The stats relating to the number of people who seek financial advice and support is only about 20% of the population* which is rather a small number when you consider that virtually all people in the workforce have some form of debt, superannuation or insurance.
There has been plenty of promotion by Industry Superannuation Funds, various articles and programmes in the media as well a plethora of new Government legislation which you’d think would trigger more people to investigate their financial position and what they can do to improve their prospects.
The reason for this financial apathy, we believe, is that people’s awareness of their financial state is largely out of sight and out of mind and usually only becomes apparent when something drastic occurs such as forced retirement, ill health or accident, receipt of an inheritance or other change in personal circumstances. Most people are consumed by what happens each day so little wonder that planning for life events, whether they come to pass or not, takes a back seat. More than ever, we’ve become a society dependent on meeting our needs instantaneously or on impulse.
This partly explains why our national debt level is now at record highs and savings are at record lows. Even manufacturers, retailers and industry work on the principal of ‘just in time’ where they buy and sell products based on short term needs.
Sound financial advice
Sound financial advice is almost the opposite experience of all that we’re accustomed to in today’s fast and hectic way of life. The focus of a skilled adviser is to engage their clients in identifying their current circumstances and those things that are most important to them so that they have a good understanding of what they wish to achieve for themselves and their families.
This valuable information is the basis for creating a financial plan which might include specialist strategic advice around taxation, superannuation, retirement income or structuring an insurance programme in the most effective way.
The benefit of the advice process is to create path or direction through clarity and new vision so clients are motivated to achieve their desired outcomes. This is then seen as a financial marathon rather than a sprint.
*Source Investment Trends 2015 Direct Client Report
This year’s Federal Budget was not as controversial as previous years, however there are still changes which may affect you and your family.
Additional super contributions from proceeds of downsizing your home
From 1 July 2018, individuals aged 65 and over will be able to make an after-tax super contribution of up to $300,000 ($600,000 for couples) from the proceeds of the sale of their home, providing it was held for a minimum of 10 years. This measure will not attract any special Centrelink treatment but will allow individuals to make contributions above the super caps, without meeting work or age test requirements.
First home saver scheme
The Government will allow voluntary super contributions to be withdrawn for a first home deposit. From 1 July 2017, individuals can make voluntary contributions of up to $15,000 per year, up to $30,000 in total to super for the purposes of this measure.
Increase in Medicare Levy
From 1 July 2019, the Medicare levy will increase by 0.5% to 2.5% of taxable income. The increase ensures the National Disability Insurance Scheme (NDIS) is fully funded.
Extending the immediate $20,000 asset write-off for small business
Accelerated depreciation rules for small businesses will extend until 30 June 2018. This allows small businesses, with aggregate annual turnover of less than $10m to immediately deduct purchases of eligible assets up until that date, provided the asset costs less than $20,000. Assets valued $20,000 or more can be depreciated at 15% in the first income year and 30% each income year thereafter.
Disallowing deduction of travel expenses for residential property
From 1 July 2017, the Government will no longer allow deductions for travel expensesrelated to inspecting, maintaining or collecting rent for residential rental property. However, investors can continue to deduct those types of expenses incurred by third parties such as real estate agents and property management services.
Reducing the corporate tax rate
The legislation to reduce the corporate tax rate has passed both houses but is not yet law. The reduced company tax rate will progressively apply to companies with an aggregated annual turnover of less than $50m only. The proposed rate for 2016/17 onwards is 27.5% for companies with annual aggregated turnover of less than $10m per year.
Changes to repayment of HELP debt
The income thresholds will be revised for the repayment of HELP debt, repayment rates and the indexation of repayment thresholds. A new minimum threshold of $42,000 will be established with a 1% repayment rate and a maximum threshold of $119,882 with a 10% repayment rate.
Pensioner concession card reinstatement
Age pensioners who lost entitlement to their Pensioner Concession Card due to the assets test changes on 1 January 2017 will have their card reinstated. The card will be automatically reissued over time with an ongoing income and assets test exemption.
Family Tax Benefit (FTB)
The FTB payment rate will remain fixed until 1 July 2019 and indexed each year thereafter. From 1 July 2018, all families with total income over $94,316 will have their FTB Part A reduced by 30 cents for every dollar above $94,316.
In writing this article, Planning for Prosperity (ABN 97 110 670 463), has not taken into account any particular person’s objectives, financial situation or needs. Before acting on this information, consider the appropriateness of this information having regard to your financial situation or needs. We recommend seeking financial advice specific to your situation before making any financial, investment or insurance decisions.
RETIREES worried about tougher new age pension rules are trying to lower their Centrelink-assessable assets through buying funeral bonds and other strategies.
In a recent article published in news.com.au by Anthony Keane, several Financial experts including David Koch and Planning for Prosperity’s own Bob Budreika were interviewed on the impact of the impending Centre-link entitlements and in particular how these changes will impact pensioners
Jan 1 pension entitlement changes
In summary, from January an estimated 300,000 people will lose part or all of their age pension, while about 170,000 low-asset pensioners will receive a boost, as the government lowers the level of assets you can hold before pensions reduce.
Kochie’s video here provides a quick summary of the impact to pensioners, while the detailed article by Trish Power on SuperGuide provides more detail.
Planning for Prosperity senior financial adviser Bob Budreika believes many retirees are in for a nasty surprise in January when the pension changes hit.
“I think a big part of the population isn’t really aware,” he says. “Retirees who don’t have a financial planner don’t realise what they need to do.”
Don’t blindly reduce assets
However, Bob cautions people from blindly trying to lower their assets for the sake of preventing pension cuts, because the longer term cost of losing the assets may be greater.
“There’s an attitude with some people to do whatever they can to make sure they maximise Centrelink. Some of the decisions they make can be pretty silly,” he says.
“Look at two sides of the equation. Ask yourself “if I do tie up assets in a home renovation, funeral bond or gifting, what is it going to mean for my long-term financial security because that money is effectively gone.”
People generally see the passing of a new year as a significance event. Often it’s at that time when people create their new year’s resolutions. Resolution is another word for goal or objective. As we all know, not too many people are successful in achieving their goals. Why is this?
From my experience, both personally and in business, the primary reasons why objectives are most often not achieved is because:
There are too many resolutions. (We tend to believe that less is more).
They are not clearly defined, including how and when they are to be achieved.
The progress of the objectives are not reviewed regularly.
I feel, of the 3 points listed above, the last one is the most crucial. Reviewing and re-assessing your progress allows you to make changes so you remain on track. Without a doubt, having someone who is willing to help you in the process can make your objectives more meaningful and achievable. Their role is to facilitate and support you on your journey.
The title of this month’s article is a reminder that we are in a new financial year. The issue of goals, objectives and resolutions is just as relevant for a business as for individuals, though, less common to see. I think the reasons for this is that businesses, such as farming enterprises, involve more than one person with the focus is on getting the work done. Longer term planning and setting clear objectives is a much more complex task when there are different generations with competing interests involved in the farm. In many respects, knowing people’s expectations and business objectives is even more important in a family business because they are more willing to collectively work for the benefit of everyone. How do I know this? From our experience of working with farming families over 25 years.
When engaged with people in business, our most important initial role is to understand their circumstances and what’s most important to them and their family. This is how we begin the process of helping them to define their objectives. We learn what drives them. The next questions are “How can they achieve those things, what needs to be done and what is the implementation process?”
As you can see, this is a very different role to an accountant, solicitor, agronomist or bank manager. Yes, we are qualified financial advisers but we really see our main role as facilitators. A facilitator knows their client, what they want to achieve and supports them on their journey.
Perhaps this New Financial Year is an ideal time to review and assess your business in relation to what your family members would like to achieve for themselves.
There’s a simple saying I often use: “You don’t know what you don’t know”. In a roundabout way what this phrase is saying is that making important decisions without getting all the facts can have very long lasting consequences. There are lots of examples where this rings true. I can think of my own situation where, on occasions, I would’ve saved time, effort and money had I opted to getting sound advice and support.
Financial Planning is a very different service to anything I know. Why? Because life goes on whether people engage with them or not. Seeing an adviser is purely optional. Unlike other professionals such as accountants, there’s a legal requirement to get your tax done each year. When we’re unwell we see a doctor or take our car to a mechanic for repairs. There’s an obvious need and reason to take action. It gets back to ‘you don’t know what you don’t know.’
I believe that many people are heading for a financial disaster of some sort but don’t know it. The disaster might not mean they’re wiped out but with sound advice and support they could’ve saved time, money and effort. Without labouring on this point, I’ll give a couple of examples.
Purchasing farm land in the most cost-effective way
One of the areas we specialise in is helping farming families purchase farm land in the most cost effective way. The most common method is to borrow from a bank and make repayments. A far more cost effective way is to use the tax advantages of superannuation. There are significant savings, often in the hundreds of thousands of dollars.
In our last article Daniel wrote about succession planning which is a fancy term for having a plan to transfer a business to the next generation. This is one of those things that most farmers know should be addressed but sometimes leave far too long. Business succession plans provide confidence, peace of mind, security and direction for all family members. It’s the best way to prevent legal issues and break up of families.
Direction and purpose
The most common reason for people engaging with us is because they want to establish a plan that gives them direction and purpose. It’s a broad statement but what they’re really saying is that they are so focused on what happens day to day to do it themselves. Establishing a meaningful plan is both motivating and rewarding.
The starting point with all the work we do is to have a good understanding of a person’s situation and discover those things that are most important to them. This is the basis to providing sound financial advice.
Over recent years there has been a focus for the financial planning industry to move from product-centric sales to financial advice. New FOFA legislation (Future of Financial Advice) was recently introduced to ensure changes occurred but with some good old fashioned lobbying from big banks and various interest groups, largely nothing happened.
For years I’ve seen many respected people in the financial planning industry get put on pedestals (often at professional development days and conferences) and be told that these are the professionals we as advisers should look up to. Many of these are the same people who are happy to be remunerated by asset based trail commissions, contribution fees, volume bonuses and sweetheart deals to keep their clients with large superannuation and investment product providers. Even with all the increase scrutiny the financial services industry faces, these crooked practises still occur behind the scenes. A simple Google search of these topics returns a range of firms disclosing their murky arrangements and even legal firms that offer advice on how to ensure volume bonuses can be maintained within the new FOFA environment. Essentially, a volume bonus is legal if it is paid to the firm and not the adviser directly and there is an extensive list of products that the adviser can potentially recommend to clients. In short, very little has changed.
I distinctly remember the moment several years ago when I realised the firm I was working for at the time, earned a sizable portion of their revenue this way. I was quite young and had just begun in the industry as a junior paraplanner. That particular day I stopped to read one of the wordy disclaimers I had been obliviously inserting into each statement of advice document. I read it again and the penny dropped. It explained why all of our clients had the same expensive product when cheaper alternatives were available. A large chunk of the admin fees that were charged from the client’s accounts were being paid to the dealer group (who held the firm’s financial services licence), which were in turn paid back to the firm. The thing that stood out the most was the line “…this payment (to the firm I worked for) is made by the dealer and is at no additional cost to you…”. I was horrified at this mistruth and thought perhaps the client would be too if they knew we were taking an additional sweetener under the table. This made me wake up and question what I felt comfortable with if I ever became entrusted to give people financial advice.
The day we started Planning for Prosperity was a new beginning and a chance to draw a line in the sand and distance ourselves with the old world. It boggles the mind how these sorts of arrangements can continue to exist today and that the so-called advisers involved happily endorse it.
I recently finished reading a great book titled ‘Dog Days’ by Ross Garnaut. While it might have a fiction sounding title, it’s a non-fiction economic book. Ross Garnaut is very well known as a Professor, Government adviser and Board member of several well known Australian companies.
For some time I’ve held the same view as Mr Garnaut that Australia is now living a dream and we’ve become incredibly complacent especially since steering through the GFC almost unscathed. It seems that our nation has a feeling of invincibility and things are ‘different this time.’
Ross Garnaut’s analysis shows that we are at a tipping point where we will be confronted with making difficult national decisions based on outcomes for the good of everyone and not favoured groups. We’ve all benefited from a vastly higher standard of but unfortunately, much of this success has little to do with our work ethic or how smart we are but from the fortune of having resources and commodities that other nations have needed.
The resource cycle, since 2011, is now is steady decline. We’ve become far too dependent on exports and at the same time seen almost all other domestic non resource businesses struggle due to the expensive Australian dollar and high domestic costs. The complacency has resulted in much lower productivity for over a decade. It seems that you can hide behind inefficiency while times are good but eventually it catches up.
Unless we are lead, and accept to be lead, through this era of change, we are likely to realise lower living standards going forward. You could call this; pay back. If you think this isn’t possible ask middle class Americans or Europeans how different their lives are post 2008.
This might sound rather negative but Mr Garnaut’s (and my belief) is that we can avert the decline in living standards if we accept decisions that are in the common good of everyone. This will need a major shift in our thinking and attitudes and above all, true leadership in Government, business and the community.
While Mr Garnaut presents the bigger picture, it’s quite easy to identify with the complacency all around us. If you consider your own region, most of the EP has experienced an unprecedented ‘purple patch’ of above average seasons including higher grain prices, record sheep and wool prices. It can be easy to take the ‘eye off the ball’ and become more complacent. Nobody aims to be complacent but I suppose this is human nature. This is why it’s important, not only for our nation but as individuals to be aware and be prepared for the changes that will be forced upon us. It’s quite obvious that the Commonwealth Government is enacting major legislative changes because they know we’ve been living beyond our means.
My final note: History does repeat itself but the events and circumstances make things seem different or ‘different this time.’
In running a small business, we receive regular feedback and service from other key individuals that advise us on all facets of what we do. This includes advice from a business coach, our accountant and a ‘web guy’ to help us manage our website – just to name a few. Each brings a different skill set and knowledge base to the table that we rely upon.
A recent trip to the Eyre Peninsula highlighted to me just how important good financial advice can be. As a partner in a small business that provides a service in this area, it is something I am already aware of, yet it is easy to underestimate the value that can be added simply by knowing a client’s situation well enough and what they can do.
The best examples that come to mind involve family farming businesses across multiple generations.
A popular strategy being used is purchasing farm land inside superannuation. This involves using a self managed super fund as the vehicle which is also able to borrow from a lender. It can work brilliantly for the family as the lease payments are deductible to the farm and the parents have a reliable source of income for their retirement.
The key factor to these strategies is that the family units all get along and want to help one and other. Regular contributions, lease payments and a flat 15% tax rate can mean repaying the loan in a fraction of the time, saving thousands on repayments and tax in the process. Obviously each case is vastly different and must be worked through carefully to ensure that each stakeholder achieves the outcome they are after. Another example is helping the farming parents transition off of the farm in the most tax effective and Centrelink effective way. Past cases we have been involved in have been able to spread tax amongst family members in good years and receiving the Age Pension in bad ones.
Often the role of the financial adviser is narrowly thought of as the person to help with investing, although we find vastly more value can be added through sound financial strategies that adapt to a client’s circumstances over time. Not all advice we give, however, has a tangible windfall or saving attached to it that can be easily measured in dollars and cents. One measure we continually promote is having good working relationship with an accountant that provides timely financials and tax returns. The time saving and value this can provide should not be underestimated. In every case we come across we believe the best result is achieved when the accountant is on board with each strategy.
Above all else, you don’t know what you don’t know.
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This information is of a general nature only and neither represents nor is intended to be specific advice on any particular matter. We strongly suggest that no person should act specifically on the basis of the information contained herein but should seek appropriate professional advice based upon their own personal circumstances. You should read the PDS and consider whether the product/s is right for you. Past performance is not a reliable indicator of future performance.
Strategic Advice Solutions Pty Ltd (ABN 86 619 221 662) t/as Planning for Prosperity is a Corporate Authorised Representative of Infocus Securities Australia Pty Ltd (ABN 47 097 797 049) AFSL and Australian Credit Licence No. 236523