Super changes will hit saving strategies


Please find a link below to an article on the Macro Business blog website about the expected and unexpected effects of the proposed Super changes.  No More Tax Free

http://www.macrobusiness.com.au/2013/04/super-changes-will-hit-saving-strategies/

Macro Business has an excellent engaged readership and as always the comments tend to be very valuable at exploring the details of any subject just that little bit further.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Using Beer To Explain How Tax Concessions Work


Let’s put tax concessions for superannuation in terms everyone can understand.

Suppose that every night, ten men go to their favorite bar for a few beers. The tab for all tenBeer Fund
comes to $100. If they paid their bill the way we pay our taxes, it would go something like
this:

  • The first four men (the poorest) would pay nothing.
  • The fifth would pay $1.
  • The sixth would pay $3.
  • The seventh $7.
  • The eighth $12.
  • The ninth $18.
  • The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every night and seemed quite happy with the
arrangement, until one day, the owner threw them a curve ball.

“Since you are all such good customers,” he said, “I’m going to reduce the cost of your nightly tab by $20.”

So, now drinks for the ten only cost $80. The group still wanted to pay their tab the way we pay our taxes.  So, the first four men were unaffected. They would still drink for free.

But what about the other six, the paying customers?

How could they divvy up the $20 windfall so that everyone would get his ‘fair share’?

The six men realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being ‘PAID‘ to drink beer!

So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.

And so:

  • The fifth man, like the first four, now paid nothing (100% savings).
  • The sixth now paid $2 instead of $3 (33% savings).
  • The seventh now paid $5 instead of $7 (28% savings).
  • The eighth now paid $9 instead of $12 (25% savings).
  • The ninth now paid $14 instead of $18 (22% savings).
  • The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once drunk and outside the bar, the men began to compare their savings.

“I only got a dollar out of the $20,” declared the sixth man. He pointed to the tenth man “but he got $10!”

“Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar, too. It’s unfair that he got ten times more than me!”

“That’s true!!” shouted the seventh man. “Why should he get $10 back when I got only $2? The wealthy get all the breaks!”

“Wait a minute,” yelled the first four men in unison. “We didn’t get anything at all. The system exploits the poor!”

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up at the bar, so the nine sat down and drank without him. But when it came time to pay the tab, they discovered something important. They didn’t have enough money  between all of them for even half of the tab!

And that, ladies and gentlemen, journalists and Mr Turnbull and Mr Morrison, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction or concession like the Superannuation contribution tax rate. Tax them too much, attack them for being wealthy, and they just may not show up to pick up the tab anymore.

In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.
For those who do not understand, no explanation is possible

This article has been adapted to Australian circumstances and is based on what is believed to have originally been a letter to the Chicago Tribune by a Mr Don Dodson in March 2001 (Source SNOPES.com )

As always please contact me if you want to look at your own particular situation as we specialise in plain English strategies. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

.

Don’t depend on working longer to save for your Retirement Income


Looking to RetirementMany clients believe delaying their retirement is a solution to inadequate savings, but they often find themselves out of the workforce sooner than they’d planned. None of us has that crystal ball!

It is likely that the shortfall in retirement savings here in Australia stems in part from our “she’ll be right” attitude towards life, which leads us to believe that we do not need to start saving early and that somehow it will all work out ok.

Delaying retirement can be a powerful boost to your superannuation nest-egg. But relying on the ability to work for a few extra years to stretch retirement savings out a little longer is fraught with risk and does not reflect personal and family health or other issues that may arise. As an example I have had some clients forced to retire to look after their grandchildren due to the illness of the parent.

If you played with any retirement planning calculator or have spoken to an adviser, the “work a little longer” solution would have been investigated and many put it forward as the solution to the GFC “dip” (read plunge) in savings.

The concept is easy to grasp: By working longer then you originally planned, you get more years of concessionally taxed growth in your superannuation accounts especially if you used a Transition to Retirement Pension from 55 or 60. You can also continue to salary sacrifice and make non-concessional contributions while getting the benefit of the Senior And Pensioners Tax Offset (SAPTO) that I mentioned a few weeks ago here.

The idea is the longer you work and save and more you get into a superannuation income stream then your capital will last longer and you may also benefit from more Age Pension when required.

Back to reality with a jolt!

But there is a huge disconnect between workers’ expectations and retirement reality. Over half of the retirees surveyed in a US study last year said they left the workforce earlier than planned, and just 8% of them said that positive factors — such as the ability to afford early retirement — prompted the move. For the vast majority of early retirees, negative circumstances, such as personal or spouse health problems or company downsizing played a role.

40% of Australians will suffer a critical illness before age 65 (Cologne Life Re study). They will most likely survive but their retirement funding will be devastated.

The 2015 Productivity Commission report on post-retirement shows that about 40 per cent of Australians who retire between the age of 60 and 64 do so involuntarily, either because of their own or a family member’s ill health, or redundancy.

For those aged between 65 and 69 who retire involuntarily is not that different, while for younger age groups most people who retire do so involuntarily.

Retirement ages

Clearly, workers relying on delayed retirement are rolling the dice. Yet, most people discount the future so much that they’re willing to take that gamble. May hope that an inheritance will save the day but do not realise that age care costs and parents living longer may eat heavily into any expected inheritance.

Strangely the people most likely to plan on working a few more years to boost their retirement security may actually have the least ability to postpone their retirement. People who suffer an illness or injury  are more likely than those in good health to have pushed back their expected retirement date in recent years, according to  a report from consulting firm Towers Watson. Yet health problems or disabilities were cited by more than half of retirees forced to retire earlier than planned.

Don’t put you head in the sand – start now

As psychologists are quick to point out, we all have that inner voice that loves to procrastinate who loves to put off till tomorrow what we should do today – beause its “all too hard to get your head around”. Saving more today is a sure thing, and extra years in the workforce are anything but. If you know you don’t have enough, you should start saving more today, because that’s by far the less risky alternative.

Let’s look at an example using the Retirement Planner on the MoneySmart.gov.au site for a 55-year-old pre-retiree with just $30K in superannuation. If she earns $80,000, makes $17,500 annual salary sacrifice contributions (in addition to Employers SGC contributions of 9.5%)  and earns a 7.5% return pre retirement and 6.5% after, she could be looking at an Income in retirement of $32,143 by age 67 including the Age Pension. If she’s forced to retire at that point, she’s still in better shape than most Australian’s. And if she can continue working, she  counld improve on this lifestyle with a better retirement income.

Retirement Income

A final don’t is cancelling TPD or Income Protection insurances to save money while in your most productive earning years (read here for more on that subject). The loss of 5-10 years of earnings potential is one guaranteed way to destroy your lifestyle in retirement. Your ability to earn is your biggest asset

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Think twice before cancelling insurances as you get older.


Do you know that the average person cancels their personal insurance about 1-2 years before an claimable illness strikes! The average age a person discontinues one or more of three types of living insurance policies – cover for disability, critical illness/trauma and income protection – is 45 years yet the average age for a claim is 46.5 years. (source TAL)

As mentioned in a previous blog the SMSF regulations now require Self Managed Superannuation Fund Trustees to consider Insurance as part of the SMSF Investment Strategy . TheRisk Management following applies to everyone regardless of the type of investor you are or the structure you use to save for retirement.

I see many clients in our Castle Hill and Windsor offices in their late 50’s who have cancelled their life and income protection insurances before they have come to see me. Usually they say it is because they have paid off their mortgage and are debt free so they didn’t feel they needed cover any longer.

Their focus now was on expense reduction and saving via salary sacrifice to superannuation and even some after tax contributions from savings.

While it is great to see them focus on saving for retirement and budgeting, what they don’t realise is that in cancelling insurances it is their retirement lifestyle or that of their spouse they are no longer insuring and not just their current needs.

With 5-15 years of focused savings towards a retirement nest egg they can substantially improve their lifestyle after retirement. However those dreams of a happy retirement can all be taken away with a diagnosis of cancer or a stroke that inhibits them working for a prolonged period.

You don’t just find yourself financing time off work and medical expenses but also lose out on the employer super contributions and salary sacrifice as well or worse for a small business owner, you face the expense of a getting someone to cover for you to keep the business afloat.

To realistically assess if you need to maintain your Life, Trauma or Income Protection insurance, you need to think through the worst-case scenario. If you were unable to work for 3 years due to an illness today, how would you and your loved ones cope financially?

  • Would you be able to meet ongoing living expenses like food, clothing, changing the car, pay for private health insurance premiums, etc? (this assumes mortgage paid off)
  • Would you have the liquid funds to cover additional expenses or loss in income (e.g., gap in your medical fees, time off work for your spouse to take care of you,
  • What would happen to your retirement plans and would you be able to save enough money to see the kids through the final college years or fund your retirement comfortably?
  • What if you were actually permanently disabled and they had all the costs of rearranging the home, medical care and transport options for you.

In all honesty, it is always a struggle when you lose your earning capacity. The last thing you need compounding the situation are financial concerns. Insurance helps make sure that you and the people you care about will be provided for financially, even if you’re not around to care for them yourself.

So whether you’re in retail, industry or a Self Managed Super Fund, take a moment to consider how insurance might fit into your retirement plans. We can look at ways to reduce the cover and costs to keep them affordable and provide that protection for you and your family.

If you think you may need to review your Insurances then you can contact us to offer you advice on your options. As well as offering advice on Insurances, Superannuation and SMSF’s our advisers can also offer you help in many other area’s you may be experiencing problems such as:

  • Financial Planning,
  • Tax Planning,
  • Debt Consolidation,
  • Investment Portfolios,
  • Estate Planning,
  • SMSF Trustee queries.

Have you found this blog helpful? Pass it on. Social media buttons beneath the article.

Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Funding the transfer of the business to the next generation | MYOB Blog


Funding the transfer of the business to the next generation | MYOB Blog.

Trading Company as SMSF Trustee or Sole Purpose SMSF Trustee Company?


 Traditionally the majority of SMSFs steered away from using a company trustee due to the costs associated with it. This has been changing in the last decade as Trustees see the difficulty of adding or removing members or trustees from a fund. The process of replacing a director on the other hand is relatively simple.

The cost to establish a company to act as Trustee for a fund varies from $660 – $1600, depending on who you engage to organise it for you. A SMSF with a corporate trustee can usually be set up within a few days with the ABN and TFN taking up to a month to organise with the ATO and get listed on the Super fund Lookup site http://superfundlookup.gov.au/

The Company is required to prepare and lodge an Annual Review with ASIC each year at a cost of approximately $318 per annum, and pay an ASIC lodgement fee of $214. (The lodgement fee is reduced from $256 to $46 for companies who are used solely as SMSF Trustee companies commonly now known as a Sole Purpose SMSF Trustee Company).

The problem is people still look to save on costs so occasionally clients ask if they can utilise an existing trading company to act as the SMSF Trustee, to save on “cost”.

The strict answer is yes but just because you can do something, doesn’t mean you should. Using a company for multiple purposes is fraught with risk. You would have to be meticulous about keeping transactions and record keeping of the 2 functions absolutely accurate.

I really recommend against this for a number of reasons:

  • the accounts and bookkeeping for the trustee company inevitably become much more complex, having to account for its trading activities separately from its activities as a trustee. This in turn results in higher accounting fees and risk of mistakes;
  •  SMSF auditors are very delicate individuals who follow rules to the nth degree. There can’t be any overlap between SMSF funds and other company funds. We often get clients calling and advising us that they accidentally used the wrong cheque book or transferred funds by Bpay to or from the wrong account. (This is also a reason I suggest clients use a different bank for the SMSF )Yes it was accident, but the SIS Act and Regulations say this is totally illegal. You can never guarantee that you will never make mistakes. Avoid this hassle and set up a separate sole purpose corporate trustee;
  •  if the company gets into financial difficulty and a receiver or liquidator is appointed – the SMSF fund assets could be at risk. This is because using a trading company may result in you losing control over your SMSF if the company entered some form of administration due to trading difficulties. Even if you have kept clear records the liquidator or receiver may look to freeze those assets while you prove the true ownership which could take months or years if record keeping not perfect;
  • there are potential issues associated with identifying the true owner of the assets. If all of the company/SMSF assets are held in the same company name, how does one distinguish between assets held in capacity of trustee compared with those held beneficially for the company? For example in most States the Land Titles Office will only record the Trustee name not the “ATF XYZ Super Fund”;
  • Introduce some Business Real Property, say a warehouse, leased back to the business and it gets even messier. The company as trustee for the SMSF leases the business premises back to itself in its capacity as the trading company. Now if the trading company gets in difficulty and can’t make lease payments then the same company has an obligation in its capacity as Trustee of the SMSF to chase itself for recovery of the lease payments!;
  • then to the subject of liability. Trustees of funds are generally prohibited from borrowing but nevertheless liabilities can still arise.  For example, a plumbing contractor engaged to repair a residential investment property might suffer an injury and can sue the trustee for damages.  This could mean that if the SMSF does not have the funds to meet any damages, the assets of the business may now become a target for the lawyers of the victim. Again in time this could be sorted and true ownership proved but could you or your business afford the time arguing the case or funding the defence.

For those who do have a Trading Company as Trustee, then if the company or business is in trading difficulty your first step is go to the ASIC advice for small company directors at http://www.asic.gov.au/asic/ASIC.NSF/byHeadline/Directors%20and%20insolvency

I would also suggest a quick visit to your Adviser to put in place a new Trustee Company in charge of your fund or if you really feel you are going to be in trouble you might opt to become a Small APRA regulated fund where you hand over the running of the fund to an Approved Trustee but you may struggle to find one willing to take over in such circumstances.

What are your thoughts? I would be interested in feedback from lawyers, accountants and advisers and of course auditors on this issue!

Liam Shorte B.Bus SSA™ AFP

Wealth Advisor & SMSF Specialist Advisor™

 SMSF Specialist Adviser 

 Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook   

Verante Financial Planning

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.

Last minute planning checklists for everyone from Small Business Owners to SMSF Trustees as well as Personal planning.


Have you left your financial planning until the last minute?  Go over this checklist with your accountant or financial planner as soon as possible.  Some of these strategies apply every year, while others are specific to this year because of the changes in the tax rate, the end to the flood levy, and some changes to small business write offs in the next year.

Checklists for:

Personal / Family

Small Business Owner:

SMSF Trustee

Investment Property Landlord

See full article: http://myob.com.au/blog/end-of-financial-year-planning-checklists/#ixzz1ysA6ExvQ

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated.

Liam Shorte B.Bus SSA™ AdvDipFS AMC

Financial Planner & SMSF Specialist Advisor™

  Follow SMSFCoach on Twitter Liam Shorte on Linkedin NextGen Wealth on Facebook SMSFCoach Blog

Verante Financial Planning

Tel: 02 8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 • AFSL No.232686

Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

Consider prepaying next years Private Health Insurance before June 30th – EOFY Money Saving TIP #1


As a result of the introduction of mean testing of the Private Health Insurance Premium Rebate wewant to alert you to a one-off savings possibility in relation to the private health insurance rebate.

If you pre-pay your 2012/13 private health insurance premium before 30 June 2012, you may still be able to access the Government rebate.

As you may be aware, the Government currently provides a non-means tested rebate for private health insurance premiums. The rebate can be claimed directly from the insurer, or as a tax offset when you lodge your income tax return. the majority of clients claim it upfront and if you don’t then you may need to consider doing so this year.

The rebate is currently 30% for those under 65 and rising  from 35% to 40% of the premium depending on the age of the policy holder.

The Government has now passed the required legislation that will apply an income test to the availability of the rebate to any premiums paid on or after 1 July 2012. The more income you earn, the lower the rebate as follows:

Private Health Insurance Incentive Tiers (2011-2012) with effect 1 July 2012

Singles

<$84,000 

$84,001-97,000

$97,001-130,000

>$130,001

Families

<$168,000

$168,001-194,000

$194,001-260,000

>$260,001

Rebate
< age 65 30% 20% 10% 0%
Age 65-69 35% 25% 15% 0%
Age 70+ 40% 30% 20% 0%
Medicare Levy Surcharge
All ages 0.0% 1.0% 1.25% 1.5%

Note: The thresholds increase annually, based on growth in Average Weekly Ordinary Time Earnings (AWOTE). Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first.

Singles earning $84,000 or less and families earning $168,000 or less will continue to receive the existing 30, 35 and 40 per cent rebate, depending on their age.

Once your ‘adjusted’ income is greater than $130,000 (or $260,000 as a family), no rebate will be available.

For a family with gross premiums of say $2,500, this will result in an increase to the out of pocket premium costs of $750.00

The current rebate applies to a premium ‘paid’ during the income year. Accordingly, it follows that if you prepay your 2012-13 premium on or before 30 June 2012, the current rules should apply and the rebate should be available.

If you are interested in this one-off savings opportunity, we suggest you contact your private health insurer to discuss the possibility of pre-paying next year’s premium and ensure that their is no penalty for prepayment and that their system can cope with the prepayment.

Increase to Medicare Surcharge levy for High Income Earners

For those without Private Health Cover be aware that  the Medicare levy surcharge for people without private health insurance will lift to 1.5 per cent of taxable income for those top earners without private health insurance cover. (see table above)

I hope this guidance  has been helpful and please take the time to comment. Feedback always appreciated.

Liam Shorte B.Bus SSA™ AdvDipFS AMC

Financial Planner & SMSF Specialist Advisor™

      

NextGen Wealth Solutions

Tel: 02 8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 • AFSL No.232686

Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

The added value of franking credits in a SMSF Portfolio


 One of the least understood and core benefits of SMSFs are the value of franking credits attached to many blue chip share dividends.  You can tilt your portfolio to enhance the taxation benefits to your fund.

Targeting of imputation credits received predominantly from direct share investment in Australian, and to a lesser extent through managed funds is not that difficult. Franking credits (properly known as Imputation credits) can also be used to offset the tax payable on the taxable income of the fund if still in accumulation stage or refunds can be received from the ATO if in pension phase (don’t you just love receiving money from the ATO!)

The key point to understand around franking credits is the fact that the income tax rate for super funds is only 15% in Accumulation phase and 0% in Pension phase, while imputation credits from fully franked dividends can be as high as 30% of the gross dividend of an Australian share. This means that the franking credit covers the tax payable on the dividend received, and leaves a significant excess to be used to reduce the other tax payable by the fund or to be claimed as a refund

So how does it work in reality ?

So company Widget Ltd makes $1.00 profit and therefore is required to pay company tax at the rate of 30% on this $1 profit. Consequently the taxed $0.30 (30% of $1) will be paid in cash to the tax office and the company then records this $0.30 into their franking account. The franking account is only a record of what was paid and does not contain actual money. The company’s ability to frank its dividend will depend on the balance of this franking account. If the franking credit contains a surplus, the company may declare a fully franked (100% franked) dividend. If the franking account isn’t large enough, perhaps because it pays tax overseas, then the company may declare a partially franked dividend. That is, the dividend received by the SMSF is “grossed up” by the amount of the imputation credit to achieve a grossed up dividend. It is on this amount that tax is then assessed at 15% or 05 depending on the phase of your SMSF. The fund is then entitled to a tax offset for the franking credit.

Example: a worked example below of a SMSF that only holds Telstra shares and ANZ shares:

Dividend Franking Credits Taxable Income Accumulation Phase Taxable Income Accumulation Phase
TLS Shares $1260 $540 $1,800 $1,800
ANZ Shares $840 $360 $1,200 $1,200
Total $2100 $900 $3,000 $3,000
Tax @ 15% $450
Tax @ 0% $0
Less: Franking credits $900 $900
Excess Franking credits $450 $900

In this example, not only will the fund pay no tax on the dividend income of these two shareholdings, but it will have:

  • Accumulation Phase $450 of excess franking credits
  • Pension Phase $900 of excess franking credits ;

Which the SMSF Trustees can use to offset against other tax liabilities of the fund (such as other income, capital gains, and taxable contributions) or if  none exists, then the SMSF fund can receive a refund of this amount. (Love it!)

The 45 day rule

As the examples have shown fully franked dividends and franking credits make investing in Australian shares a very tax effective strategy. However, the ATO realises this and to prevent investors from abusing the system (called dividend stripping) they introduced the 45 day rule. The 45 day rule states that shareholder must hold shares for 45 days (not counting days of purchase or sale) for any franking credits over $5,000.

Beware of blind dividend chasing , you can hit a wall!

A word of warning before you decide to put your life savings into chasing shares with the highest dividends. While some high yielding dividend stocks may look enticing it would be useless if those shares drop in value (falling capital value). Always research the company and look for strong fundamentals, for example what does the company’s dividend history look like? Are the dividends growing year on year in line with the earnings per share? Is there long term potential for this company? Will earnings rise in the near term and are they sustainable.

Want a Superannuation Review or are you just looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! make 2016 the year to get organised or it will be 2026 before you know it.

Please consider passing on this article to family or friends. Pay it forward!

Liam Shorte B.Bus SSA™ AFP

Financial Planner & SMSF Specialist Advisor™

SMSF Specialist Adviser

Tel: 02 98941844, Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

5/15 Terminus St. Castle Hill NSW 2154

Corporate Authorised Representative of Magnitude Group Pty Ltd ABN 54 086 266 202, AFSL 221557

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Superannuation Guarantee Age Limit to be Abolished in 2013


This change last November has gone under the radar but its needs to be highlighted as it will be especially important to Self Managed Super Fund members who run their own businesses as it will enhance their ability to tax plan and continue contributing to Super tax effectively.

The Government has announced that the 70 year age limit for superannuation contributions required to be made by an employer under the Superannuation Guarantee (Administration) Act, 1992 will be abolished.  Currently, employers are not required to make any SG contributions in respect of employees once they attain age 70.

The Government had originally aimed to increase the age limit to 75 but has subsequently decided to remove the age limit entirely.

This is a win for older working Australians with the House of Representatives passing amendments to the Superannuation Guarantee (Administration) Amendment Bill 2011 that abolish the superannuation guarantee age limit.

From 1 July 2013, eligible employees aged 70 and over will receive the superannuation guarantee for the first time. This increases the coverage of the superannuation guarantee scheme to an additional 51,000 Australians aged 70 and over, who will get the benefit of the superannuation guarantee if they continue working.

“Making superannuation contributions compulsory for these mature-age employees will improve the adequacy and equity of the retirement income system, and provide an incentive to older Australians to remain in the workforce for longer,” Mr Shorten said.

A 1 July 2013 commencement date provides time for employers and older Australians to adjust to the new superannuation arrangements.

The changes will also ensure that employers will be able to claim income tax deductions for superannuation guarantee contributions made to employees aged 70 and over from 1 July 2013.

It ensures employers will not bear a higher cost in employing workers 70 and over compared with other workers.

Feedback always appreciated.

Liam Shorte B.Bus SSA™ AdvDipFS AMC

Financial Planner & SMSF Specialist Advisor™

       

NextGen Wealth Solutions

Tel: 02 8853 6833,  Mobile: 0413 936 299

PO Box 6002 BHBC, Baulkham Hills NSW 2153

 

ABN 20 060 778 216 • AFSL No.232686

Liam Shorte is a partner in NextGen Wealth Solutions, Corporate Authorised Representative of Genesys Wealth Advisers Limited, Licence No 232686, Genesys Wealth Advisers Limited ABN 20 060 778 216.

Important information

The information in this article is provided for illustrative purposes only and does not take into consideration your personal circumstances. You are encouraged to seek financial advice suitable to your circumstances to avoid a decision that is not appropriate. Any reference to your actual circumstances is coincidental. Genesys and its representatives receive fees and brokerage from the provision of financial advice or placement of financial products.

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