Fins2643 Final Notes
Fins2643 Final Notes
Fins2643 Final Notes
After Cash and fixed-interest investments, many conservative investors consider property investment as an appropriate means of achieving their financial goals.
These investors believe that people will always need a place to live and work and shop, thus shaping their security in the 'bricks and mortar' approach.
The family home is their biggest investment for Australians, and they spend most of their working life paying it off. However many Australians also increase their
wealth by investing in other residential property and commercial property.
- Residential Property
Owner-occupied homes
Investment houses/units
Holiday houses/units
Immigration
LOCATION
Inflation
Deferring of first home purchase
Interest rates
Changes in legislation regarding taxes
Macroeconomic events
Average income and unemployment
Federal Taxes:
- Stamp Duty
State tax levied on the purchase of property including the main residence.
Varies between states, but is required to be paid on purchase.
- Land Tax
All states and Territories except NT, levy land tax. Principal places of residence are usually
exempt from land tax.
Many first-time property INVESTORS forget to factor in land tax in their costs.
NSW charges flat 1.6% on land values exceeding a threshold of $376,000, and 2% premum
for land values exceeding $2,421,000
Price Risk
Interest rate and liquidity/financing risk
Additional costs (mentioned above)
Lumpy illiquid asset
Frequent to moderately frequent changes in government policy concerning taxation makes
property less attractive as an INVESTMENT
- Requires a substantial amount of funds to purchase a property
- May require continual maintenance
- Requires a long holding period for a realizable capital gain
Reasons to Rent:
- Live in a place they cannot afford to buy in, for example a place close to work, university etc.
- More freedom of movement between locations
- Tenants pay no rates and have no maintenance or upkeep responsibilities in place they live in
Financial modelling that looks to analyze the best financial option, tends to find that there is little long-term difference between renting and taking out a mortgage.
However the results are very dependent on the assumptions made about financial variables and personal actions.
- Inspecting Properties
- Auction purchase
10% deposit and no cooling off period after the fall of the hammer
Deposit bonds
- Financial derivative products that can be obtained by the mortgage broker, that is an acceptable
type of guarantee for the deposit of the purchase of a property.
- This is usually undertaken when the buyer has insufficient funds to make the 10% deposit on the
house.
- "substitute for cash"
- Each property is unique and not frequently traded, thus computing returns is problematic
- Property price indices are computed on cumulative changes on median property prices
Types of Mortgages:
Deductability for:
- Running costs: utilities such as gas water electricity, and depreciation of office furnishings are
allowed for both places
- Occupancy costs: rent, or mortgage, interest, insurance is only allowed for a place of business
Selling a Property:
-
Selling by Auction:
-
Retirement Issues:
- Age pension
- Many retirees will seek benefits under Centrelink age pension
- Assets and income tests to determine if criteria is qualified, and how much an individual is entitled
to
Retirement Issues:
- Downsizing
- Relieved from the upkeep on a larger home
- New home is purchased in an area that meets retirement lifestyle needs
- More time to find a buyer willing to pay the reservation price, but with less pressure
- Only 0.25% penalty for buyers dropping out after the exchange of contract during the 5 day
cooling off period
- Open listing involves more than one agent selling
- Exclusive listing involves only one agent selling for a month or two
Retirement Issues:
- Reverse mortgage
- Arrangement made with a lender under which the homeowner draws money from the equity in
their home and uses this to top up their retirement expenditure.
- When the homeowner passes, the debt is cleared from the proceeds of the sale of the property.
- The balance remaining is paid to the homeowner after the sale or to beneficiaries of the estate.
Income Tax
- The typical Australian taxpayer pays about a third of gross income in various types of taxes
- ATO is responsible for the administration and enforcement of taxation
- Tax returns are collected three months after the end of financial year
- Tax collected is PAYG - pay as you go meaning tax is paid at expected salary, and deviations will
result in tax return benefits
PAYG
- Affects individuals, sole traders, companies, partnerships, trusts, super funds, businesses, NFP
organizations and government organizations.
- Introduced in Jan 2000
To prevent individuals from transferring money to minors, ATO has set up additional rules that apply to income not
received from work, classified as "Other Income"
Excepted Categories:
- Distribution from testamentary trust
- Employment and business income
- Receipt of pensions and compensation
- Lottery Winnings
The maximum tax offset of $445 applies if the taxable income is less than $37,000. This amount is
reduced by 1.5cents for each dollar over $37,000.
Eg. Kris is 15, and has $20,000 of excepted income, and $4,000 of other income.
Tax on excepted income:
=($20,000-$18200)*19%
= $1,800*19%
= $342
Tax on "Other Income"
= $4,000*45%
=$1,800
Kris has taxable income of less than $37,000 and is entitled to the $445 low income tax offset.
Taxation Page 4
Kris has taxable income of less than $37,000 and is entitled to the $445 low income tax offset.
However this can only reduce her excepted income tax and not total income tax.
Thus tax payable by Kris is $1,800 + ($342 - $342)
= $1,800
Capital Gains
- Statutory income
- Introduced 20/9/1985
- Determined after deducting the cost base from the proceeds
STEP 1:
- Determine if there is A CGT event has occurred
- Y > exemptions
N > the cost base of the asset
- When adjusted proceeds exceeds the adjusted cost base, capital gain has occurred, and vice versa
CGT events:
A1: Sale of Capital Asset
C1: Loss or destruction of an asset
D1: creating contractual rights
E1: Trust created over a CGT asset
E2: Transferring CGT asset to trust
E5: beneficiary becoming entitled to a trust
E6: Disposal of capital interest
I1: Taxpayer becomes a non-resident
K3: assets pass to tax-advantaged entity
CALCULATING CGT:
- Calculate cost base
- Calculate assessable capital gains
- Offset any capital losses
- Offset by any discount amount
- Add resultant capital gain to other assessable income to determine overall tax liability
- If purchased after 21/9/1999, the new 50% discount method can be used
EXAMPLE:
- On 5 October 1989, purchased asset for $10,000.
- Sold for $30,000, on 15 October 2003.
- Marginal tax rate is 48.5%
New Method:
Capital gain = $20,000
Tax payable = $20,000 x 50% x 48.5% = $4,850.00
Capital Losses
- Capital losses are only deductible against capital gains, not against ordinary income.
- Net capital loss can carry forward into the next tax year
CGT issues
Non-residents must pay CGT for Australian business assets, land, buildings, shares, options etc
Marital breakdown: CGT may be rolled over to future date
Deceased estates: beneficiary will be liable at the point of disposing of the asset, if main residency, 2
years to dispose before CGT will be levied.
CGT applies to gifts bequeathed to charity or foreign residents
Taxation Page 5
General Deductibility
- Loss is incurred in gaining or producing assessable income
- Loss must not be for personal reasons, must not be non-assessable purpose or excluded by
legislation
Capital v Repairs
- Initial repairs to assets are not deductible but are counted as capital
- Improvements of substantial nature is capital, minor repairs are deductible
- Replacement or change to asset will be capital
Home Office
- Has limited deductibility, where taxpayer maintains a main office elsewhere
- Can claim running costs in fitting, cooling, lighting
- If home office is the only office, taxpayer can claim a proportion of the house expenses, including
interest and council rates
Clothing
- Private clothing is non-deductible
- Work related clothing can be deducted
Uniforms or distinguishing garb
- Sunscreen/sunglasses are deductible if related to work
Interest
- Interest incurred in producing income is deductible
- Non-deductible if it is a capital acquisition with no income being produced
Gearing
- Borrowing to purchase income producing assets is gearing. Interest payable v income
- Positive gearing: Income> Interest
- Negative gearing: Interest> Income
- Neutral gearing: Interest = Income
- Negative gearing is attractive as capital gains can be offset by capital losses.
Other Issues
Many deductions require proof or evidence.
- Travel expenses must be recorded, and have upper and lower limits
- Entertainment expenses are generally non-deductible, unless directly linked to producing income,
ie. Entertaining clients
Depreciation/Capital Allowances
- Capital item can be written off or deducted over the life of the asset
- Certain taxpayers can write off assets less than $1,000 under the diminishing value method
- Certain taxpayers can write off assets worth less than $300
Accrual accounting
- Income is derived and tax payable when received or owed to the taxpayer
- Deductions are possible for outgoing losses that have been incurred, even if yet to be paid
Tax offsets are subtracted against tax liability instead of being deducted from assessable income
Low income offset $445 for income under $37,000
Spouse contribution up to $540
Medical expenses over $1,500
Family tax benefit A and B
Tax offsets reduce tax liability more, as tax deductions still get taxed by a reduced amount, where
tax offsets negate the liability by the full amount
Taxation Page 6
Net tax payable is the total amount of income tax that is owed
Subtract any payments already made from your pay (PAYG)
If overpaid, a tax return will be refunded
If underpaid, the different is payable
SUPERANNUATION FUNDS
- Trusts, but they have special tax treatment.
- Contributions attracts 15% tax upfront.
- Superannuation funds
Do not distribute capital unless satisfying certain criteria
Pays 15% tax on its income
10% tax on long term capital gains
Types of Income
- Personal Services Income
- Investment Income
Interest from loans
Rent
- Equity income
Dividends, imputation credits
- Capital Gains
Dividend Imputation
- The taxation of income earned from shares is dominated by the imputation system of corporate
taxation:
Company tax is paid to get NPAT
Dividends are paid out of NPAT
Franked dividends are paid out of income on which tax has been paid
Unfranked dividends are paid out of income on which tax has not been paid
Franked dividends are grossed up and added to taxable income, but the dividend recipient is
given a tax credit equal to the amount of tax paid by the company
Taxpayers can claim unused franking credits as tax refund from the government.
Eg.
Earnings = $10,000
Corporate tax at 30%: $10,000 x 0.3 = $3000.0
After-tax income: $10,000 - $3,000 = $7,000.00
The grossed up value is: dividend/1-tc = $7,000 / (1-0.3) = $10,000
Eg2.
Receive fully franked dividend of $1,780
Company tax rate 30%, marginal tax rate 15%
Grossed up dividend $1,780/(1-0.3) = $2,542.86
Tax credit = $2542.86 - 1,780 = $762.86
Tax payable = 0.15 x $2,542.86 = $381.43
Tax credit remaining = $762.86 - $381.43 = $381.43
Possible tax-free income is: $381.43/0.15 = $2,542.87
This is why funds with low marginal tax rate such as superannuation funds are keen to invest in franked
dividends.
Salary packaging
- Employers have an overall remuneration budget and the employee is allowed to choose their form
of payment:
Salaries
Superannuation
Share ownership plan
Non-cash benefits such as car, computer, meals etc
Taxation administration
- Self-assessment subject to ATO tax audit
- PAYG tax return results in refund or payment
- ATO administers but does not make tax legislation
- Public and private rulings may be given in ambiguous situation
Taxpayers must keep records which explain and record taxpayer's activities
ATO can require access to taxpayer's premises and the taxpayer must facilitate the required
access
ATO can interview taxpayers
Eg.
-
Tax Benefit:
- $30,000 x 0.11 x 365/365 = $3,300.0
- Type 1 GROSSED UP VALUE = 2.0647 WHERE THE PROVIDER IS ENTITLED TO A GOODS AND
SERVICES TAX CREDIT
- In this case, the grossed up value is:
- $3,300 x 2.0647 = $6,813.51
- FBT payable is: $6,813.51 x 0.465 = $3,168.28
IF SHE LEASED THE CAR HERSELF:
- $6,960 + $5,000 = $11,960.00
- As this will be paid out of post tax earnings, she will have to earn:
- $11,960/(1-0.465) = $22,355.14
Tax Audit
- ATO uses indicators to analyze if a taxpayer is within acceptable boundaries when declaring
income and making deductions and offsets
In particular Small business, investors, super contributions
Checking for undisclosed income or overestimation of deductions
Not declaring capital gains
Investment that have no economic substance but have massive tax advantages
There may only be a fine line between tax avoidance and tax evasion
- Avoidance means taking advantage of cracks in tax legislation, whereby the tax payer whilst
obeying the law, comes up with strategies to minimize tax liability
- Tax evasion is deliberately breaching existing laws
Types of Credit
- Consumption Financing
Credit Cards
Personal Loans
- Lease Financing
- Asset Financing
Home loan
Margin loan
Bridging loan
Lines of Credit etc
Secured Debt
- Most common examples are:
Home/investment property loans
Margin lending
Credit Cards:
- Convenient way of managing finances
- Can be cheaper using credit if balance is paid in full
- Interest costs can be very high otherwise
Often There are advertisements offering interest free finance, with no deposit for the purchase of
furniture.
Interest applies after 12 months, without mention of rate of interest
Advantages of Gearing:
Gearing is borrowing to generate income.
There is positive, neutral and negative gearing.
- Additional capital can be used for investment (leverage)
- Hence a larger portfolio can be constructed
- Allows diversification
- Tax benefits:
Deductible interest
Conversion of current income to future capital gains
Capital gains are taxed more favourably
Margin lending/trading
- Margin lending is to borrow money to buy shares
- Margin calls: investors need to have cash or additional shares to maintain the agreed loan to
market value ratio
- Additional costs will be generated, including brokerage, lender fees, insurance etc
Things to consider:
- Cost to a home includes:
Interest, fees, and it is generally best to look for the lowest comparison rate
Key features include:
Variable v fixed rate
Additional repayment and redraw facility
Life Insurance
- Covers against risk of premature death and disability
- Death and disability are not very predictable events
- Principal causes of death
Cancer
Heart attack
Accident
Old age
MULTIPLE APPROACH
- To arrive at the multiple, an investment interest rate at an achievable level is selected (expected
rate of return)
- divide 100 by the rate and rounded up.
e.g. rate is 7%, 100/7 = 14.2857 round = 15
If salary was $70,000, then cover would be:
$70,000 x 15 = $1,050,000.00
The amount invested at 7% would produce:
$1,050,000 x 0.07 = $73,500.00
- SHORTCOMINGS:
- Any other resources that may exist
- Whether dependents need that much income per annum
- Inflation not accounted
Not a very good approach as it is standard and not tailored to the individual
NEEDS APPROACH
1. Calculate the amount needed for the dependents to maintain standard of living
2. Calculate the resources the dependents have to meet those needs, i.e do the dependents have
enough money, assets, whatever to finance their goals
3. The difference between the two sums is the amount for which life insurance needs to be
undertaken
DEPENDENTS
- Immediate dependents would be spouse and children
- Partner is required to be provided for life, or until superannuation comes into effect
- The children need to be provided for the period of their dependency
- For the dependents it is essential to establish age and length of dependency
Insurance Page 11
DISABLEMENT
Life insurance policies can be extended to include disablement cover and pay a lumpsum in the event of:
- Total and permanent disablement
- Consequence of significant illness (trauma)
- Two categories for expenses
Medical, therapy costs
Ongoing support costs and their dependents
Insurance Page 12
Types of policies:
- Term: insurance cover is only for the specific period of cover, if the event of payout happens
during that period then a payout will be given, if not then the premium is sacrificed
- Whole of life: insurance cover that lasts whole of life, with premiums payable every year or
period, and a payout is given at death to dependents
- Endowment: hybrid between term and whole of life, whereby a maturity is selected such as 10, 15
years and a lumpsum payout is paid at maturity or death before maturity.
Funding Sources:
- How are the costs that come from incapacity to earn income going to be met?
Depends on length
Is sick leave avaiable?
What level is funding is necessary? > depends on severity
Sources:
Sick leave entitlements
Worker's compensation
Compulsory third party benefits
Invalid pension
INSURANCE
Insurance policies:
There are many insurance policies that provide cost of living during disablement
- TPD and trauma policies
- Income protection insurance
- Business overhead insurance
- Medicare, private health insurance
Income Protection
- Provides protection for loss of income due to inability to work
- Designed to replace part of the insured's income whilst he is totally disabled
- Payment comes commencing a waiting period and continues until the insured is no longer
disabled or the benefit period expires
- Can include partial disablement
- Injuries EXCLUDE all self-inflicted injuries
Waiting period
- Start of the incapacity during which the insured elects a period of no benefit
- Qualified periods range 14, 30, 60, 90
- Much lower premium for a longer period
Benefit period
- Benefit period is the time at which payment is required
- The period can be 1, 2 years or to the age of 65
- Life time cover may be offered to professionals
Insurance Page 13
TPD
- Will pay lump sum in the event of TOTAL PERMANENT DISABLEMENT or on the occurrence of a
specific event, usually traumatic
- Different levels of cover depending on lump sum payment
Health Insurance:
- Hospital and medical insurance is provided:
- Publicly: Medicare
- Privately: private health funds
Hospital cover
Ancillary cover
Medicare
- Federal government scheme
- 1.5% income taxable income levy
- 2012-13 thresholds
Single person earning income greater than $84,000
Couple with combined income greater than $168,000
If income is greater, the levy will increase 1%, 1.25%, 1.5%
Hospital benefits
- Extent of cover differs as to whether the person is a private or public patient
- Public:
Medicare allows a public patient to receive free treatment
A private patient in a public hospital is treated the same
- Private
Meet the cost of accommodation, medical and related expenses, but have their choice of
doctors and specialists
Insure these costs under private health insurance
Restrictions on medicare
- Hearing aids
- Dental
- Ambulance
- Home nursing
- Costs incurred as a private patient, can be at a public hospital, where they select private
treatment
Government incentives
- Private health insurance crisis,
Number of people insured privately dropping to low levels
The Medicare levy surcharge
30% rebate on private health insurance (carrot)
General Insurance
- Insurance other than life or business
- Home and contents
- Motor vehicle
- Under-insurance in property is a problem as it leaves people at high risk with nothing they can do
Insurance Page 14
Indemnity value
- Indemnity value or market value represents value of property, and takes into account
depreciation
- Insured will be reimbursed with depreciated value, and is unlikely to be able to repurchase a
property
Replacement value
- Replacement value cover is referred to as a new for old cover because it replaces the existing
property with a new one
- However the insured will most likely only offer replacement value when rebuilding and not
repurchasing
- If insured wants cash settlement, then the indemnity value will be paid
Co-insurance
- If total loss is greater than payout, the person will not be able to cover for full loss
- If loss is less than agreed, then the person will be able to cover for the full loss
- Insurer pays pro rata basis for partial loss
Premiums
- Premiums insurers charge vary according to LOCATION, and loss experience of the insurer.
Insurance Page 15
Claims
- Reinstate, rebuild, or repair property to equal but no better or more extensive than when new
- Replace the property with new property or use the nearest equivalent available
- Pay cost of reinstatement, rebuilding, replacement or repair
- Changes to Contributions:
Initially was 3%
Currently at 9% of gross income (increasing to 12%)
Co-contribution for low income earners (government $1 for $1
Employment requirement lifted that such that anyone <65 can contribute
- Changes to taxation payout:
Payouts are now tax free for ages over 60
- Other changes
Easier to transfer between funds
Reasonable benefit limits abolished
Cooper review recommends Mysuper and Superstream
Types of benefits
- Defined benefit
Payout based on a formula typically related to income in the final year of employment
Investment risk is absorbed by the employer
- Accumulation Fund
Investment risk rests on the individuals
Regulators
- APRA
The super fund industry
- ATO
SMSF
- Superannuation complaints tribunal (SCT)
Types of funds
- Industry super funds (lower fees)
- Standard employer-sponsored funds
- Public sector funds
- Retain funds
- Small superannuation funds
Superannuation Page 16
SMSF
- Less than 5 members
- Members are required to be trustees of the fund, or directors of a company which is the trustee of
the fund
- Governed by SIS act
- Trustee requirements, required to be approved and licensed by APRA
Advantages of SMSF
- May cost less than alternative public funds
- Able to transfer non-cash assets owed by the member into the super fund
- Increased flexibility to deal with benefits such as tax planning strategies
- Better investment CONTROL
Portfolio control
Ability to invest in boutique investments
Own real property that can be leased for income stream
Better control of capital gain realization
- Estate planning
Ability to transfer residual amounts to other members
Ability to have wider death benefit choice for beneficiaries
- Portability - no need to transfer benefits between funds when changing employers as all benefits
stay in SMSF
- Insurance - continuity of insurance cover on change of employment
Disadvantages of SMSF
- Tax
When a fund is wholly in the pension phase tax deductions may not be used as efficiently as
possible
- Costs
Depending of level of assets in the fund, the costs of running can be more expensive than a
master trust investment
- Investments
Not required to satisfy prudential standards which may lead to poor stewardship
Lack of access to wholesale rates due to the small pool of funds
SMSF that invests in managed funds may merely end up paying two layers of costs
- Administration
Spending excessive periods of time on management, due to lack of experience
Poor management can lead to compliance problems
Causes
Failure to comprehend the complexity of the rules
Failure to seek appropriate professional advice
- Insurance
Inability to have access to group cover rates
CONTRIBUTIONS
- Depending on circumstances, the contributor may be eligible for:
Income tax deduction
Tax offset
Co-contribution
- Concessional contribution attracts 15% contribution tax (before tax)
- Non-concessional contribution attracts 0% contribution tax (after tax)
Spouse contributions
- Where a spouse contributes to superannuation for their low income earning partner, they may be
entitled to a tax offset
- Maximum tax offset is 18% of contributions made by the spouse, up to max offset $540 (equates
to a 3000 contribution)
- Full offset is available for spouse who earns less than $10,800
- No tax offset is available when the spouse earns $13,800
Non-concessional contributions
- After 30/6/2009, the amount of non-concessional contributions that can be made to
superannuation without penalty is $150,000 for each financial year
- Or, $450,000 in three years
2 exemptions
Superannuation Page 17
SUPERANNUATION CO-CONTRIBUTION
- Contributions out of after tax income may be entitled to government co contributions
- Since 1/7/2003
- SMSF since 1/7/2007
- Maximum government co-contribution is $500 in 13/14 year
- CONDITIONS
Less than $46,920
After tax contribution
Preservation standards
- Three categories of preservation that may apply to a member's benefits:
Preserved benefits
Restricted non-preserved benefits
And unrestricted non-preserved benefits
2 exemptions
Conditions of release
- Benefit may be paid from a superannuation fund when conditions of release have occurred
- The effect of a member satisfying a condition of release is that all preserved and restricted non preserved benefits will CHANGE to unrestricted non-preserved benefits
CONDITIONS OF RELEASE
- Retirement
After a person has permanently ceased employment after age 55, and before age 60
(1/7/60)
After age 60, benefits and before age 65 benefits can be paid on ceasing employment
Reaching age 65
Death
Permanent incapacity
Severe financial hardship - being able to apply for centrelink > payout between 1-10k
Compassionate groups approved by APRA
Temporary incapacity
Returning permanently overseas
Other circumstances approved by APRA
Income streams
- In Australia, people have preferred to receive lump sum benefits to income streams, such as
pensions or annuities
- The amount of money saved in superannuation funds has been relatively small
- If the money was spent, the retiree could always rely on social security to provide a modest
income to live on
Pensions commencing after 20 September 2007 do not receive concessions for Centrelink asset test
purposes
Value of complying pensions that commenced before 20 September 2004 were 100% asset test exempt
Complying pensions and market limited income streams between 20 september 2004 and 20 september
2007 were 50% asset test exempt
Taxation of pensions
- Under the tax law, all pensions were included in assessable income until 30/7/2007 as they were
regarded as income of the person,
- From 1 july 2007, all pensions, paid from taxed sources to persons who are 60 or older are tax free
- Pensions paid from untaxed sources and those paid to people under 60 are subject to tax
Superannuation Page 18
Social security
- Programs such as those operating in Australia and others in the OECD operate on the PAYG,
Safety net retirement
Unemployment payments
Disability payments
Through taxation received from the working population
Criteria of eligibility
- Must satisfy criteria to receive payments
- Certain age, and residency
- Means tested to see whether the person is actually in need
Administration
- Centrelink 1997, charged with the responsibility of assessing and making social security payments
and providing other services on behalf of the commonwealth government.
Types of pensions
- AGE pension: unable to fund for their retirement adequately, 25% of average earnings
- Disability support pension: disability, illness or injury, preventing from working fulltime
- Carer allowance: income supplement for someone who provides daily care for a person will illness
or disability
- AUSTUDY: for people undertakign qualifying study who are 25 years or older
AGE PENSION
- 1909, to meet basic living expenses of older people
- Originally very few people were eligible for the benefit because the life expectancy was much
lower back then
- 2011 payment rate:
- Single: $712 per fortnight
- Couple: $537.70 each per fortnight
- 65 years for males
- Progressively increasing to 65 years with eligible age
- Pension age has not changed, but life expectancy has changed from 55 to 85
- Youth allowance: for full-time students aged 16-24, or those temporarily incapacitated for study
- Newstart allowance: unemployed people aged 21 or more, but under the eligible age of age
pension, must be willing to search and accept suitable paid work
- Widow allowance: women 50 years or older who have no recent work experience and are
widowed, divorced or separated
ASSET TESTING:
- Value of financial investments, such as:
Cash, bank, listed shares and securities, managed investments, loans to family members
- Value of personal items such as:
Home contents, clothing, hobby collections, paintings, art and electrical appliances
Motor vehicles, bikes and caravans
Real estate
Businesses and farms
Surrender value of life insurance policies
Gifts above $10,000 per income year
Deeming:
- The calculation process of payments and benefits was long and complex before 1996
- The new method is as follows:
Single
$45,000 of financial investments earn income at 2.5% pa
The amounts above that earn income at 4% pa
Couple
$75,600 for joint financial assets
Superannuation Page 19
MEANS TESTING
- Two tests are used to determine the age pension:
ASSET TEST
INCOME TEST
- Each is applied and the one which produces the lower pension entitlement is the applicable test
- When advising a client, it is important to establish which is the relevant test as this may affect
investment strategies of the investor/pensioner
Superannuation Page 20
Estate Planning
- Encompasses asset acquisition, growth, protection as well as transfer
- Effective estate planning :
Ensures assets are protected and distributed according to the wishes of the client even after death
Minimizes tax liabilities in the wealth transfer process and in the hands of recipients
- Family Objectives
Educating the grandchildren
Protecting the children's inheritance
Spending the children's inheritance
Managing family longevity
Managing family incapacity
Establishing the means for a family to manage its collective investment capital for the
benefits of themselves and succeeding generations
Asset ownership
- The manner in which a person owns and controls his or her wealth ultimately determines
Whether or not particular assets are protected both during and after the clients lifetime
from unexpected claims
How control can be passed onto the client's intended beneficiaries
The estate planning options that might be available or impediments that may affect the
client's estate planning strategy
METHODS OF OWNERSHIP
- Individual ownership - self or spouse owned assets
- Co-ownership - jointly owned assets versus tenancy in common
- Discretionary (non-fixed) trust ownership
- Superannuation entitlement
- Superannuation entitlement
Estate assets
- Are available to fund bequests to a client's beneficiaries under that client's will, through the
establishment of a testamentary trust
- Vulnerable to challenges to a client's will by family members or other claimants
- Vulnerable to access by a client's financial creditors in the event that he or she dies an
undischarged bankrupt
- Are fully assessable in the hands of the client for social security purposes
Died Intestate
- Person who died without a will
- Where there is no will, the deceased family members must apply for letters of administration
- No one can deal with the deceased estate assets until such time as letters have been granted
Wills
- A legal document in which a person chooses the controller of his or her estate by selecting an
EXECUTOR, and sets out how and whom his or her assets are to be distributed after death
- Estate planning includes much more than a will, but a will remains an essential part in the estate
planning process
Choice of executors
Non-estate assets
- Are not available to fund bequests under the client's will and are not appropriate sources of
funding for a testamentary trust established by the will
- In most jurisdictions, are protected from challenges to the clients will
- Generally cannot be accessed by the client's financial creditors
- May remain assessable for social security purposes
Choice of executors
A person is able to nominate the most appropriate person to act as the executor, such as a trusted
family member
An executor is responsible for ensuring that the will and estate assets are duly administered
However, the assets of the estate that pass to a beneficiary are taken to have been acquired by the
beneficiary at the date of death
If the asset is PRE CGT - ie pre 20/9/1985 the cost base of the beneficiary is the value at the date of
death
If the asset is POST CGT, then the beneficiary inherits the asset with the cost base of the deceased
If at the date of death, a residence was the main residence of the deceased, then the main residence
exemption is available to the beneficiary, provided the residence is sold within 2 years of acquisition
If the beneficiary occupies the property as their main residence, the exemption continues beyond the
initial 2 years
TESTAMENTARY TRUST
- Trusts that are established by a will
- Funded by the assets of a deceased estate or by payments to the estate in consequence of death
- To be administered by the executor of the estate or a trustee appointed in accordance with the
will and subject to the terms of the will
Discretionary trusts
- Generally speaking, assets held in discretionary trusts are:
Protected from claims against the client
Protected from claims made against the client's estate
- Discretionary trust can long outlive the client
- Disposition of discretionary trust assets is controlled by the trust deed
- The trustee is the legal owner of the trust assets
- Trustee must administer the trust assets in accordance with the terms of the trust deed for the
benefit of the beneficiaries
- THE APPOINTOR is the one who can hire and fire the trustee of the trust
- The beneficiaries of discretionary trusts
The trustee's discretion that enables beneficiaries to able to state that the assets belong to
the pool and not to any one of them.
Superannuation
- Asset protection conferred upon superannuation up to a limit - reasonable benefit limit (RBL)
under bankruptcy act
- Abolished the RBL in 1 July 2007
Powers of attorney
- Ensuring decisions can be made at times when it is impractical or inconvenient for the person
granting the power of attorney to be making those decisions
- An estate plan is not complete until the issue of powers of attorney have been addressed
- Very dangerous in the wrong hands
the grantor of the power appoints a representative to be his or her attorney and gives the
attorney the authority to act on the grantor's behalf within the limitations applying to the power
of attorney
Limitations of POA:
- Must act with fiduciary duty of the bests interests of the grantor
- Cannot make a will on behalf of the grantor
- Can only exercise a power of appointment of a trustee in the best interests of the grantor
- Cannot act as a director of a company
Relationship Breakdown
- Clients are becoming concerned to protect their own and their beneficiaries assets from division upon relationship
breakdown
- The parties concerned are legally married or have children
CONSIDER
- 50% of marriages do not stand the test of time
- 95% of separating couples resolve their differences without necessity of court determination
- Emotion and revenge are the wildcards behind family law negotiations
- Exemptions of financial restructuring may not be available for same sex or defacto partners
Superannuation
- Superannuation interest counts as property for family law purposes
- Split may be at breakdown or retirement
- Reasonable Benefit Limit (RBL) is separate and individual
Trusts
- Family court has to e power to lift the corporate veil
Depends on the control of the trust
- Discretionary trust may still work if it is not a family trust
Family Breakdown Page 25
Real estate
- Transfer of real estate title between spouse as part of family breakdown settlement is exempt
from stamp duty
Spousal Maintenance
- If the need for support can be demonstrated
E.g Out of the workforce while looking after children
The other party can be shown to have the financial resources to provide for it
May or may not continue after final resolution of property proceedings
Child Support
- Rate of payment is based on the payer's annual taxable income less an exempted income of
$12,000
- Depends on the number of children, 18%, 27%, 32%, 34%
- Cap income $130,000
- Paid monthly
- Same rate until a child reaches 18 y/o
- Collected directly by child support agency from the employer
- Tax exempted and non-deductible
SUMMARY
Family Breakdown Page 26
SUMMARY
- Family court takes into account all assets which are owned, controlled or entitled by spouses
- Apportionment depends on contribution, duration of relationship, spousal maintenance needs,
child support obligations
- Carefully designed pre-nuptial agreements, binding financial arrangements can deal with family
breakdown effectively