Wealth Creation Tips
Several clients have recently approached me to discuss information picked up from investment seminars. I appreciate these clients giving me the opportunity to be involved in their decisions and allowing me to meet with seminar organisers. Most have very useful information and experiences to share, and great track records of success in their chosen investment fields.
As a wellness accountant I have a close working relationship with my clients and enjoy being part of the team when financial decisions are being made. I am not licenced to provide financial advice. However I have provided some questions to ask and points to consider from a commercial and taxation perspective. I thought I would share them with you as well.
When reading the projections provided for properties and other investments, keep in mind that these have been prepared with various assumptions on who the "standard" investor is. Some of these assumptions will include what tax rate you are on and your family's personal financial structure. These standard projections cannot take into consideration your individual long term goals. They are purely based on keeping this money invested in this particular investment indefinitely or investing further in the same investment over time. What if you have other plans for that money, other goals such as getting into your own business or travel? This needs to be factored into a customised projection.
Some questions you may want to consider asking:
- Is the organisation providing the projections licenced to provide financial advice? The type of information they are providing may not require a financial licence, however it is important for your own piece of mind to know who has prepared the information that you are relying on.
- What tax rate has been used in the calculations?
- What rates have been used for inflation, interest rates, investment growth rates and why?
- What are the exit strategies if my circumstances change and what are the costs?
- Has this data been based on historical returns? Will the same results be achievable going forward?
- Are there any other assumptions made that may be different to my own circumstances?
And a very important question to ask yourself when looking at money choices:
What ARE my long term goals, and is this investment in line with these important life goals?
This is not just about making money. It is about what having that money will allow you to achieve. Will this investment assist you in reaching these life goals?
You may be able to structure your investments through different entities such as self managed superannuation funds and trusts. Here are some points to consider.
- The tax rate for complying superannuation funds is currently 15% until the member goes into pension mode. Negatively gearing property through a superannuation fund produces less of a tax benefit than with an individual at a higher marginal tax rate. The superannuation fund cannot receive any tax benefit unless it has other assessable income to claim the loss against. So any tax credits referred to on projections may not apply in the years as shown.
- When the superannuation fund does eventually sell the property and there is a capital gain, there are greater tax concessions than as an individual, and this may be tax free if the member is in pension mode at the time and the current legislation still applies. If the fund goes into pension mode the superannuation fund needs cash to pay the pension, so it may have to realise the property or have other more liquid assets as well.
- If one spouse has little or no income in his/her own name, losses may be quarantined until he/she has any income to offset them. Therefore any tax credits in projections may need to be halved, reduced, or deferred until the spouse has assessable income to offset the losses.
- If the property is to be shared other than 50/50, according to partnership law, rental income and expenses need to be shared in proportion to their legal interest. This split will also apply to any future capital gains.
- Mixed purpose loans need to be structured carefully to ensure the interest deductibility is not jeopardised. Ensure personal and tax deductible debt is specifically identified. Redraw facilities are problematic and should be avoided.
- Buying negatively geared property through a discretionary trust means again that the losses are quarantined until there is assessable income to offset it. However, once there is income, the trustee has the discretion to decide how much income and/or capital gains are distributed to each eligible family member. The trust deed identifies who the trustee can distribute to.
Once you are satisfied with the answers and information that you have received, I am more than happy to assist you with checking projections, investment structures and your specific tax and cash consequences, utilising in depth knowledge of your particular circumstances and practical knowledge in many aspects of finance, investment and business considerations.
