Author: intrepid_dev

  • What to Do with an Inherited Gift

    What to Do with an Inherited Gift

    When you receive money or a gift from a family member’s or friend’s estate, the last thing you probably think about is tax and insurance. However, you can circumvent future difficulties or financial loss if you attend to a few practical financial issues as soon as possible.

    Let’s Start with CGT

    Determining your capital gains tax (CGT) liability when bequeathed assets are eventually disposed of can be a real headache. To avoid potential problems always determine and document whether the assets were acquired by the deceased before or after 20 September 1985.

    It is a good idea to obtain an accurate valuation as at the date of death if retained assets were acquired before 20 September 1985, because any future CGT liability will be determined by the increase in value from that date (known as the ‘cost base’).

    Also it is important to know how the gifted assets are classified for CGT purposes. Generally these assets will be divided between collectables, personal use assets and other assets. Some special, but limited, CGT exemptions can apply to ‘collectibles’ and ‘personal use’ assets. These exemptions are also based on their ‘cost base’.

    Collectibles vs Personal Use Assets

    Valuations are particularly important for any assets or objects categorised as ‘collectibles’. If the market value of a collectible (including antiques) at the date of death was less than $500 then any capital gain will be disregarded. A similar, but much higher exemption applies to ‘personal use assets’ of up to $10,000.

    ‘Collectables’ are defined as artwork, jewellery, antiques, coins or medallions, rare folios, manuscripts or books, postage stamps or first day covers that are used or kept for personal use or enjoyment.

    ‘Personal use assets’ are non-collectible assets, other than land or buildings, used or kept for the personal use or enjoyment of the deceased. An item of personal furniture would normally fall into this category, unless it is determined to be ‘antique’, for tax purposes. In this latter case it will fall into the ‘collectible’ category.

    When an Antique is Not an Antique

    Unfortunately the word ‘antique’ for the purposes of determining if they should be treated as ‘collectibles’ or simple ‘personal use assets’ is not clearly defined in the Income Tax Acts. However, a tax ruling (TD 1999/40) has been issued to clarify this point. To quote from the tax ruling: ‘An ‘antique’ for the purposes of the Income Tax Assessment Act is to be determined according to ordinary concepts and usages. It is generally recognised that an antique is an object of artistic or historical significance that is of an age exceeding 100 years’.

    The point at which an asset is deemed to be an antique for CGT purposes relates to when it is disposed of, not when it is acquired. For example, this means that if Tom retained a fine piece of furniture that was 96 years old when acquired, it would not be deemed to be an antique at that time (it would merely be a personal use asset). But if he sold the very same piece five years later (when it was 101 years old) it would be deemed to be an ‘antique’, and as such it would be categorised as a ‘collectible’ asset for CGT purposes.

    This business about ‘antiques’ might all seem a bit complicated. However, the key point is that it may be very useful to ascertain the relative age of any old and valuable furniture. You can see that this can have a significant impact on the tax position. As a practical proposition it is often much easier to gather such information (perhaps from the deceased’s records) soon after death, rather than try to determine the age of an antique many years later when you are planning to sell the item.

    Generally, it is not necessary to obtain a valuation for tax purposes, if the deceased acquired an asset on or after 20 September 1985. This is because the ‘cost base’ for the beneficiary will be the same as that of the deceased’s. Similarly the beneficiary is taken to have acquired an item as a collectible or personal use asset. To explain, let’s take our example further. Say Uncle Reg had acquired a rare old book (a collectible) for $2,000 in 1997. Tom, as his beneficiary, would have been gifted a collectible. In future he would use this $2,000 to determine how much gain, and hence how much CGT that will apply, if and when he sold the book.

    You can appreciate that while a valuation at the date of death may not be required, it is still necessary to find out what the ‘inherited’ cost base is for future reference. Again that tends to be easier to do sooner rather than later.

  • The Rise of Ethical Investments

    The Rise of Ethical Investments

    In recent years, ethical investing or socially responsible investing (SRI) has become increasingly popular. Driven by the growth in demand for businesses that are profitable and ethical, along with regulatory frameworks to address challenges such as climate change and modern slavery, there has never been a better time to gain exposure to ethical investments.

    What are Ethical Investments?

    Ethical investments provide exposure to companies with strong environmental, social and corporate governance (ESG) structures and practices. The Responsible Investment Association of Australia estimates there is almost $1 trillion invested in ethical companies and strategies across the country, equating to 44 per cent of the entire $2.24 trillion managed by professional investors in Australia.

    Depending on your risk appetite, there are a range of ways you can invest ethically. You can put capital into an actively or passively managed fund with a focus on ethical investments. Your super fund may also offer investment options that focus on ethical leadership and business practices.

    How to Pick Stocks in Ethical Companies

    The research and analysis process for buying stock in ethical companies is broadly no different from regular stock picking. Analysing the typical indicators of financial strength is essential, including earnings per share, the price-to-earnings ratio and dividend yield. You will, however, need to weigh up whether a company’s approach to ESG aligns with your beliefs around important issues. These issues are typically environmental, societal, and political.

    How to Get into Ethical Investing

    To get into ethical investing, you may place some of your capital into a responsible investment fund which uses ESG and ethics criteria, along with financial performance, to determine which companies are invested into. It’s important to note that the screening criteria for responsible investing are different from those used in strict ethical funds. As a comparison, strict ethical funds screen out specific industries such as energy, mining, gambling, pornography and narcotics as a default. ESG investment funds differ by focusing on stakeholder engagement and shareholder activism to influence change in companies instead of simply divesting or eliminating the option of investing in particular organisations in the first instance.

    Whether you put your money in a fund or decide to pick individual stocks to get started in ethical investing, you need to determine what you’ll look for in potential investments. You may look for companies that are carbon neutral, or those that have initiatives such as planting a certain number of trees each year. There are also more detailed criteria such as the company’s approach to manufacturing which you may assess in your research. You may also choose to invest in funds that are financial vehicles and loan money to, or invest in, ethical businesses.

    Do Your Research to Diversify Your Investments

    Similar to diversifying your portfolio with a range of asset classes, you also need to do your research and thoroughly analyse any potential investments that will provide exposure to ethical companies. To ensure you balance risk effectively, speak to your financial adviser to assess the specific ethical investments that are suitable for your unique situation.

  • Home is Where the Heart is – Please Protect it

    Home is Where the Heart is – Please Protect it

    When you receive money or a gift from a family member’s or friend’s estate, the last thing you probably think about is tax and insurance. However, you can circumvent future difficulties or financial loss if you attend to a few practical financial issues as soon as possible.

    As a direct result of the widespread natural disasters Australia has experienced in recent years, insurance premiums for house and contents have, in many cases, risen dramatically. When faced with these higher costs, many home-owners might be tempted to under-insure their homes or, even worse, not insure at all.

    Your home may be your pride and joy, an asset with a big emotional attachment, but it is also usually the biggest financial commitment you will ever make.

    It therefore makes sound financial sense to insure your home appropriately. Whether you are reviewing your current cover or insuring a new home, here are some tips to help you make the right decisions.

    Identifying Your Needs

    Determining the appropriate level of insurance is a relatively simple process:

    1. Make sure you obtain an up-to-date valuation for your home. Home prices can change significantly over time so it is important to know the current value of your property to enable you to match the insurance cover accordingly. The services of a property valuer could be engaged to obtain a professional expert opinion, or you could contact a couple of real estate agents specialising in your area for their view.

    2. Accurately assess your contents value. While you might not think your ‘stuff’ is worth that much, most people actually have more than they realise. The value of your contents quickly adds up, especially considering the cost of ‘little things’ like your music and movie collection, clothing and kitchen items.

    Many insurance companies have contents checklists on their websites to help make this process easier.

    Complete a contents checklist then take a video of everything. Being able to see what your home and contents look like in detail can help a claims assessor speed up the process. Don’t forget to update it periodically or as you buy/replace larger items.

    After completing your checklist and video, store them securely. A small fireproof safe can be an affordable option; or store them away from your home with a trustworthy friend or relative. 

    3. Take into account whether you live in a known bushfire or flood risk area and consider obtaining a quote for the cost to completely replace your property. A registered builder will be able to provide you with realistic cost options to give a more accurate assessment of cover required.

    4. Appropriately calculate the value of any collectibles or jewellery. Many people have inherited assets or have a special (or very expensive) piece of jewellery. Others may have collections that can turn out to be more valuable than they ever thought possible. 

    Make sure that you obtain a specialist valuation for any items of particular value so your insurance coverage can be adjusted accordingly.

    Finding the Right Insurance Policy 

    Detailed below are some tips to assist you in getting the policy that perfectly suits your personal circumstances.

    • Are there any exclusions? It is said that the devil is always in the detail. Some providers have exclusions that are standard options on the same class of cover with a competitor, so make sure you read the fine print, especially when switching providers.
    • Understand the options available. There are many insurance companies within the Australian marketplace, each offering different types of insurance coverage to suit a variety of needs. Make sure you understand fully what you are covered for before signing up. Not all insurance policies are created equally, even if they are called by a similar name.
    • Are you covered for natural disasters? Damage caused by catastrophic weather events can be subjective so make sure your cover matches the level of risk your home is reasonably likely to face. Some insurance companies only cover natural disasters of certain types in particular areas.
    • Consider additional policy options. For a small additional premium you can add extras to your coverage. For example, many insurers offer cover for alternative accommodation for a set period if your home has to be rebuilt following a disaster.
    • What about renovations? You need to check that your existing policy adequately covers you during any renovation process. And don’t forget to review the policy to cover the increased value of your home after the reno.
    • Does absence affect your policy? Some insurers will decline to cover a home that is unattended on a regular basis or for a prolonged period of time. This is especially relevant if you’re planning to become a Grey Nomad or are often away from home for other reasons.
    • Insuring a rental property. Specialist insurance for landlords may be needed to cover your home for damage or theft if your property is not owner-occupied.
    • Answer all questions accurately. This is crucial because if there are any errors or untruths discovered by the insurer at claims time, it may decline to pay some or all your claim.

    It Won’t Happen to Me…

    It is expected that damaging weather events will cost Australia $33 billion by 2050. Natural disasters such as bushfires, floods and destructive storms are part of life in Australia:

    Bushfires: Property losses are commonly experienced in most Australian states, typically between September and March. The direct cost of the 2019-20 bushfires has been estimated at over $4.4 billion.

    Floods: Unprecedented wide scale and repetitive flooding in recent years proves that no single area of Australia is totally safe from these disasters. The 2011 floods in Queensland that also affected New South Wales, still rank as one of the costliest disasters with the economic loss valued at $6 billion.

    Cyclones and Storms: Cyclones are common in northern Australia, especially between December and April, and over the decades have destroyed entire towns. However, in recent years, severe storms nation-wide have caused damage on a more regular basis than cyclones.

    Consider Speaking to an Insurance Expert

    If personally navigating your coverage options isn’t for you, ask for specialist help.
    If your home is where the heart is, it’s crucial to protect it from potential harm.

  • Separation Planning: An adviser’s Perspective

    Separation Planning: An adviser’s Perspective

    Few client meetings have been as challenging. After years of being happily married, Sarah and her husband decided to separate, and the story of her acrimonious divorce was certainly distressing.

    It started with a chance meeting, where in passing, Sarah mentioned the divorce. She assured me she’d had enough of advisers for a while and just wanted some time out. I insisted we meet as quickly as possible.

    The first step was to sort out her will. Again, Sarah said she never wanted to speak to another solicitor again, but this quickly changed when I explained that if something happened to her today, all her assets would go to her ex-husband.

    We also needed to update her superannuation. The binding nomination she had put in place, again leaving everything to her ex, needed to be changed to stop this flow of money, which would otherwise bypass her will and go directly to her husband.

    I suggested Sarah think about putting in place a power of attorney so someone could step in and handle her affairs if she could suddenly no longer do this herself as well as think about appointing a medical power of attorney.

    She needed to make provisions for her three children. While her ex-husband insisted, he’d continue in their lives, this could easily change in the future, particularly if he were to meet someone new.

    Sarah had retained the family home but needed to re-mortgage it to buy out her ex-husband. As a successful professional in her own right, she could afford to do this but only just. A new family budget was needed, and she would have to stick to it, at least for the next few years.

    So far, Sarah had been agreeable to my suggestions, but then I turned the conversation to two other key areas. To retain the family home, Sarah had agreed to give part of her superannuation to her ex-husband.

  • Uncovering the Iceberg of Financial Advice

    Uncovering the Iceberg of Financial Advice

    We can all agree that the costs of providing financial advice have risen significantly over recent years. An article from Rod Bertino at Business Health mentioned average ongoing fees at $3,558 per annum in the current advice landscape.

    I see many practices going through the exercise of re-evaluating their cost-to-serve, factoring in current overheads and a reasonable profit margin, with considerable gaps often found between current fees charged and what should be charged after the cost-to-serve analysis.

    For mature businesses with long term clients, this seems to be a common problem, especially when presenting fee increases to these long term clients. The issue has, however, also arisen when looking at making acquisitions involving clients with annual fees.

    The issue of value in ongoing advice should be addressed as part of the overall fee review project. And this is where the illustration of the iceberg comes in.

    The Iceberg Principle (or Iceberg Theory) suggests that we cannot see or detect most of a situation’s data. The theory applies to systems and problems too. As with an iceberg, only its tip is visible, while the bulk is below the water’s surface, invisible.

    It is interesting to look at the cost-to-serve analysis and see the small number of client-facing hours during a year versus the overall hours spent providing services to clients.

    In examples I have recently viewed, only 10% of the total hours served on a client’s work were face-to-face. It is clear there are many tasks that clients do not see over a year, yet that are still providing value.

    The list of items below the Iceberg waterline is quite extensive, including:

    • Review of goals and implications;
    • Record of Advice;
    • Supporting documentation and facilitating the implementation of any additional advice provided; 
    • Review portfolio management;
    • Review debt and insurance;
    • Centrelink;
    • Effect of legislation changes; and
    • Administration.

    When presented with all the information, clients can make their own decision regarding the price they are prepared to pay for ongoing advice and the peace of mind it brings. I have many stories where clients have surprised their financial planner with determination to maintain an ongoing relationship at a higher price.

    I believe some of the cost-to-serve issues lie with financial planners underestimating their value and unable to position their fees appropriately.

    Cost-to-serve analysis like this requires help from a financial business specialist, who has seen what works in many different practices.

    If this story resonates with you, why not give me a call? I help financial planners improve their business life.

  • Australia’s Reliance on China

    Australia’s Reliance on China

    In 2007 China displaced Japan as Australia’s largest trading partner. In 2009 it became Australia’s largest export market, and in 2017-2018 we sold A$123.3 billion worth of goods and services to China – 30.6% of our total exports. In comparison Japan, still our second most important market, only took 12.7% of our exports.

    On the flip side China supplied us with 18% of our imports worth A$71.3 billion. Our total economy, as measured by GDP, was worth around A$1.9 trillion at the time, so our two-way China trade made up about 10% of our economic activity. That may not make us totally reliant on China for our economic health, but any major disruption to that trade means Australia will have many billions of dollars less to run our schools and hospitals, pay pensions and wages, and to maintain our high standard of living.

    Should We be Looking to Other Markets?

    In times of smooth sailing a high dependence on one trading partner may not be a cause of great concern. However there are many events that can disrupt trade, from natural disasters and pandemics to political tensions. In such times having a range of export markets helps to reduce the impact of interruptions to trade with one partner.

    Achieving greater diversity of export markets is easier said than done however, particularly when seeking to replace demand from what is the biggest market for many of our goods and services. For example, China takes 100% of the nickel ore, 95% of the timber and 83% of the iron ore that we export. It also takes time to build trust and develop the personal relationships that underpin trade.

    Looking at the big picture, China accounts for around 16% of global GDP. That leaves 84% in which to seek out new markets.

    When Relationships Sour

    The political and diplomatic relationship between China and Australia might be described as ‘challenging’ at present, with trade being used as a weapon of influence. Still, there’s more to Australia’s economic story than China, and many Australians may not experience much fallout from these trade tensions. They may even benefit from a surfeit of cheaper lobsters! On the other hand, and in the worst case, the farmers, winemakers, coal miners and timber workers who have seen the fruits of their labour hit with huge tariffs or denied entry into China face potentially catastrophic losses. This would place a general drag on the economy, potentially spark a recession and lead to an increase in unemployment.

    The Importance of Trade

    Nations engage in trade because it creates wealth. Our iron ore and coal helped to modernise China, build its infrastructure and allow it to make a huge range of manufactured goods, many of which we then import at much lower cost than we could make them for here.

    In support of trade, Australia is currently a party to 14 free trade agreements (FTAs), including one with China. Much of the focus of these agreements is to reduce or remove the tariffs that increase the cost of our goods in our export markets, and where possible eliminate other barriers to trade. For example, the China-Australia Free Trade Agreement provides Australian businesses with better access to Chinese markets for legal, education, financial and tourism services, amongst others.

    Perhaps the most comprehensive FTA is the Australia-New Zealand Closer Economic Relations Trade Agreement. Aside from eliminating all tariffs between the two countries, it also harmonises food standards, which minimises regulatory red tape, and removes impediments to the movement of skilled workers between the two countries. Unfortunately, as the recipient of just 3.6% of our exports, it will take a lot of New Zealands to significantly reduce our reliance on China.

  • 5 Tips for Starting Your Own Successful Business

    5 Tips for Starting Your Own Successful Business

    Some people’s dream is to nurture a business idea through to success. Calling the shots, working their preferred hours and achieving financial independence fires their dream.

    Many people have a great idea but are overwhelmed when they look to turn their idea into a thriving business. Here are 5 tips for translating your dream into reality.

    1. Road Test Your Idea

    Speak to people whose opinion you trust and run your idea past them to gain feedback and an alternative perspective. You’ll be pleasantly surprised by how many people will be happy to help and connect you to professional expertise.

    The chances of your idea being stolen are low. After all, if your idea can be replicated that easily it’s not a great a business concept!

    1. Start Lean

    Way too many businesses run out of money before they have an opportunity to succeed. Spend as little hard cash as possible to get your idea up and running. Get a basic website up using WordPress templates. Target Facebook Ads to reach a specific audience and look at options like Hootsuite to drive your social media presence.

    1. It Takes a Community

    Starting your own business can be tough and lonely! Find a friendly, affordable accountant and lawyer. Sound technical advice can save you money and tears further down the track.

    Similarly, seek out people who’ve been in your shoes. Learn from their experiences and ask for feedback.

    1. Follow the Money

    You need capital to start your business. You may self-fund, borrow from family or friends or tap into a partner to help with your start-up. Map out a draft Business Plan, budget and cash flow projections then stick to your budget. Make sure your business has a dedicated bank account for transparency. Muddling your private bank account with the businesses is a recipe for future disaster.

    1. Legals and Ownership Structure

    Choosing the right structure for your fledgling business can be complex. Multiple options, each with different pros and cons can be confusing. Think about:

    • Your personal liability from your business, its products or services
    • Future plans for downstream partners or investors
    • Administrative costs of setting up and maintaining your preferred business structure
    • Tax effectiveness of your chosen structure.

    Being a Sole Trader may be the simplest and cheapest option, but your personal assets are unprotected. It doesn’t give you much protection if things go horribly wrong in your business.

    An Australian limited liability company (an LLC) remains the most common structure. It needs only one shareholder, one director and one resident director. There is no mandatory minimum paid-up capital and your personal assets are protected.

    Whatever your structure, you’ll need to register your business with ASIC. Your form needs to identify the business’ ownership structure. You will also need an Australian Business Number (ABN) for your business from the Australian Business Register website. Then register for the Goods and Services Tax (GST). Registration is mandatory for any business generating more than $50,000 in revenue (not profits) during any 12-month of operations.

    Final Observation

    Setting up your own business is exciting, challenging and occasionally frustrating if you’re not prepared. Put in place smart plans, receive competent tax planning and legal advice and consider staffing lean, to begin with. Above all else, keep a sharp eye on your cash burn!

  • The US Influence on Australian Shares

    The US Influence on Australian Shares

    There’s an old saying in investment circles: ‘when Wall Street sneezes, the rest of the world catches a cold’. That’s not surprising. The New York Stock Exchange is by far the world’s largest, so what happens there is bound to be noticed by stock exchanges everywhere, including Australia.

    It works on the upside too. A good day on the US market is more likely than not to be followed by a good day here (and elsewhere). This is particularly so when comparing similar indices such as the S&P 500, which tracks the performance of the top 500 US companies, and the S&P/ASX 200, comprising Australia’s top 200 shares.

    Playing follow the leader on a daily basis is one thing, but shares are a long-term investment. So what happens over longer time frames? Once again, there is a remarkable correlation between the two markets. Nearly all of the major ups and downs of the S&P 500 are reflected by the ASX 200. Most of the minor peaks and troughs also match up in both markets.

    While the influence of the US market on the local market is considerable, it isn’t absolute. In many cases the magnitude of the ups and downs differs quite significantly, sometimes favouring Australia, and at other times Wall Street. That’s important for investors because it creates a diversification opportunity. The performance difference between the two markets is big enough that by investing in both markets an investor is likely to be able to reduce the short-term risk of their portfolio while maintaining long-term returns.

    When the performance of the two markets diverge, it is often due to the differences in the underlying makeup of the S&P 500 and the ASX 200, which in turn reflects the differences in the US and Australian economies. The Australian market is dominated by the big four banks and other financial stocks, followed by the resource sector. The US market is far more diverse, with I.T. the leading sector, but with significant contributions from health care, consumer goods and energy stocks.

    The influence that the US market has on us is unlikely to change in the foreseeable future, largely due to its size and its ability to set the mood of investors around the world. It certainly can’t be ignored, so if you would like help in protecting your investments from the effects of a Wall Street sneeze, or to take advantage of the many periods of good market health, talk to your financial adviser.