FINS2643: Week 5 Home Ownership/Investing in Property (10)

Monday, October 28, 2013

5:38 PM

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:

Factors that affect the demand for property include:

- Residential Property
Owner-occupied homes
Investment houses/units
Holiday houses/units

- Small Commercial Properties

Shops/service stations

Immigration
LOCATION
Inflation
Deferring of first home purchase
Interest rates
Changes in legislation regarding taxes
Macroeconomic events
Average income and unemployment

- Large Commercial Properties

Office Buildings
Hotels
Shopping Centres
- Land

Methods of Property Investment:

- Direct Ownership by negotiable sale or open auction
Good yields with lower volatility. Important to consider location, quality and the property market cycle
- Shared Direct Ownership (syndicate groups)
Group of Investors come together to purchase a property. Usually in tenancy in common.
- Listed Property Trusts
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.
- Unlisted 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
- Listen Property Companies
Eg. Westfield/Lendlease
- Superannuation fund
Diversified investments usually have a weight in property depending on the individual's risk tolerance.

Costs of Investing in Direct Property:

Investing in direct property involves costs beyond the purchase price. These include:
- 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...
State Taxes:

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

Advantages of Home Ownership/Property Investment:

- Tax deductions can be claimed for interest on borrowed funds used to finance investment and for

Home Ownership Page 1

- Goods and Services Tax

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
- Capital Gains 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

Disadvantages of Home Ownership/Property Investment:

- Price Risk

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?

How are Historical returns compiled?

- RECENT SALES of similar property in the same neighbourhood

- Capitalization of future cash flows from the property
P = y/(r-g)
P = property value
Y = annual income from property
R = discount rate
G = growth rate from income received over time

How to Choose the right property:

- Two Criteria:
Suit your own needs
Have certain physical characteristics which will appeal to future property buyers

- Look at what has been previously sold

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
- Check Selling Prices
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.

- 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?

- Private treaty purchase
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

- 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"

Home Ownership Page 2

- 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:

What to look for in a mortgage?

- Standard Variable Loans

20-25 years + allow faster payback
- Basic Variable Loans
0.5% lower interest but less flexibility
- Fixed-rate loans
1-5 years, less risk vs penalties
- Capped 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
- All-in-one or 100% offset loans
Allows a reduction in interest payable by having a deposit account linked directly to the
home loan.
- Combination fixed & variable rates
Spreads interest rate risk
- Home equity loans
Funds are drawn against equity

First Home Buyer Aids

- Federal government
$7000 grant
Was raised up to $21,000 until Sept 2009
- NSW government
Waive or reduce stamp duty subject to conditions

- Low comparison rate

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 fees
- Extra repayment and redraw facilities
- Portability
- Lender's mortgage insurance

CGT & Home Office:

- It is important to consider the outcomes if the main residency is used as a place of business, as
CGT is reduced accordingly.
- The ATO have made a distinction between:
A place of business: doctor has consulting rooms attached to the main residence
A place of convenience: teacher preparing lessons at home

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:
-

Selling by Private treaty/Negotiation:

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

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

Home Ownership Page 3

- 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.

FINS2643: Week 7 Taxation (13)

Tuesday, October 29, 2013
8:13 PM

Income tax = (taxable income x rate) - tax offsets

Taxable income = assessable income - deductions
(Income Tax Assessment Act 1997)

History of Taxation in Australia

- First levied in 1800
- Income Tax introduced in 1915
- Income Tax assessment Act 1936
- 1983 review of tax system
- Income Tax Assessment Act 1997
- The Henry Review
Passed by the Rudd government in 2008

Major Taxes relevant to financial planning in Australia

- Income Tax
Capital Gains 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

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

Non-Residential Tax rates

ATO and rulings/powers:

- 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

Personal and Entity Taxation

- 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 Income Tax

- Australia has a progressive marginal tax structure
Higher the taxable income, the higher the marginal tax rate
- There is also a 1.5% Medicare levy over the entire taxable income

Residential Tax rate

Screen clipping taken: 29-Oct-13 8:46 PM

Screen clipping taken: 29-Oct-13 8:48 PM

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

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.

Taxation Page 4

Tax planning opportunities with minors

- 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.

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

[1] Assessable Income

- All income that is subject to income tax
Includes Wages and Salary, bonuses, commission, tips, dividend, business, investment
income everything
- Does not include:
Exempt income
Return of Capital
Genuine Gifts
Hobby Income
- 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

Steady increase in capital gains taxation is attributed to:

- Share market booms
- Rapid increase of real estate over the past decade

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

EXEMPT ASSETS FROM CGT

- 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

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

Personal Use Assets:

- Are exempt from CGT if acquisition is less than $10,000
- Capital losses cannot be used to offset future gains

Small business tax concession

- 15 year exemption, business value up to $6 million
- 50% active asset reduction
- CGT retirement exemption
- CGT rollover

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

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

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)

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

[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

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

FINS2643: Week 8 Tax Planning (14)

Thursday, October 31, 2013
4:38 PM

Company Income Tax

- 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

Income Tax and Partnerships

- 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

Trusts and income tax

- 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.

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.

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

Screen clipping taken: 31-Oct-13 5:42 PM

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.

Taxation of Asset Classes

- Cash, Fixed interest, Property, Shares, Global income, and foreign tax credits
- Insurance bonds if invested of 10 years are tax exempted

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

Tax Planning Page 7

Fringe Benefit Tax

- 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

CALCULATING FBT: Salary sacrifice motor vehicle:

- 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

Other Fringe benefits may include:

- Living away from home
- Expense payment
- Work travel
- In-house benefits
- Generally exempt: briefcases, calculators, diaries, laptop, cars and work phones

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.
-

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

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

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

Financial planning and tax planning

- Same investment strategy can result in very different taxation outcomes under different tax
arrangements
- Some issues may be:
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]

[1] Ways to improve a cilents tax arrangements

- 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

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

Tax Planning Page 8

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

FINS2643: Week 8 Personal Credit, Debt and Lending (6)

Thursday, October 31, 2013
9:15 PM

Regulation of lending industry

- 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

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

- Several options in home loans:

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

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

Screen clipping taken: 31-Oct-13 10:09 PM

Personal Credit, Debt and Lending Page 9

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

Screen clipping taken: 31-Oct-13 10:13 PM

Where gearing is to be recommended, several things are to be assessed:

- Correct market conditions
- Repayment capacity
- Long investment horizon
- Job stability
- High- Risk tolerance
- Full personal insurance cover
- Partner preferences

Potential risk of excess borrowing: bankrupcy

- Situation where liabilities exceed assets, and they can no longer service debt

Alternatives to bankrupcy are:

- 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

Personal Credit, Debt and Lending Page 10

FINS2643: Week 9 Insurance (16)

Saturday, November 02, 2013
10:39 PM

Risk management process:

- Identifcation of risks
- Quantification of risks
- Strategies for handling risk:
Reduce or Eliminate
Retain: provide financing to meet consequence
Transfer: INSURANCE

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

- Life expectancy graph for adults

Immediate consequences of death:

- Funeral and associated expenses
- Final medical expenses
- Mortgage
- Debts
- Emergency funds
- Taxes and legal costs

Consequences of death or disability on DEPENDENTS

- 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

How much cover?

- 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

Screen clipping taken: 02-Nov-13 10:55 PM

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

Living expenses [1]

- 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

Current resources [2]

- After calculating the amount needed by the dependents next step is to ascertain what funds will
be available
- This comes from:
Income from surviving family members
Government benefits
Proceeds from life insurance from superannuation plan

Insurance Page 11

Screen clipping taken: 02-Nov-13 11:44 PM

Screen clipping taken: 02-Nov-13 11:44 PM

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 policies and premiums

- When applying:
INSURER required to put in a product disclosure statement, outlining description of the
policy and the conditions, premiums, taxation methodology etc
The INSURED has a duty under Commonwealth Insurance Contracts Act to disclose the PDS
and any other material information
Material: any information that is significant that may affect a insurer's decision making
If information is not wholly truthful, the insurance company can terminate cover or reduce
liability at maturity

Deciding whether to accept the risk

- 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
- Pastimes include:
Historical medical conditions
Addictions
Hobbies
Travel etc.

Two types of premiums:

- 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.

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.

Uses of life insurance in business

- Employment benefit
- The business could take cover for a key employee, such as death of partner

Life and TPD insurance under superannuation

- Advantages for an individual in this sort of cover come from:
Lower effective tax rate lower premium
Less stringent requirements for applications
Bulk buying power, superannuation funds can achieve premium discounts/concessions

Losing the ability to Generate income:

- An even more valuable "asset" than losing property is the loss of the ability to produce income
- The range of disabling events that can impair the ability to earn income is quite extensive
Usually total disablement will be covered for

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

What counts as income?

- Employed:
Total remuneration package comprising salary, commissions, bonus, fringe benefit, super
- Self- employed
Income earned by personal exertion less expenses incurred

Benefit of income protection policy

- 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

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

Business overhead insurance

- 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
- Things that are not covered:
Goods, merchandise in trade
Depreciation on real estate
Remuneration of those who directly contribute to the business
Contingencies
Business taxes

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

Private health insurance

- Greater choice and flexibility
- Greater costs involved that attribute from
Special services: special doctors, accommodation, drugs,
Surgical implant prostheses, diagnostic tests, pharmaceuticals, doctor services

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)

The lifetime health cover scheme

- 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)

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

Home and contents

- 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

How much to insure for home?

- Property is an indemnity contract, money is reimbursed at loss

Insurance Page 14

- 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
- 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.

Personal Property Insurance

- Personal effects policy
- Jewelry and valuables policy
- Multi-risk policy
- Covers for accidental loss or damage to personal items

Motor vehicle insurance

- Compulsory third party insurance (green slip)
- Third party property, fire and theft cover
- Full comprehensive insurance
Last two have limitations on who may drive the vehicle, or excess for certain driver
demographics

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

Legal liability cover

- All house and contents package policies come with legal liability policy - negligence cover on the
property you are living in

FINS2643: Week 10 Superannuation and Social Security (17,18)

Sunday, November 03, 2013
5:27 PM

History of Superannuation in Australia:

- Three pillar model
Age pension: benefit given by gov to those who turn 65 and over
Occupation based contribution:
Personal contribution

Superannuation guarantee charge

- 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

- 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

Three stages of superannuation

[1] CONTRIBUTIONS
- Usually involves cash being paid into the superannuation fund for its members
- Contributions may be made
By an employer to employees
By employees
By people aged under 65
By the government as co-contributions
[2] ACCUMULATION
- Balance is invested in a diversified pool and taxed at the concessional rate of 15% on income and
10% on long term capital gain
[3] BENEFITS
- Must meet at least one condition of release under Superannuation Industry Act 1993
- Payout in lumpsum or pension

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

Regulation of Superannuation funds

- Income Tax Assessment Act 1997
- Superannuation Industry Act 1993
Establish greater control over the superannuation industry
Prudential framework
Restricting funds from investing in particular areas
Ensuring members are notified about their benefits
Requiring trustees to ensure security of funds

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

Choice of Super Fund

- 1/7/2005 employers must allow certain employees to have a choice of
A regulated super fund or
Retirement savings account
That will receive their superannuation guarantee contributions

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

SMSF INVESTMENT STANDARDS (SIS)

- In-house investment <5%
- Acquiring assets from members
Cash, real property, shares, etc
- Borrowing limit
10-90 days and for cash flow reasons
Installment warrant

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)

Concessional contributions from july 2009

- 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

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

And unrestricted non-preserved benefits

- Benefit is given when the individual reaches preservation age

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

TAX on superannuation benefits

- Lumpsum, pensions or both
- Tax depends on
Age
Reason for payment
Source of payment
Taxed, or untaxed (government defined benefit scheme)
Whether the payment consists of a taxable or tax exempt component

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

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

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

Divorce and Superannuation

- 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

Recent tax reform on superannnuation

- 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

Superannuation Page 18

Taxed source: superfund

- 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

$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.

Financial planning issues and superannuation

- Superannuation has been made a complex and confusing subject mainly because of the maze of
rules that have developed over many years
- Number of things that need to be considered
Timing of contributions
Payment of employment termination payments
Taking advantage of salary sacrifice and transition to retirement pensions

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

Income stream products:

- Provide regular income to the investor, and may suit their income needs of retirees and
pensioners depending on their objectives
- Main products are:
Allocated income streams
Lifetime income streams
Life expectancy income streams
Market linked pensions
Term certain income streams

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

 Term certain income streams

Other allowances include:

- Newstart allowance
- Disability support pension
- Rent assistance
- Pharmaceutical allowance
- Telephone allowance
- Concession cards
- Service pension

Screen clipping taken: 04-Nov-13 3:34 AM

Superannuation Page 20

FINS2643: Week 11 Estate Planning (19)

Monday, November 04, 2013
3:04 PM

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

Estate Planning process:

1. Identify and prioritize the client's objectives
2. Assess current and likely future circumstances
3. Ascertain adequacy of short and long-term funding for achieving objectives
4. Assess options and identify impediments
5. The strategy - formulate the estate plan
6. Implement the estate plan
7. Ongoing review

Role of estate planning advisors

- Financial advisors need to stay within the limits of the financial advice license
Estate planning often needs to include:
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

Key estate planning tasks

- Client capacity
Are they in a perfect state/capacity to write their will
- Client representation
Powers of attorney
- Client connections
Territoriality
Family and personal accountabilities
Community and other connections
- Client risk adversity

Estate planning (Succession) objectives

- 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

Establishing the outcomes

- Financial objectives
Financial stability for the client, the family and successors
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

- 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

Estate Planning Page 21

- Superannuation entitlement

Asset protection principles

- A key objective of many clients is that of asset protection
Protection from:
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
Beneficiaries themselves:
Spendthrifts, intellectual disability

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

Screen clipping taken: 04-Nov-13 4:24 PM

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

NSW INTESTACY DISTRIBUTION RULES

- 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

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

Who can prepare a will?

- 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

Choice of executors

Estate Planning Page 22

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

Limitations of using a will

- Family testator clause
Permits the testators family members that are financially dependent to challenge will
distribution
Only estate assets can be distributed by a will and estate assets are exposed to creditor
claim

Death and capital gains tax

- Death is not a CGT event,
- Capital gains tax is not payable either by
The legal personal representative to whom the assets passes onto
The beneficiary to whom it subsequently passes pursuant to the will
Or on intestacy

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

Death and Income Tax

- If beneficiaries are presently entitled to the income from the estate, then the beneficiaries
themselves are personally liable for the tax on that income at their marginal rates of tax
- To the extent beneficiaries are not presently entitled to the net income of the deceased estate,
the tax liability will rest with the deceased estate

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

Advantages of testamentary trusts

- The ability to provide asset protection for intended beneficiaries
- The ability to transfer use, enjoyment and benefit of assets in the trust with other family
members, often with reduced transfer costs,
- Income tax advantages, particularly in the generation of excepted income

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

Estate Planning Page 23

Avoiding pitfalls of testamentary trusts

- The manner in which they are drafted can significantly impact how they operate
- Poorly drafted testamentary trusts can at best be a nuisance and greatly devalue inheritance
- Key risks:
Unwanted testamentary trusts
Lack of flexibility
Lack of long-term planning

- Abolished the RBL in 1 July 2007

- Financial advisors must be involved in advising clients on
The amount of wealth to place in super, whether in the form of deductible or undeductible
contributions
Choice of fund
Ordering of deeds for self-managed funds
Whether or not to acquire life insurance via a superannuation fund
Manner in which to withdraw benefits from superannuation

With superannuation death benefits, it is necessary to consider

- Choice of fund
- Type of death benefit nomination - binding or non-binding
Non-binding the member provides with a nomination as to how the death benefits will be
distributed, ultimately trustee retains control of distribution
Binding, the member directs the trustee in what proportion their superannuation benefits
are to be paid. Trustee must abide (binding)
The terms of the death benefit nominations made
Terms of pensions that may be in place
Terms of a member's will

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

Types of POA: (attorney: legal representative)

- Enduring power of attorney - financial
- Enduring power of attorney - medical treatment
- Enduring guardian
- General power of attorney
- Commercial 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

Estate Planning Page 24

FINS2643: Week 11 Family Breakdown (17)

Monday, November 04, 2013
5:35 PM

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

Power of the Family Court

- Extensive power to look beyond what would otherwise be protective structures, and order that
the assets of such structures be divided
- Structures that are more flexible and that can be controlled by the relevant party to the
relationship are therefore potentially less protective
- Property: defined as anything of value
Including superannuation and beneficial entitlements in family trusts
- Financial apportionment of assets

Net assets determined

- Market value, net of tax and selling expenses
- CGT may or may not be accounted for
- Income tax liabilities and refunds

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

- Discretionary trust may still work if it is not a family trust

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

Pre- Nuptial Agreements

- Pre marriage agreements that contractually sets out the division of property, should the marriage
fall apart - binding financial agreement
- Must be prepared by a qualified family lawyer and both parties must seek separate and
independent advice before signing them if they are to be binding
- Couples must satisfy requirements in legislation
- Deals with apportionment maintenance and support issues
- Useful for avoiding emotional issues and other devices

Family trusts not useful in avoiding CGT in family breakdown

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

Family Breakdown Page 27