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.
Types of Property Investment:
Owner-occupied homes ○ Investment houses/units ○ Holiday houses/units ○ Residential Property -Shops/service stations ○
Small Commercial Properties -Office Buildings ○ Hotels ○ Shopping Centres ○
Large Commercial Properties
-Land
-Factors that affect the demand for property include: Immigration -LOCATION -Inflation
-Deferring of first home purchase
-Interest rates
-Changes in legislation regarding taxes
-Macroeconomic events
-Average income and unemployment
-Methods of Property Investment:
Good yields with lower volatility. Important to consider location, quality and the property market cycle ○
Direct Ownership by negotiable sale or open auction
-Group of Investors come together to purchase a property. Usually in tenancy in common. ○
Shared Direct Ownership (syndicate groups)
-ASX professional and diversified trusts that invest directly in property; known as A-REITs (Australian Real Estate Investment Trust) and work similarly where investors can purchase units ○
Such include Australand Property Group, Centro Retail Group, GPT Group, Stockland, Westfield Group ○
More liquidity than direct ownership, also beneficial for those wanting exposure without large capital for the whole property purchase. ○
Listed Property Trusts
-These are not on the ASX but still offered as a managed, diversified product. Macquarie and ING offer such products which can be geared to different asset groups and markets. ○
Usually have higher entry/exit fees than LPT, but lower volatility due to less susceptibility to daily market fluctuations. ○
It is key to choosing a fund manager with a proven track record ○
Unlisted Property Trusts
-Eg. Westfield/Lendlease ○
Listen Property Companies
-Diversified investments usually have a weight in property depending on the individual's risk tolerance. ○
Superannuation fund
-Costs of Investing in Direct Property:
Interest on loans
-Establishment and valuation fees
-Conveyancing costs (transport costs) -Disbursement fees -Loan Application -Stamp Duty -Land Tax
-Capital Gains Tax
-Goods and Services Tax -Strata fees -Mortgage Insurance -Council rates
-List goes on...
-Investing in direct property involves costs beyond the purchase price. These include:
State Taxes:
State tax levied on the purchase of property including the main residence. ○
Varies between states, but is required to be paid on purchase. ○
Stamp Duty
-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
○ Land Tax
-Federal Taxes:
The purchase of new residential property and commercial premises is subject to 10% GST. ○
Also applies to commissions from the sale of property and rental commissions. ○
No GST is charged on rent paid by tenant for residential purposes. ○
No GST is charged on land or on the sale of existing residential property ○
Goods and Services Tax
-Applies to assets purchased after 20 September 1985, with 50% of the gain on property included as assessable income.
○
Main Residence exempt from CGT ○
Charged on land adjacent to family home if home is sold separately ○
Charged on family home if a person ceases to be an Australian resident ○
Charged on the sale of investment property ○
No CGT on deceased estates if there is continued use as main residence by beneficiaries, OR if disposed of within two years of the deceased date of death
○ Capital Gains Tax
-Advantages of Home Ownership/Property Investment:
Tax deductions can be claimed for interest on borrowed funds used to finance investment and for
-Disadvantages of Home Ownership/Property Investment: Price Risk
-FINS2643: Week 5 Home Ownership/Investing in Property (10)
Monday, October 28, 2013 5:38 PM
Advantages of Home Ownership/Property Investment:
Tax deductions can be claimed for interest on borrowed funds used to finance investment and for expenses. This strategy is often used for negative gearing, which results in reducing tax liabilities.
-Can provide income stream while also achieving steady capital growth
-Property is relatively stable and not subject to drastic changes in value and is a secure investment class
-When added into a portfolio, can help manage risk and return
-CGT exemption for main residence property
-High Collateral value with low finance costs
-A good address can open social doors
-Disadvantages of Home Ownership/Property Investment: 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.
How to value a property?
RECENT SALES of similar property in the same neighbourhood
-P = y/(r-g) ○
P = property value ○
Y = annual income from property ○
R = discount rate ○
G = growth rate from income received over time ○
Capitalization of future cash flows from the property
-How are Historical returns compiled?
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
-How to Choose the right property:
Suit your own needs ○
Have certain physical characteristics which will appeal to future property buyers ○
Two Criteria:
-Prices at which properties are sold give you a good idea of the market prices ○
Call the selling agent to determine prices ○
No substitute of inspecting the property ○
Look at what has been previously sold
-Local council may allow you to inspect its register of property transfers ○
These list the addresses, prices and transaction dates of all sales in the local area ○
Australian Property Monitor produces a home price guide listing all sales by postcode for the previous 12 months.
○
Check Selling Prices
-Inspecting Properties
-Buying and Selling:
Homes are generally purchased using a real estate agent, either by negotiable sale or through open auction.
-Even where the buyer has pre-approved financing, and the home is purchased through auction, settlement can take months
-Where new developments are at the planning stage, buyers can purchase "off the plan", which refers to a locked in price, protecting the buyer from increase in costs etc., and possibly allowing them to have a say in features in the property.
-This is undertaken where the construction feels that there is a risk of not being able to sell
-Private Sale or Auction?
The buyer and seller each sign a copy of the contract, and the solicitor will arrange them to be exchanged
○
10% deposit is required ○
There is a 5 day cooling off period after the exchange of the contract ○
0.25% penalty is payable for withdrawl ○
Private treaty purchase
-10% deposit and no cooling off period after the fall of the hammer ○
Auction purchase
-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"
-Deposit bonds
Types of Mortgages:
20-25 years + allow faster payback ○
Standard Variable Loans
-0.5% lower interest but less flexibility ○
Basic Variable Loans
-1-5 years, less risk vs penalties ○
Fixed-rate loans
-Designated upper threshold fixed rate that cannot be exceeded regardless of economic conditions for the first x years. Ie. 7.5% pa 3 years
○ Capped loans
-Allows a reduction in interest payable by having a deposit account linked directly to the home loan.
○
All-in-one or 100% offset loans
-Spreads interest rate risk ○
Combination fixed & variable rates
-Funds are drawn against equity ○
Home equity loans
-What to look for in a mortgage?
Not just the honeymoon rate ○
Remember to consider all charges to determine the real rate of payment ○
5.99% with $600 application and $10 monthly fee could mean 7.33% ○
Low comparison rate
-Low fees
-Extra repayment and redraw facilities
-Portability
-Lender's mortgage insurance
-$7000 grant ○
Was raised up to $21,000 until Sept 2009 ○
Federal government
-Waive or reduce stamp duty subject to conditions ○
NSW government
-First Home Buyer Aids It is important to consider the outcomes if the main residency is used as a place of business, as
CGT is reduced accordingly.
-A place of business: doctor has consulting rooms attached to the main residence ○
A place of convenience: teacher preparing lessons at home ○
The ATO have made a distinction between:
-CGT & Home Office:
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:
No sentimental value is priced
-1-3% agency costs
-Use local agents
-Select agents based on recommendations, past sales record, drive and honesty
-Selling by Auction:
Competitive bidding can lead to a higher price being paid
-Less chance of buyer dropping out as there is no cooling off period and no refund on deposit
-Faster than private treaty
-However there may be advertising costs that is required to be paid by the seller
-There may be fixed fees ($1000) whether the sale proceeds or not as the auctioner has provided a service
-Selling by Private treaty/Negotiation:
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
-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:
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.
-Retirement Issues:
Downsizing
-Relieved from the upkeep on a larger home
-New home is purchased in an area that meets retirement lifestyle needs
-Retirement Issues:
Income tax = (taxable income x rate) - tax offsets Taxable income = assessable income - deductions (Income Tax Assessment Act 1997)
First levied in 1800
-Income Tax introduced in 1915
-Income Tax assessment Act 1936
-1983 review of tax system
-Income Tax Assessment Act 1997
-Passed by the Rudd government in 2008 ○
The Henry Review
-History of Taxation in Australia
Capital Gains Tax ○
Income Tax
-Income Tax was applicable to individual, company, trusts, super and estate
-Fringe Benefit Tax - A benefit received from employment, such as car, loan, housing, payable by the employer at 46.5%
-Stamp Duty - Tax from purchasing a home levied by the state
-Goods and Services Tax
-Major Taxes relevant to financial planning in Australia
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
-Income Tax
Affects individuals, sole traders, companies, partnerships, trusts, super funds, businesses, NFP organizations and government organizations.
-Introduced in Jan 2000
-PAYG
ATO administers, but does no make tax legislation
-ATO can issue public and private rulings as to its interpretation of legislation regarding income and deductions
-ATO is bound by public rulings
-ATO and rulings/powers:
Tax within Australia is based on taxable income received by individuals and entities
-Australians are liable for tax on their worldwide income
-Non-Residents are liable for the income with an Australian source
-Taxes can be levied on Federal, State, and Local levels
-Personal and Entity Taxation
Higher the taxable income, the higher the marginal tax rate ○
Australia has a progressive marginal tax structure
-There is also a 1.5% Medicare levy over the entire taxable income
-Personal Income Tax
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Residential Tax rate
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Non-Residential Tax rates
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"
Screen clipping taken: 29-Oct-13 9:13 PM
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.
Distribution from testamentary trust
-Employment and business income
-Receipt of pensions and compensation
-Lottery Winnings
-Excepted Categories:
Family investment trusts (testamentary trusts) can distribute some income to minors to get limited tax benefit, as the standard tax rates apply instead of "other income" tax rates.
-Tax planning opportunities with minors
FINS2643: Week 7 Taxation (13)
Tuesday, October 29, 2013 8:13 PM
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
TAXABLE INCOME & TAX LIABILITY Assessable Income [1] Less Allowable Deductions [2] = Taxable Income [3] Less Tax offsets [4] Medicare levy [5] Less PAYG [6] = Net Tax payable
Includes Wages and Salary, bonuses, commission, tips, dividend, business, investment income everything
○
All income that is subject to income tax -Exempt income ○ Return of Capital ○ Genuine Gifts ○ Hobby Income ○
Does not include:
-Capital Gain/loss occurs when an asset is sold for more/less than its original cost
-Short-term capital gain occurs when item is held for less than 1 year and is taxed at normal tax rates
-Long-term Capital Gain occurs when asset is held for longer than 1 year, and is taxed at half of marginal tax rate.
-Capital Gains Statutory income -Introduced 20/9/1985
-Determined after deducting the cost base from the proceeds
-[1] Assessable Income
Share market booms
-Rapid increase of real estate over the past decade
-Steady increase in capital gains taxation is attributed to:
Determine if there is A CGT event has occurred
-N > the cost base of the asset ○
Y > exemptions
-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
-STEP 1:
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
-CALCULATING CGT:
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 EXAMPLE:
Main residence (property): if it is rented out, it can still retain its residency status for a max 6 years
-Personal Use Assets
-Sale of a small business when used for supporting retirement
-Sale of car, where not carrying on a business of selling motor cars
-Gambling wins
-Hedging contracts
-EXEMPT ASSETS FROM CGT
Are exempt from CGT if acquisition is less than $10,000
-Capital losses cannot be used to offset future gains
-Personal Use Assets:
15 year exemption, business value up to $6 million
-50% active asset reduction
-CGT retirement exemption
-CGT rollover
-Small business tax concession
Capital losses are only deductible against capital gains, not against ordinary income.
-Net capital loss can carry forward into the next tax year
-Capital Losses
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
[2] Allowable Deductions
General deductions allows expenses to be deducted, whereby it directly reduces the assessable income for an individual
Specific deductions allow the deduction of particular kinds of expenses, such as income tax expenses and borrowing costs. These are specifically listed and quantified in legislation
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
-General Deductibility
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
-Capital v Repairs
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
-Home Office
Private clothing is non-deductible
-Uniforms or distinguishing garb ○
Work related clothing can be deducted
-Sunscreen/sunglasses are deductible if related to work
-Clothing
Interest incurred in producing income is deductible
-Non-deductible if it is a capital acquisition with no income being produced
-Interest
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.
-Gearing
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
-Depreciation/Capital Allowances
Other Issues
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
-Many deductions require proof or evidence.
Cash accounting/Receipts method
Outgoings and losses are deductible only when incurred and not expected Income is only assessable only when received (cash accounting method)
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
-Accrual accounting
[3] Taxable income and basic tax payable:
Taxable income is the amount on which is used in the tax calculation
-Use tax rate tables to determine taxable income
-[4] Tax offsets
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
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
Is fixed at 30% since July 2001
-Between 1995 and June 2000, tax rate was 36%, and 34% during 00'- 01' financial year
-Tax rate is important to calculate tax rebates for franked dividends
-Company Income Tax
Partnerships do not need to pay tax out of profits but need to file tax returns for income tax purposes
-Individual partners pay tax according to their share of the partnership. Losses are personal
-This is the only structure that the law permits distribution of losses
-Income Tax and Partnerships
A trust is an arrangement where a person (trustee) holds property as its nominal owner for the good of beneficiaries, and it created by execution of a trust deed.
-Settler: Puts assets in the trust, usually in the form of money or property.
-Trustee: the person administering the trust under the deed, subject to law
-Beneficiaries: those who receive income or payment from the trust.
-Trusts and income tax
Managed Funds are fixed/unit trusts
Discretionary trust: trustee has the right to decide which beneficiaries are to receive income from the trust.
Must lodge tax return
Income has been taxed solely in the hands of beneficiaries.
Losses cannot be distributed, but only deducted from income made in the future years.
Trusts, but they have special tax treatment.
-Contributions attracts 15% tax upfront.
-Do not distribute capital unless satisfying certain criteria ○
Pays 15% tax on its income ○
10% tax on long term capital gains ○
Superannuation funds
-SUPERANNUATION FUNDS
Screen clipping taken: 31-Oct-13 5:42 PM
Personal Services Income
-Interest from loans ○
Rent ○
Investment Income
-Dividends, imputation credits ○
Equity income
-Capital Gains
-Types of Income - Cash, Fixed interest, Property, Shares, Global income, and foreign tax credits
Insurance bonds if invested of 10 years are tax exempted
-Taxation of Asset Classes
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. ○
The taxation of income earned from shares is dominated by the imputation system of corporate taxation:
-Dividend Imputation 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.
Salaries ○
Superannuation ○
Share ownership plan ○
Non-cash benefits such as car, computer, meals etc ○
Employers have an overall remuneration budget and the employee is allowed to choose their form of payment:
-Salary packaging
FINS2643: Week 8 Tax Planning (14)
Thursday, October 31, 2013 4:38 PM
Salaries, super, and share ownership plans are taxed under income tax and are paid by the individual or superannuation fund.
-Prior to FBT, companies would package up costs of the executives and pay them from company funds, charging the costs against the executives remuneration.
-FBT is levied on the employer at the highest marginal tax rate
-The major benefits are salary sacrifice into superannuation and motor vehicle leasing
-Fringe Benefit Tax
FBT is payable on motor vehicles only if used for personal purposes
-FBT = (ABC/D) - E
-A: base value of car
-B: statutory fraction determined by the annualized number of gross kilometres travelled
-C: number of days that in the FBT year that the benefit was provided
-D: number of days in the FBT year
-E: any of the recipients payments
-CALCULATING FBT: Salary sacrifice motor vehicle:
G has car $30,000
-Operating lease payments $6,960
-Annual running costs $5,000
-Expected annual km is 25,000, which is 11%
-Period for which car is provided is 365 days
-Eg.
$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 -Tax Benefit: $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
-IF SHE LEASED THE CAR HERSELF:
Total running costs of the car is: $11,960 - 11,960/11 = $10,872.73 + FBT payable = 3,168.28
$10,872.73 + 3,168.28 = $14,041.01 After tax benefit to G is:
($22,355.14 - $14,041.01) x (1-0.465) = $4,448.06 Living away from home
-Expense payment -Work travel -In-house benefits
-Generally exempt: briefcases, calculators, diaries, laptop, cars and work phones
-Other Fringe benefits may include:
Self-assessment subject to ATO tax audit
-PAYG tax return results in refund or payment
-ATO administers but does not make tax legislation
-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 ○
Public and private rulings may be given in ambiguous situation
-Taxation administration
Same investment strategy can result in very different taxation outcomes under different tax arrangements
-What structures should the client use and what assets should they hold? [1] ○
What tax reduction techniques such as salary packaging can be used to lower total tax liability? [2]
○
What strategies implemented now can minimize future tax liabilities? [3] ○
How willing is the client to engage in tax management behaviours? [4] ○
How much of an impact can be made by income splitting between family members on a total family tax basis? [5]
○
What tradeoffs is the client willing to make between administrative simplicity, investment performance, liquidity and lower tax liabilities? [6]
○
Some issues may be:
-Financial planning and tax planning
Shift earned income into a lower tax structure, ie. Superannuation or,
-Invest in growth assets that are expected to increase the level of income that the client receives
-Managing CGT in a tax advantageous manner
-Ensuring that the client takes all available deductions and claims of tax offsets
-[1] Ways to improve a cilents tax arrangements
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 ○
ATO uses indicators to analyze if a taxpayer is within acceptable boundaries when declaring income and making deductions and offsets
-Tax Audit
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
-There may only be a fine line between tax avoidance and tax evasion
Regulation of banking/lending industry aims to protect both borrowers and lenders
-Focus on consumer credit code, which wile state based has consolidated the previous state credit acts
-Main features of the code include better disclosure before loan advance, and assistance for reasonable cause
-Regulation of lending industry
Credit Cards ○ Personal Loans ○ Consumption Financing -Lease Financing -Home loan ○ Margin loan ○ Bridging loan ○
Lines of Credit etc ○
Asset Financing
-Types of Credit
Home/investment property loans ○
Margin lending ○
Most common examples are:
-Principal and interest mortgages ○
Lines of Credit: establishing a maximum loan balance that the bank will permit the borrower ○
Balloon payment Loans: does not fully amortize over its term, balloon payment is required at the end to repay the amount due
○
Fixed/variable rate loans ○
Reverse mortgages ○
Several options in home loans:
-Secured Debt
Interest, fees, and it is generally best to look for the lowest comparison rate ○
Variable v fixed rate
Additional repayment and redraw facility
Key features include: ○
Cost to a home includes:
-Things to consider:
Convenient way of managing finances
-Can be cheaper using credit if balance is paid in full
-Interest costs can be very high otherwise
-Credit Cards:
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.
Additional capital can be used for investment (leverage)
-Hence a larger portfolio can be constructed
-Allows diversification
-Deductible interest ○
Conversion of current income to future capital gains ○
Capital gains are taxed more favourably ○
Tax benefits:
-There is positive, neutral and negative gearing.
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
-Margin lending/trading
Screen clipping taken: 31-Oct-13 10:09 PM
FINS2643: Week 8 Personal Credit, Debt and Lending (6)
Thursday, October 31, 2013 9:15 PM
Screen clipping taken: 31-Oct-13 10:13 PM
Correct market conditions
-Repayment capacity
-Long investment horizon
-Job stability
-High- Risk tolerance
-Full personal insurance cover
-Partner preferences
-Where gearing is to be recommended, several things are to be assessed:
Situation where liabilities exceed assets, and they can no longer service debt
-Potential risk of excess borrowing: bankrupcy
Informal arrangements
-Declaration of intent to present a debtor's petition
-Part IX debt agreements are available to individuals who have unsecured debt of under $60,000
-Part X arrangement is where a trustee is appointed and assists the debtor to reach an arrangement with creditors
-Alternatives to bankrupcy are:
Identifcation of risks -Quantification of risks -Reduce or Eliminate ○
Retain: provide financing to meet consequence ○
Transfer: INSURANCE ○
Strategies for handling risk:
-Life expectancy graph for adults
-Screen clipping taken: 02-Nov-13 10:55 PM
Risk management process:
Covers against risk of premature death and disability
-Death and disability are not very predictable events -Cancer ○ Heart attack ○ Accident ○ Old age ○
Principal causes of death
-Life Insurance
Funeral and associated expenses
-Final medical expenses -Mortgage -Debts -Emergency funds
-Taxes and legal costs
-Immediate consequences of death:
Who would be affected by premature death or disability?
-Degree of dependency will depend on the income/productivity forsaken
-Needs change over the life of the person (financial life cycle)
-the different stages of life and -the needs of -the dependents at those stages needs to be considered
Consequences of death or disability on DEPENDENTS
If calculated amount is insufficient, then it is the clients family that will suffer, as dependents will not be able to be provided for
-The sums produced can be high and may result in the client being inclined to dismiss the amount if too excessive
-How much cover?
To arrive at the multiple, an investment interest rate at an achievable level is selected (expected rate of return)
-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 ○
divide 100 by the rate and rounded up.
-SHORTCOMINGS:
-Any other resources that may exist
-Whether dependents need that much income per annum
-Not a very good approach as it is standard and not tailored to the individual ○
Inflation not accounted
-MULTIPLE APPROACH
Calculate the amount needed for the dependents to maintain standard of living 1.
Calculate the resources the dependents have to meet those needs, i.e do the dependents have enough money, assets, whatever to finance their goals
2.
The difference between the two sums is the amount for which life insurance needs to be undertaken
3.
NEEDS APPROACH
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
-DEPENDENTS
Derived from amounts currently incurred
-The full amount of the expenditure needs to be brought into account to ascertain full amount
-Costs will change with time, it is important to factor this into calculation
-Living expenses [1]
After calculating the amount needed by the dependents next step is to ascertain what funds will be available
-Income from surviving family members ○
Government benefits ○
Proceeds from life insurance from superannuation plan ○
This comes from:
-Current resources [2]
FINS2643: Week 9 Insurance (16)
Saturday, November 02, 2013 10:39 PM
Screen clipping taken: 02-Nov-13 11:44 PM
Screen clipping taken: 02-Nov-13 11:44 PM
DISABLEMENT
Total and permanent disablement
-Consequence of significant illness (trauma)
-Medical, therapy costs ○
Ongoing support costs and their dependents ○
Two categories for expenses
-Life insurance policies can be extended to include disablement cover and pay a lumpsum in the event of:
INSURER required to put in a product disclosure statement, outlining description of the policy and the conditions, premiums, taxation methodology etc
○
Material: any information that is significant that may affect a insurer's decision making
The INSURED has a duty under Commonwealth Insurance Contracts Act to disclose the PDS and any other material information
○
If information is not wholly truthful, the insurance company can terminate cover or reduce liability at maturity
○ When applying:
-Insurance policies and premiums
Primary insurance pricing principal is diversification.
-When deciding whether to accept the client, the insurer is looking for live that meet certain requirements in relation to health, occupation and pastime activities
-Historical medical conditions ○ Addictions ○ Hobbies ○ Travel etc. ○ Pastimes include:
-Deciding whether to accept the risk
Stepped: as the person grows older they are more exposed to risk of death disablement, trauma, injury etc. and so the premium will increase proportionately
-Level: May initially be higher but the costs will even out as the premiums stay the same over the lifetime of the cover, meaning in the long horizon, premium costs will be lower and money may be saved.
-Two types of premiums:
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.
-Types of policies:
Employment benefit
-The business could take cover for a key employee, such as death of partner
-Uses of life insurance in business
Lower effective tax rate lower premium ○
Less stringent requirements for applications ○
Bulk buying power, superannuation funds can achieve premium discounts/concessions ○
Advantages for an individual in this sort of cover come from:
-Life and TPD insurance under superannuation
An even more valuable "asset" than losing property is the loss of the ability to produce income
-Usually total disablement will be covered for ○
The range of disabling events that can impair the ability to earn income is quite extensive
-Losing the ability to Generate income:
Depends on length ○
Is sick leave avaiable? ○
Sources:
Sick leave entitlements
Worker's compensation
Compulsory third party benefits
Invalid pension
INSURANCE
What level is funding is necessary? > depends on severity ○
How are the costs that come from incapacity to earn income going to be met?
-Funding Sources:
Insurance policies: TPD and trauma policies
-Income protection insurance
-Business overhead insurance
-Medicare, private health insurance
-There are many insurance policies that provide cost of living during disablement - 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
-TPD
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
-Income Protection
Total remuneration package comprising salary, commissions, bonus, fringe benefit, super ○
Employed:
-Income earned by personal exertion less expenses incurred ○
Self- employed
-What counts as income?
When invoked, money received is usually a monthly amount which is related to the insured income at the time the policy was effected
-The insurer will provide up to 75% of pre-disability income this is done to provide incentive to return to work asap
-Benefit of income protection policy
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
-Waiting 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
-Benefit period
Significant incapacity can seriously impair the business
-e.g. sole trader gets sick cant open shop, cant pick up goods for sale cant purchase orders etc.
-Expenses covered include: depreciation, land, payroll taxes, rates, interest on loans, utilities, everything basically
-Goods, merchandise in trade ○
Depreciation on real estate ○
Remuneration of those who directly contribute to the business ○
Contingencies ○
Business taxes ○
Things that are not covered:
-Business overhead insurance
Hospital and medical insurance is provided: -Publicly: Medicare -Hospital cover ○ Ancillary cover ○
Privately: private health funds
-Health Insurance:
Federal government scheme
-1.5% income taxable income levy
-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% ○
2012-13 thresholds
-Medicare
Extent of cover differs as to whether the person is a private or public patient
-Medicare allows a public patient to receive free treatment ○
A private patient in a public hospital is treated the same ○
Public:
-Meet the cost of accommodation, medical and related expenses, but have their choice of doctors and specialists
○
Insure these costs under private health insurance ○ Private -Hospital benefits Hearing aids -Dental -Ambulance -Home nursing
-Costs incurred as a private patient, can be at a public hospital, where they select private treatment
-Restrictions on medicare
Greater choice and flexibility
-Special services: special doctors, accommodation, drugs, ○
Surgical implant prostheses, diagnostic tests, pharmaceuticals, doctor services ○
Greater costs involved that attribute from
-Private health insurance
Number of people insured privately dropping to low levels ○
The Medicare levy surcharge ○
30% rebate on private health insurance (carrot) ○
Private health insurance crisis,
-Government incentives
Take out cover at younger age and maintain throughout life
-Increase the premium for cover payable by 2% for each year after age 30 where a person takes out cover (stick)
-The lifetime health cover scheme
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
-General Insurance
Home insurance is always required by the lender in mortgaged homes
-Contents is personal property, and receipts or evidence is required for specific items
-Indemnity v replacement ie, cash payments rather than replacing items
-Home and contents
Property is an indemnity contract, money is reimbursed at loss
-How much to insure for home?
Property is an indemnity contract, money is reimbursed at loss
-Replacement value may be greater than the pay out due to additional costs of purchasing a new home, building etc.
-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
-Indemnity 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
-Replacement value
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
-Co-insurance
Premiums insurers charge vary according to LOCATION, and loss experience of the insurer.
-Premiums - 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
-Claims
Personal effects policy
-Jewelry and valuables policy
-Multi-risk policy
-Covers for accidental loss or damage to personal items
-Personal Property Insurance
All house and contents package policies come with legal liability policy - negligence cover on the property you are living in
-Legal liability cover
Compulsory third party insurance (green slip)
-Third party property, fire and theft cover
-Last two have limitations on who may drive the vehicle, or excess for certain driver demographics
○
Full comprehensive insurance
-Motor vehicle insurance
Age pension: benefit given by gov to those who turn 65 and over ○
Occupation based contribution: ○
Personal contribution ○
Three pillar model
-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 Contributions:
-Payouts are now tax free for ages over 60 ○
Changes to taxation payout:
-Easier to transfer between funds ○
Reasonable benefit limits abolished ○
Cooper review recommends Mysuper and Superstream ○
Other changes
-History of Superannuation in Australia:
Imposed on all employers
-The charge can only be reduced by an employer contributing a percentage of a persons ordinary time earnings
-The contribution that must be paid on a persons earnings in each quarter must be at least equal to 9% of the employees ordinary time earnings
-Superannuation guarantee charge
Three stages of superannuation
Usually involves cash being paid into the superannuation fund for its members
-By an employer to employees ○
By employees ○
By people aged under 65 ○
By the government as co-contributions ○
Contributions may be made
-[1] CONTRIBUTIONS
Balance is invested in a diversified pool and taxed at the concessional rate of 15% on income and 10% on long term capital gain
-[2] ACCUMULATION
Must meet at least one condition of release under Superannuation Industry Act 1993
-Payout in lumpsum or pension
-[3] BENEFITS
Payout based on a formula typically related to income in the final year of employment ○
Investment risk is absorbed by the employer ○
Defined benefit
-Investment risk rests on the individuals ○
Accumulation Fund
-Types of benefits
Income Tax Assessment Act 1997
-Prudential framework
Restricting funds from investing in particular areas
Ensuring members are notified about their benefits
Requiring trustees to ensure security of funds
Establish greater control over the superannuation industry ○
Superannuation Industry Act 1993
-Regulation of Superannuation funds
The super fund industry ○ APRA -SMSF ○ ATO
-Superannuation complaints tribunal (SCT)
-Regulators
Industry super funds (lower fees)
-Standard employer-sponsored funds
-Public sector funds
-Retain funds
-Small superannuation funds
-Types of funds
A regulated super fund or ○
Retirement savings account ○
1/7/2005 employers must allow certain employees to have a choice of
-That will receive their superannuation guarantee contributions Choice of Super Fund
FINS2643: Week 10 Superannuation and Social Security (17,18)
Sunday, November 03, 2013 5:27 PM
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
-SMSF - In-house investment <5%
Cash, real property, shares, etc ○
Acquiring assets from members
-10-90 days and for cash flow reasons ○
Installment warrant ○
Borrowing limit
-SMSF INVESTMENT STANDARDS (SIS)
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
-Portfolio control ○
Ability to invest in boutique investments ○
Own real property that can be leased for income stream ○
Better control of capital gain realization ○
Better investment CONTROL
-Ability to transfer residual amounts to other members ○
Ability to have wider death benefit choice for beneficiaries ○
Estate planning
-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
-Advantages of SMSF
When a fund is wholly in the pension phase tax deductions may not be used as efficiently as possible
○ Tax
-Depending of level of assets in the fund, the costs of running can be more expensive than a master trust investment
○ Costs
-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 ○
Investments
-Spending excessive periods of time on management, due to lack of experience ○
Poor management can lead to compliance problems ○
Failure to comprehend the complexity of the rules
Failure to seek appropriate professional advice
Causes ○ Administration
-Inability to have access to group cover rates ○
Insurance
-Disadvantages of SMSF
Income tax deduction ○
Tax offset ○
Co-contribution ○
Depending on circumstances, the contributor may be eligible for:
-Concessional contribution attracts 15% contribution tax (before tax)
-Non-concessional contribution attracts 0% contribution tax (after tax)
-CONTRIBUTIONS
No limit of tax deductible (concessional) contributions FOR THOSE WHO QUALIFY
-Additional contribution tax of 31.5%, ie total 46.5% applies of total contribution exceed $25,000 <50 years
-Threshold for additional contribution tax of those >50 is $50,000
-Screen clipping taken: 03-Nov-13 11:12 PM
Concessional contributions from july 2009
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
-Spouse contributions
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
-Less than $46,920 ○
After tax contribution ○
CONDITIONS
-SUPERANNUATION CO-CONTRIBUTION
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
-2 exemptions ○
Or, $450,000 in three years
-Non-concessional contributions
Preserved benefits ○
Restricted non-preserved benefits ○
And unrestricted non-preserved benefits ○
Three categories of preservation that may apply to a member's benefits:
-Preservation standards
2 exemptions
○ ○ And unrestricted non-preserved benefits
Benefit is given when the individual reaches preservation age
-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
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 ○
Retirement
-CONDITIONS OF RELEASE
Lumpsum, pensions or both
-Age ○
Reason for payment ○
Taxed, or untaxed (government defined benefit scheme)
Source of payment ○
Whether the payment consists of a taxable or tax exempt component ○
Tax depends on
-TAX on superannuation benefits
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
-Income streams
Type of pensions and asset tests:
4 types of pensions which are described in the SIS act:
-Account based
-Complying with market limited income streams
-Allocated pensions
-Complying lifetime pensions
-Complying life expectancy pensions
-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
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
-Taxation of pensions
If the pension is taxable, that part which represents the income or taxable component of the pension is included in the assessable income for tax purposes
-All taxable pensions paid from taxed sources to a person under 60, are eligible for a tax offset equal to 15% of that taxed part of the pension
-Taxed source: superfund
2002, superannuation was introduced so that superannuation forms part of the property of a marriage and can be split between the parties to the marriage
-Couples can split superannuation entitlements by agreement and if no agreement can be reached, then a court order will be made indicating how the property will be split
-Superannuation is not avaiable to CREDITORS, unless the aim of the contribution is to defeat creditors
-Divorce and Superannuation
Guaranteed increase to 12% from 9%
-0.25% increments 13/14 financial year
-Following 2014, 0.5% per annum
-Increasing the contribution age from 70 to 75, to give incentives for mature workers to continue in the workforce
-Lower income earners will get $500 worth of government co -contributions with the limit being $37,000 earnings, effective from 1/7/2012
-Recent tax reform on superannnuation
$37,000 earnings, effective from 1/7/2012
Government allows individuals above the age of 50 with super under 500,000 to make extra 50,000 contributions, doubling the current cap of 50,000.
-Superannuation has been made a complex and confusing subject mainly because of the maze of rules that have developed over many years
-Timing of contributions ○
Payment of employment termination payments ○
Taking advantage of salary sacrifice and transition to retirement pensions ○
Number of things that need to be considered
-Financial planning issues and superannuation
Safety net retirement ○
Unemployment payments ○
Through taxation received from the working population
Disability payments ○
Programs such as those operating in Australia and others in the OECD operate on the PAYG,
-Social security
Must satisfy criteria to receive payments
-Certain age, and residency
-Means tested to see whether the person is actually in need
-Criteria of eligibility
Centrelink 1997, charged with the responsibility of assessing and making social security payments and providing other services on behalf of the commonwealth government.
-Administration
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
-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
-Types of pensions
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 -AGE PENSION ASSET TEST ○ INCOME TEST ○
Two tests are used to determine the age pension:
-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
-MEANS TESTING
Cash, bank, listed shares and securities, managed investments, loans to family members ○
Value of financial investments, 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 ○
Value of personal items such as:
-ASSET TESTING:
The calculation process of payments and benefits was long and complex before 1996
-$45,000 of financial investments earn income at 2.5% pa
The amounts above that earn income at 4% pa
Single ○
$75,600 for joint financial assets
Couple ○
The new method is as follows:
-Deeming:
Provide regular income to the investor, and may suit their income needs of retirees and pensioners depending on their objectives
-Allocated income streams ○
Lifetime income streams ○
Life expectancy income streams ○
Market linked pensions ○
Term certain income streams Main products are:
-Income stream products:
Term certain income streams ○
Screen clipping taken: 04-Nov-13 3:34 AM
Newstart allowance
-Disability support pension -Rent assistance -Pharmaceutical allowance -Telephone allowance -Concession cards -Service pension
-Other allowances include:
Encompasses asset acquisition, growth, protection as well as transfer
-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 ○
Effective estate planning :
-Estate Planning
Identify and prioritize the client's objectives 1.
Assess current and likely future circumstances 2.
Ascertain adequacy of short and long-term funding for achieving objectives 3.
Assess options and identify impediments 4.
The strategy - formulate the estate plan 5.
Implement the estate plan 6.
Ongoing review 7.
Estate Planning process:
Taxation advisor to address the taxation issues, immediate and potential
Legal practitioner to prepare the necessary documentation and legal advice
An accountant to attend to day-to-day taxation and accounting issues
Estate planning often needs to include: ○
Financial advisors need to stay within the limits of the financial advice license
-Role of estate planning advisors
Are they in a perfect state/capacity to write their will ○ Client capacity -Powers of attorney ○ Client representation -Territoriality ○
Family and personal accountabilities ○
Community and other connections ○
Client connections
-Client risk adversity
-Key estate planning tasks
Succession of control -Succession of management -Succession of ownership -Preservation of capital
-Delivery of substantial income stream to succeeding generations
-Establishing equity across blended families and generations
-Estate planning (Succession) objectives
Protecting assets from third party claims
Managing the interests of vulnerable beneficiaries
Assuring support to surviving spouse and family
Assuring the continuation or orderly sale of family business
Financial stability for the client, the family and successors ○
Financial objectives
-Establishing the outcomes
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
○
Family Objectives
-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
○
The manner in which a person owns and controls his or her wealth ultimately determines
-Asset ownership
Individual ownership - self or spouse owned assets
-Co-ownership - jointly owned assets versus tenancy in common
-Discretionary (non-fixed) trust ownership
-Superannuation entitlement
-METHODS OF OWNERSHIP
FINS2643: Week 11 Estate Planning (19)
Monday, November 04, 2013 3:04 PM
Superannuation entitlement
-The client's financial creditors
The client's beneficiaries financial creditors
The former spouse of the client and their beneficiaries
Disgruntled family members who want to overthrow the clients arrangements
Spendthrifts, intellectual disability □
Beneficiaries themselves:
Protection from: ○
A key objective of many clients is that of asset protection
-Asset protection principles
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
-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
-Non-estate assets
Screen clipping taken: 04-Nov-13 4:24 PM
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
-Died Intestate
Estate assets will go to the surviving husband or wife or defacto spouse and children if they are alive
-If no children spouse, partner inherits everything
-If there are surviving children etc, the first $150,000 is given to the spouse
-With any excess being divided between children and the spouse/defacto
-If no spouse, children inherit in equal shares
-If no spouse or children, goes to next of kin
-If none of the above GOVERNMENT
-NSW INTESTACY DISTRIBUTION RULES
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
-Wills
A person over 18 years and have testamentary capacity to prepare a will
-Not necessary for a person to seek legal practitioner to prepare a will
-Who can prepare a will?
Choice of executors
