Smart End of Financial Year Strategies
Wealth Education
Carnegie Financial Planning
What’s in this Wealth Education Bulletin?
It’s that time of year again...
With 30 June 2011 fast approaching here are some Smart Strategies to help you Build, Protect and Manage your money in a tax effective way. This bulletin covers
• Tax Effective Ways to Build Wealth using Superannuation Contributions
• Building Wealth through Gearin
• Protecting Yourself with Insurance that’s Tax Effective
• Tax Effective ways to Manage How to read this document
Making smart decisions about your money to meet your daily needs and steer towards your long term goals can be a complex task consider such as taxation, legislation, associated costs,
money goals. Developing, implementing and acting on a Financial Plan to achieve your goals requires you to understand how these issues will impact on you and what you should expect over time. As your Financial Adviser,
wealth. This document provides some additional information to help you see it as personal advice.
This document should be used to compliment our Financial Planning Process
risk and investment in order to ensure that our recommendations suit your needs and situation. The purpose of our Financial Planning Process is to de recommended strategy and product solution unique and tailored to your situation and needs.
Guide Build
Level 7,34 Charles St Parramatt PO Box 103
Web: www.carnegie.com.au
Smart End of Financial Year Strategies
Part of the:
Wealth Education Bulletin
by
Carnegie Financial Planning
What’s in this Wealth Education Bulletin?
With 30 June 2011 fast approaching here are some Smart Strategies to help you Build, Protect and Manage your money covers
Tax Effective Ways to Build Wealth using Superannuation Contributions Building Wealth through Gearing (Borrowing to Invest)
Protecting Yourself with Insurance that’s Tax Effective
Tax Effective ways to Manage how you make and spend money
Making smart decisions about your money to meet your daily needs and steer towards your long term goals can be a complex task
consider such as taxation, legislation, associated costs, protecting your wealth and assets and the inherent risks of choosing one path over others to achieve your cting on a Financial Plan to achieve your goals requires you to understand how these issues will impact on you and me. As your Financial Adviser, part of our role is to inform and educate you to be better builders, protectors and managers of your This document provides some additional information to help you understand financial planning concepts in general. You should not act on this information nor
our Financial Planning Process which involves knowing enough about your objectives, current situation and attitudes to rder to ensure that our recommendations suit your needs and situation. The purpose of our Financial Planning Process is to de
recommended strategy and product solution unique and tailored to your situation and needs.
Protect Manage
1 Level 7,34 Charles St Parramatta NSW 2150 PO Box 103 Parramatta NSW 2124 Phone: 02 9687 1966 Fax: 02 9635 3564 Web: www.carnegie.com.au
Smart End of Financial Year Strategies
Bulletin
With 30 June 2011 fast approaching here are some Smart Strategies to help you Build, Protect and Manage your money
Making smart decisions about your money to meet your daily needs and steer towards your long term goals can be a complex task. There are so many issues to one path over others to achieve your cting on a Financial Plan to achieve your goals requires you to understand how these issues will impact on you and part of our role is to inform and educate you to be better builders, protectors and managers of your
u should not act on this information nor
which involves knowing enough about your objectives, current situation and attitudes to rder to ensure that our recommendations suit your needs and situation. The purpose of our Financial Planning Process is to deliver a
Wealth
2 Building Wealth with Superannuation
What you need to know about Super
Superannuation is the most tax effective way of building wealth for your retirement. You are able to invest in a wide variety of opportunities using cash, shares, property and even choose the type of super fund you have. For more information on Superannuation see “Understanding Superannuation” on the Wealth Education page of our website www.carnegie.com.au.
The tax rates imposed on superannuation funds are as follows:
• Contributions Tax is a maximum of 15%.
• Investment income is taxed at a maximum of 15%.
• Capital Gains are taxed at a maximum of 15%. If the asset has been owned by the superannuation fund for more than 12 months the maximum rate of capital gains tax is 10%.
• When an income stream is commenced upon retirement, the tax rate imposed on income and capital gains in the pension account is reduced to zero. Pension payments are also tax free for those aged over 60. For those aged between 55 and 60, pension payments (less any tax free amount) will be taxable and receive a 15% tax offset.
These superannuation tax rates could be lower than your personal marginal tax rate. Using Super as a wealth building vehicle is a sound financial strategy, just remember the rules and limits that come with Superannuation investments.
There are contribution caps
What is it What’s the Cap
Concessional Contributions
A contribution made by or for individuals that are deductible to the contributor and are assessable in the hands of the superannuation fund.
Includes: employer contributions, salary sacrifice, insurance premiums paid into a super fund Life Insurance policy and self employed contributions Are taxed at a maximum of 15% and form part of the taxable component of your superannuation benefit.
The current annual limit for concessional contributions (from all sources) is $25,000.
Concessional contributions made in excess of this limit are charged penalty taxes, and so for most people should be avoided.
For those 50 years of age and over at any time in a financial year this limit is $50,000 per person per year
Non
Concessional Contributions
Include contributions to the fund such as personal after-tax contributions and spouse contributions.
The current annual limit is $150,000.Contributions made in excess of this limit are charged penalty taxes, and so for most people should be avoided.
Individuals under age 65 are able to bring forward two years of non-concessional contributions, allowing $450,000 in one year, with no further contributions in the next two years.
3 It’s your money...but not yet
Superannuation benefits are restricted in that they generally cannot be accessed until the owner reaches their
Preservation Age and has retired, or the owner reaches age 65. A person’s Preservation Age will vary between age 55 and 60 depending on their date of birth (as outlined in the table below).
Date of Birth Preservation Age
Before 1 July 1960 55
1 July 1960 – 30 June 1961 56
1 July 1961 – 30 June 1962 57
1 July 1962 – 30 June 1963 58
1 July 1963 – 30 June 1964 59
After 30 June 1964 60
Smart Super Strategies for End Of Financial Year (EOFY)
If You... You Could... So you Can... But make sure you...
Are getting a bonus from your employer
Arrange to salary sacrifice the bonus into super rather than get it as cash (after tax).
Reduce tax on your bonus of up to 31.5%
Make a larger after tax investment in super
Stay under your concessional contribution cap.
Consider other strategies like using this money to repay non deductible debt like home loans or credit cards.
Earn less than 10% of your income from eligible employment so you’re either self employed or not employed
Invest in Super (making a concessional contribution) and claim your contribution as a tax deduction
Use the deduction to offset other taxable income.
Build wealth outside of your business if you’re self employed.
Get wealth into superannuation with the view to a tax effective retirement income
Stay under your concessional contribution cap.
Do your sums and consult your accountant or tax adviser to get the most tax effective mix
Earn less than $61,920 with at least 10% from employment or business
Make a personal after tax contribution to super
Qualify for a Government Co-Contribution of up to $1,000
Increase your retirement savings
Stay under your non concessional cap.
Consider starting a regular investment plan and get your employer to draw this from your salary starting 1 July 2011.
Have a spouse earning less than $13,800 p.a
Make an after tax super contribution for them
Receive a tax offset of up to $540 Increase your spouse’s retirement savings
Stay under your spouse’s non concessional cap Consider starting a regular investment plan and
get your employer to draw this from your salary starting 1 July 2011.
Are any or all of the above Purchase life insurance, total and permanent disability insurance or income protection in a super fund
Save on premiums some super funds use
“Group” rates for members
Protect your Family against the financial burden of your death or disability
Check the fine print and know your insurance policy
Consider using the money you save wisely. You could top up your super contributions or to repay non deductible debt
Get a Financial Planner to help you get the most out of your super life insurance.
Have an investment in your own name
Cash out the investment and use the money to make a personal after tax contribution to super
Reduce the tax on investment earnings by up to 31.5%
Grow more wealth in superannuation
Stay under your non concessional cap Consider the tax consequences of selling an
investment like Capital Gains and Losses.
Have a capital gain from the sale of an asset and less than 10% of your income from employment
Invest the sale proceeds into super by making a concessional contribution
Claim a tax deduction to gain an offset against the capital gain
Increase the portion of your wealth in super
Do your sums and get your tax adviser’s guidance Stay under the concessional cap
Consider making an additional non concessional contribution to get more wealth into super
4 Building Wealth by Gearing.
Gearing simply means borrowing money to invest. Gearing can accelerate the process of wealth creation by allowing an investor to make a larger investment than would otherwise be possible. The borrowed money can be invested in a number of ways, including direct shares, property and managed investments.
Gearing can be an effective strategy if the after tax capital gain and income return of the geared investment exceeds the after tax costs of funding the investment.
If the net gains from your investments over the long term outweigh the costs of borrowing, gearing will magnify those gains. Gearing is considered to be an effective long term strategy because experience has shown that over the long term, growth based investments can deliver the higher potential returns required.
However, investments suitable for gearing are generally more volatile than others, and can also lose value. During a period when investments are losing value, gearing will magnify those losses.
Any gearing strategy should also be prudent enough to protect the investor from being forced to sell investments at a low point in the investment markets.
Gearing is only appropriate for growth based investments such as shares and property and should be viewed as a long- term strategy, that is, seven to ten year timeframe. You need to be able to retain the investment (and maintain the loan repayments) during potential short-term market declines, in order to obtain the benefits of long term growth.
What is Negative Gearing?
Negative gearing occurs when the interest payable on borrowed funds and any expenses incurred to derive that income exceeds the net income received from the investment. The investor must have surplus income from other sources over and above their day to day living expenses to meet the shortfall.
Gearing is most appropriate for people:
• With an assertive or aggressive risk profile, who are prepared to accept investment volatility
• With a strong, secure cash flow (which is protected by appropriate levels of insurance)
• On higher marginal tax rates
• With an investment time-frame of greater than seven years
The Benefits of Gearing
Potential for increased capital gains and diversification. Gearing increases the size of an investor's portfolio by allowing them to purchase additional investments with borrowed funds.
By increasing the number of investments in an investor's portfolio, the volatility of the overall investment portfolio may be reduced due to greater diversification.
Taxation. Tax savings should never be the primary reason for choosing an investment strategy, however there are some additional tax benefits associated with gearing.
Under current legislation, interest payments on money borrowed to invest in income producing investments, together with ongoing expenses, can normally be claimed as deductions against your taxable income.
In some cases investors may be able to pay the interest costs for up to 12 months in advance. The higher your marginal tax rate, the greater the tax saving you will receive from tax deductions.
Investment income that is predominantly sourced from Australian investments may provide an additional benefit through the value of any franking credits.
In many cases investors will be able to obtain a full tax deduction for interest incurred through gearing into international funds.
5 Smart Gearing Strategies for EOFY
If You... You Could... So you Can... But make sure you...
Are already Gearing
Pre pay interest for the next financial year before 30 June this year
Effectively claim 2 years worth of deductible interest in one year interest paid during the financial year plus a full prepayment of next year’s interest.
Have cash to cover the lump sum interest payment
Are new to Gearing with cash to invest
Consider a Capital Protected Investment and a 100%
Investment Loan
Put your cash to work by using it to pay the interest on a 100% Limited Recourse Investment Loan where:
• Your loan can be used to fund 100% of your investments
Use the 100% Investment Loan to buy into a Capital Protected Investment where:
• You have access to Growth Assets such as Australian and International Shares
• Are protected from a fall in the value of your investment
• Have no obligation (aside from interest repayments over the term of the loan) to repay the loan
• Can sell your investment after the loan term and take the growth accumulated.
Interest and part of the cost of protecting your loan and investment will be tax deductible.
Investment income can be used to meet the ongoing interest charged.
Get advice from a Financial Planner and Tax Adviser before implementing this strategy
Look for a Capital Protected Product with an Australian Tax Office Product Ruling
Protecting Wealth with Insurance
An insurance strategy is the foundation for all successful plans to build and manage wealth. The most valuable financial asset you have is your physical ability to earn income.
Smart Insurance Strategies for EOFY
If You... You Could... So you Can... But make sure you...
Need to work to live Invest in an Income Protection Policy that will pay up to 75% of your salary if you can’t work due to illness, injury and disability
Provide for the financial needs of your family if you can’t work.
Claim a tax deduction for the income protection premium
Have this in place and premiums paid by 30 June 2011
Work with your Financial Planner to get the best Income Protection Policy for your needs and situation.
Run a business with ongoing expenses
Invest in a Business Expense Insurance Policy
It’s like income protection for your business covering ongoing expenses like rent, equipment finance, salaries of your support staff, accounting fees.
All of these expenses continue even if you cease trading due to your illness, injury and disability
Keep your business going if you can’t work
Claim a tax deduction for the business expense premium
Have this in place and premiums paid by 30 June 2011
Work with your Financial Planner to get the best Policy for your needs and situation.
Have a family that depends on your financially
Purchase life insurance, total and permanent disability insurance or income protection in a super fund
Save on premiums some super funds use “Group” rates for members Protect your Family against the financial burden of your death or disability
Check the fine print and know your insurance policy
Consider using the money you save wisely. You could top up your super contributions or to repay non-deductible debt
Get a Financial Planner to help you get the most out of your super life insurance.
6
Managing Wealth
Making smart and informed decisions about how to spend, save and invest is what managing wealth is all about. With the EOFY around the corner here are some tips on how to manage wealth tax effectively.
If You... You Could... So you Can... But make sure you...
Are earning investment income or making a capital gain
Time income and capital gains to come after 30 June.
Bring forward any deductible investment expenditure prior to 30 June
Defer receiving income to the new financial year
So you can claim these expenses against this year’s income
Look at the possibility of making a deductible super contribution
Have Capital Losses Sell assets with a capital loss Use these losses to offset any capital gains this year
Consider use tax-deductible super contributions to offset tax on capital gains
Are considering a Charitable donation
Do it before 30 June Claim a deduction Are donating to a registered charity Have School Aged
Children
Invest in:
• laptops, home computers and associated costs (including repair and running costs of computer
• equipment and lease costs), home internet connection and printers and paper;
• education software;
• school textbooks and material (including prescribed textbooks, associated learning materials, study
• guides and stationery); and
• prescribed trade tools.
Claim the education tax refund.
The refund covers expenses of up to
$794 for each child at primary school (maximum refund of $397) and $1588 for each child at secondary school (maximum refund of $794) this year.
So if you have not used up your full entitlement it may also be worth bringing forward education expenses to boost your refund.
Keep receipts
Run a Business Bring forward business expenses and consider prepaying expenses for 2012 Defer receiving income until after 30 June
So you can claim these expenses against this year’s income
Make sure there is sufficient cash flow to keep things running into the new financial year
Have the ability to Income Split with another person
Split income from investments to a taxpayer on a lower marginal tax rate.
Share the tax burden of investment income across partners or within a family.
Make full use of each individual’s tax free threshold and the following tax offsets:
• Mature age workers
• Low Income Tax Offset
• Senior’s Tax Offset
Do your sums
Consider that a change in ownership of an investment (and the income) may result in a capital gain or loss.
Quick Tips
• Work related expenses are extensive, know what you’re entitled to claim and start keeping these records
• If you have had more than $1,500 in medical expenses “out of pocket” you may be entitled to a Net Medical Expenses Tax Offset.
• Consider private health insurance if you’re single and earning more than $77,000 per annum or a Family earning more than $154,000. This will eliminate the Medicare Levy Surcharge.
• Keep good records to support all your tax deduction claims. Consider using one dedicated bank account or credit card for all deductible expenses and keep receipts in one safe place.
7
Advice to Make Smart Decisions
Every Carnegie Financial Planning Client is taken through our Advice Process. It is designed to ensure that our Advice is authentic, oriented to achieving your life goals and is built on a foundation of mutual trust and respect. There are six stages in our Advice Process and they’re usually spread across at least two face to face meetings
Our Advice Process
Our Advice Process starts with a Discovery Meeting. Think of it like a first date. We gather information about your current financial situation, your life and wealth goals. We ask you five very important questions and we use a Financial Road Map which you can take home with you. When we meet we will ask you:
• What is most important to you in life?
• What goals do you have that need time, money and a plan to achieve?
• Where are you now?
• Where do you want to be?
• What’s in your way or stopping you?
After our Discovery Meeting we mutually agree to work together to achieve the goals you’ve identified and address the issues crucial to your financial wellbeing.
This agreement is documented in our Terms of Engagement which is a joint commitment to each other. We then begin the detailed process to prepare and present our Advice to you.
Presenting our Advice and gaining your consent to “Make it Happen” commits you to our Strategies and Recommendations. We then implement our Recommendations and agree on an Ongoing Service Arrangement with You.
You are the driver at the centre of Our Advice Process. Our role is get you to focus on Protecting, Building and Managing your Wealth now and with a clear direction and purpose for the future.
For more information about Carnegie Financial Planning read our Financial Services Guide available on our website.
For more Wealth Education visit www.carnegie.com.au/wealth-education
This document has been published by Carnegie Financial Planning AFSL 389528, registered address Level 7/34 Charles St Parramatta NSW 2150, ABN 94 128 285 110 for use in conjunction with their Financial Planning Process and Statements of Advice prepared by Carnegie Financial Planning and its Authorised Representatives.
This document contains general information about the benefits, costs and risks associated with certain product classes and strategies. It is designed for use in conjunction with our Financial Planning Process and a Statement of Advice that takes into account the circumstances and objectives of an individual. Before making a commitment to purchase or sell a financial product, you should ensure that you have obtained an individual Statement of Advice.
As legislation may change you should ensure you have the most recent version of this document.
