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Wealth transfer is a family matter

August 5th, 2016 Posted by Assets 0 comments on “Wealth transfer is a family matter”

Wealth transfer is a family matter

It’s often said that it is better to give with a warm heart, but divesting assets while you are alive may not be the best way to pass on your accumulated wealth to your nearest and dearest.

Certainly giving when you are alive means you have more control over who gets what and you get to see them enjoy their inheritance. It also means your wishes are less likely to be contested after you are gone. But for many reasons this is not always practical or possible.

None of us knows how long we will live so there is little point giving everything away only to have insufficient funds to pay for, say, aged care in your later years.

The best way to ensure that you and your family are properly cared for is to have a comprehensive estate plan. Talking about death and money is never easy, but having a conversation with your family about your wishes can help prevent disputes and disappointment after you have gone.

Where there’s a Will

The most important thing is to make sure you have an up-to-date Will that truly reflects your current situation and your wishes. And make sure your family knows where your Will is kept. It’s good to get financial advice as there may be many hurdles and unforeseen consequences.

Most estate planning issues centre on bequeathing assets evenly among family members and understanding the different tax implications for each asset. For instance, if one child gets the family home and the other the holiday home then the holiday home beneficiary may be liable for capital gains tax. CGT can also be an issue when it comes to passing on shares.i

Asset protection is another area that requires careful planning. You may be worried about an adult child’s inheritance being lost in a divorce settlement or through financial mismanagement, or you may have a disabled child who will need ongoing financial support. One way to protect your assets in such situations is to set up a family trust.

Conversely, you may decide that your adult children are already well established and don’t need a large inheritance. With so many young people finding it hard to break into the housing market and repay student debt, you might consider bypassing your children and bequeathing your estate to your grandchildren.

A super strategy

Your Will is only part of the equation though. Many people don’t realise that super is a non-estate asset unless you specifically direct it to your estate by nominating your legal personal representative as the beneficiary.ii

Super is one asset where giving with a warm heart can be a smart strategy in some circumstances, such as the diagnosis of a terminal illness, particularly if your beneficiaries are your adult children.

This is because children aged 18 or more are treated as non-dependent under tax law unless they are financially dependent on you.iii So it is likely your adult children will be hit with a hefty tax bill on receipt of your super.

But if you’re aged 60 or more, you can withdraw money from your super, even a day before you die, and you will not pay any tax as all withdrawals from that age are tax free. Then you can pass the money on tax-free to your non-tax dependent children.

Succession planning

If you have your own business or a farm, then you also need to consider succession planning. Do all or any of your children want to stay in the business? How will you compensate those who don’t? Successful succession planning needs to start early so the next generation can plan their future with some certainty.

To make sure your wishes are carried out as intended, talk with your family and give us a call to discuss your estate planning needs.

i http://www.makdap.com.au/publications/cgt-consequences-will

iihttp://www.schweizer.com.au/articles/Who_Gets_Your_Superannuation_When_You_Die_(SK00125438).pdf

iii ATO, https://www.ato.gov.au/individuals/super/super-and-tax/tax-on-benefits/#Taxondeathbenefits
https://www.moneysmart.gov.au/superannuation-and-retirement/how-super-works/tax-and-super

SMSF Rules change… again.

August 5th, 2016 Posted by Superannuation, Tax 0 comments on “SMSF Rules change… again.”

SMSF rules change, again

As every trustee of a self-managed super fund (SMSF) knows, the ATO loves shifting the goal posts. This time the taxman’s big change is to grant a seven-month extension on the deadline for SMSFs to ensure any property loans they have are operating on an arm’s length basis.

This change follows criticism of the ATO for failing to provide enough time for SMSFs to review their loan arrangements and either restructure or wind them up if they are not at arm’s length.

Although the extension will give SMSFs some badly needed breathing room before the new 31 January 2017 deadline, the ATO is determined to tighten the screws on limited recourse borrowing arrangements (LRBAs) with related parties, particularly as SMSF property investments stand accused of helping to fuel the current investment property boom.

What is an LRBA?

The new rules do not affect bank loans to an SMSF, only LRBAs with a related party such as a member of the SMSF, a relative or friend. The ATO defines an LRBA as a loan from a third party lender which the SMSF uses to purchase an asset held in a separate trust. Any investment returns earned go to the SMSF. With an LRBA, if the SMSF defaults on the loan, the lender’s rights are limited to the asset held in the trust and it has no recourse (or access) to the SMSF’s other assets.

As many SMSFs have entered into this type of arrangement to buy an investment property or business premises, trustees should ensure they review their current loan arrangements are consistent with what the ATO deems is an arm’s length arrangement. Anyone contemplating a new LRBA not financed by a bank or commercial lender should seek professional assistance before signing the loan documentation.

Ensure your SMSF complies

To help SMSF trustees determine if their loan arrangement complies with the rules, the ATO has outlined a set of key points it will consider in determining whether an LRBA with a related party is generating non-arm’s length income. These are called ‘Safe Harbour Rules’.

By 30 September, the ATO plans to have issued further guidance for SMSF trustees clarifying the circumstances in which it will deem an SMSF to be receiving non-arm’s length income from an LRBA. If an LRBA arrangement does not meet the regulator’s requirements, the SMSF has three options:

  • alter the terms of its loan,
  • refinance through a commercial lender,
  • or pay out the LRBA by 31 January 2017.

SMSF trustees should note all related party LRBAs need to be put on arm’s length terms on or before 31 January 2017, so the fund will also need to start making regular monthly repayments of principal and interest by this date.

Comply, or pay more tax

If the SMSF fails to comply with the rules by the 31 January 2017 deadline and the ATO determines it is receiving non-arm’s length income, it could face a stiff penalty in the form of additional tax. Non-arm’s length income in an SMSF will be taxed at 47 per cent, which is much higher than the normal 15 per cent concessional rate in the accumulation phase, or nil in the pension phase.

Check your collectibles

As if SMSF trustees didn’t have enough to do, they also need to ensure full compliance with the new rules around collectibles. ‘Collectibles’ covers assets such as artwork, jewellery, antiques, coins, bank notes, stamps, rare manuscripts and books, memorabilia, wine or spirits, motor vehicles and boats.

After 30 June 2016, these types of assets must not be leased or used by a related party of the SMSF, or stored or displayed in a private residence of a related party.

All decisions about collectibles must be documented and retained. The asset must also be insured in the fund’s name within seven days of acquisition, and if it is transferred to a related party, it must be at the market price determined by a qualified, independent valuer.

If you have any questions about what these rules mean or how the changes may affect your SMSF, please call our office.

Australian Growth Resilient in Tough Times

August 5th, 2016 Posted by Small Business 0 comments on “Australian Growth Resilient in Tough Times”

Australian growth resilient in tough times

‘Resilient’ is perhaps the best way to sum up Australia’s economic performance over the past 12 months. That was the word used by Standard and Poor’s director of sovereign ratings, Craig Michaels, when confirming Australia’s AAA credit rating in mid-June.

Australia’s strong performance is even more remarkable in a year characterised by ongoing uncertainty and volatility on global markets, culminating in the shock British exit – or Brexit – from the European Union. Locally, investment plans were on hold during the long federal election campaign which began shortly after the May budget and extended to July 2.

Global markets were also holding their breath in the lead-up to the UK referendum on European Union membership on June 23. When the vote for a Brexit was announced global share markets tumbled. Investors flocked to the relative safety of gold and bonds, pushing the yield on German government bonds below zero.

Economic growth

Australia’s economy is growing faster than other developed economies, at an annualised rate of 3.1 per cent in the March quarter, as we continue the gradual transition away from mining to a services-led economy.

Despite perceptions that Australia is still a resources-based economy, service industries currently account for 58 per cent of Australia’s output, far outstripping construction, mining, manufacturing and retail, each of which contributes less than 10 per cent.

In the US, signs of a gradual economic recovery remain intact with annual growth of 2 per cent, allowing the US Federal Reserve to cautiously begin lifting official interest rates. But growth has remained stagnant across the Eurozone (1.7 per cent) and Japan (0.1 per cent), with renewed fears that a Brexit could push the UK and Eurozone into recession.

Part of the reason for the glacial rate of global economy recovery is the slowdown in China, where growth has slipped below 7 per cent to 6.7 per cent.

Share markets

Sluggish global growth took its toll on global share markets over the past 12 months, but concerns about a Brexit sparked a new wave of selling once the shock outcome was announced.

Australian shares didn’t escape, down close to 6 per cent over the year. The US market fared better, up less than 1 per cent. Not so the UK (down 4 per cent), China (down 28 per cent) and Japan (down 23 per cent).

Commodities

One of the factors affecting the Australian sharemarket in particular was ongoing volatility in commodity markets. Brent crude oil fell from US$57 a barrel to US$26 before recovering to around US$50. Iron ore fell from near US$59 a tonne to US$37, before also recovering to around US$53. But overall oil is down 19 per cent over the year with iron ore down 10 per cent.

It’s not all bad news though. The global flight to safety has pushed gold above US$1300 an ounce, up more than 12 per cent in a year.

Interest rates and inflation

Australian interest rates have fallen to record lows, but they still look extremely attractive compared to what’s on offer globally.

The Reserve Bank cut interest rates just once this year – by 25 basis points to 1.75 per cent in May. This was in response to an unexpectedly large fall in inflation to 1.3 per cent, well below the Bank’s target band of 2-3 per cent.

The yield on Australian 10-year government bonds fell close to 1 per cent over the year to 2.02 per cent. This narrowed the gap between local and US bond rates, with the 10-year US Treasury yield currently standing at around 1.49 per cent.

The dollar

Despite slipping 5 per cent against the US dollar over the past year, the Australian dollar remains higher than the Reserve Bank would like at around US74c.

Most economists predict the Aussie dollar will fall from its current levels to below US70c over the next 12 months, which is good news for exporters but not so good for travellers. Unless you are headed to the UK. The British Pound suffered its biggest sell-off in history after the Brexit surprise; the Aussie dollar now buys 0.55 British Pounds, up from 0.49 a year ago.

Consumer confidence

Whatever else is going on in the world, Australian consumers remain cautiously upbeat. The Westpac Melbourne Institute Consumer Confidence Index rose 7.2 per cent to 102.2 in the year to June, thanks to low unemployment, low interest rates and inflation, a strong property market, stable dollar and solid economic performance.

The unemployment rate, at 5.7 per cent, has barely shifted over the year.

Residential property

After several boom years, the residential property market remains strong although it is still a tale of many markets.

Dwelling prices across all capital cities rose 10 per cent in the year to May 31, led by Sydney and Melbourne with growth of over 13 per cent. Brisbane and Adelaide were up 7 per cent and 3.9 per cent respectively, while Perth dragged the chain with a fall of 4.2 per cent. The median dwelling price is $580,000 in capital cities and $367,000 in regional areas.

Looking ahead

While the low interest rate, low growth environment and recent market events remain a challenge for investors, Australia is well-placed to continue the transition from mining to a more diversified economy.

If you’d like to discuss the issues raised in this article or are concerned about the impact of the recent Brexit vote on your portfolio or financial situation please contact us

How to avoid an ATO audit

August 5th, 2016 Posted by Tax 0 comments on “How to avoid an ATO audit”

How to avoid an ATO audit

There is nothing pleasant about being audited by the Australian Tax Office (ATO). Even in a best-case scenario, it creates stress and chews up time and energy. At worst, where the ATO decides you’ve failed to disclose important information or misrepresented your financial situation, the financial penalties can be significant.

While there is no way to guarantee you won’t be audited, there are things you can do to lessen the likelihood of it happening.

Be extra conscientious if you take cash

Accurately or otherwise, the ATO believes those who operate in the cash economy –restaurant owners, shopkeepers, tradesmen and taxi drivers among others – are disproportionately likely to fail to declare all their income.

This doesn’t mean you need to change careers if you sometimes get paid in cash. It does mean you can expect to be audited at any time. So be extra careful about having all your paperwork in order.

Try to avoid big income fluctuations

What’s most likely to get the red lights flashing at the ATO is either earning less than you have in previous financial years or less than others in a similar situation. The ATO has benchmarks for what it expects people in different industries to earn, which can be found on the ATO website.

Double-check your arithmetic

One of the most common triggers for an ATO audit is things failing to add up. This is a particularly tricky area for business owners. They can find themselves flagged for all sorts of discrepancies, such as inconsistencies between their income tax return and BAS on total sales and expenses.

Business owners should also be mindful that failing to pay employees the correct superannuation could result in a review of superannuation guarantee obligations. This can quickly snowball into audits of income tax, GST and fringe benefits tax.

Be punctual

Lodging your income tax returns along with all necessary supporting documentation on time, year in, year out, results in a good compliance history. That indicates to the ATO you’re serious about meeting your obligations and less likely to be engaging in creative accounting.

Keep records of work expenses

Each year the ATO focuses on a particular area of non-compliance. For the 2015-16 financial year that area is excessive work-related expenses.

As a general rule, taxpayers are allowed to claim expenses related to earning an income, assuming they weren’t otherwise reimbursed for these expenses and they have the necessary records. Be aware though that the ATO is cracking down on those who push the envelope.

Another area to watch is the $20,000 instant asset write-off. Business owners run the risk of getting audited if they attempt to take advantage of it for items that are going to be used privately.

Share your proceeds of the sharing economy

The ATO has also announced it is paying close attention to income generated by the likes of Uber and Airbnb. If you’re earning money by providing services in the so-called sharing economy, make sure you’re following the guidelines. In some instances, this may involve getting an ABN or paying GST. The guidelines can be found on the ATO website.

Expect the Tax Office to use data matching

These days, new technology makes it much easier for the ATO to keep track your finances. Thanks to increasingly sophisticated data analytics and risk modelling, it is able to identify and review income tax returns that omit information or contain incorrect statements.

Making sure you pay your fair share of tax but not more can be a complicated business. So call us now to discuss your end of financial year obligations.

What are the odds of an audit?*

  • On average, the ATO contacts over 350,000 taxpayers each year to alert them to errors in their tax return.
  • In the 2014–15 financial year, the ATO used over 650 million transactions reported by third parties to cross-check individual income tax returns and other income statements.
  • In 2014-15, the ATO conducted around 450,000 reviews and audits of the 12.8 million tax returns filed by individuals.

* Information supplied by the ATO

Small Business: Mind the Exit

August 5th, 2016 Posted by Small Business 0 comments on “Small Business: Mind the Exit”

Small Business: Mind the Exit

Running a small business can be an all-consuming activity, but there comes a time when even the most passionate business owner needs to call it a day. When that day comes, due to retirement, ill health or a better opportunity, you need an exit plan.

A succession (or exit) plan outlines who will take over your business when you leave. Whether it’s a family member, an employee or an outside buyer, the earlier you begin planning the transition the smoother and more profitable it will be for everyone involved.

Given that the average age of small business owners is 55, with an estimated 81 per cent planning retirement in the next 10 years, the clock is ticking. Yet a survey carried out by RMIT University found that three-quarters of small business owners lack an exit strategy.

There are a number of reasons why this may be the case, including reluctance to hand over control, difficulty choosing among children or simply a case of relegating the issue to the too-hard basket.

Family affair

Family-run businesses often hope to keep it all in the family by handing the baton to the next generation.

Handing control to an adult child or another family member does have advantages provided they are qualified and willing to accept the role. It ensures the founder can maintain some influence over the company and have the satisfaction of knowing that their life’s work will benefit future generations.

Unfortunately, family members often have other plans.

Consulting family members about their ambitions and concerns should be central to any succession plan. A written document with information about roles and responsibilities of all family members and mechanisms for transferring ownership and leadership helps keep the spotlight on the business rather than family relationships.

Maintaining momentum

Having worked hard to succeed, owners may fear the business will lose momentum in the hands of a less-experienced successor.

Grooming a new leader is a continuous process—it begins long before a business owner steps down and ends long after a successor takes the reins. It requires careful planning, professional guidance and a long lead time.

Successors need to be exposed to all aspects of the company’s operations and sufficiently trained to be qualified for the top job. A gradual handover whereby owners maintain a mentoring role allows successors to develop necessary leadership skills.

Sale appeal

Sometimes the preferred option for an owner is to unlock maximum value from the business by selling up and moving on. According to a recent PricewaterhouseCoopers survey of 90 Australian businesses, only 24 per cent will hand over to the next generation, down from 38 per cent in 2012.

An improved market for business sales since the global financial crisis has heightened the appeal of selling to a third party. Small firms with fewer than 20 employees generated $3.4 trillion in private business sales in 2012, and the upward trend has continued. In 2014, 38 per cent of owners wanted to sell or float their family business compared to 34 per cent in 2012.

Having an independent business valuation and senior management and staff in place are among the factors that make a business easier to sell.

The most popular sale options are a trade sale, stock market float or a management buyout.

Other options

The least attractive option is to liquidate the company’s assets and close the business. Liquidation is often the default position of owners who avoid the issue of succession planning until it is too late.

Not only can this be costly but it is unlikely to raise as much money as the sale of the business as a going concern.

A well-designed succession plan can make exiting your business as rewarding as starting it in the first place. If you would like to get the process started, don’t hesitate to give us a call.

3 Insurance myths exposed

August 5th, 2016 Posted by Insurance 0 comments on “3 Insurance myths exposed”

Three insurance myths exposed

In the unlikely event that you break a leg or, heaven forbid, die prematurely you and your family have got it covered, right? You’ve got life insurance care of your super fund, not to mention that pricey health insurance policy. And if worst comes to worst, there’s always a government pension to fall back on, isn’t there?

Actually, most Australians don’t have nearly enough insurance. The nation’s underinsurance gap has been estimated at a whopping 1.8 trillion dollars.i Part of the reason for that is the trio of misconceptions outlined above.

Let’s go through them one by one.

Myth one:
My super will cover me

The reality is that the overwhelming majority of people that have insurance attached to their super are underinsured. One in two super fund members has less than half the life insurance cover they need. Nearly three quarters are underinsured for total and permanent disability cover.ii

Here’s another sobering statistic: Rice Warner found a couple in their mid-thirties with young children would need at least $680,000 worth of life insurance cover. The default super fund cover was just $200,000 – less than a third of what’s required.

Super policies typically don’t automatically include income protection or total and permanent disability (TPD) cover. While it’s true that many super funds will allow you to purchase these types of insurance, often at an attractive price, you’ll almost always have to contact your fund to put special arrangements in place. What’s more, trauma insurance is not available inside super.

If you haven’t already, you should read over your super policy carefully or contact us to determine exactly what kind of insurance is being provided. You’ll likely find the money your super fund would pay out in the event of a calamity is far less than you imagine.

Myth two:
My private health insurance will cover me

Private health insurance is a wise investment, but even at the highest level of cover it won’t even cover the full amount of your medical bills. And it certainly won’t pay the mortgage or other everyday living costs such as utilities, groceries or school fees.

Granted, there are moves afoot to allow private health funds to provide more comprehensive cover, possibly eliminating costs such as gap fees. But, by definition, health funds will only ever cover health costs and only until a set monetary or time limit is reached.

Myth three:
The government will look after me

The Australian government does provide a range of payments to support people if illness or disability leaves them unable to work. But unless you lead an extremely modest lifestyle, trying to survive on a pension is an enormous challenge. The Disability Support Pension currently provides $867 a fortnight if you’re single and over 21, or $653.50 a fortnight for each member of a couple.

That translates to $433.50 a week for a single person, or about 65 per cent of the minimum wage. Interestingly, the government also estimates the average person under 35 spends $869 a week on living expenses – which provides some idea just how tough it is trying to make ends meet on a disability pension.

The truth will set you financially free

In a worst case scenario you or your family would be unlucky to be left entirely on your own to cope. Your super and health funds, the government and possibly even friends, family and charitable organisations might provide some assistance.

But wouldn’t you prefer to know that in the event of a serious health challenge you have the right level of insurance cover? That you and your family wouldn’t need to worry about financial issues on top of everything else?

If so, call us to discuss whether your current level of insurance is appropriate to your situation.

i ‘Underinsurance in Australia’, Rice Warner, July 2015

ii www.lifewise.org.au