much tax, to be underinsured, or to leave yourself open to legal problems. 4. Have the right structure in place Make sure you hold assets in the most appropriate tax structure. Individuals, companies, trusts and super funds are all taxed differently on their capital gains and income. What structure will give you the best asset protection and flexibility? 5. Are all your investment eggs in the same basket? Investments perform very differently and when the share market is booming, the property market could be treading water. If you have a diversified investment portfolio of shares, property, managed funds and fixed interest this should reduce the volatility and even out your returns. Are you investing for
cash flow, capital growth or both?, inside or outside super? These are some of the discussions you should be having with your adviser. 6. Can you use your home as a springboard to wealth? If you own your home or have sufficient equity, you can gear against your house or set up a separate investment loan that can be used for deposits on property or leverage into shares. The interest you pay would normally be tax deductible and by having a separate loan there will be no confusion between personal and investment expenses. 7. Get rid of Non-Deductible debt first Your main aim should be to reduce nondeductible debt as soon as possible. This could be your Home loan, non-deductible car loan and any credit card debt. You are paying these loans with your after tax dollars and apart from your home loan they are normally depreciating items! Leave deductible loans until last as the government is footing part of your interest bill with tax breaks. 8. Reduce your CGT liability By holding your investments for more than 12 months or postponing the sale of assets until your taxable income is lower are just two ways to reduce capital gains tax. For business Owners there are a range of concessions that you could be eligible for when selling active Assets. You also need to get professional advice in relation to the ownership structure of assets and too have these in place before you invest. 9. Keep money aside for emergencies You should have sufficient funds set aside to cover any unforeseen circumstances. As a general rule this should be a lump sum to cover 6 months of your normal expenses. This lump sum could be invested in an account the earns interest but allows you easy access without penalty. It could be a financial buffer
you have built up on a line of credit mortgage or loan draw back facility. Income protection provides a tax deductible way to cover up to 75% of your income in case a sickness or accident prevents you from working. 10. Get Protected Reviewing your current level of insurance is vital to protect you and your family. If you have taken on new debts, increased your income or changed jobs, these and any other significant changes should trigger a review of your personal insurance situation 11. Make or update your will If you want to make sure that your loved ones are provided for in your Will, that your estate is divided in the way that you wish and any assets reach those you intend them for, it’s vital that you make a Will and keep it up to date.
How Much is Enough Cover? Sufficient life insurance is generally accepted to be a figure at least 10 times the insured’s earnings plus paying off debts. But in reality, six in ten people with dependants don’t have enough life insurance cover to look after their loved ones for more than one year if they were to die. Many people insure their home and their car, but fail to insure their most important asset, their ability to produce an income or replace the lost income if they lose their life. People fail to realise the value of their ‘working’ life. It supplies the money that fuels the lifestyle that you and your family enjoy, not just now, but well into the future. The table below demonstrates just how valuable an ‘asset’ your ability to produce an income is. It shows your potential earnings over 20 years and takes into account annual CPI increases (3% pa) and pay increases (3% pa). The table represents your gross income, building over time. An annual income of $50,000 today is potentially worth more than $1.8 million in 20 years time. Imagine no longer having access to that future income if you were to suffer an injury, illness or premature death. Who Wants To Be A Millionaire?
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. 1 IFSA-Rice Walker Fast Facts: a nation exposed!
What about Franked Dividends and Franking Credits Franking of dividends is a major reason why investment in share trusts and direct shares can make so much sense.
historically provided superior income and capital growth than other asset classes in most time periods.
When you also consider that many companies pay fully franked dividends of around 4% or 5% this compares very well with current fixed interest returns. Shares carry more short term capital risk but on a long term basis have
Shares in Australian companies that pay tax at the 30% company rate, have $428.57 of franking credits for every $1,000 of dividends they pay out. These franking credits are basically a credit for tax already paid by the company. Franking can be used to reduce
your tax liability and any excess franking credits are refunded to you. A shareholder on the 30% tax rate can essentially receive these franked dividends tax free. A shareholder on a 15% marginal tax rate or any franked dividends received by a Self Managed superfund will receive a refund of $215 for every $1,000 of fully franked dividends received. This credit can also be used to offset the tax from other income. Talk to your adviser about dividends & franking credits .
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Is Deprecation working hard for you? A must know for Property Investors What can Depreciation do for you? If you own an investment property, depreciation is a “must know”. Depreciation is a tax deduction available to you to cover the wear and tear of your asset, in this case the property itself and other items such as blinds and air conditioners, etc that over time may eventually need replacing. This deduction is then offset against any taxable income you may have received. For example if your income was $90,000 for the year and your depreciation from your investment property was $8,000 you would only pay tax on the $82,000. This is normally available at year end but can be taken through the financial year by applying for a variation, speak to your accountant for details. How do I work out the depreciation? Don’t worry help is at hand. This can be worked out with either your accountant or by employing a quantity surveyor. If you think that your investment property is fairly straight forward, ie a new build with blinds air conditioner and cook top, then your accountant should be able to work this out with the information you provide to them. However if your property is a little more complicated and maybe an older build and say for example you have replaced a number of items such as carpets, blinds, cook top, etc then you may want to consider using a quantity surveyor. They can be found in the yellow pages or via the internet, alternatively
your accountant may be able to suggest one. They will prepare a report which you can then give to your accountant at tax time.
But you will need to check with your accountant as to exactly how far back you can claim as an individual.
How much can I claim back?
How long will the schedule last?
This will depend on many factors including:
Then once you have a deprecation schedule in place provided by either you accountant or quantity surveyor it can last the lifetime of the property.
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How old the property is, brand new ones tend to attract the most depreciation.
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How much renovation has taken place.
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How many depreciable items the property contains (see next paragraph)
What items are depreciable? The list may include the following but it is always best to double check with your accountant or quantity surveyor: Air Conditioning units, Cooktops, Ovens and rangehoods, Blinds and Curtains, Floor coverings, basically carpets, Dishwashers, Hot water Systems, Solar panels and hardware, Light Fittings, Alarms (smoke and heat, Freestanding garden sheds. The list goes on, if unsure double check. Is it too late to do a depreciation schedule to claim tax back, even though I purchased it a while ago? Fortunately its not. A depreciation schedule is valid form when you took ownership. So you can claim going back to the date you settled on the property. Your accountant or quantity surveyor can back date the report to reflect this.
However this will have to be updated if there are any changes made or added such as you buy new blinds, air conditioning is added, new carpets are put down and so on. This can normally be done by informing your accountant at year end rather than paying for a new schedule. Don’t forget to claim. So many property investors are either unaware that they can claim or haven’t been told that they can claim and lose out on the benefits of depreciation. Or investors are aware of depreciation but wrongly assume it only covers the building and not any other items. For example furniture packages that may have been included with the purchase of a unit, which depending on the price of the furniture package can mean substantial deprecation. If you are unsure ask you accountant or contact a reputable quantity surveyor, it could just save you 000’s in tax. Tim Farmer, Property Champions
What is an Anti-detriment payment from superannuation An anti-detriment payment is a lump sum amount that is paid in addition to the account balance of the deceased member (section 295-485 ITAA 1997). It is only payable where the death benefit is being paid out as a lump sum, and represents a refund of the 15% contributions tax levied against the deceased member’s superannuation entitlements during their lifetime. This may increase the super death benefit by up to 17.647% and is known as an anti-detriment payment or tax saving amount. This payment can only be made to a spouse, former spouse or child (including an adult child) of the deceased member – either directly from the super fund or via the estate. Where the death benefit is being paid to a spouse, ex-spouse or minor child, the entire benefit, including the antidetriment payment, will be tax-free as these beneficiaries are dependants for tax purposes and always receive a superannuation death benefit tax-free. Where the anti-detriment payment is made to an adult child who was not financially dependent on the deceased,they will be taxed on the lump sum death benefit’s taxable component. This rate may be from
15% for the taxed element of the taxed component, to 30% for the untaxed element of the taxed component (plus Medicare Levy). Anti-detriment payments are not available in “insurance only” superannuation funds where the entire contribution is used to pay premiums which are tax deductible. As no contribution tax is ever paid, no refund of anti-detriment payment is available. One of the issues for super funds is that they must pay the benefit before they claim a tax deduction against future taxable income. Methods of calculating anti-detriment payments There are two methods of calculating antidetriment payments. Super funds are entitled to pay the greater of the two methods. Formula method - applies a percentage to the taxable component of the lump sum death benefit (net of insurance benefit proceeds). The percentage is 17.647% if the service period commenced after 30 June 1988. The percentage is 13.65% if the service period commenced before 30 June 1983. The percentage is between the two rates for service periods commenced between 30 June 1983 and 30 June 1988.
Audit method - calculates the exact amount that would have been paid if contributions to super were not included in the assessable income of the fund. A superannuation fund trustee is able to adopt its own actuarially-backed formula subject to the Tax Commissioner’s prior approval. Case study: Trevor (born 1 February 1950) dies on 1 December 2007, aged 57. His service period began on 1 January 1989, and he has a superannuation death benefit of $380,000 with no insurance component. Trevor is survived by his wife, Tina, aged 57, who is the nominated beneficiary. Trevor’s super death benefit lump sum may be increased by an estimated anti-detriment payment of $67,059. Summary: Anti-detriment payments are a great boost to a beneficiary’s death benefit. Unfortunately, there is no legal requirement for super funds to make anti-detriment payments. Some super funds pay this additional benefit automatically, other funds won’t make the payments unless requested, and there are some who just don’t make these payments at all. If the trust deed of the superannuation fund does not authorise payment, it cannot occur.
Division 7A rears its ugly head! In the good old days, we took money out of our companies tax-free and ‘forgot’ to pay them back. Unfortunately, in 1997 the ATO woke up to what was going on. Division 7A was born. Div 7A rules are there to stop sneaky shareholders (and their associates) from taking profits out of their company taxfree. We all know our friends at the ATO are pedantic. If you take money out of your company and you don’t fully comply with the Div 7A rules, watch out! The ATO says that all of this money is a deemed dividend. Cue ominous music. So what transactions does Div 7A cover? Div 7A rears its ugly head when your company either: 1.
loans to a shareholder or their associates;
2.
forgives shareholder debt;
3.
pays money for a shareholder’s benefit; or
4.
gives a guarantee for a shareholder’s benefit.
We call these the Dreadful Four. How do I get around Div 7A Ask yourself what kind of person you are - do you like risk and a quick fix? Or do you enjoy being covered in the warm and comforting blanket of our $2m PI Insurance? I want the quick and dirty •
Loans made in this current financial year
If you borrow money from your company and pay it back in the same financial year then you don’t have to pay any Div 7A interest. Pay back the loan you owe your company now, before 30 June. If you don’t have the cash (or can’t borrow the money - obviously you can’t borrow the money from the company) to do it, the quick and dirty isn’t for you. You need a Division 7A loan agreement. •
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Can I forgive the debt - for love and affection?
Did your company forgive the debt out of ‘love and affection’? Sorry, you can’t do that. You are deemed to have received that value as a dividend under the company (under Division 7A). •
Can I make some weird payments that get around Div 7A?
A payment is so broadly defined it includes almost any benefit. Best to give that payment back before end of financial year. If you can’t do that (for example, it involved a transfer of property and settlement has gone through), you need professional help, quickly - before 30 June. •
The company merely guaranteed my obligation
Be happy in the knowledge that the mere giving by your company of a guarantee does not trigger Div 7A. It is only triggered when the 3rd party enforces the guarantee. This falls foul of Div 7A. There is no quick and dirty fix for this one. Guarantees are strange creatures - the entity giving the guarantee gets absolutely no benefit for the risk it bears. Your company risks hundreds of thousands of dollars and gets nothing for it. Not even the odds at your local casino are that bad. What is the common thread for the quick and dirty Dreadful Four? It is that they don’t work. You are best to sit down with your accountant and do it properly. I want the full protection “blanky” •
Loans
Protect yourself with a Division 7A Loan agreement. You can do this in 2 ways: A. Amend your Constitution so that it includes a Div 7A loan agreement. Then every shareholder is automatically protected by the Div 7A loan agreement. Note however, that
loved ones are not covered by this Div 7A loan agreement as they are not shareholders (not privity of contract). The company constitution is like a contract between the company and each of the shareholders. If not, update your Constitution to allow for Division 7A loans. Use the Company Constitution Update if you want to update your constitution completely. Use the Company Constitution (add Div 7A) document if you want to keep your old constitution as well as allowing for Div 7A. B. If you don’t want to update your Constitution to include its very own Div 7A loan agreement (or you have nonshareholders borrowing from the company) then individually build Div 7A loan agreements for each person. You only need to do one per borrower - each Div 7A lasts for many years. A Division 7A Loan Agreement works for all loans made by your company to a “related party”. Our Loan Agreement works for one or many loans. If your company lends you more money next financial year, then you continue to use the same Div 7A Loan Agreement. Your Division 7A Loan Agreement is like a credit card - a revolving line of credit. Think about it. The first time your company lends you money, the Div 7A works. If you never take another loan from the company, your Div 7A works. If you borrow more money from your company, the Div 7A still works. It works for one loan or many loans. Every Div 7A loan first starts when your company first lends you the money. While our Div 7A agreements work forever, each Division 7A loan is paid back by the end of the 7th year. You pay off part of the capital each year plus interest. You can pay off more if you wish - but not less than 1/7 of the capital each financial year. Brett Davies, lawcentral.com.au
Moneys borrowed in previous financial years
Obviously, if you borrowed money from your company in previous financial years then you would have needed to have the Div 7A in place by the time you lodged the company tax returns - or were required to have lodged the company’s tax returns - whichever is the earlier.
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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