Financial Planning magazine

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The success of a planning practice has never been so important as it is today

Th is issueCompulsion and retirement products

Removing barriers to insurance inside super

Small business CGT exemptions

Building profi tability

VOLUME 24 | ISSUE 8 | SEPTEMBER 2012 | $15.00

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Pointing the way for life insurance within SMSFs

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Life’s better with the right partner™

16 A point of difference TAFE NSW is broadening its image from an education provider for traineeships and apprenticeships only, and is moving into the higher education space by offering degree courses, writes JAYSON FORREST.

18 Money smart, money wise

FPA stalwart Paul Clitheroe is the reassuring face of financial planning for many Australians. He spoke to JAYSON FORREST about the challenges of improving the financial literacy of consumers.

20 Compulsion and retirement products

The Government’s Superannuation Roundtable is tasked with progressing the thinking around giving retirees more options in the drawdown phase. DAVID SHIRLOW and LUIS SARMIENTO provide their thoughts on what may happen with retirement products.

24 Building a profitable businessToday’s planning environment is one where every dollar counts – whether in revenue or expenses – and one where a practice’s profitability has never been such an important issue, as JANINE MACE discovered.

36 Insurance inside super

CPD Quarterly: Funding insurance through super can provide a viable solution to client affordability issues, writes RACHEL LEONG.

40 Retirement from a small business

CPD Quarterly: When a small business owner is looking to dispose of their business and retire, two of the key considerations are minimising any CGT from the disposal of business assets, and maximising super contributions to provide tax-effective retirement income, says TIM SANDERSON.

Regulars4 CEO Message

6 News

8 Opinion

10 New CFP® Professionals

12 CFP® Practitioner Strategy

44 Centrelink

45 Chapter Event Review

46 Event Calendar

47 Directory

EDITOR Jayson Forrest Locked Bag 2999, Chatswood NSW 2067 Phone: (02) 9422 2906 Facsimile: (02) 9422 2822 [email protected]

EDITORIAL DIRECTOR Lindy JonesPhone: (02) 9220 4532 [email protected]

PUBLISHER Zeina KhodrPhone: (02) 9422 2198 Facsimile: (02) 9422 2822 [email protected]

ADVERTISING Jimmy GuptaPhone: (02) 9422 2850 Mobile: 0421 422 [email protected]

ADVERTISING Peter KalantzisPhone: (02) 9422 2695 Mobile: 0416 815 [email protected]

© Financial Planning Association of Australia Limited. All material published in Financial Planning is copyright. Reproduction in whole or part is prohibited without the written permission of the FPA Chief Executive Offi cer. Applications to use material should be made in writing and sent to the Chief Executive Offi cer at the above e-mail address. Material published in Financial Planning is of a general nature only and is not intended to be comprehensive nor does it constitute advice. The material should not be relied on without seeking independent professional advice and the Financial Planning Association of Australia Limited is not liable for any loss suffered in connection with the use of such material. Any views expressed in this publication are those of the individual author,

except where they are specifi cally stated to be the views of the FPA. All advertising is sourced by Reed Business Information. The FPA does not endorse any products or services advertised in the magazine. References or web links to products or services do not constitute endorsement. Supplied images © 2012 Shutterstock. ISNN 1033-0046 Financial Planning is published by Reed Business Information Pty Ltd on behalf of the Financial Planning Association of Australia Limited. , CFP® and CERTIFIED FINANCIAL PLANNER®

are certifi cation marks owned outside the U.S. by the Financial Planning Standards Board Ltd. The Financial Planning Association of Australia Limited is the mark’s licensing authority for the CFP marks in Australia, through agreement with the FPSB.

18

2012

Financial Planning is the offi cial publication of the Financial Planning Association of Australia Limited (ABN 62 054 174 453)Web: www.fpa.asn.au | E-mail [email protected] | Level 4,75 Castlereagh Street, Sydney NSW 200 | Phone (02) 9220 4500 | Facsimile: (02) 9220 4580

Average Net DistributionPeriod ending Mar’1210,519

Features September 2012

www. fi nancialplanningmagazine.com.au | financial planning | SEPTEMBER 2012 | 3

CEO MESSAGE

The FPA is often challenged to help members grow their businesses over the short term, and we support our members in this endeavour in a number of ways – such as toolkits, best practice CPD workshops and with this magazine. But there is a wider issue afoot. As you know, there is a general lack of trust by Australians that financial advice is worth seeking. The need for advice has never been greater but the take-up is still far too low, and there is a real lack of awareness amongst Australians as to how to do their due diligence when selecting a financial planner.

You are also no doubt aware that the FPA is committed to bridging this gap and earning the trust of Australians by lifting professional standards and promoting financial planning to become a true profession. This includes forging ahead with restricting use of the term ‘financial planner’ to those who are members of an approved professional body and sign up to a Code of Practice.

To clarify any misconceptions, let’s get clear on what it means to be a true profession.

A defining characteristic of a profession is that its members act in the public interest so that their activities raise the confidence and trust of consumers. It follows that members get the respect they deserve. A professional body must be able to promote standards of professionalism that are higher than the regulator and provide guidance on meeting these standards, as well as carry out effective disciplinary measures where necessary. This means that leading the professional development of members is another core requirement of a professional body.

The CFP® designation is the highest level of certification that a financial planner can achieve. Other examples of professional designations within the financial services industry include CA, CPA and CFA, and each requires an ongoing commitment to professional education and professional membership to maintain the designation. Generally, the professional associations awarding designations can be differentiated from academic institutions awarding qualifications by the responsibility they take for the actions of their graduates. Academic institutions don’t take any responsibility whereas professional organisations do.

The FPA’s current consumer advertising campaign aims to enhance the reputation of financial planners in the community by educating them on the CFP designation and on the value of a financial planner who is a member of the FPA. Investment Trends

research (April 2012 Planner Business Model Report) found that 86 per cent of CFP professionals believe the designation has already resulted in enhancing their reputation.

We extend a special thank you to all our members who helped make Financial Planning Week such a success in August. We made a big impact with our ‘Ask an Expert’ online forum, where Australians get to ask FPA members their questions to get a taste of financial advice. Along with the new FPA consumer website, this initiative shines a light on the services a professional financial planner can provide and is another way we are trying to lead our communities to your doorsteps. We encourage our members to sign up for this service and devote some time to making a big difference to our profession.

This year we also celebrate two decades of progress in our professional journey with the FPA’s 20th Anniversary program in capital cities during November and December. The program will include two distinct events – a half-day workshop series focusing on advanced technical CPD workshops followed by celebration dinners featuring the FPA 2012 Best Practice Awards where we can recognise the pioneers, role models and exceptional contributors to our profession.

There is no doubt that we are committed to seizing this opportunity to turn our industry into a profession where we serve the community, and we appreciate your support and participation on this journey.

Mark Rantall CFP®

Chief Executive Officer

ENHANCING THE REPUTATIONOF OUR MEMBERS Becoming a true profession is the catalyst that will enable our members to earn the trust of all Australians.

4 | financial planning | SEPTEMBER 2012 | www. financialplanningmagazine.com.au

–– “There is no doubt that we are committed to

seizing this opportunity to turn our industry into a

profession where we serve the community.”

We see it as your clients do; ultimately‚ it’s about losing money.

www.aberdeenasset.com.au

The world of investment is filled with all kinds of mathematical formulas measuring risk. The trouble is that, like in so many areas of finance, an excess of data can distract you from the main game.

At Aberdeen, we hold risk management sacred and we wouldn’t want to diminish its importance, but we like to put things in perspective: do your clients perceive risk as a statistical equation or as the danger of losing money? We suspect it’s the latter, and we couldn’t agree more.

Aberdeen has been around since 1983 and our long-term equity returns have consistently outperformed the market. This has been particularly notable in volatile times, which attests to our prudent approach to risk: we do complex calculations too, but we never forget that we are managing real people’s money.

If you’d like to find out more about Aberdeen’s Australian, Asian and Global Equities funds‚ call us on 1800 636 888 or visit our website.

Issued by Aberdeen Asset Management Ltd ABN 59 002 123 364 AFSL 240263. You should carefully consider the relevant Product Disclosure Statement and seek advice which takes into account your own circumstances, objectives and financial situation in deciding to invest, or continue to hold an investment. 3CAB3FP

Some see risk as a function of complex calculations.

Reaction to the FPA’s consumer advocacy initiatives rolled out during last month’s Financial Planning Week (20-26 August) has been overwhelmingly positive, according to FPA chief marketing officer Lindy Jones.

“We re-started our national advertising campaign in June and have seen great results so far. We used Financial Planning Week this year to build on that and be a key focal point for a range of new initiatives to build awareness of financial advice.”

The five initiatives implemented include:• Consumer advertising campaign;• Consumer brochure;• New consumer website;• New ‘Ask an Expert’ online forum; and a• Manifesto video.

The consumer advertising campaign continues to focus on promoting the higher standards of FPA members to consumers. Two extensions of the campaign were successfully used, with one promoting CFP® professionals, while the other

focused on FPA practitioner members.

The FPA also released a new consumer brochure, which outlines a range of issues including: what financial planning advice is; why a person would need a planner; what kind of advice fits an individual’s needs; the six-steps of the financial planning process; finding a planner; questions to ask; and the benefits of working with a planner.

The 20-page brochure has proven popular, with FPA members already ordering over 4,000 copies.

The FPA also launched a new online hub for consumers to visit at the FPA website. With a new design, navigation and content, the site at www.fpadifference.com.au provides consumers with a wealth of plain English information, FAQs, video content, real-life stories, and showcases the work being done by members in support of Future2.

The consumer website features a new section – ‘Ask an Expert’. This online forum allows consumers to ask financial planning questions,

which will be answered by FPA practitioner members. The website also features the popular Find-a-Planner directory.

“We are already seeing the results of these initiatives with a noticeable increase in enquiries and traffic to our website,” Jones said. The FPA website attracts up to 150,000 hits from over 35,000 visitors each month, and these numbers are on the rise.

“We believe these ongoing consumer initiatives will raise awareness and provoke conversation about financial advice,” Jones said.

Initiatives raise awareness

This month’s AMP Future2 Wheel Classic has 38 cyclists registered for the nine day ride – an increase of six times the number of cyclists from last year.

Cyclists have already raised over $35,000 for the Future2 Make the Difference! Grants, which go to community organisations in support of financially disadvantaged young Australians. The charity ride aims to raise an overall figure of $100,000.

This year’s 1,200km charity cycle kicks off from Sydney on 15 September, taking riders to Melbourne via Bundanoon, Canberra, Jindabyne, Corryong, Wangaratta, Shepparton, Bendigo and Castlemaine.

David Dyson CFP® is typical of the 37 other cyclists taking on the challenge this year.

Dyson, from Financial Life Balance in Ivanhoe East, has been part of the financial services industry for the past

28 years and thought it was time to get more involved.

“Given the Future2 Wheel Classic offers the ideal opportunity to marry riding with fundraising for young Australians, I couldn’t pass up the chance,” he said. “I’ve been to various events and have jumped out of a plane for a local youth organisation, but this ride looks like a real challenge.”

It’s a view shared by Group GH planner, Peter Hawcroft. The Port Adelaide-based CFP® said the Future2 Wheel Classic presents an extreme personal and physical challenge which he is excited to be a part of.

“I see it as a fantastic opportunity to challenge myself whilst supporting our community members who are doing it tough,” Hawcroft said.

Donations can be made at www.future2fundraising.org.au/event/f2wheelclassic.

Planners ready for charity ride

NEWS

6 | financial planning | SEPTEMBER 2012 | www. fi nancialplanningmagazine.com.au

financialadvice butwho do you turn to?

you know you need

www. financialplanningmagazine.com.au | financial planning | MONTH 2012 | 7

Investors across different generations recognise the value of advice when managing their SMSFs, meaning planners need to tailor their approach to advice according to these different life stages to have the greatest impact with their clients. This was one of the key findings to emerge from The SMSF Generations Report, undertaken by the SMSF Professionals’ Association of Australia (SPAA) and Macquarie Bank.

“SMSF investors across the generations recognise the role financial planners have to play in providing valuable guidance on their investments,” said Macquarie Banking and Financial Services Group Analytics Research Manager, Gary Lembit.

“However, through better understanding their clients’ state of mind, planners can adapt their advice models and learn to communicate in a way that better meets their needs, while articulating the value they can add.”

The report also provides a snapshot of the SMSF asset allocation preferences among the generations. As a general trend, cash/near cash holdings and direct shares in SMSFs

have increased in recent years, while managed fund holdings have decreased.

Typically, Generation Y has lower cash balances and a higher proportion of their portfolios in equities than others, and a greater focus on achieving capital growth. They have been the most active during the past 12 months in changing the asset allocation of their funds. On average, Generation X has 30 per cent of their SMSF capital in direct property, but with relatively illiquid portfolios, they are less likely to have substantially changed their SMSF’s asset allocation in the past year.

Baby Boomers have taken a more defensive stance towards their SMSF asset allocation. While still largely focused on capital growth, half have sought out franked dividends as a source of regular income. They have the highest allocation to direct equities, second only to the Silent Generation.

Despite ongoing market volatility, the Silent Generation (born before 1946) have increased their SMSF allocation to direct equities in the past six years.

Generational planning 72.5%

34.1%

7.4%

The percentage of women who think their organisation is not transparent about pay parity.

The proportion of women in the financial services industry who are managers.

The proportion of women in the financial services industry who are CEOs.

Source: Finsia Biannual Financial Services Gender

Research.

Earlier this year, the Federal Government set up a Superannuation Roundtable tasked with, amongst other things, progressing the thinking around giving retirees more options in the drawdown phase with products like annuities and deferred annuities. What are your thoughts on what should happen with retirement products?

LONGEVITY AND INVESTMENT RISKQ

OPINION

Want to have your say? Join the debate at www.fpa.asn.au/linkedin

Annuities have made a comeback recently given volatile financial markets and some marketing by one of the main providers in Australia.

I have a large retiree client base and quite a few clients invested in annuities in 2004 and 2007, prior to the change in Centrelink rules. Little did any one of us know that apart from Age Pension benefits, these annuities were going to insulate many of my clients from the GFC and its aftermath, literally a few months after these income streams were set up!

Another great comfort to many of my clients over the last five years have been superannuation pensions

they opted to commence, rather than taking lump sums from their employer super funds at retirement.

Most of my clients also receive an Age Pension (full or part) if they have reached Age Pension age and this income has acted as a safety net since 2007.

Given the experience of my retired clients, there is definitely a need for a range of income streams that provide options so that people can sleep at night. At present, most of my clients are managing longevity risk by spending less, particularly if there is a fear of running out of money. Or they are working longer if they feel there isn’t sufficient

money accumulated at retirement.

Another way my clients are managing investment risk is by allocating savings and lump sums to cash and fixed interest investments at the margin. Very few clients have exited the share market completely, especially as dividend returns from shares are still attractive.

Providing retirees incentives to purchase certain types of income streams certainly worked prior to 2004 in relation to complying annuities which were Age Pension friendly. However, the Federal Government phased out these Age Pension friendly income streams in 2007, as it was costing quite a bit of money to keep in place due to higher Age Pension payments.

If the Federal Government budget remains under pressure in future years, providing incentives for certain types of income streams may prove difficult.

With a sustained period of poor investment performance and an increasing life expectancy, many retirees now face the prospect of outliving their retirement nest egg. The GFC has highlighted the fact that many usually fail to consider the underlying investment climate at that time, and the impact that this will have on the sustainability of our capital sum. Incentivising people through legislative intervention to adopt certain retirement strategies over others should be considered.

There are a number of options that could be considered including:

1. Imposing a higher tax regime for those withdrawing lump sums and

incentivise those who take an income stream under a certain sustainable percentage of their capital sum (for example, 4 per cent).

2. Changing the Centrelink assets and income thresholds to retrospectively include lump sum draw downs for a set period to discourage lump sum withdrawals.

3. Providing concessional Centrelink assets and income test assessment for those who elect to use a guaranteed income stream. This would offset the slightly lower interest rate that these products offer.

Constantly changing the superannuation goal posts is destroying consumer confidence in the structure and by default, encouraging the use of other investment alternatives. Superannuation should remain as the primary retirement vehicle for most Australians. However, the GFC has highlighted the flaws in the pension phase and the Government needs to legislate with appropriate incentives to ensure that sustainable income levels are taken until at least the average life expectancy. This remains a difficult balancing act.

Daryl LaBrooy CFP®

Financial Adviser, Hillross Financial ServicesLicensee: Hillross Financial Services

Charles Badenach CFP®

Private Client Adviser and Principal, Shadforth Financial GroupLicensee: Shadforth Financial Group



Words of encouragement from previous FPA CEO Jo-Anne Bloch persuaded Cameron McAusland to complete his CFP® studies.

CREDIBILITY AND PROFESSIONALISM

Name: Cameron McAusland CFP®

Education Qualifications: CFP®, BBus, ASFS (FP)Practice: MLC Advice RandwickLicensee: MLC AdviceCFP Designation: December 2011Years as Financial Planner: 8 years

NSWJames Fenwicke CFP®

Point Wealth Advisers Paul Burgon CFP®

Robert Lipman and Associates Brett Call CFP®

SaigeVictoria Spurway CFP®

Ark Total WealthMichelle Kerlin CFP®

HEST AustraliaAnthony Williams CFP®

BT Financial GroupRichard Andrew Felice CFP®

Countplus MBTChristopher Hale CFP®

CHFP Wealth & Protection Guy Halpin CFP®

Wellings and Associates Dustin Bartholomew CFP®

Morse Financial Services Tony Lu CFP®

Announcer Financial PlanningPhilippa Grant CFP®

Centric Wealth AdvisersJames Falconer CFP®

ANZ

QLDBlake Richards CFP®

Elston PartnersKyle Medson CFP®

Moore StephensNeil Salkow CFP®

Roskow Independent Advisory

SAEmma Pardede CFP®

Triple A Financial ServicesAndrew Woodrow CFP®

Eastwoods Wealth ManagementJoshua Pardede CFP®

Triple A Financial ServicesSu Fong Goh CFP®

Prescott Securities

VICMark Wojtas CFP®

Vic Super

Brendan Donovan CFP®

Russell Investments

Andrew Torney CFP®

HLB Fin Plan

Marcus Gridley CFP®

Vic Super

Bradley Hunt CFP®

William Buck

Scott Fisher CFP®

Lanyon Partners

Ashley Woodhead CFP®

Dixon Advisory

Damien Kennedy CFP®

Dixon Advisory

Bradley Hunt CFP®

William Buck

Luke Fitridge CFP®

Chapman Welsh Financial Services

Christopher Fagan CFP®

Sholten Financial Services

Sean Cummins CFP®

TFSA McQueen Penhale

Matthew Bonnor CFP®

Bendigo Financial Planning

Aaron Hitch CFP®

FMD Financial

WAMalcolm Evans CFP®

Helm Capital

Anne Ichwan CFP®

Australian Financial Solutions Group

Zoe Winzer CFP®

ANZ Financial Planning

Craig Butler CFP®

Plan B Wealth Management

Christopher Jas CFP®

RSM Bird Cameron Financial Services

Robert Maclean CFP® AEPS®

Equitas WealthJosef Stadler CFP® AEPS®

PSK Financial Services

Frank Da Luz AFP® LRS®

Enrizen Financial GroupBrett Puxty CFP® LRS®

LIFP Consultants

Anne Graham CFP® LRS®

McPhail HLG Financial Planning

The FPA congratulates the following members who have been admitted as CERTIFIED FINANCIAL PLANNER® practitioners and who have recently achieved the AEPS® Accredited Estate Planning Strategist and LRS® Life Risk Specialist designations.

AEPS Practitioners

LRS Practitioners

1. What motivated you to become a fi nancial planner?Although the motivation to become a financial planner started with superannuation it has not stopped there. Over the years I have found that ordinary people find other areas of their finances confusing and too hard as well. Whether it be budgeting their weekly, fortnightly or monthly income, managing their increasing debts or considering protecting their most valuable assets (family, health and ability to earn an income), I found myself playing an increasingly valuable role for my clients. I was helping them take control of their financial position and most pleasing of all was the fact I was providing them with the confidence to make financial decisions and not to worry about making them.

2. What motivated you to pursue the CFP® designation compared to other qualifi cations?Ultimately it was the credibility that the CFP® designation provides, as well as the professionalism that the FPA expects as the motivation to select the CFP® over other industry options.

3. How did you fi nd the four ‘Es’ to CFP® certifi cation (ethics, education, examination and experience)?Personally completing the CFP® certification was one of the most challenging times in my

career so far. I was in the process of juggling a young family, launching a new franchise business (MLC Advice Randwick), as well as completing the CFP®. It was difficult and so it should be!

I found that the different requirements of the CFP® certification required different levels of focus and consideration. I was comfortable with the Ethics and the Experience areas, as my existing role as a planner was based on industry best practices, so I felt this was a matter of maintaining my current standards that I was already practising. The remaining areas of Examination and Education I found the most challenging and required my full attention. Unfortunately, study does not come easy to me, so it was a matter of sacrificing time with my young family at night and on the weekends to make sure the modules were read, completely understood and I was ready for the exam. It was difficult but thankfully it was worth it in the end.

4. What is the greatest challenge facing the fi nancial planning profession?We need to keep improving the quality of people who are in our profession. It is encouraging to see education entry levels increasing and the work that is being done to have professional codes of conduct. We need to press on with these programs, including the banning of planners who are found to be doing the wrong thing.

Past performance is not indicative of future performance. The Hunter Hall Value Growth Trust was launched in May 1994 and is our flagship investment product. Initial applications for units can only be made on an Application Form found in the current Product Disclosure Statement and its supplement for the Hunter Hall funds. HunterHall Investment Management Limited (AFSL: 219462) or any related entity does not guarantee the repayment of capital or any particular rate of return from the Fund. This advertisement does not take into account a reader’s investment objectives, particular needs or financial situation. It is general information only and should notbe considered investment advice and should not be relied on as an investment recommendation. © 2012 Morningstar, Inc. All rights reserved. Neither Morningstar, nor its affiliates nor their content providers guarantee the above data or content to be accurate, complete or timely nor will they have any liability for its use ordistribution. Any general advice has been prepared by Morningstar Australasia Pty Ltd ABN: 95 090 665 544, AFSL: 240892 (a subsidiary of Morningstar, Inc.), without reference to your objectives, financial situation or needs. You should consider the advice in light of these matters and, if applicable, the relevant product disclosurestatement, before making any decision. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/fsg.pdf.

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HUNTERHALL

Ethical Managed Funds

The problemSuperannuation is an investment whose features are designed to address retirement and death. Some people use the fact that we don’t know when either of these events will occur, in order to delay investing in superannuation.

An appropriate strategy for some clients is to put excess income into super, for various reasons well-known to financial planners. One of the reasons is to establish a “pattern of making contributions to one or more eligible superannuation plans”1. However, I am seeing more clients concerned that they may be sued as a result of becoming a director or setting up in business. A creditor would be well advised to pursue directors or business people who own assets in their own name rather than parties who have implemented appropriate asset protection strategies.

The strategy whereby someone close to the client owns assets can backfire if the person who owns the assets (including a trustee) becomes sick or cannot or will not take instructions.

I asked a planner of a particular client what the attitude was of the trustee of the client’s public offer superannuation fund to payments to dependents, such as former spouses or adult children. The

planner was disappointed not to be able to get clear guidance from the trustee. Often a trustee will be quick to say that they will decide at the time of an event requiring their decision and not beforehand. This is not very helpful for a client who is trying to plan for a certain contingency.

I reinforced that if the person is going to invest in superannuation, they should consider what the lie of the land will be at the time they can access it (i.e. a condition of release having been satisfied).

One way to manage this is to nominate a person (a legal personal representative under an enduring Power of Attorney [POA]) to take advice from their advisers. That person can be authorised to sign superannuation documents on their behalf, so that their family does not needlessly bear tax or the expense of a trip to Court.

In this particular case, the planner’s client had a $1 million balance built up over years of making contributions (and paying the appropriate 15 per cent contributions tax). Our client’s wife had died and the most recent estate planning review had been done when his children were in school.

Until the client had a new spouse (from whom

the family might think asset protection was also appropriate), an additional tax of $150,000 would be ‘in the post’, as the client had no other ‘tax dependents’2.

It must be remembered that POAs are no longer valid when the person who granted them has died. Some planning is still required if their superannuation balance has not been dealt with during their lifetime by being paid out to them or by the establishment of a reversionary pension. Even then, for some situations it’s best to maintain flexibility in relation to the payment of the super. For example, if a client thinks someone may challenge their Will, it would be prudent not to have a binding nomination in favour of their estate.

Alternatively, a binding nomination in favour of a named person could result in the planner not being able to assist the client recontribute the monies into super due to the contribution limits. It should be remembered that planning in a Will can involve life interests and contingencies that may not be available in the public offer super environment.

The solutionThe appropriate use of POAs can assist a person to manage their affairs, notwithstanding they may be

ASSET PROTECTIONAND SUPERThe use of Powers of Attorney can save a client and their family significantly in terms of time and money, at an otherwise stressful time, writes Donal Griffin CFP®.

CFP® PRACTITIONER STRATEGY


ill or even totally incapacitated. The family can then tidy up their affairs so that administrative and other matters are best managed.

In NSW, the law offers no default situation whereby a person’s family can, without an appropriate POA being in place, make decisions on behalf of a family member. The only way to proceed is to make an expensive application to Court in order to have any documents signed on behalf of that family member.

In Queensland, the default situation is that the Public Trustee of Queensland can make those decisions on an individual’s behalf if that individual is alive but has lost capacity3.

I suggested to the planner that most clients would, if they had the time to think about it, prefer to simply nominate a trusted family member to make such a decision.

I asked the client’s financial planner if he had a POA on his file for this client. He didn’t. I suggested that it might be a good idea to have a certified copy of the POA on the file, particularly in these times of volatile markets.

Of course, consideration should be given to including appropriate limits on the use of the POA. In this situation, I suggested that an appropriate limitation would be for the attorney to be obliged to first seek the advice of the client’s trusted financial planner (who told them about the strategy).

Implementing the solutionA family meeting was arranged. The planner was introduced by me to the rest of the family for the first time. I explained to the family that the planner had his client’s best interests at heart and was keen to be in a position to manage the payment of tax by the children in certain situations4.

I pointed out that the planner was in a unique position to quickly move assets within the family in an appropriate way, particularly as the planner knew the cost base of those assets, the risk profile and the strategy behind their acquisition.

I tabled POAs which the client signed and which the children accepted by signing5.

The planner used the opportunity to find out more

about the family in a gentle way and, in particular, to give the young adult children some advice on insurance and mortgages. The adults said they would be sure to contact him first if they were thinking about any of those matters.

The Law Societies or Law Institutes of each State and Territory have a standard form of POA which they recommend and these are the documents that most people use.

Recent experience has shown the limitations of some of these documents in relation to the above management strategies. Indeed, some public offer super funds have refused to accept these documents on behalf of their members and this has resulted in large amounts of tax not being saved. The planner agreed that this was another reason for the client to consider establishing an SMSF.

I told the family that a POA was also essential to assist their financial planner help them enjoy the tax advantages of superannuation, if:

• they knew when they were going to become incapacitated in relation to super, they might start a pension to lock in a zero tax-free environment;

• they knew when they were going to pass away, they might start a reversionary pension or withdraw their superannuation balance, so there was no possibility of it being taxed in the hands of adult children, for instance; and

• for those professionals who use superannuation to save 30 or 45 per cent on income tax, they may not be pleased to pay an extra 15 per cent tax as a result of the end of a pension or their death.

Client outcomesThe client decided to establish an SMSF with an appropriate trust deed and, inter alia, a POA that authorised the attorney to sign certain documents on behalf of the member after taking advice from the named planner. In that situation, the member’s balance could be withdrawn or an appropriate pension commenced before the client died. On death (based on current rates), there would be no tax payable, a saving of $150,000.

A bonusIn 2010, the Australian Taxation Office (ATO)

confirmed another reason for members of an SMSF to have a legal personal representative6.

The ATO issued a ruling which confirmed that an SMSF must have appropriate trustees. If it does not, it may fail the definition of an SMSF and be subject to tax of up to 45 per cent on the balance in the fund and on income of the fund in any year when the fund is deemed to not be a complying SMSF. Trustees of such funds can, separately, be subject to other penalties.

Where a legal personal representative is, in accordance with the law, appointed as a trustee in place of a trustee who cannot so act, the SMSF will not be subject to that penalty tax.

The use of appropriately worded Powers of Attorney can save a client’s family significantly in terms of time and money, at an otherwise stressful time. •Donal Griffin is a CFP® and lawyer at De Groots Wills and Estate Lawyers. He specialises in asset protection and estate planning. Griffin has also worked as a financial planner at Centric Wealth.

Footnotes 1. Section 128B(3)(a) Bankruptcy Act 1966 (Cth). 2. If a person’s superannuation is paid to non-dependents, Medicare aside, 15% tax is payable on the taxed component and 30% tax is payable on the untaxed element (whih includes insurance proceeds). 3. Each State and Territory have different rules. 4. I advised the client that, as superannuation law is constantly changing, they should keep in constant contact with their planner to ensure strategies remained vital. 5. I also tabled Appointments of Enduring Guardian which were signed and which needed to be explained to the children by a lawyer, so these documents were also executed. 6. ATO SMSFR 2010/2.

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www. financialplanningmagazine.com.au | financial planning | SEPTEMBER 2012 | 13


PROFILE

GRACIOUS IN VICTORY

As the fi nal speaker in the FPA’s Professional Leadership Series, Olympic gold medallist Anna Meares will share her thoughts on motivation, focus and self-belief. Jayson Forrest caught up with her prior to her presentation.


A two-time Olympic gold medallist, an Order of Australia Medal recipient, and with 10 cycling world titles under her belt, Anna Meares is a true Australian champion in every sense of the word.

This inspirational Australian, who first started competitive cycling in 1994 at the age of 11, has overcome a life threatening injury to become the newly crowned golden girl of world cycling.

Fresh from her Olympic gold medal victory at the London Olympics in the sprint event and bronze medallist in the women’s team sprint, Meares will be speaking in Adelaide on 5 September as part of the FPA’s Professional Leadership Series.

As guest speaker, Meares will talk to FPA members and their guests about motivation, goals and leadership at the elite level.

Indeed, Meares attributes much of her success to hard work, persistence and self-belief, but jokes it helps to have good genes as well.

“I believe the qualities that define a sporting champion are focus, hard work, clear goals, determination and a belief that you can win,” she says. “And to be gracious when you don’t win, and when you do win, to not be too arrogant.”

Meares clearly practices what she preaches, showing great humility and graciousness in victory after beating long-term rival Victoria Pendleton for gold in one of the most anticipated

races of the London Olympics – a task made all the more harder after Meares lost the sprint world title to Pendleton in Melbourne three months prior.

Meares credits her love of cycling and competitive streak as being key motivators for her success. “I think having goals, objectives and working to achieve, is second to none,” she says.

It’s this strong work ethic to succeed which saw Meares turn around a potentially life-threatening injury in 1998 when she fractured vertebrae in her neck. So severe was the injury that another 2mm would have seen her on a breathing respirator for the rest of her life. Yet, despite this injury, she picked herself up and turned things around.

“What’s the use of sitting around in pity,” she says. “You have to get up and have a go again. Even if I didn’t race again, I had to make the most of what I had. I was motivated to get back on the bike and make a go of it. It was all about having and setting realistic objectives, meeting targets, putting in the hard work and focus. And two other things: having self-belief and the support from those around me.”

Meares doesn’t credit one single person as having the biggest impact on her sporting career – “It would be selfish of me to think this way.”

Instead, she credits her husband Mark for his support on and off the track, her parents, who gave Meares the opportunity to take up cycling,

and her sister Kerrie, who has always been an inspiring role model for the Olympic champion.

“But there have also been my coaches Gary West and Martin Barass, as well as my first coach Reggie, my manager Francine Pinnuck, my team mates, my support staff, Cycling Australia, and my sponsors. They have all played a role in shaping Anna Meares.”

She pauses briefly.

“And finally myself. I’ve had the guts and determination to do what I’ve done.”

After achieving so much at the elite level of her sport, what are the most valuable lessons she has learnt that can be replicated in the business world?

“I think there is a lot that sport and business can learn from each other,” she says. “I think the most valuable lessons would be: to have clear goals and targets; be determined to succeed; take time to reflect when things go wrong; be gracious when you win or lose; put in the effort and do the hard work; and be strategic.” •

More than 700 FPA members and their guests have heard from Australian sporting champions as part of the Professional Leadership Series events, sponsored by IRESS. The Professional Leadership Series supports the Future2 Foundation.

EDUCATION

A Technical and Further Education (TAFE) institution might not be the first place you would consider going to for a Financial Planning degree, but times are changing as TAFE shakes off its reputation as just being a vocational training provider for trades, and moves into the higher education space.

This year, the St George and Meadowbank campuses of TAFE NSW Higher Education have launched a Bachelor of Applied Finance (Financial Planning) – a three-year full-time program, which can also be completed part-time in six years.

However, Diana Bugarcic – Course Co-ordinator and Head Teacher of Accounting and Finance at the St George campus – concedes that overcoming traditional misconceptions about TAFE and its new higher education program it now offers, will be a challenge to overcome when convincing students of the benefits of signing up to a TAFE degree.

“There’s no doubt that the Bachelor of Applied Finance (Financial Planning) is a break with tradition at TAFE,” Bugarcic says. “What’s important to note is that TAFE NSW is now a higher education provider.”

The first degree rolled out at TAFE NSW Higher Education, Sydney Institute was a Bachelors of Interior Design. Bugarcic says the success of this initial degree persuaded TAFE to look at other vocational areas where it thought degrees might be needed going forward.

“Obviously, with all the changes in legislation to financial planning and the higher education standards required from associations like the FPA, we recognised that financial planning and

finance was a degree that students would need,” Bugarcic says. “However, we are going to have to educate students about TAFE being a higher education provider. Currently, students don’t understand that whilst they will be receiving an undergraduate degree, it won’t be coming from a university, instead, it will be coming from TAFE.”

Points of diff erenceBugarcic is confident TAFE NSW already has a very good reputation amongst students, government, academic institutions and within the financial planning profession, with the Bachelor of Applied Finance (Financial Planning) program offering many attractive components that will differentiate it from other tertiary courses in the market.

“One of the main attractions of our degree from others in the marketplace is the internship component. This happens in the third year of the course, enabling students to undertake an industry placement, which allows them to apply their newly acquired learning and skills in a practical and real work situation.”

Bugarcic says internships are one of the best ways of properly equipping students for the real world, ensuring that graduates leave Sydney Institute “work ready”. “It’s a win for both students and employers,” she says.

Bugarcic adds that while the Bachelor of Applied Finance (Financial Planning) is primarily a financial planning degree, the main focus in the development of the degree was that it would give students two pathways: one would be as a financial planner, while the other would be to work in finance, banking and funds management.

“So, whilst this is a financial planning degree,

the course content is finance focused, meaning that internship opportunities would not only be available for students in financial planning but also for those wanting experience in banking, superannuation and other related areas.”

According to Bugarcic, TAFE NSW Higher Education is currently talking to the industry regarding partnership opportunities for the internship component of the course. AMP has already expressed interest in helping, along with some other larger dealer groups, while the FPA has agreed to help source appropriate members for the program.

Another point of difference between TAFE and universities that Bugarcic is quick to point out is the requirement that all TAFE lecturers not only hold postgraduate qualifications in their respective discipline but they must also have relevant industry experience.

“This is an important differentiator because not all university lecturers have the same industry experience. All TAFE lecturers have either worked in their respective industries recently or are still actively working in their industry and teaching at TAFE.”

Bugarcic believes this is an important consideration for any prospective student, and cites a current TAFE lecturer who is actively working in compliance within the financial services industry, while also teaching on this topic to students at Sydney Institute.

“We have other lecturers working in estate planning and paraplanning, and I don’t believe you’ll find that happening in the universities.”

Another differentiator for TAFE NSW is that unlike

TAFE NSW is broadening its image from an education provider for traineeships and apprenticeships only, and is moving into the higher education space by offering degree courses. Jayson Forrest spoke to Sydney Institutes’ Diana Bugarcic about the benefits of studying for a Bachelor of Applied Finance (Financial Planning) at TAFE NSW Higher Education.


A POINT OF DIFFERENCE

many other tertiary degree courses, TAFE NSW Higher Education has made entry into its degree course programs more accessible to students, provided they are able to meet the selection criteria.

“We see this as another advantage of coming to TAFE. Our course is actually open to a lot more students,” says Bugarcic. “While we don’t require an Australian Tertiary Admission Rank (ATAR), students are expected to submit a 500-600 word essay dealing with a financial planning issue as part of the application process.

“We also interview each candidate to ensure the student understands their commitment and requirements of the course. The whole selection process allows us to identify whether the student is in need of any additional support requirements. Ultimately, we want to make sure that all students who enrol in this degree are going to be successful.”

Course structureBugarcic admits that in developing the content for the Bachelor of Applied Finance (Financial Planning) degree it was critical that it aligned to industry standards, as well as professional conduct and ethics. To ensure this happened, a course advisory committee was setup. The committee included external academics, including Dr Mark Brimble from Griffith University, representatives from the FPA, employer representatives and staff from TAFE NSW Higher Education.

“Having input from other tertiary academics, as well as industry, was essential in ensuring we developed a curriculum that was not only relevant for students but also relevant for the changing regulatory landscape. The result is a specialist degree geared towards preparing students for the practical demands of a professional industry career.”

The current three year full-time degree is divided into two semesters per year, with students required to complete four subjects per semester.

The degree has a multidisciplinary focus that not

only develops students’ practical skills but also equips them with the required knowledge of the financial planning industry. The program covers the legal and regulatory environment, finance and investment concepts, professional communication skills, critical thinking and analysis, and reflective practice.

Specific topics spread out over the six semesters include: Principles of Finance and Investment; Regulation and Legal Principles in Practice; Fundamentals of Personal Financial Planning; Principles of Economics and Economic Theory in Practice; Insurance Planning for Personal Risk Management; the Psychology of Client Engagement; Investment Analysis and Portfolio Management; Retirement and Superannuation Planning; and Income Tax Law.

AssessmentBugarcic is particularly proud of the integrated and self-assessment approach to the program, where students are required to engage in reflective tasks to help evaluate their own values and practices. This process of analysis, evaluation and self-questioning enables students to become engaged with their own learning, thereby encouraging them down the path of continuing professional development, which is a defining characteristic of professional practice and conduct.

The integration of both theory and practice is encapsulated in the program through a wide range of assessment techniques. These include

individual and team-based projects, investigation of concepts, role plays, presentations, reflective journals, workshops, and the development of academically sound and industry relevant papers.

“Students are expected to be able to work collaboratively and define their own goals for professional life-long practice and development, which they can use as a basis to reflect on their strengths, weaknesses and areas for further development,” Bugarcic says.

At this stage, the Bachelor of Applied Finance (Financial Planning) degree doesn’t include a mentoring program, as some other tertiary courses have, however, Bugarcic believes this will evolve naturally as more students undertake the course.

“Another benefit of studying at TAFE is the smaller class sizes we have. Our classes have a maximum of 70 per lecture. That provides students with a much more personalised approach to their learning, and already we’re seeing that coming through in their assessments.”

Up and runningThe Sydney Institute St George campus degree is already in full swing, having started semester one at the beginning of this year. According to Bugarcic, there are currently 22 students enrolled in the first intake, with the second intake of students having just taken place for semester two.

“For the first intake, we only had full-time day classes available for students but from July 2012, we have evening classes as well for part-time students. So for those people working in the industry who are looking to upgrade their qualifications, they can actually attend these night classes.” •For more information, go to www.highered.tafensw.edu.au.


Diana Bugarcic,Sydney Institute

The Bachelor of Applied Finance (Financial Planning) is available at two TAFE NSW Higher Education campuses – St George and Meadowbank. It is an FPA approved course and meets RG146 requirements. An approved course is an undergraduate or master’s degree that meets the FPA’s requirements for enrolment into the CFP certification program. It exempts the need to add an Advanced Diploma of Financial Planning to another degree.


FINANCIAL LITERACY

Dubbed the “nice guy” of financial services – though don’t tell him that – Paul Clitheroe has had an enormous impact on raising the profile of financial planning and championing the cause of financial literacy. Through the highly successful Money program on television, to the magazine of the same name and to his radio segments, when it comes to consumer advice, Clitheroe is a man in demand. And it seems that for the past 30 years, that has always been the case.

Clitheroe first started out in the finance industry back in 1980 as a research assistant but admits his 30-year involvement with financial planning really began in 1983 when he formed ipac with his three partners. Since then, he has had a significant presence in the media.

“It’s hard to believe that 30 years ago, only about 3 per cent of people owned shares. There was no ‘money’ section in the newspaper and you didn’t have Alan Kohler on ABC TV. Back then, retail advice didn’t exist. People had a bank account and paid off a house. That was it,” Clitheroe says.

“So, my three partners and I saw an opportunity

to provide people with more education. In our first week of setting up ipac in 1983, we sent out a weekly press release just talking about personal financial planning. This was anything from doing a budget to buying shares. Back in those days, that was deemed as being so radical that we would get a vast number of radio, television and newspaper interviews off a very simple press release.”

And the rest, as they say, is history.

This mover of first advantage paid off for Clitheroe who started doing radio and TV interviews, which led to the launch of the enormously successful Money program in 1993, followed by Money magazine and books.

“The Money show was the most watched series in Australia for many years. In fact, it used to get about three million viewers on a normal Wednesday night around the capital cities. Back then there was no internet of Foxtel, so it’s amazing to see how much the world has changed in just a short period of time.”

The Government also hitched a ride on

Clitheroe’s bandwagon, appointing him chair of the Financial Literacy Board back in 2004. And it’s in this position, which he still holds today, that he is well placed to comment on the extent to which financial literacy has changed over time.

“Financial literacy has made significant progress over the past eight years. For example, we now have financial literacy in the national curriculum being taught in schools. With the Government’s website ‘Understanding Money’, we’ve got hundreds of thousands of people on that website doing their budgets and so on. So the awareness of financial literacy is really quite high.”

Clitheroe also credits the FPA with initiatives like Financial Planning Week for playing a key role in raising consumer awareness of financial literacy and the role of good advice.

Behavioural changeHowever, he admits the Financial Literacy Board is still not getting a lot of traction in behavioural change.

“Probably a good analogy for financial literacy is Australia’s obesity problem that we’re all

MONEY SMART,MONEYWISE

In the often confusing and complicated world of finance, for many Australians, Paul Clitheroe is the reassuring face of financial planning. He is the public face they have come to trust over the past 30 years. Jayson Forrest spoke to him about the challenges of improving the financial literacy of Australians.


incredibly aware of. Calories weren’t something most of us knew anything about 30 years ago, but now we do. I think every Australian is now aware of what is good food and what is bad food, yet as a nation we are getting heavier.

“What’s fascinating for me is for the last half dozen New Year eves, the second most popular New Year resolution is ‘I’ll be better with my money’, and the number one resolution is to lose weight. I find this really quite interesting,” he says.

“Go back 30 years and our knowledge of money was very low, but in a sense, you didn’t need a lot of knowledge about money back then. There were no mobile phones and credit cards. So, it was hard to get into trouble with money, because unless you had money in your pocket, you couldn’t spend money.”

But Clitheroe concedes times have changed and with access to easy money as prevalent as it is today, more needs to be done to change the spending and behavioural habits of Australians.

“Australians are far more financially literate now than they have ever been,” Clitheroe says, “But the complexity of products in the marketplace now has increased 1,000 per cent. So, it’s not that we’re dumber, it’s just that the world is incredibly sophisticated and temptation for credit is everywhere.”

He agrees that the single biggest issue facing consumers in the financial literacy space is the complexity of today’s products and clever product marketing.

But despite this, when it comes to money, Clitheroe believes most of us are actually quite good managing it most of the time, but concedes “we’re still humans and suffer from emotional human behaviour”.

“For whatever reason, too often we’re tempted by offers like ‘take home today and pay nothing for three years’ or ‘get a free store credit card’. So, basically it is very difficult for humans to be disciplined 100 per cent of the time. I think it’s a bit like binge eating,” he says.

Clitheroe says the thing that challenges him most is how to develop strategies that help people in the moments they need it most, and it’s the reason why the Financial Literacy Board works closely with ASIC to match legislation with good consumer behaviour.

A good example of this, he says, is new credit card legislation from July 1, which means consumers can no longer receive unsolicited offers to increase their credit card limit, thereby removing the temptation to increase their limits during busy times like Christmas and when children go back to school. “At times like these, it’s very easy for us to say ‘yes’ to a credit card increase, so this new legislation will be good for consumers.”

Another good example of ASIC and the Financial Literacy Board working well together is that from July 1, the credit card minimum repayment box on statements will now display to the consumer how long it will take to pay off their credit card if they only make the minimum repayment.

“We think that is good information to help people stay on track,” he says.

However, he concedes more needs to be done in the financial literacy space. But what?

“It’s all about increased and continuing awareness,” he says. “That’s why the FPA’s Financial Planning Week is so important. It places the emphasis squarely on good financial advice for a dedicated week.”

MoneySmartAs part of his role as chair of the Government’s Financial Literacy Board, and his ongoing commitment to encouraging Australians to become smarter with their money, in a national initiative by the Board, the inaugural ‘MoneySmart Week’ will be held this month – 2-8 September. Clitheroe sees it as being supportive of the FPA’s Financial Planning Week.

“MoneySmart Week is designed to encourage Australians to take a close look at their everyday money management,” Clitheroe says. “It is an

independent, not-for-profit initiative promoting the importance of financial literacy.

“The key message for MoneySmart Week this year is simple – ‘Do a Free Financial Health Check’. By doing this, we hope people will go to a range of relevant websites, like MoneySmart, to do a free financial health check. And we expect these health checks will reveal areas of strength and weakness for consumers. We’re hoping that for areas of weakness, for example, credit card debt, it will encourage Australians to do a budget and to actually try and get rid of that debt.”

MoneySmart Week will also feature money management seminars and other events in local communities and workplaces. There will also be a national awards program to recognise outstanding achievements in financial literacy.

StrategyClitheroe says the Board’s original strategy around financial literacy seven years ago was to make people more aware of managing their finances better, and he believes that has been achieved.

“I think we’ve done really well there,” he says. “I think we’ve got people quite aware of being better with money. But I think it’s fair to say we’re not getting the amount of traction we would like in actually having people spending what they’re earning and removing high interest debt and so on.”

While he is delighted to see an improvement in the savings ratios of Australians, with more people now using debit cards, he remains pragmatic.

“I think financial literacy has played a role in the improved rates of savings in Australia, but let’s face it, the GFC has been far scarier for us as individuals than the benefits of financial literacy,” Clitheroe says.

“That’s why we need to maintain an ongoing focus on financial literacy and address the complexity of products in the marketplace. To fail to do so will only see us repeat the errors of the past,” he warns. •


LONGEVITY

COMPULSIONAND RETIREMENT PRODUCTS

As baby boomers start to retire, and following the GFC, there is an increased focus on whether we need better ways to help our retirees manage their longevity and investment risk, and whether incentives should be provided to particular types of guaranteed income streams in order to make them a more attractive proposition.

There are a variety of approaches the Government could consider in dealing with the issue. One option is to take the compulsory route by imposing rules which require retirees

to use their super savings to purchase some form of guaranteed income product (i.e. an arrangement under which the product provider wears some level of investment and/or longevity risk, instead of the retiree).

A second option would be to provide strong tax or social security incentives in favour of guaranteed income products over other retirement income arrangements.

A third option is to offer broad choice and ensure that super-related laws and other

Government initiatives facilitate the provision of retirement income products on a product-neutral basis, leaving investors free to decide from a broad range to suit their own circumstances.

Importantly, however, the Government has already flagged that any new budget costs arising from Superannuation Roundtable recommendations are to be offset by appropriate offsetting savings. This makes the outcome of the roundtable difficult to predict, and does pose the risk of some retirement

In January this year, following on from discussion started at the Tax Forum, the Federal Government set up a Superannuation Roundtable tasked with, amongst other things, progressing the thinking around giving retirees more options in the drawdown phase with products like annuities and deferred annuities. While the roundtable is expected to complete its work by December 2012, David Shirlow and Luis Sarmiento share their thoughts on what may happen with retirement products.


products receiving favourable treatment at the expense of others.

Compulsion or preferential treatment for guaranteed income productsThe Henry panel, while leaving open the question of preferential treatment, was not convinced that there was a case for compelling people to acquire a guaranteed income product and there is nothing to suggest that compulsion is on the Government agenda. However, a number of academics and industry participants have campaigned for either compulsion or strong preferential treatment in various circumstances, typically arguing this is necessary because there is a lack of consumer awareness of the benefits of guaranteed income products and that behavioural factors cause people to undervalue them.

The underlying premise here is, of course, that a guaranteed income product will be better for the retiree and Government finances than another type of product. Let’s explore that premise for a moment because advocacy for compulsion or preferential treatment from some quarters is likely to be around for some time.

The following are some key considerations.

Investment risk and performanceIf a product provider offers to take the investment risk in return for providing a guaranteed return for a defined period, it offers a return on which it thinks it can not only cover the risk but also make a premium for having taken the risk.

Simplistically, this suggests that if all Australian retirees accepted such an offer and if the provider delivers on it, then retirees as a whole would be less well off – by the amount of the premium and foregone investment returns to the extent the provider is not required to pass these on under the contract. Alternatively, if the provider fails to cover the risk it will incur a loss and the retirees would benefit from the guarantee. However, the greater the loss, the greater the risk of the provider defaulting on the guarantee (‘counterparty risk’). Guaranteed income products with terms of 20, 30 or 40 years result in retirees being exposed to non-transferable counterparty risk over the long term.

While the GFC raises valid questions about the role of equities in a retirement portfolio, the fact remains that over the long term, equities have delivered a positive return premium relative to cash and bonds. In their paper Equity Premia Around The World, Dimson, Marsh & Stauton find an average worldwide equity risk premium relative to bonds of 3.8 per cent per annum and 5.9 per cent per annum for Australia (1900-2010). This means that individual retirees in guaranteed income products offering bond-like returns lose the opportunity for higher returns to fund a higher level of retirement income. Unlike bonds, equity markets offer retirees the opportunity to participate in the future growth of the Australian and global economies.

The point here is not that retirees should invest 100 per cent in equities, rather that equities have a valid role to play in their portfolios. The appropriate level of exposure to growth assets for a retiree will depend on their individual circumstances and is likely to change over time.

On the other hand, when retirees take on investment risk, then a fair proportion of them may have an uncomfortable investment experience and, in the event of adverse long-term market outcomes, may be substantially worse off than if they had chosen a guaranteed product. Whereas (ignoring counterparty risk) if everyone accepted a guaranteed income stream then no-one will have a particularly bad experience as a result of this ‘insurance’.

The role of the Age PensionHowever, in Australia we have a means tested Age Pension as a safety net. In effect, all retirees have retirement income insurance and bad experience is mitigated. In that environment, why do we need another form of insurance?

One response might be that the existence of the Age Pension safety net is unduly undermining retirees’ appetite for guaranteed income

products. Further, some argue that the cost of the Age Pension for the Government may be moderated if people were compelled or induced to purchase guaranteed income products. However, given the investment performance discussion above, there must be a serious question as to whether the overall effect would be positive for the Government given that returns of the overall retirement savings pool would be depressed, and the Government would still be potentially exposed in the event of a guarantee income product provider defaulting.

Strength of our financial systemOn the subject of default, arguably our financial system following the GFC is faring better than it would have if a larger proportion of retirement incomes had been in products intermediating investment risk. The longer term structural implications associated with counterparty risk should be central to any discussion around promoting any substantial increase in the share of these types of products in the market. Indeed, how can an investor assess the viability of a financial institution over the timeframe at hand?

While capital requirements for insurance companies offering guaranteed income products are robust and getting stronger, they add to the cost of private firms offering these products and hence reduce the levels of income offered to retirees. Capital requirements protect retirees from counterparty risk, protect the Government from product provider default risk and protect the economy from systemic risk in the financial sector. Unfortunately, this protection magnifies the problem around ensuring an efficient level of return for the retirement savings pool.

It is questionable whether adding compulsion into these dynamics helps, as it introduces a greater level of responsibility for the Government in the event of provider default and reduces the need to offer attractive levels of income through this product category in order to remain competitive relative to other investments.

Choice and flexibilityOften financial security ranks highly in terms of retiree priorities, but this is likely to be linked to a deeper desire for ongoing independence and control over personal matters. Independence

David Shirlow,Macquarie Adviser

Services

Continued on p22

and control require ongoing choice and flexibility. Viewing a retirement strategy as a ‘day one’ decision only is limiting and not what a retiree would want or need. The typical, and in some cases necessary, inflexibility of guaranteed income products puts them at a disadvantage in this regard.

What if I have unexpected healthcare costs or need long-term care? What if my spouse passes away? What if my children or grandchildren need help? What if the social security rules change? What if the share market underperforms?

Managing these issues through retirement is an ongoing process. Different retirees have different expenditure needs which vary during the course of retirement. They also have different amounts of assets and other resources relative to those needs, and thus different levels of suitable investment risk over time.

The 2007 super tax reforms enhanced flexibility by, on the one hand, removing the need to drawdown from super at all and, on the other hand, allowing tax favoured pensions (other than transition to retirement pensions) to have no maximum payment limits. Since then the Henry panel has supported a flexible approach, accepting the presumption that individual retirees are generally in the best position to determine how they use their assets during retirement.

The current tax and social security settings offer choice without substantial bias although, as we discuss later, a key question for the roundtable is whether the available range of choice is broad enough.

Point in time pricing sensitivityThe pricing of guaranteed income streams is driven, amongst other factors, by interest rate levels which are cyclical in nature. Higher interest rates can make guaranteed income streams attractive by increasing the level of income offered by providers, however, low interest rates can make the same guaranteed income stream really unattractive. Any form of compulsion or preferential treatment runs the risk of steering investors into an annuity at a particularly bad point in time and locking in a particular cohort of investors into a low level of return for a long period of time. The current

level of USD interest rates illustrates this point: nominal interest rates are around 2.3 per cent per annum for 10 years and 3.4 per cent per annum for 30 years.

Longevity riskSome of the appeal of compulsion for guaranteed income products offering longevity insurance relates to gained efficiencies through the pooling of longevity risk across the whole population and the reduction of ‘leakage’ out of the retirement incomes system through bequests to descendants. However, deeper analysis of both these points leave the argument wanting.

From a client’s perspective with compulsion, a higher level of income for life is able to be offered by product providers, because compulsion avoids the selection problem where only healthy people purchase lifetime annuities. However, as identified by the Henry panel, forcing the less healthy (and hence typically less privileged) to purchase lifetime annuities for the benefit of others raises equity questions. Further, without compulsion, the benefits of pooling longevity risk for those who choose such a product still exits, albeit at a higher average longevity level.

From a Government’s perspective, the pooling of retirement savings to cover longevity risk can ensure that more of these savings are used as retirement income. This is because savings from those dying earlier would be applied to incomes for those dying later, rather than passed on to descendants as bequests.

However, given the equity issues raised above, mandating this type of risk pooling would be a fairly blunt tool in comparison to other more direct, but politically unacceptable, approaches such as taxation of death benefits or taxation of large lump sum withdrawals from pension accounts.

Soft compulsion or strong preferential treatment: a more likely scenario?Is soft compulsion more palatable?An example of soft compulsion is a proposal put forward by the Actuaries Institute involving what it refers to as ‘intelligent defaults’ – if a retiree does not choose (by a specified age), they are placed into a default solution that includes a deferred annuity for the later years1.

From a behavioural perspective, defaults are important as they serve as a benchmark to choices made by individuals. Defaults also cover the ‘engagement gap’ from which arguments of choice, flexibility and financial market efficiency can suffer in practice. Having said this, retirement in itself is a strong trigger for a person to become engaged in decisions about their superannuation.

The appeal of ‘intelligent defaults’ is that it leaves those who choose not to have a deferred annuity with the ability to opt-out and make their own choices. So if you accept the underlying premise that a deferred annuity would be a preferred solution for those who don’t choose otherwise, then this approach may appeal. If you don’t, it won’t.

Stronger Super, the Government’s response to the Cooper Review, recognises the importance of defaults in superannuation through the introduction of MySuper, which is intended to be a low cost, simple superannuation default for the accumulation phase. While further consultation with regards to a post-retirement component to MySuper has been flagged, the fact that this is currently out of scope illustrates the greater challenge in building a consensus as to what an optimal post-retirement default should look like.

Currently, a person’s superannuation will continue to accumulate post-retirement until a person engages with the trustee to arrange for benefits to be paid (unless the rules of the fund require a benefit to be paid at some point).

–– A positive outworking of the roundtable would be that

a broader range of retirement income products could be

offered with incentives being made available on

a product neutral basis, so that Australian retirees’

choices are optimal and not unduly skewed.


LONGEVITY


It can certainly be argued that this continued accumulation is an appropriate ‘default’, enabling benefits to build up for potential use at a later stage of retirement. So the question is whether there is a better default.

Is tax and social security favouritism any more acceptable? As with soft compulsion, influencing choices with tax or social security incentives or disincentives would arguably meet with broader appeal than outright compulsion. This approach is worthy of particular attention at the current time, as it’s the most likely to be contemplated from a Government policy perspective.

Incentives such as tax and assets test exemptions for investments in non-commutable guaranteed income products, where access to the capital is deferred, may encourage people to invest in those products more. However, the question remains as to whether that is a desirable outcome, taking account of considerations such as those discussed earlier. These investments continue to have a value. What particular characteristics would be necessary to warrant their value being ignored for assets test purposes? To what extent might innovative hybrid products qualify or not?

And what particular characteristics should be required to attract fund tax exemption on an income stream? Should the current rules be relaxed? Certainly there have been concerns expressed by product providers about the difficulty in designing innovative income products which fit within the existing super law annuity and pension rules. The existing laws are somewhat ‘product siloed’. The roundtable will no doubt examine ways in which the rules might be extended to accommodate a broader range of tax exempt income streams (including deferred ones), but when doing so their terms of reference appear to indicate that they will also be required to look for offsetting budgetary savings.

On the flipside, is there a risk that the range of income streams that attract tax and social security concessions is actually narrowed, against the backdrop of the Henry recommendations? Could this be a means of tilting preferences towards income streams that have particular characteristics? After all, as a policy option this is one step less extreme

than imposing compulsion and one Henry panel recommendation was to impose a 7.5 per cent rate of tax on super fund earnings in both accumulation and drawdown phase.

The bottom line is that this recommendation has not been adopted as Government policy. In any case, if taken in isolation, the recommendation would provide no tax incentive to take any particular form of income stream. In that context, one appeal of the recommendation is that it would be even-handed regardless of how a retiree chose to draw their savings from superannuation. However, assuming current effective personal tax thresholds remain largely unchanged, it would actually create an incentive for many retirees to withdraw their entire super immediately and invest elsewhere. It would also raise substantial political considerations relating to grandfathering of current arrangements.

For completeness, it’s worth noting that another potentially even-handed or ‘product neutral’ means of nudging retirees towards adopting any preferred pattern of income drawdowns would be to impose tax thresholds on benefit drawdowns. This approach is presumably not in contemplation, given that tax on benefits for those aged 60 or over was removed only as recently as 2007, and noting also that taxing super benefits directly was ‘off limits’ for the Henry review.

Other means of influencing choicesOf course, there are various other levers the Government can pull to influence behaviours. In particular, supply side incentives can also play a part, for example, as identified by Henry, through the Government introducing long-dated Government securities which would help product providers in managing the risks of providing long dated guarantees. Ideally, any such securities would also be made available directly to self-managed super funds and/or retail investors. Incidentally, the NSW Waratah Bond

program announced earlier this year is the first Government Retail Annuity Bond in Australia, demonstrating how this is achievable in practice.

Further, whether intended or not from a retirement incomes policy perspective, we may already have a supply side incentive in the pipeline for lifetime annuities through the Future of Financial Advice (FoFA) reforms. To be more specific, under current drafting they appear generally to be exempt from the ban on risk insurance commission payments to advisers.

Where does this leave us?There are regulatory improvements which could be made to better facilitate retirement income products which mitigate both market and longevity risks, such as modernising the definitions of annuities and pensions in superannuation law, in particular to move away from prescriptive product type based categories or ‘silos’, into an environment more welcoming of innovation.

A positive outworking of the roundtable would be that a broader range of retirement income products could be offered with incentives being made available on a product neutral basis, so that Australian retirees’ choices are optimal and not unduly skewed. Distorting the choice of product by providing tax and social security incentives for some income streams but not others would be turning back the clock. Ideally, the introduction of any further income stream concessions would not come at a cost of tighter concessions elsewhere, although there must be some question about the extent to which the ‘revenue neutral’ limitation imposed on the roundtable gives it enough legs to make a recommendation along those lines. In any case, compulsion is off the table for the time being. •David Shirlow is an Executive Director and Luis Sarmiento is an Associate Director within Macquarie Adviser Services, Macquarie Bank Limited. The views outlined in this article are those of the authors and do not necessarily reflect those of Macquarie Bank Limited or Macquarie Group Limited.

Footnotes1. Discussion Paper, Exploring barriers to Australia’s annuities market, Melinda Howes, CEO, Actuaries Institute, 23 February 2012.

Luis Sarimento,Macquarie Adviser

Services


Today’s planning environment is one where every dollar counts – whether in revenue or expenses – and one where a practice’s profitability has never been such an important issue. Janine Mace reports.

BUSINESS STRATEGY

BUILDING A PROFITABLE BUSINESS

“Hope is not a strategy.”

This is how veteran practice consultant, Jim Stackpool from Strategic Consulting and Training, sums up the situation facing financial planners in the brave new FoFA, post-GFC world.

It is a sentiment shared by Forte Asset Solutions director, Steve Prendeville, who does not mince his words when it comes to the gravity of the current situation: “This is talking about survival.”

Practices are facing the ‘perfect storm’ of FoFA and a tough economic background. “Most mature practices are still operating 20 per cent below their 2008 level. This means they need to look at their business model,” Prendeville says.

“Any hope of a quick reversal is gone now after four years. You cannot accept the status quo. You need to break things down and go back to basics.”

The tough environment explains much of the recent merger and acquisition activity, with planning businesses seeking scale to drive profitability. “When there is no organic growth, you need to be looking for inorganic growth,”

Prendeville notes.

He believes the pressure on practices is unlikely to lessen any time soon and describes the current environment as “hyper-competitive”.

With extensive experience in business consulting to both accounting and financial planning practices, Peter Knight, from Knight Partners Business Accountants, agrees that professionals in the financial services industry face unprecedented challenges.

“The average age of financial planners and accountants is around 55 so they are often resistant to change, but in this environment they are not able to not do it,” he says.

While recognising traditional habits are hard to change, Stackpool believes planners need to recognise they are operating in an environment which is “fundamentally different” to the past and need to act now to remain profitable. “With FoFA and the new accountancy standards in 2013, change will continue. The world is not returning to the pre-2007 landscape.”

He argues planners need to accept the changes. “People have been venting their spleen at the new legislation and practices, but it’s not going to change. For many planners, their business model is on broken ground.”

In search of profitabilityWhile transformation to ensure profitability is essential, the question is how to achieve it. The first step is to undertake a searching review of the practice, its owners and its business model.

“Planners need to look at every part of the value chain. Taking a business-like approach is absolutely essential in an environment where it has never been as hard,” Prendeville says.

Although vital, reviewing the practice from the ground up is not always a comfortable task, notes Fiona Mackenzie, associate director at Macquarie Practice Consulting.

“It can be challenging to look at the legacy issues in a business, such as the client base

and the business’s operations. However, practices need to take stock as this is a very labour and relationship intensive business,” she says.

Stackpool argues it is not a time to be fainthearted. “You need to change how you behave and your mindset. This is not some new tool or script. You need a focus that is laser-like on the client, especially at the moment.”

However, a key question planners need to ask themselves is whether they are prepared to put in the work required, he notes. “Do I have the energy for this transition? Am I up for it, as it’s not easy?”

Prendeville agrees: “Over the past four years it has been very draining, so business owners need to take a personal inventory and ensure they have the energy to continue and make the necessary changes.”

Once they make this commitment, he believes a business-like approach is essential, as the luxury of knowing new business will come through the door no longer exists.

“Owners must manage their business as a business. The practice needs systems and workflow processes to provide clients with a standardised experience,” Prendeville says.

“The increasing focus on customer service and fee-for-service means there is a need to segment the client base and take the McKinsey time-in-motion approach. You need to look at the cost of delivery on a per client basis.”

He believes practices need to meet very specific benchmarks if they want to remain profitable. “The margin needs to be more than 35 per cent. This is the optimum level if you wish to maintain the capital value of the practice.”

Prendeville argues profitability will become a key determinate of the value of planning businesses. “EBIT needs to be at 35 per cent to maintain the value of the practice. Profitability will impact on the multiples achieved during any sale and high profitability will lead to higher multiples.”

How to analyse a practiceWhile undertaking a business review sounds simple, knowing where to start is not always obvious.

According to Knight, a simple way is to create an organisational chart of the practice under headings such as marketing, operations/product and finance/accounting. “These are the areas to look at in 80 per cent of businesses and it gives you a structure to approach the review,” he explains.

It is then possible to review the tasks (such as timesheets or preparing billings), which come under each heading. “You then ask how it is done and can we do it better? Under the sales heading for example, what are the authorised representatives’ activities and what are they doing to achieve their targets?”

From there think about what can be changed or restructured, Knight says. “The big question is if we started again from scratch, would we build the same business?”

He believes a key tool in lifting profitability in a professional services practice is improved productivity, but cautions this cannot be imposed. “You need to talk to people to get them involved and participating.”

With improved productivity increasingly important, a detailed analysis of every member of the practice to ensure they are


According to Macquarie Practice Consulting’s 2012 Financial Planning Benchmarking Report – The Business of Advice, the average practice looks like this:

• $93 million – funds under management• 481 – clients• 185 – clients per adviser• 69% – active clients (contact level once per year)• $1,710 – revenue per client• $316,350 – revenue per adviser• 87 – clients per employee• 2.6 – advisers• 0.6 – paraplanners• 1.6 – support staff

Continued on p26

What is the average?


efficiently performing their allotted role is essential. “You need to closely analyse roles and who is doing what to ensure it is a good match,” Knight notes.

In his experience, professional services businesses consist of “finders” who are responsible for new business, “minders” who manage relationships and “grinders” who enjoy technical tasks. “A lot of the role in the past few years may have been ‘minding’, but now people may need to become ‘finders’ again,” he says.

Examining each aspect of the business includes the basics. “Productivity and time management are increasingly important and need close attention,” Knight counsels.

He believes planners need to focus on time management and suggests putting an estimated finish time next to items on their ‘To Do’ list, so they can map out their day and see what realistically can be achieved in the available time.

“Get team leaders to do this with their team members in the morning and then check at the end of the day to see how they have gone and what remains to be done,” Knight says.

Mackenzie agrees productivity and efficiency are vital to profitability. “When planners are putting plans together, they need to be streamlined and disciplined in using templates to increase the efficiency of production,” she says.

“Documenting plans is a large piece of work and it needs to be done very efficiently.”

Benefitting from technologyAlthough focusing on personal productivity is essential for improved profitability, new technology is also important.

Prendeville believes this can provide an important bottom line benefit. “Technology will help customise delivery and growing technological innovation will lead to increased profitability,” he says.

“There will be significant liberators through new technology, so practices can maintain and even increase their margin from clients.”

Growing dissatisfaction with available planning technologies is encouraging development of new offerings that improve asset allocation, automate the production of SoAs and enhance report generation.

“The planning industry has not had a seamless front to back-office, but the increased arrival of streamlined solutions will change all this,” Prendeville says.

“The dominance of key software products has homogenised advice, but now you need a client-centric approach and this will be available via new software offerings.”

Mackenzie agrees: “Planners need to get the back-office working really well and ensure the IT system is being utilised well so more time is spent on client relationships.”

Doing the numbersWhen it comes to the operational nuts and

bolts of practice profitability, Knight believes the first step is simple but important. “Do a budget and a cash flow statement,” he advises.

“If the world is as scary as it seems, it’s important to see what things are likely to look like. Do the exercise and then have the conversation with the partners or your life partner and ask, ‘What are we going to do about it?’.”

This analysis will encourage discussions about necessary changes. “The only way to increase profitability is to increase sales or lower expenses, but you need to identify how to achieve that,” Knight notes.

Although lowering expenses is often an easy solution, it is not always the right one, as some expenditure – such as marketing costs – may need to go up, not down. “You must watch expenses, but you need to be smart with what you do and how you spend,” he notes.

Prendeville agrees: “Ensure you have personalised marketing and communications and don’t take the accountant view that marketing is an expenditure. It is an investment.”

Mackenzie believes there needs to be a forensic examination of both revenue and expenses. “Every part of the business can be looked at to improve profitability.”

This includes the level of staffing in the practice.

“People are part of the expense line, so you need to consider what their utilisation level is. This may need to be reviewed, as utilisation is often only 60-70 per cent,” Prendeville notes.

“Hard times call for hard decisions. It is increasingly evident that practices may need to downsize.”

However, it’s not about a ‘slash and burn’ mentality. “You need to focus on it, but you also need to focus on maintaining staff relationships and morale. This is easy to let slide, but it needs to be looked after,” he cautions.

BUSINESS STRATEGY

Undertake a detailed review of the practice and its business model.

1. Evaluate whether you have the required personal energy and drive to change.

2. Identify operational areas within the practice requiring improvement or restructuring.

3. Ensure appropriate systems and workflow processes are in place and fully documented.

4. Evaluate the practice’s performance against industry benchmarks and identify areas requiring improvement.

5. Look for ways to improve personal productivity and time management within the business.

6. Review new technological offerings that may improve productivity.

7. Review staff utilisation and carefully evaluate employment expenditure against revenue.

8. Consider alternative options for the practice premises. 9. Carefully evaluate the client base and return per

client.10. Refocus on marketing to win new business.11. Focus on the clients and their needs.

Top tips for improving profitability

Stackpool is another who believes employment expenditure needs to be reviewed.

“You need to review productivity. The return should be $200,000-$250,000 per full time equivalent (FTE) in the business. With $200,000 per FTE, that means $1 million plus in turnover equals five people,” he says.

“A lot of practices are carrying people in the hope the sun will shine again, but if the practice is staying below $200,000 for an extended period, then its future is doubtful.”

The $200,000 benchmark is one Stackpool has used for over 20 years and in his experience, better advice firms currently average $750,000-$1 million revenue per adviser. “The best model is to go for quality people, not quantity of people,” he says.

Another area to reconsider is the practice’s office.

“Premises is the second biggest expense, so you need to ask if you can do something smarter in this area, such as sharing, for cost mitigation,” Prendeville explains.

“Cost savings needs to be considered. In the absence of income growth, you need to look for savings.”

Clients under the microscopeImproved profitability will also come from evaluating the client base, Mackenzie says. “Planners need to focus on who the practice will concentrate on and how it will do it.”

She believes practices need to take a very hard look at their client base, as during the set-up phase they often took on almost any client, but now they need to reconsider that approach.

“They need to analyse their client base, as often half the clients are not profitable. They also need to talk to staff about identifying the ideal clients and about succession for those who are not in the sweet spot,” Mackenzie says.

Stackpool agrees clients are an important part of the profitability equation. “There

are a number of levers that can be pulled in the practice. One lever is to decrease the numbers in the client base, as a large number of inactive clients reduces the return per client,” he explains.

“You need to use a client segmentation model to determine what is the return per client.”

Practices also need to carefully consider whether or not some types of business, such as corporate super, are profitable enough to warrant retention, Stackpool explains.

They also need to recognise traditional rules of thumb are changing. He says the “magic number” is now 40 per cent per client per year, with the revenue split being 40 per cent profit, 30 per cent for overheads and 30 per cent for wages. (This includes a normalised annual wage for principals of $100,000-$150,000.)

Stackpool believes a profitable practice needs to be realistic. “You need to recognise some clients represent the past and some represent the future,” he says.

“You also need to accept you can’t be there for everyone. Every client deserves respect, but not everyone deserves service.”

Getting it in the doorWhile improving the numbers and productivity are vital, winning new business is also essential.

Practice experts agree ongoing marketing and promotion have an important role to play in building profitability.

“You still need to do it. Planners need to go back to how they started the business in the 1980s and 1990s. It’s about getting your message out,” Prendeville notes.

“You need to understand how clients get your message and how to stand out. You need to give clients more information and it needs to be more personalised and tailored.”

Knight agrees this is vital, as technology is lowering barriers to entry and radically changing the operational aspects of many professions. In the accountancy profession for example, practices are starting to offshore routine tax and compliance work to Malaysia for completion by Australian-trained accountants.

“Practices need to reassess who their competitors are. They may not be other financial planners, they may be SMSFs, banks and accountants. So what does this mean? Your competitors may not be who you think they are,” he notes.

Mackenzie believes it is important to focus on the fundamentals of practice marketing.

“Be clear on what the client value proposition is and who the target market is and how the business addresses their needs. Getting this right is important for the practice’s marketing and the type of messaging it uses,” she says.

“It also increases your confidence when talking to clients. For staff, it highlights that these are the things which are important in the practice, such as whether it is ‘high touch’ or has a quick turnaround time.”

Mackenzie also recommends auditing the practice’s marketing collateral, noting it needs to be very professional and aligned to the business’s goals. “Ensure your website is up to speed and consistent with everything else in your marketing.”

However, when it comes to marketing expenditure, Knight cautions that careful monitoring is required, as the goal is getting a signed authority from the client, not a huge number of hits on a website or tweets per day.

“Marketing is an area of massive waste and people hide behind strange measures such as brand awareness, but in a small business it’s about getting customers to sign up for the service.” •


Steve Prendeville,Forte Asset Solutions


TO ANSWER QUESTIONSWWW.FPA.ASN.AU

Many advisers have been questioning the value of the transition to retirement (TTR) strategy and searching for clients who will obtain a positive outcome from it after the changes that came into place from 1 July 2012. The truth is there is still value in the strategy, however, you will need to understand the new landscape and how your clients will be impacted.

It is time to face the new reality for the next two financial years and hunt for value within the TTR space.

The changing ideal TTR clientSince 1 July 2007, the ideal TTR client has been constantly changing (see Table 1) due to the continued reduction in the contribution caps. In each scenario, we look at maximising the concessional contribution cap whilst receiving a tax-free pension to achieve the same after-tax expenses. Some things to note are:

• From 1 July 2007, target clients were 60+ and earning approximately $120,000 per annum. The amount of salary sacrifice would deliver $30,000 taxable income, a personal income tax liability of $2,350 (down from $35,495), a net benefit of $44,010 (after the contributions tax and pension payments were taken into account) and a full co-contribution of $1,500.

• From 1 July 2009, the reduced contribution cap (to $50,000) diluted down the strategy for all clients. Coupled with the change to certain qualifying income tests to include reportable employer contributions (such as salary sacrifice into super), this spelt the end for certain incentives and tax offsets (such as co-contributions) which further reduced the net benefit of the strategy.

Further details about the period from 1 July 2012 onwards are covered later in this article.

The new rules of thumb for salary sacrifice into superFor the 2011/12 year, there was minimal tax benefit for salary sacrificing below $30,000 (which derives the maximum low income tax offset [LITO] of $1,500). There is no additional low income tax offset for salary sacrificing below $30,000 and the contribution tax rate of 15 per cent was the same as the marginal tax rate (15 per cent). However, the 1.5 per cent Medicare levy was saved.

The new rules of thumb for salary sacrificing into super for 2012/13 have changed due to a number of factors:

• There is a new tax-free threshold of $18,200 and a marginal tax rate of 19 per cent within the $18,200 to $37,000 income bracket. This means salary sacrifice contributions are taxed at 15 per cent rather than the marginal tax rate of 19 per cent (plus Medicare levy).

• This tax-free threshold is now effectively $20,542 (the new effective tax-free threshold) due to the reduced LITO of $4451 based on a lower income threshold of $30,000.

• Due to the mature age workers tax offset2 of $500, the adjusted effective tax-free threshold is $23,174 ($20,542 + $500/marginal tax rate of 19 per cent).

• The Medicare levy upper threshold is $24,167 and lower threshold is $20,542 for a single person. Salary sacrificing into super between the $24,167 threshold and the adjusted effective tax-free threshold of $23,173, means the Medicare levy is reduced whilst avoiding the marginal tax rate of 19 per cent.

Table 2 shows the net tax benefit of salary sacrificing $1 into super at various income levels. From this table, we can make general rules of thumb for the 2012/13 year in regards to salary sacrificing.

What to do with existing TTR clientsWhen it comes to your existing TTR clients, the net benefit of the strategy for clients over age 60 will reduce across the board. On the other hand, the impact on clients aged 55 to 59 will be even greater because the net benefit of the strategy based on a $50,000 concessional contribution cap was marginal in many cases (even after the adviser fees and product/administration fees were taken into account). This means you will need to determine whether it is worthwhile to continue the strategy into the 2012/13 financial year for all ages.

When determining if a strategy is suitable for your existing clients, it is advisable to go back-to-basics to determine whether the strategy is worthwhile and reinforce the key benefits. However, some key points to note about existing clients are:

• The reduction in the total net benefit of the strategy for a client aged over 60 and earning $120,000 per annum could be as much as $12,0003. Over the next two financial years, this equates to $24,000 (calculation: $12,000 x 2) until the proposed catch-up concessional cap comes into play at 1 July 2014.

• If there is a reduction in the pension payments when revising a strategy from 1 July 2012, you may need to reset the strategy for clients aged 55 to 59 if the minimum pension payment produces surplus income.

• Don’t give in to temptation to stop the strategy for clients aged 60 and over because: – clients can recycle the surplus cash

into super as non-concessional contributions for estate planning purposes.

– clients will be reducing the amount of tax savings on the investment income from the pension capital by returning an amount to the accumulation phase.

TTR: Not looking good, but...DAMIEN HEARNIOOF

THIS ARTICLE IS WORTH

0.50 POINTSCRITICAL THINKING

Includes

• The ideal TTR client

• Salary sacrificing into

super

• The value of the TTR

strategy


CPDQUARTERLY

So what is the value of the TTR strategy? When determining whether a TTR strategy is suitable for your new or existing clients, it is advisable to go back-to-basics. The following information outlines some of the issues that you should be considering.

Tax saving on the pension account should be included in the analysis A TTR analysis should take into consideration the

reduction in the total taxation paid (such as personal income and contributions tax) but many advisers have questioned whether or not to include the impact of the tax savings from commencing a pension. Including the tax saving on the pension earnings in the net benefit analysis is necessary as it will allow you to provide an accurate position for the client. This will help you determine whether a strategy should be commenced relative to the costs of the advice. It is important to recognise the following:

– The tax savings from the pension on investment earnings should be limited to the income producing assets of the investment portfolio (unless capital gains will be generated during a financial year).

– Avoid assuming a standard investment return for the client’s risk profile which includes a growth portion.

Income range Tax Medicare LITO MAWTO Contribution Total saving saving tax benefit $ - $18,200 $0.00 $0.00 $0.00 $0.00 -$0.15 -$0.150$18,200 $20,542 $0.19 $0.00 $0.00 $0.00 -$0.15 $0.040$20,542 $23,174 $0.19 $0.10 $0.00 $0.00 -$0.15 $0.140$23,174 $24,167 $0.19 $0.10 $0.00 $0.00 -$0.15 $0.140$24,167 $37,000 $0.19 $0.015 $0.00 $0.00 -$0.15 $0.055$37,000 $53,000 $0.325 $0.015 $0.015 $0.00 -$0.15 $0.205$53,000 $63,000 $0.325 $0.015 $0.015 $0.00 -$0.15 $0.205$63,000 $66,667 $0.325 $0.015 $0.015 $0.00 -$0.15 $0.205$66,667 $80,000 $0.325 $0.015 $0.00 $0.00 -$0.15 $0.190$80,000 $180,000 $0.37 $0.015 $0.00 $0.00 -$0.15 $0.235$180,000 over $0.45 $0.015 $0.00 $0.00 -$0.15 $0.315

Table 2: The net tax benefit for every $1 salary sacrificed into super

Table 1: The changing ideal TTR client

1 July 2007 to 30 June 2009 1 July 2009 to 30 June 2012 1 July 2012 onwardsConcessional contribution cap $100,000 $50,000 $25,000Super account $600,000 $300,000 $175,000Employment income $119,266 $73,395 $44,196Salary sacrifice $89,266 $43,394 $21,022Tax-free pension payment1 $56,121 $29,274 $15,633Taxable income2 $30,000 $30,001 $23,174Personal income tax $2,350 $2,250 $348Total tax paid – tax saved3 $23,755 $10,713 $3,436Net super position $24,255 $8,913 $2,236Net benefit $44,010 $19,626 $5,672Additional value addsCo-contribution4 Low income tax offset Mature age workers tax offset4 1The same after-tax income is derived without the TTR strategy being used. 2Calculated on the tax scales for the last financial year for period included within each scenario. 3Tax saving on the pension account is calculated based on all of the super account balance being used within the pension. Assumed rate of return rate is 4 per cent and tax rate of 15 per cent. 4The co-contribution and mature age workers tax offset was impacted at 1 July 2009 by the inclusion of salary sacrifice contributions when calculating the entitlement or amount.

Tax saving = marginal tax rate x $1.LITO = low income tax offset (LITO) x $1.MAWTO = mature age workers tax offset (MAWTO) x $1 and note MAWTO does not improve due to salary sacrifice arrangements.Contributions tax = superannuation contribution tax payable on salary sacrificed contribution x $1.Total benefit = net tax benefit received by taxpayer for every $1 salary sacrificed in specified income range x $1.

Legend$18,200 Tax-free threshold $20,542 Medicare levy lower threshold$20,542 Effective tax-free threshold including LITO$23,174 Adjusted effective tax-free threshold including MAWTO and LITO$24,167 Medicare levy upper threshold$37,000 LITO lower threshold$53,000 Phase out MAWTO$63,000 Nil MAWTO$66,667 LITO upper threshold

Continued on p30



Going back to basics for existing clients who have TTR strategies It is important to highlight the reduced benefit of the strategy with your clients due to the standard $25,000 concessional contribution cap, but then complete an analysis of the difference between ceasing the strategy or continuing it based on the $25,000 concessional contribution cap. Along the way make sure you reconfirm the basic fundamentals of the strategy with your client before making the decision to continue or stop it.

Consider current investment market conditions Some advisers have considered ceasing to recommend TTR strategies due to the current market conditions, however, it should continue to be recommended to new and existing clients. The pension payments should be funded from sufficient cash within the portfolio (at least two to three financial years of pension payments in cash and fixed interest investments) and no growth assets are being sold to fund the pension payments.

If your client ceases their TTR strategy, they may lose the net benefit, however you need to complete an analysis to determine the actual cost to the client and reduction to their retirement savings by solely salary sacrificing into super.

How to drive the value further for TTR Though the benefit of the strategy to clients can be marginal for some clients, especially when the cost of advice (including administration and product costs) is taken into account, you should consider the following ideas to enhance the strategy:

Consider receiving pension payments of 19 per cent Clients wishing to maximise the amount they can draw from super should consider taking the maximum pension payment of 10 per cent which is not pro-rated either side of 1 July. This means the total pension payment is 19 per cent of the commencement value of the non-commutable account-based pension.

For example: $25,000 calculated on 10 per cent of $250,000 before 30 June and $22,500 calculated on 10 per cent of $225,000 (calculation: $250,000 - $25,000). This means a total pension payment of $47,500 either side of 1 July or 19 per cent (calculation: $47,500 divided by $250,000).

Consider a combined TTR strategy across couples This involves the higher income earner salary sacrificing into super whilst their lower income earning partner commences the pension. The obvious benefit is the reduced taxation saving on the pension income but this is dependent on the lower income earning partner having a sufficient super balance given the annual pension payment is capped at 10 per cent of the pension account.

Increase the tax-free component for clients

aged 55 to 59Personal non-concessional contributions can improve the tax effectiveness of the pension payments. However, if these contributions are made into an existing super account, then your client may be caught out by the proportioning rule. The pension payments will be drawn proportionally from the components which are determined at the commencement of the pension. This also means a portion of the pension payments will be assessable income for taxation purposes, with the 15 per cent

No TTR TTRPersonal income tax Employment income $44,196 $44,196Less salary sacrifice $0 $21,022Plus transition to retirement pension payment $0 $15,633Taxable income $44,196 $23,174Less gross income tax payable $5,911 $945Less Medicare levy $663 $348Plus low income tax offset $337 $445Plus mature workers tax offset $500 $500Total tax payable1 $5,737 $348 Income after tax $38,459 $38,459Less non-concessional contribution $182 $182Adjusted income after tax $38,278 $38,278 Net super position Superannuation guarantee $3,978 $3,978Salary sacrifice $0 $21,022Total contributions $3,978 $25,000Less tax on super contributions $597 $3,750Non-concessional contribution $182 $182Co-contribution entitlement $91 $91Net contributions $3,653 $21,522Less pension payments $15,633Total $3,653 (a) $5,889 (b)Net benefit (a - b) $2,236 Total tax paid Personal income tax $5,737 $348Contributions tax $597 $3,750Tax saving on pension account investment earnings - -$1,200Total $6,334 (a) $2,898 (b)Total tax saving (a - b) - $3,436 Total net benefit Net superannuation position - net benefit $2,236Total tax paid - total tax saving $3,436Total $5,672

1. 2012/13 marginal tax rates applies.

Table 3: An ideal client post 1 July 2012

CPDQUARTERLY

tax offset applying. Instead, you might want to focus your strategy on 100 per cent tax-free pension payments to improve your client’s TTR strategy (as outlined below).

Important: You should consider appropriate recommendations for your clients should their super account balance exceed the $500,000 limit and if the tax efficiency of their strategy reduces. You need to decide if alternative strategies are required.

Obtain 100 per cent tax-free pension payments for clients aged 55 to 59You could consider whether the personal non-concessional contribution can be made into a new pension account in order to commence a 100 per cent tax-free pension4. Once the pension is established, the client’s existing account can be rolled over. Conversely, you could also consider contributing a personal non-concessional contribution into the super account of the client’s spouse which has a low or nil balance.

Combine TTR with other contribution typesConsider combining other contribution types, such as the co-contribution or the low income superannuation contribution, in addition to a TTR strategy. In fact, your client may be better off taking advantage of the co-contribution before salary sacrificing, given the proposed changes to the co-contribution arrangements.

The new ideal TTR client When looking for the new TTR sweet spot, you should target clients who are over age 60 and earning $44,196 per annum. They can salary sacrifice $21,0225 into super, which means they don’t pay personal income tax and an overall tax rate of 7.46 per cent (calculation: $2,898 / $38,807) versus 14.33 per cent (calculation: $6,334 / $44,196). Most importantly, the total net benefit of the strategy is $5,668 (as shown in Table 3).

Summary The future of the concessional contribution caps is uncertain at this stage, but for clients with super or pension accounts less than $500,000, it is important to keep their TTR strategy in place even if the net benefit (after advice and product fees) is small. For the rest of your clients, welcome to the new reality of the standard $25,000 contribution cap.

Let’s be honest, most of your clients will be unhappy with the reduction in the effectiveness

of their strategy. It is advisable to revisit the basic fundamentals with the client and discuss with them how it can still boost their retirement savings.

Forget how good it was in the past, take a critical look at the net benefit derived by the strategy for 2012/13 and look forward until 1 July 2014 when the higher contribution caps (hopefully) come out. •Damian Hearn is National Manager – Technical Services, IOOF.

1. Bob age 61. is planning to commence a transition to retirement strategy in June 2013. His maximum pension payment will be calculated by his superannuation fund on his $250,000 pension account balance. The maximum pension payments Bob could receive for the 2012/13 and 2013/14 financial years are? a. A $25,000 pension payment prior to 30 June 2013 and a further $20,000 pension payment after 1 July 2013.b. A pro-rated maximum pension payment prior to 30 June 2013 and a further $25,000 pension payment after 1 July 2013. c. A $25,000 pension payment prior to 30 June 2013 and a further $22,500 pension payment after 1 July 2013.d. None of the above.

2. Low income earning clients who are eligible for the mature age workers tax offset could salary sacrifice their employment income into super. However, they should make the decision to:a. Remain within the concessional contribution cap and target the effective tax-free threshold of $20,542.b. Remain within the concessional contribution cap

and target adjusted effective tax-free threshold of $24,784.c. Remain within the concessional contribution cap and target the adjusted effective tax-free threshold of $23,174. d. All of the above.

3. When salary sacrificing into super as part of a transition to retirement strategy, a client can reduce their adjusted taxable income to qualify for the low income superannuation contribution?a. Trueb. False

4. The inclusion of the tax saving on the pension account within the cost benefit analysis of a transition to retirement strategy is essential. However, the assumed investment earnings should be limited to:a. Income producing assets only.b. Income producing assets and capital gains that are generated during the financial year.c. Standard investment returns such as income and growth. for the client’s risk profile to ensure the integrity of the calculation.d. None of the above.

Questions

Footnotes1 The low income tax offset threshold has increased from $30,000 to $37,000. Your clients are entitled to receive the offset if their taxable income is below $66,667. The maximum value of $445 begins to be phased out at the reduced rate of 1.5 cents for each dollar of taxable income over $37,000. 2 The maximum mature age workers tax offset of $500 applies when a client’s net income is less than $53,000.3 The figure includes the reduction in the net contributions into superannuation after taking into account contributions tax and pension payments. The increased personal income has been included within the figure but the taxation scales used for both financial years included Medicare levy for a single person and tax offsets (such as the low income tax offset and mature age workers tax offset). A pension account of $400,000 is used and the same net income after tax is derived for each scenario. The taxation saving on the pension account is excluded due to the constant $400,000 pension account balance being used across both financial years.4 Advisers should steer clear of schemes to avoid the proportioning rule as this can be captured under the anti-avoidance provisions of the Income Tax Assessment Act 1997. It is important to note that acceptable strategies can be recommended to clients to achieve tax-free pension payments for ages 55 to 59. If you are concerned about this speak to your dealer group.5 The effective tax free threshold is $20,542 factoring in the low income tax offset (LITO) of $445. However, the mature age workers tax offset (MAWTO) means the client’s taxable income is reduced to $23,174. This means the MAWTO of $500 increases the effective tax free threshold to $23,174 (calculation: $500 divided by 19 per cent marginal tax rate plus $20,542).




Owners of certain assets used in small businesses may be entitled to capital gains tax (CGT) concessions upon such assets being sold. There are broad eligibility requirements that apply to claiming the concessions. Generally speaking, these requirements seek to ensure that the concessions are available on assets utilised in businesses that are a ‘Small Business Entity’.

While additional specific conditions apply to each of the CGT concessions available, this article will focus on the broad eligibility requirements. The specific conditions applying to each concession will be addressed in a future edition of Financial Planning magazine, together with some of the strategic issues that need to be considered.

Please note, the eligibility requirements for the CGT concessions are complex and clients should always be referred to a specialist tax adviser to obtain specific advice.

Broad Eligibility RequirementsIn order to meet the broad eligibility requirements, one of the following conditions must be satisfied when the asset is sold:

• The business is a small business entity.

• Where a business is not carried on by the owner of the asset, the asset is used in a business carried on by a small business entity that is affiliated with, or connected to, the owner of the asset (referred to as passively held assets).

• The owner of the asset is a partner in a partnership that is a small business entity.

• The maximum net asset value test is satisfied.

In addition, even if one of the above conditions are satisfied:

• It is necessary for the asset to satisfy the active asset test.

• If the asset is a share in a company or an interest in a trust, the individual claiming the concession must be a CGT concession stakeholder. Further, additional requirements apply if an interposed entity exists between the CGT concession stakeholders and the company or trust in which the shares or interests are held.

If these requirements are not satisfied, then the business does not qualify for the concessions even if it satisfies the specific conditions relevant to one or more of the concessions.

In order to understand how the broad eligibility requirements operate, it is important to understand a number of key terms. These key terms have been bolded above and are examined further below.

Small Business Entity (SBE) A Small Business Entity (SBE) is where an individual, partnership, company or trust is,

• Carrying on a business, and

• Has aggregated annual turnover

Small Business CGT Exemptions

FRANK CAMILLERI Shadforth Financial Group



Includes

• CGT Concession

Stakeholder

• Small Business Entity

• Active Asset Test

–– Please note, the eligibility requirements for

the CGT concessions are complex and clients should

always be referred to a specialist tax adviser to

obtain specific advice.


CPDQUARTERLY

of less than $2 million.

Importantly, in determining whether a SBE’s turnover is less than $2 million, the turnovers of other connected or affiliated entities are taken into account. Whether an entity is connected to or an affiliate of the SBE is complex and can include an individual’s spouse and/or children (see below).

The objective here is to ensure that only genuine SBEs benefit from the CGT concessions, as larger businesses do not have an opportunity to restructure, so that parts of the overall business qualify.

Generally, it is the turnover from the prior income year which is relevant in determining whether a business is a SBE, however, in certain circumstances, it is possible to use an estimate of current year turnover.

Passively Held Assets This basic condition generally allows access to the concessions where the owner of the asset is not carrying on a business, but that asset is used in the business of an entity connected with, or affiliated to, the owner (see below). The requirement can only be satisfied if the asset is held ready for use in, or is inherently connected with, the business of the affiliated or connected entity.

Maximum Net Asset Value test To pass this test, the assets of the business must not be greater than $6 million just before the CGT event that results in the capital gain. Again, in determining whether this test is satisfied, the assets of connected and affiliated entities need to be taken into account (see below).

Partnership CGT rules operate on the basis that a partner in a partnership carries on the partnership business collectively with the other partners. However, a partner cannot be a small business entity. It is the partnership that must satisfy the small business entity test outlined above.

Certain elements of the conditions to be classified as an SBE vary to some extent where a partnership is involved. It should be noted that the maximum net asset value test applies

differently so that it is the individual partners in the partnership that determine their eligibility for the small business CGT concessions, and not the partnership.

Active Asset Test An asset is an active asset if;

• The asset has been owned for 15 years or less and the asset was an active asset for at least half the period of ownership; or if

• The asset has been owned for more than 15 years and the asset was active for at least 7.5 years.

An asset is an active asset if it is used, or held ready for use in the course of carrying on a business. Certain intangible assets (such as ‘goodwill’) that are inherently connected with the business may also be an active asset. In

Individual Direct Interest in ABC Unit Trust Indirect interest in operating company1

Bill 5% 3.75%Jennifer 65% 48.75%Nicky 30% 22.50%

Case Study 1 - CGT Concession Stakeholder

Consider the following ownership structure:

In this situation, the direct interest in the ABC trust and the indirect interest in the operating company of Bill, Jennifer and Nicky is as follows:

The ABC unit trust and operating company has Jennifer and Nicky as CGT Concession Stakeholders. However, while the concessions may be available to Jennifer and Nicky if units are sold in the ABC unit trust, they would not be available if shares are sold in the operating company. Because there is an interposed entity between Jennifer and Nicky and the operating company, the Small Business Participation Percentage (SBPP) of CGT CS in the Operating Company needs to be at least 90 per cent. However, the combined value of their SBPP is only 71 per cent.

Bill

5% of distributions

Jennifer

75% of the Ownership

65% of distributions

ABC Unit Trust

Operating Company

Nicky

30% of distributions

Continued on p34

Footnote1 The indirect interest is the product of the individual’s ownership in the ABC Trust and the ABC Trust’s ownership in the Operating Company. For example, in Jennifer’s case, 65% x 75% = 48.75%.

addition, shares in company or an interest in a trust can be an active asset but for such assets to be active, certain additional requirements must be satisfied.

However, some assets cannot generally be active assets and are hence not eligible for the small business CGT concessions. For example, a rental property or an asset subject to depreciation, are not generally active assets.

CGT Concession Stakeholder (CGT CS)An individual is a CGT concession stakeholder (CGT CS) of a company or trust if they are a significant individual. An individual is a significant individual if they have a small business participation percentage (SBPP) of at least 20 per cent. In simple terms, a SBPP generally represents the number of shares the individual owns in the company or the extent to which they receive distributions from a trust. Where an individual is a CGT CS, their spouse

will also be a CGT CS provided they have a SBPP, even if it is below 20 per cent.

Note also that the SBPP can be held directly or indirectly through one or more interposed entities. Where there is an interposed entity, the SBPP of all CGT CS in that entity must be at least 90 per cent to be eligible for the concessions.

This is highlighted in Case Study 1.

Affiliations or ConnectionsThe concept of an entity being connected with, or affiliated to, the owner of an asset is relevant for various aspects of how the small business concessions are applied in practice. For example, the owner of a passively held asset must be connected with or affiliated to the small business entity that uses the asset, for the owner to be broadly eligible to the concessions.



Connect with Vanguard™ The indexing specialist > vanguard.com.au/costsmatter > 1300 655 205

At Vanguard, we have a long history of using our scale and experience to keep costs to a minimum for our investors. We’re now pleased to announce even lower fees on our biggest wholesale index funds – including the Vanguard® Australian Shares Index Fund and the Vanguard® International Shares Index Fund.*

*The reduced fees will be effective 1 August 2012. **Vanguard research based on Morningstar data and definition of 'wholesale fund'. ©Morningstar 2012. All rights reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied, adapted or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past financial performance is no guarantee of future results.Vanguard Investments Australia Ltd (ABN 72 072 881 086 / AFSL 227263) is the product issuer. We have not taken your or your clients’ circumstances into account when preparing this publication so it may not be applicable to the particular situation you are considering. You should consider your or your clients’ circumstances and our Product Disclosure Statements (PDSs) before making any investment decision or recommendations. You can access our PDSs at www.vanguard.com.au or by calling 1300 655 205. Past performance is not an indication of future performance. This publication was prepared in good faith and we accept no liability for any errors or omissions. © 2012 All rights reserved. ‘Vanguard’, ‘Vanguard Investments’, ‘LifeStrategy’ and the ship logo are trademarks of The Vanguard Group, Inc.

We’ve hit new lows. Because costs matter.

We recognise the significant impact that costs have on investment returns. And with some of our fees dropping to only a fifth of the industry average**, your clients now have a greater chance of investment success.

Introducing even lower fees on Vanguard’s biggest index funds.

–– The concept of an entity being connected with, or

affiliated to, the owner of an asset is relevant for various

aspects of how the small business concessions are

applied in practice.


CPDQUARTERLY

1. Which of the following is not one of the broad eligibility requirements for the small business CGT concessions?a. The business is a small business entity.b. The maximum net asset value test needs to be satisfied.c. The asset needs to be an active asset.d. The business must not be incorporated.

2. To be considered a small business entity, a business, and its affiliated or connected entities, must have aggregate turnover of less than:a. $2 million.b. $3 million.c. $5 million.d. $6 million.

3. An individual is a significant individual of a company or trust if they have a small business participation percentage of:a. 10% b. 15%c. 20%d. 25%

4. Is the general CGT discount applied to the gross capital gain prior to the application of the small business CGT concessions?a. Yesb. No

Questions

Case Study 2 - General 50% CGT Discount and Captial Losses

Phil (aged 52) is the owner of a manufacturing business. During the year, he sold two assets and received net sale proceeds of $350,000. One has a gross capital gain of $60,000 and the other a $10,000 capital loss. Phil’s business meets the broad eligibility requirements to be eligible for the small business CGT concessions. He is also eligible for the general 50 per cent discount on both assets. Phil’s net capital gain prior to considering his eligibility to the small business CGT concessions is as follows:

AmountGross Capital Gain $60,000Less Current Year Losses $10,000Net Capital Gain $50,00050% General CGT Discount $25,000Net Discounted Capital Gain $25,000

Therefore, Phil has a $25,000 net capital gain to which he can apply one or more of the small business CGT concessions.

An individual or company is the affiliate of the owner of the asset if in relation to their business affairs they act or could reasonably be expected to act, according to the owner’s directions or wishes. In certain circumstances, an individual’s children and/or spouse can be taken to be their affiliate. In addition, an entity is connected with another entity if either entity controls the other, or both entities are controlled by the same third party.

General 50% discount and capital lossesIt is important to note that the general 50 per cent CGT discount and capital losses are taken into account prior to determining the capital gain which may be eligible for one or more of the CGT concessions. Regardless of the circumstances, the nominal capital gain must be reduced by any current year or carried forward losses and if eligible, the general 50 per cent discount must be applied. (See Case Study 2.)

SummaryIt can be seen that the broad eligibility requirements are complex, particularly where a company and/or trust forms part of the small business entity’s legal structure. It is vitally important that the owners of the asset receive advice prior to selling the asset to ensure they satisfy the eligibility requirements. Despite all the legislative and regulatory guidance available, often the situation is not clear.

The role of the financial planner is not to provide specific advice in this area but to

be able to discuss the broad issues with the client and ensure they understand the need to receive specialist advice prior to any decisions being made. •Frank Camilleri CFP® is Group Technical and Professional Development Manager, Shadforth Financial Group.

–– It is vitally important that the owners of the asset receive

advice prior to selling the asset to ensure they satisfy the

eligibility requirements. Despite all the legislative and regulatory

guidance available, often the situation is not clear.


A survey commissioned by the Financial Services Council (FSC)1 revealed that only 5 per cent of families with dependent children in Australia hold adequate life insurance. The National Institute of Social and Economic Modelling (NATSEM)2 estimated that this underinsurance will cost the Government $1.3 billion over the next 10 years.

While the MySuper provisions will provide automatic term life and TPD insurance within super, the level of insurance may not be adequate for each family’s needs. In addition, automatic insurance may not be provided where a super product other than MySuper is chosen. Altogether, this provides a golden opportunity for financial advisers to reach out to Australian families to address gaps in their life insurance cover.

One of the main objections to insurance is that families simply cannot afford it due to the rising cost of living. Insurance through super provides a viable solution. It allows life insurance to be funded from mandatory employer contributions and/or the accumulated balance rather than disposable income; or alternatively through tax-effective voluntary concessional contributions.

Due to the complexity of the super system and constant legislative change, it is understandable that some advisers veer away from life insurance inside super. This article discusses strategies that can be used to overcome perceived barriers.

Tax concessions from holding insurance inside superAs discussed above, insurance is

quite often held within super because the premiums can be paid from the accumulated super balance, employer contributions, or voluntary concessional contributions (salary sacrifice or if they are an eligible person3, personal deductible contributions).

Case Study 1 explores how voluntary concessional contributions can be used to tax-effectively fund insurance inside super.

However, holding insurance inside super can create extra complexity as:

• insurance proceeds must meet a super condition of release before being released (proceeds may become trapped inside super);

• tax on insurance proceeds may apply to some insurance payments from super, when most are received tax-free when insurance is held outside super;

• the retirement savings balance may be reduced if contributions/the accumulated balance is used to fund premiums;

• the insurance products offered within super may have less product features;

• payment of insurance proceeds

may take longer due to the additional process within super; and

• beneficiaries for term life payments are generally restricted to dependants under super law.

I shall address each of the above issues and offer a strategic solution to each.

Release of insurance proceeds from superA super condition of release must be met to release any super; whether the payment is funded by the accumulated balance or insurance proceeds, or both.

With term life insurance, there is usually no issue with release of proceeds from super as ‘death’ is a condition of release. Furthermore, income protection proceeds are generally released under the ‘temporary incapacity’ condition of release that allows a non-commutable income stream to be paid to the individual.

However, neither a ‘Total and Permanent Disability’ (TPD) nor ‘trauma’ condition of release exists for TPD and trauma proceeds paid to the super fund.

Removing barriers to insurance inside super

RACHEL LEONGSuncorp



Includes

• Tax concessions from

holding insurance

inside super

• Effect on retirement

savings

• Beneficiaries for term

life insurance

Grace earns $85,000 per annum in 2012/13. Her insurance premiums are $1,500 per annum for $1 million term life cover. If Grace used her after-tax income, she would have to use $2,4394 of gross income. However, if Grace chose to hold her term life insurance inside super, she would need to salary sacrifice only $1,5005. Effectively, no tax has been paid on this contribution compared to paying 38.5 per cent marginal tax if insurance is held outside super.

Case Study 1


CPDQUARTERLY

Continued on p38

Generally, individuals will apply for release of their TPD or trauma insurance proceeds through the ‘permanent incapacity’ condition of release. The super fund trustee must be ‘reasonably satisfied that the individual is unlikely to engage in gainful employment for which they are qualified for by training, education or experience’. This criterion may be different from the insurer’s criterion to pay insurance proceeds for TPD or trauma.

The ‘any occupation’ TPD insurance definition, although it can still differ from the super release criteria, is closer than the ‘own occupation’ TPD insurance definition. Therefore, if an individual has a specialist occupation and requires own occupation TPD insurance, holding insurance outside super may be a preferable option.

Strategy: TPD splitting The issue of TPD preservation has largely been addressed by product enhancements such as TPD splitting. TPD splitting is where a TPD any occupation policy is held inside super jointly with a TPD own occupation policy outside super. As it is a joint policy, the cost is lower than two separate policies.

Insurers will generally pay insurance proceeds for trauma upon the diagnosis of a critical illness such as a heart attack or cancer. This is quite different from the super fund’s release condition for permanent incapacity as described above. While TPD and trauma held inside super may not be suitable for all individuals, it may be a viable option for those approaching retirement.

Strategy: Consider older individuals Own occupation TPD insurance inside super for clients approaching age 55 may be a suitable option as they are likely to satisfy the permanent retirement condition of release. Similarly, trauma insurance inside super for clients approaching age 60 could be considered as proceeds will be released if they terminate an employment arrangement. If employment termination does not occur, proceeds will be preserved within super for a maximum of five years (until they reach age 65), however, the upside is they may be earning income in the meantime.

Brenda (age 55, DOB 1/1/1957) is employed by her own company ABC Pty Ltd. This company is valued at $500,000, with an adult son Paul (age 27) as the successor and a non-tax dependant. Brenda’s marginal tax rate is 34 per cent (including Medicare levy).

Life insurance is in place for $500,000 so that her other son, Dave, receives half her estate upon her death.

Other relevant information for Brenda:

• Eligible Service date (ESD) for Brenda is noted as 1/1/1992.

• Brenda passes away on 1/1/2012.

• Premium cost is $1,4216 per annum.

The table below compares the real insurance cost of a death benefit paid to a non-tax dependant when:

– Outside super: assumes that life insurance is purchased outside super and the premiums are funded from after-tax dollars, and

– Inside super: assumes that life insurance is purchased inside super and the premiums are funded from pre-tax salary sacrifice contributions.

While the premium for $500,000 term life cover is $1,421 outside super, the premium cost is paid from after-tax dollars, so the real cost is $2,153 ($1,421/0.66), as a marginal tax rate of 34 per cent applies.

If the insured amount within super is grossed-up to $636,946 to cover the tax of $136,946,

the real cost of the premium is $1,788 (assuming the 15 per cent contributions tax is offset by the tax deduction insurance claimed by the super fund).

The amount of tax payable when insurance is held within super is calculated as follows:

Taxable (taxed) component = $636,946 x 7,3057/10,9588 = $424,611

Tax @16.5% = $424,611 x 16.5% = $70,061

Taxable (untaxed) = $636,946 - $424,611 = $212,335

Tax @ 31.5% = $212,355 x 31.5% = $66,886

Total tax payable = $136,946

Net proceeds = $636,946 - $136,946 = $500,000

Holding insurance inside super attracts tax of $136,946 upon Brenda’s death. Therefore, to ensure that Dave receives the intended amount of $500,000, the sum insured is increased to an amount of $636,946. The premium cost for a sum insured of $636,946 is $1,788 and represents the real cost to Brenda when insurance is held inside super.

The above analysis demonstrates that holding his life insurance inside super will cost $365 less annually than if life insurance is held outside super. That is a premium saving of 17 per cent. Even with the higher insured amount inside super, the real cost is less than the cost of holding insurance outside super.

Case Study 2

Outside super Inside superNet term life proceeds required $500,000 $500,000Tax on proceeds N/A $136,946Sum insured $500,000 $636,946Premium $1,421 $1,788Real cost $2,153 $1,788



Tax on insurance proceedsIf insurance is held through super and proceeds are released, there may be additional tax to pay compared to holding term life, TPD and trauma insurance outside super. Note that the tax treatment of income protection proceeds will be exactly the same whether insurance is held inside or outside super.

Term life insurance If term life insurance is paid to a non-tax dependant, up to 31.5 per cent tax may be payable on the benefit. The term life insurance proceeds will be added to any accumulated super balance and a proportion will be calculated as the taxable (taxed) component. The remainder will be made up of a taxable (untaxed) component and tax-free component.

The following tax rates apply for payments to non-tax dependants:

Strategy: Grossing up the sum insured In the event that tax will be payable on a lump sum death benefit, the insured amount may be grossed up to offset the tax. In most cases, the real cost for the larger sum insured still works out cheaper inside super.

See Case Study 2.

TPD and traumaTPD and trauma proceeds paid from super may incur super lump sum tax if paid to someone under age 60.

Table 1 are the tax rates that apply for TPD and trauma payments from a taxed source:

Strategy: Grossing up the sum insured A similar strategy for TPD and trauma insurance can be employed where the sum insured is grossed-up to offset any tax payable.

Effect on retirement savingsIf insurance is held through super, retirement

savings may be depleted if contributions are not made and premiums are funded from the account balance. However, when personal contributions are made into super to fund insurance for low-income earners, this can actually increase retirement savings.

Building retirement savings is particularly important for low-income earners, as they typically have lower retirement savings balances compared to higher income earners.

Strategy: Access the Government co-contribution If non-concessional contributions are made by individuals with income less than $46,920 (proposed for 2012/13), the Government co-contribution may be payable. If insurance premiums inside super are less than non-concessional and Government co-contributions; retirement savings may be higher compared to funding insurance premiums through disposable income, when insurance is held outside super.

Product features The product features available with insurance products offered through super may be restricted/limited compared with those offered with insurance products outside super. This is because the super fund cannot offer an insurance product that would contravene the sole purpose test.

Strategy: Reassessment of product feature requirements Clients should consider whether the additional features on non-super products are really necessary and therefore worth paying the additional premium for. If it is deemed unnecessary to pay for the additional features, the product offered within super may be an appropriate choice.

Timing of paymentsWhen insurance is held through super, this creates an additional process to be followed before the individual or beneficiary receives the proceeds. Not only must the insurer assess whether the individual has met their definition for release of the insurance proceeds into the super fund; the super fund trustee must then determine whom to make a payment to, according to a binding nomination or through trustee discretion.

Strategy: Ensure correct information is provided When a super fund trustee pays a death benefit, it will be according to a valid binding nomination, otherwise trustee discretion will be exercised. If a valid binding nomination is in place, this will expedite the payment of the death benefit. Therefore, if the client ensures that their binding nomination is kept up-to-date and the beneficiary is valid under super law, the death benefit will be released without further delay.

Component Tax rate (including Medicare Levy)Tax-free 0%Taxable (taxed) 16.5%Taxable (untaxed) 31.5%

Note: payments to tax dependants are tax-free.

Component Age Tax rate (including Medicare Levy)Tax-free Any 0%ºTaxable Under preservation age (currently 55) 21.5% Preservation age <60 16.5% (if over $175,000 - 2012/13) 60 or older 0%

–– With the tax advantages of paying premiums from pre-tax

dollars, as well as the ability to use another source of money aside from disposable income;

insurance inside super should be seriously considered.


Table 1: Tax rates

CPDQUARTERLY

With TPD, ensuring that the correct medical certificates are obtained quickly will speed up the process for release of proceeds and calculation of the disability super benefit (if applicable).

Beneficiaries for term life insuranceIf insurance is held within super, the proceeds form part of the accumulated balance and fall under normal super rules. Therefore, payments can generally only be made to the individual’s estate or their dependants (as defined under super law). The trustee of the super fund will only pay a non-dependant if they have exhausted all other avenues.

If insurance is held outside super, there are generally no restrictions on who can be nominated as a beneficiary.

Strategy: Nominate beneficiaries through the Will If the estate is nominated in a binding nomination, the nomination will remain valid for at least three years (sometimes indefinitely if the binding nomination is non-lapsing). Therefore, as long as the nomination is updated a maximum of every three years, the Will dictates how the super death benefit is distributed.

While the same tax outcome will occur regardless of whether the death benefit is paid directly from the super fund or through the estate, the benefit of distributing proceeds via the estate is that the executor does not have to identify dependant beneficiaries before non-dependant beneficiaries. That is, the executor is able to pay the nominated beneficiary as identified in the Will, without being concerned about super law.

SummaryWhile there appear to be many barriers to holding insurance inside super, there are also strategies that can be employed to overcome those barriers. With the tax advantages of paying premiums from pre-tax dollars, as well as the ability to use another source of money aside from disposable income; insurance inside super should be seriously considered. Advisers can use the practical strategies discussed in this article to minimise, and often eliminate, potential issues. •Rachel Leong is Technical Strategy Manager, Key Accounts and Operations at Suncorp.

1. The benefit of holding insurance inside super includes:a. Premiums can be funded from pre-tax dollars. b. Premiums can be funded from mandatory super contributions. c. Premiums can be funded from the accumulated super balance. d. All of the above.

2. If a client would like their sister to receive term life proceeds held through super, they could:a. Gross-up the sum insured to allow for death benefit tax. b. Ensure that their binding nomination is made to the estate and is valid. c. Ensure that their Will directs the proceeds to the sister.

d. All of the above.

3. If a client under age 60 requires own occupation TPD, it is worthwhile considering:a. Grossing up the sum insured and/or TPD splitting. b. Grossing up the sum insured and/or maintaining a valid binding nomination. c. Reducing the sum insured and/or TPD splitting. d. Reducing the sum insured and/or maintaining a valid binding nomination.

4. An executor of an estate is bound by the:a. Super Industry Supervision Act 1993. b. Super Industry Supervision Regulations 1994. c. All of the above. d. None of the above.

Questions

Footnote1 FSC 2005 research – lifewise.org.au2 The Lifewise/NATSEM Underinsurance Report 2010.3 An eligible person is a self-employed, substantially self-employed, retired or unemployed person. It also includes anyone who derives less than 10% of total assessable income, reportable fringe benefits, and reportable employer super contributions from employment as an employee.4 $2,439 x 38.5% = $939. $2,439 – $939 = $1,500.5 The contribution does not generally need to be grossed up for contributions tax as the super fund would normally pass on the deduction claimed on the payment of insurance premiums. Note that the Government has announced that contributions tax of 30% applies to concessional contributions for individuals with income greater than $300,000. 6 Based on a 55-year old non-smoking, female, white-collar worker.7 Service period .8 Number of days from ESD to retirement date (usually the date at age 65).

Disclaimer: The case studies in this publication are for illustrative purposes only. All information contained in this publication is of a general nature only and is intended for use by financial advisers or other licensed professionals only. It must not be handed to clients for their keeping. The information has been compiled based on regulatory policy at the time of writing. We recommend that your client refer to their professional tax or legal adviser prior to implementing any recommendations you may make based on the information contained in this publication.




When a small business owner is looking to dispose of their business and retire, two of the key considerations are minimising any capital gains tax (CGT) from the disposal of business assets, and maximising super contributions to provide tax-effective retirement income.

The small business CGT concessions have a range of general and specific eligibility criteria, which can vary depending on whether the client operates the business as a sole trader or via a partnership, company or trust. This article highlights some of the issues and common mistakes that clients may experience when looking to qualify for these concessions.

Once eligibility has been determined, it is then important to look at ways a client can efficiently utilise the lifetime CGT cap, which allows super contributions of up to $1.205 million to be exempt from the non-concessional and concessions contributions cap. This can be especially important where a client’s main assets are tied up in their business and they don’t otherwise have significant super savings.

Recap of the CGT concessionsTo be eligible to claim any of the small business CGT concessions, a number of basic conditions must be satisfied. These include that the client must generally meet either a $6 million dollar net asset value test or a $2 million aggregated turnover test, and that the assets qualifying for CGT relief must meet an active asset test. Additional requirements also apply where the assets

qualifying for CGT relief are shares in a company or trust interest.

Once these basic conditions are satisfied, they could look to apply one (or in some cases more) of the following specific small business CGT concessions.

• 15-year exemption (disregards all capital gain from the sale of an asset);

• Small business active asset reduction (reduces assessable capital gain by 50 per cent);

• Small business retirement exemption (exempts capital gain up to a lifetime limit of $500,000); and

• Small business rollover.

With the exception of the small business active asset reduction, these specific concessions each have one or more additional conditions which must be met to qualify. These conditions often vary depending on the client’s age, and whether the client claiming the exemption is an individual, company or trust.

While it is important for the adviser to have an understanding of the eligibility criteria, it is important they should always confirm a client’s eligibility and amounts claimed under each small business CGT concession with their accountant or tax adviser.

Superannuation – the lifetime CGT capIn recognition that small business

Planning for a retirement from small business

TIM SANDERSONColonial First State



Includes

• Recap of the CGT

concessions

• Lifetime super

contribution cap

• Mistakes when claiming

small business CGT

–– While it is important for the adviser to have

an understanding of the eligibility criteria, it is important they should

always confirm a client’s eligibility and amounts

claimed under each small business CGT concession with their accountant or

tax adviser.


CPDQUARTERLY

owners invest and maintain much of their overall wealth in their business throughout their working lives, a separate lifetime super contribution cap (currently $1.205 million) allows retiring business owners to contribute certain eligible small business proceeds to super, without having them count towards either the concessional or non-concessional contribution caps. The following amounts can be contributed to super and counted towards the lifetime CGT cap:

• Proceeds from the sale of an asset that qualified for the 15-year exemption;

• Proceeds from the sale of an asset that would have qualified for the 15-year exemption, but failed to qualify only because the asset was a pre-CGT asset, there was no CGT on the disposal, or the asset had to be sold within 15 years due to permanent incapacity;

• Capital gains exempt under the small business retirement exemption.

A clear difference arises here depending on whether the client has claimed the 15-year exemption or the small business retirement exemption. In the case of the 15-year exemption, total asset sale proceeds can be contributed under the lifetime CGT cap, whereas in the case of the small business retirement exemption, contributions under the lifetime CGT cap are limited to exempt capital gains only.

There are also strict timeframes regarding when these eligible proceeds must be contributed in order to count toward the lifetime CGT cap. Where an individual is claiming the small business CGT concessions, a contribution must generally be made by no later than the day the client is required to lodge their tax return for the income year of the CGT event or 30 days after receiving the capital proceeds from the CGT event (whichever is later). Where a company or trust is claiming the concessions and makes a payment to a CGT concession stakeholder, a contribution must generally be made no later than 30 days after receiving the payment.

Another critical requirement when looking to contribute eligible small business proceeds

under the lifetime CGT cap is that the client must submit to their super fund a CGT cap election form either at or before the time the contribution is made. If this is not done, the contribution will likely count toward the client’s non-concessional contributions cap instead, which could lead to a substantial excess contributions tax bill.

Common issues and mistakes to be aware of when claiming small business CGT concessionsIncorrectly identifying assets counted under the net asset value test When looking to qualify for the small business CGT concessions using the net asset value test, it is important firstly to include all relevant assets, which will often extend beyond those owned personally by a client, but exclude certain assets.

As an example, Col and Kate personally own business assets worth $4 million and loans relating to the business assets of $500,000. They also own a share portfolio ($500,000), principal home ($1.5 million), home contents ($30,000) and superannuation ($100,000 each).

Col and Kate also own 50 per cent of the CK Unit Trust, which owns a commercial property worth $1 million (used in their business), and a residential property worth $400,000 (leased to an unrelated party).

The net asset value test includes the net value of CGT assets owned by Col and Kate, as well as those owned by any of their affiliates or connected entities1. However, personal use assets, a principal home (to the extent it is not producing income) and superannuation is specifically excluded.

Therefore, the value assessed for Col and Kate under the net asset value test would include their business assets less liabilities ($3.5 million), their share portfolio ($500,000), but not their home, home contents or superannuation. Because the CK Unit Trust is a connected entity of Col and Kate, all of its CGT assets ($1.4 million in total) must also be included. The net value of Col and Kate’s CGT assets is therefore $5.4 million.

Making full use of the active asset test without becoming ineligible for concessions Where a client is selling their business, they may wish to sell only some business assets immediately, and keep other assets beyond when their business ceases.

For example, Phil and Claire own a travel business and also the commercial property from which the business is run. Both the property and the business were purchased in 2006. They’ve just received an offer from a competitor to buy them out – a transaction which would involve Phil and Claire selling the goodwill in their business, but retaining the property and renting it out to the new buyers.

Phil and Claire meet the net asset value test and all business assets have been actively used at all times. Therefore, Phil and Claire could apply the small business active asset reduction and small business retirement exemption to reduce or eliminate the capital gain on the sale of their business’ goodwill.

But would they still be able to claim further small business CGT concessions when they sell their commercial property in the future? This will depend on whether, at the time they sell it, they still satisfy the net asset value test, and whether the active asset test is satisfied. The active asset test broadly requires that the property was actively used in their business

–– An important trap to be aware of when selling business assets some time after a business has

been wound-up is that it will generally not be possible for a

client to satisfy the definition of ‘small business entity’.

Continued on p42

for at least the lesser of half of its ownership or 7.5 years. The property was active at all times when Phil and Claire ran their business (six years in total) but ceased to be active when the business was sold.

This means that Phil and Claire can still satisfy the active asset test if they sell the property prior to 2018. Assuming they also satisfy the net asset value test at that time, it is likely that the sale of the property will then qualify for the active asset reduction and retirement exemption (subject to $500,000 lifetime limit).

An important trap to be aware of when selling business assets some time after a business has been wound-up is that it will generally not be possible for a client to satisfy the definition of ‘small business entity’. This means that to meet the basic conditions, they would need to qualify under the net asset value test.

Making full use of the active asset test to qualify for the 15-year exemption Because the active asset test does not require an asset to be active just prior to its disposal, clients who are selling a business may be able to retain certain assets, which at the time the business is sold, have not been owned for 15 years, and instead dispose of them once ownership of 15 years has been established.

For example, Jim meets the basic conditions for small business CGT relief and has owned a mechanic business (plus commercial property) since 2001. He wants to sell his business in 2012. If he also sells his commercial property at that time, it has only been owned for 11 years and will therefore only likely qualify for the active asset reduction and retirement exemption. However, if Jim keeps the property for a further four years after selling his other business assets, it will then qualify for the 15-year exemption. The active asset test remains satisfied because the property has been actively used in Jim’s business for at least 7.5 years, even though it was not used actively in the final four years.

Where business assets are owned in a company or trust Where a client owns business assets through a company or trust, they have two options when it comes to selling their business, both of which

have advantages and disadvantages as shown in the following example.

Gina owns 100 per cent of shares in GinaCorp Ltd, through which she runs her accounting business. Assets consist of goodwill, office equipment and a commercial property from which the business is run. Gina now wants to sell at least some of her business assets and use the proceeds to save for retirement.

Option 1 for Gina is to sell her shares in GinaCorp. This option requires GinaCorp to be an Australian resident company and for Gina to be a CGT concession stakeholder (not a problem in this case). Under the active asset test, at least 80 per cent of the market value of GinaCorp’s assets need to be active assets, or financial instruments or cash inherently connected with the business. One advantage of this option is that Gina could apply the 50 per cent individual CGT discount if the shares have been held for more than 12 months. The main disadvantage is that she cannot be selective about keeping some assets for sale at a future time – for example, it would not be possible to keep and rent out the property, as it is owned by the company whose shares she will dispose of.

Option 2 would involve Gina maintaining her

shares in GinaCorp and the company selling business assets. In this situation, GinaCorp may need to have a significant individual (not a problem in this case but could be problematic for more widely held companies or trusts), and the active asset test would need to be satisfied for each asset being disposed of (instead of the ’80 per cent test’ applying). GinaCorp would also not be entitled to apply the 50 per cent individual CGT discount. However, the big advantage in this situation is that, through GinaCorp, Gina could choose to sell some business assets and retain others for sale at some time in the future.

One other important consideration when selecting from the above options is the ownership period of the shares held by Gina, versus the ownership period of the assets held by GinaCorp. For example, if Gina had held her GinaCorp shares for 15 years, but GinaCorp purchased its business assets only 10 years ago, Gina may be better off electing to sell her shares as she may then qualify for the 15-year exemption, allowing all capital gains to be disregarded.

Claiming small business retirement exemption via in-specie super contribution In many cases, a client aged under 55 may wish to claim the small business retirement exemption and meet the requirement to contribute the exempt amount to a complying super fund by making an in-specie contribution of assets (eg, commercial property).

The ATO has released Interpretative Decision ID 2010/217, which confirms that where an individual aged under 55 has already sold an eligible CGT asset, they can meet the super contribution requirements of the retirement exemption by the in-specie contribution of another CGT asset (provided it can be acquired by the complying fund under superannuation law). The ID also confirms that similar logic applies where the retirement exemption is being claimed by a company or trust, which has to make a payment to a CGT concession stakeholder aged under 55 by contributing it to super on their behalf.

However, the ID does not address the more common scenario involving a client wanting to transfer an asset to super by in-specie

–– Where a client owns business assets through a company or

trust, they have two options when it comes to selling their business,

both of which have advantages and disadvantages.



CPDQUARTERLY

contribution and claim the small business retirement exemption in relation to that asset. The ATO was asked about this situation in 20112 and responded that in its view, the rules do not contemplate the CGT event, choice to use the retirement exemption and contribution to super happening simultaneously, and that the choice to apply the exemption must occur after the CGT event.

The above ATO view means that where the retirement exemption is to be claimed on the asset being in-specie transferred to super, and the client is under 55, a further super contribution of an amount equal to the gain exempt under the small business retirement exemption must be made for the retirement exemption to be claimed (either by an individual client claiming the exemption, or on behalf of a CGT concession stakeholder by a company or trust claiming the exemption).

In-specie super contributions and the lifetime CGT cap In light of the above view from the ATO, significant uncertainty remains about whether the in-specie transfer of an asset for which either the 15-year exemption or small business retirement exemption will be applied, can count towards a client’s lifetime CGT cap instead of the non-concessional or concessional contributions caps.

However, using similar logic, it is possible to conclude that the relevant CGT event would have to occur and either the 15-year exemption or retirement exemption would have to be applied before the contribution of eligible proceeds from that exemption under the lifetime CGT cap could occur.

Given this uncertainty, clients wishing to undertake an in specie contribution of assets and claim one or more small business CGT concessions simultaneously should be encouraged to seek legal advice or request a private ruling from the ATO. •Tim Sanderson is a Senior Technical Manager, Colonial First State.

1. John owns units in a unit trust from which he operates a stationery business. When working out the net asset value of a business, which of the following assets should not be included in the calculation?a. A share portfolio owned in John’s personal name. b. A commercial property leased to John’s stationery business and owned by John’s self-managed super fund. c. A residential investment property that is leased to an unrelated party and owned by the unit trust. d. Goodwill within the business.

2. When utilising the small business retirement exemption for a person under age 55, how much of the proceeds can be contributed under the lifetime CGT cap of $1.205 million?a. The entire amount received from the sale. b. Only the capital gain from the sale before other small business CGT exemptions are claimed. c. Only the portion of the capital gain that has been elected to be exempt under the small business retirement exemption. d. None of the proceeds. Only capital gains that are exempt under the 15-year exemption can be contributed under this provision.

3. Jenny owned and operated a grocery store as a sole trader for 13 years. Two years ago, Jenny sold the business to an

unaffiliated entity and retained ownership of the business premises. If Jenny were to sell the premises today, would she still be entitled to the 15-year CGT exemption for the sale of the premises?a. Yes, the asset was an active asset used in the business and there are no further requirements Jenny needs to meet. b. Yes, provided Jenny can meet the definition of a small business entity. c. No, the asset was only used in the business for 13 years. d. No, once the business is sold this exemption cannot be used.

4. Robert’s company owns a commercial property from which it operates a business. Robert is retiring and wishes to transfer the property from the business into his SMSF. Can Robert utilise the retirement exemption for the transfer of the property? a. Yes, the small business CGT retirement exemption can be utilised via in-specie transfers. b. Yes, the ATO has clearly stated that the CGT event and the election to exempt the CGT liability can happen simultaneously. c. No, Robert has not triggered a CGT event and hence cannot elect to exempt the CGT liability under the retirement exemption. d. No, the ATO has stated that the legislation does not contemplate the situation where the CGT event and the election to exempt the CGT liability happen simultaneously.

Questions

Footnote1. A connected entity (Section 328-15 of ITAA 1997) is generally one in which the client has 40 per cent control or entitlement to income or capital distributions. Where the client and the entity are instead both controlled in this way by a third entity, they are also considered to be connected entities. Different rules apply for discretionary trusts. 2. National Tax Liaison Group Draft Losses and CGT minutes, June 2011.


CHANGES TO BEREAVEMENT PAYMENTELIGIBILITY FOR CARER ALLOWANCE

CENTRELINK

Some Carer Allowance recipients now have increased eligibility for Bereavement Payment.

Bereavement Payment helps ease the adjustment to changed financial circumstances after the death of a partner or person an individual was caring for.

Since 1 July 2012, Bereavement Payment is now also paid to carers who receive an income support payment (other than Carer Payment) and Carer Allowance who would not otherwise receive a Bereavement Payment or allowance following the death of the person they are caring for.

If an adult care receiver dies and the carer was in receipt of Carer Allowance and an income support payment (other than Carer Payment) that does not qualify them for a bereavement payment, the carer may qualify for a Carer Allowance Bereavement Payment. The Carer Allowance Bereavement Payment is an amount equivalent of up to seven instalments of Carer Allowance and is paid as a lump sum to the carer on notification of the death of the care receiver.

A person may also be eligible for Bereavement Payment if:

• their partner dies and when he or she died they were both receiving:

– a pension from the department or the Department of Veterans’ Affairs; or

– a benefit such as Newstart Allowance or Parenting Payment for at least 12 months; or

• they are caring for an adult or child who dies and they were receiving Carer Payment for them; or

• they are receiving Carer Allowance for a Family Tax Benefit eligible child who dies; or

• they are the carer or parent of a child who dies and they were getting, or were qualified to get, Parental Leave Pay, Family Tax Benefit, Baby Bonus, or Maternity Immunisation Allowance for the child who died.

If a person is receiving Carer Allowance for a Family Tax Benefit eligible child who dies, they may receive up to seven instalments of Carer Allowance from the date of the child’s death. This is paid as a lump sum payment.

If an individual receives Carer Payment for a person who dies, they may receive Carer Payment for up to 14 weeks after the person’s death. They may also receive a lump sum Bereavement Payment.

If a person’s partner dies they may be eligible for a lump sum Bereavement Payment, usually equal to the amount they would have received together less their single rate for up to 14 weeks. The amount paid depends on individual circumstances.

In the event of stillbirth or infant death, a person may be eligible to receive Maternity Immunisation

Allowance and either Baby Bonus or Paid Parental Leave. The person may also return to work if they choose and continue to receive Parental Leave Pay.

If a person is eligible for Family Tax Benefit for a child who dies, they may receive up to 14 weeks of Family Tax Benefit payment after their child’s death. If a person has not yet received Family Tax Benefit for a child who dies but they were eligible to receive payment, they may receive a lump sum payment.

If a person is going to claim Family Tax Benefit as a lump sum after the end of the financial year, they can:

• receive their Bereavement Payment with their lump sum; or

• lodge a bereavement claim at a Service Centre.

If a person receives Parenting Payment and their only qualifying child dies, they may receive Parenting Payment for up to 14 weeks.

If a person has a dependent child and is entitled to a higher rate of Newstart Allowance or Youth Allowance and this child dies, they will keep the high rate of payment, concessions and activity test reductions for up to 14 weeks after the child’s death.

To find out more about Bereavement Payment visit humanservices.gov.au/customer/services/centrelink/bereavement-payment or call 132 300.

The future isn’t what it

used to be.

CHAPTER EVENT REVIEW

The Western Australia Chapter committee has continued its campaign to raise awareness amongst students of a career in financial planning by attending various high schools. Randall Stout CFP® (HPH Solutions) and Helen McNeill (Financial, Administrative and Professional Services Training Council) attended the All Saints College Careers Evening on 7 August to promote financial planning as a career to high school students.

Michael Scaffidi CFP® and Zoe Winzer CFP® also volunteered their time at a joint careers evening conducted by Hale School and St Mary’s School on 23 July.

Members of the Wollongong Chapter attended a CPD Member Breakfast on 15 August, where they received insights into the current global volatility and heard about unique beneficial strategies.

FPA General Manager, Policy and Government Relations Dante De Gori also delivered a presentation that dealt with the FPA’s five hot issues. The presentations were followed by an interactive Q&A session.

REGIONAL ROUNDUPBACK TO SCHOOL

FIVE HOT ISSUES

DEMYSTIFYING ETFs IN HOBART

Advance Asset ManagementANZ Financial PlanningAusbil DexiaBlackrockBNP Paribas Investment PartnersMagellan Asset ManagementOrd MinnettZenith Investment Partners

Thank you to our Chapter supporters

For more information about Chapter events, contact Di Bungey on 02 9220 4503 or [email protected]

Helen McNeill and Randall Stout CFP®. Zoe Winzer CFP® and Michael Scaffidi CFP®.


Members and guests who attended the Hobart Chapter lunch on 8 August were provided with an independent and global perspective that went to the heart of demystifying Exchange Traded Funds and investing beyond banks and resources.


EVENT CALENDAR

EVENTS AND PROFESSIONAL DEVELOPMENT CALENDAR: SEPTEMBER 2012

Presenter: Nathan Williams Date: 24 September, 12.00pm – 1.30pm (AEST)CPD: 1.5 points Clearly understanding and responding to individual client feedback is essential to earning the right to not only retain clients, but to have a conversation with them around referrals.

Most of us leave service providers because we feel they don’t care about us and we couldn’t be bothered telling them what we think, we just leave.

By proactively seeking client feedback, advisers are better positioned to understand client needs and build an even stronger advice model. Being able to document your level of service and having a process to best understand and meet client needs, is critical to building trust with your clients and enhancing the prospect of them referring or recommending your services to their friends, families and colleagues.

In this informative session specially tailored for the FPA, Nathan Williams will assist you to:

• Identify the best questions to ask your clients and the most important drivers of client retention.

• Understand how to best respond to client feedback in order to maximise positive word-of-mouth which is created by the process.

• Learn how to leverage client feedback when crafting your client value proposition so it makes your business more attractive to

prospects and referral partners.

• Understand how the results of client research should drive referrals from clients and referral partners.

Nathan Williams is the founder and managing director of Customer Return. He holds a Master of Management from the Macquarie Graduate School of Management and presents to individual businesses, dealer groups and fund managers. He also contributes to various publications.

Customer Return assists financial services businesses through a combination of workshop and keynote presentations, client surveys, client value proposition consulting and its ‘Referral Plus’ program – with 90 per cent of Customer Return’s work coming from referrals.

To register for the webinar, go to www.fpa.asn and click on ‘Financial Planners’ then ‘CPD’.

How to attract and retain the business you want

CPD LIVE AND ONLINE

CHAPTER EVENTS

19 September Cairns: Conference and Golf Afternoon

20 September Riverina: Member Breakfast Gold Coast: Member Lunch

21 SeptemberNewcastle: Annual Golf Day

24 SeptemberMelbourne: AFL Grand Final Lunch

–– “Most of us leave service providers because we feel

they don’t care about us and we couldn’t be bothered telling them what we think,

we just leave.”

DIRECTORY


CHAPTERS

NEW SOUTH WALESSydneyScot Andrews CFP®

ChairpersonTel: (02) 8916 4281Email: [email protected]

Mid North CoastDebbie Gampe AFP®

ChairpersonTel: 1300 425 943Email: [email protected]

NewcastleMark Reeson CFP®


New EnglandJohn Green CFP®


RiverinaPat Ingram CFP®


Western DivisionPeter Roan CFP®


WollongongMark Lockhart AFP®


ACTCanberraClaus Merck CFP®


VICTORIAMelbourneJulian Place CFP®


Albury WodongaWayne Barber CFP®


BallaratPaul Bilson CFP®


BendigoGary Jones AFP®

ChairpersonTel: (03) 5441 8043 Email: [email protected]

GeelongBrian Quarrell CFP®

Chairperson Tel: (03) 5222 3055Email: [email protected]

GippslandRod Lavin CFP®


Goulburn ValleyJohn Foster CFP®


South East MelbourneScott Brouwer CFP®


SunraysiaMatt Tuohey CFP®


QUEENSLANDBrisbaneIan Chester-Master CFP®


CairnsDanny Maher CFP®


Far North Coast NSWBrian Davis AFP®


Gold CoastMatthew Brown CFP®


MackayJames Harris CFP®


Rockhampton/Central QldDavid French AFP®

Chairperson Tel: (07) 4920 4600 Email: [email protected] Sunshine CoastGreg Tindall CFP®

Chairperson Tel: (07) 5474 1608Email: [email protected]

Toowoomba/Darling DownsJohn Gouldson CFP®


TownsvilleDeidre Walsh CFP®

Chairperson

Tel: (07) 4775 5703

Email: [email protected]

Wide BayNaomi Nicholls AFP®

Chairperson

Tel: (07) 3070 3066


SOUTH AUSTRALIAAdelaideMichael Farmer CFP®

Chairperson

Tel: (08) 8218 8249


NORTHERN TERRITORYDarwinGlen Boath CFP®

Chairperson

Tel: (08) 8941 7599


WESTERN AUSTRALIAPerthSue Viskovic CFP®

Chairperson

Tel: 1300 683 680


TASMANIAHobart Todd Kennedy CFP®

Chairperson

Tel: (03) 6233 0651


Northern TasmaniaChris Elliott CFP®

Chairperson

Tel: (03) 6323 2323


FPA CONTACTS AND CHAPTER DIRECTORYMember Services: 1300 337 301Tel: (02) 9220 4500 Fax: (02) 9220 4582Email: [email protected] Web: www.fpa.asn.au

FPA BOARDChair Matthew Rowe CFP® (SA)

Chief Executive OfficerMark Rantall CFP®

DirectorsMatthew Brown CFP® (QLD)Patrick Canion CFP® (WA)Bruce Foy (NSW)Neil Kendall CFP® (QLD)Louise Lakomy CFP® (NSW)Julie Matheson CFP® (WA)

Peter O’Toole CFP® (VIC)Philip Pledge (SA)

BOARD COMMITTEESMember Engagement Board CommitteeMatthew Rowe CFP®


Professional and Policy Board CommitteePeter O’Toole CFP®


FPA COMMITTEESMarketing and Member GrowthPatrick Canion CFP®


Education and Member Services

Julie Matheson CFP®


Professional Conduct

Guyon Cates


Policy and Regulations

Mark Spiers CFP®


Professional Designations

Martin McIntosh CFP®


there are noshortcutsto any placeworth goingProfessions aren’t born overnight, it takes years of hard work. There are no shortcuts, but the result is well worth the effort. Imagine – one day, FPA members will be held in the same esteem as doctors and chartered accountants. The future is bright. Will you be part of it?

Join us at www.fpa.asn.au

Financial Planning magazine

Documents

Transcript of Financial Planning magazine