Newsletter

SMSF Minimum Pension Withdrawal Reminder

A quick reminder for our SMSF trustees about the importance of withdrawing the minimum pension amount from your superannuation fund before Friday 30th June 2017.  You can find each member’s minimum pension withdrawal amounts for 2017 in the covering letter we included with your 2016 financial statements.  If you have any questions to do with your minimum pension requirements please call our office to discuss with one of our accountants.

Are you Salary Sacrificing into Super?

If you have a salary sacrificing arrangement at work to put extra into your super fund, please note that the concessional contributions cap has reduced to $25,000 from 1^st July 2017.  Take the time to review your arrangements now so you can provide adequate notice to your employer if you need to adjust the amounts to remain under the new reduced cap.

If you are a contributing member of a defined benefit fund eg CSS, PSS, Military Super, the type of contributions allocated towards the concessional contributions cap have changed.  If you need assistance with calculating whether you are still able to continue making additional concessional contributions please call our office.

Scam Alert!

If you receive an email from tax@ato.gov.au asking you to download an attachment or provide information, beware. It is yet another scam.  Delete the email immediately and do not click on the link.

Our office has also received emails claiming to be special newsletters with hot stock tips.  These are also scams and do not provide accurate market information.

If you are unsure about an email you have received, please contact our office for more information.

Important Considerations Leading up to 30 June 2017

By now most people are well aware of the changes announced to superannuation in last year’s budget which have now been enacted by law.  These changes limit the amount of tax concessions available to retirees when total superannuation benefits exceed $1,600,000.  Importantly, total superannuation benefits means all amounts held in super including any defined benefit income streams.  The calculation to determine the capital backing these defined benefits is simply the annual income multiplied by 16.  So if you receive $50,000 in a PSS pension for example, that’s an amount of $800,000 that counts towards your $1.6M cap.

These changes are simple in concept (but as always, difficult in execution) and basically limit the amount of capital a person can transfer into pension phase to $1,600,000 and thus attract the 0% tax rate that applies to pension accounts.  For individuals with more than $1,600,000 in super, all is not lost.  You still have full access to your benefits (once meeting a condition of release) and the tax rate on the excess over $1.6M is still attractive at 15% on income and 10% on capital gains for assets held for more than 12 months.

The changes also remove tax concessions received by a super fund on assets used to pay a Transition to Retirement Income Stream. These funds will be required to pay tax on earnings from the assets backing these pensions from 1 July 2017.

Fortunately there is some transitional relief for Capital Gains accrued on assets up to the 30^th June 2017 where these assets were supporting a pension on 9^th November 2016 and your super balance exceeds $1.6M  (for balances under $1.6M capital gains will remain tax free and no relief will be required).

The new provisions also limit the amount of contributions a member can make from 1 July 2017.  If you have $1.6m in super at the end of the previous year, you will be unable to make any further non-concessional contributions, whilst those with less than that can contribute $100,000pa or $300,000 over 3 years under the bring forward rule.  Of course it gets more complicated when your balance is not $1.6m but the non-concessional contribution would cause it to exceed that amount.  We could write an entire article on those provisions alone.

There are also some changes to the concessional contributions rules with the limit reducing to $25,000pa.  If your super balance is less than $500,000, any unused cap will be able to be carried forward for use in a later year although this does not commence until 1 July 2018.  In addition, fund members who are employees and could not previously make personal concessional contributions will be able to do so with the removal of the 10% test from 1 July 2017 (provided still that total contributions are under the concessional cap).

So what are the important things to do before 30^th June 2017?

1. Utilise the current non-concessional and concessional caps to get as much into super as possible.  This includes considering borrowing funds short term if cash will not be available to you until after 30^th June 2017 (ie from the delayed sale of an asset, administration of an estate etc).
2. Look at your super balance and that of your spouse.  If one of you is close to $1.6M and the other is well under, consider a withdrawal and re-contribution (assuming you are eligible to contribute) to even out balances.
3. If you have significant taxable proportions consider utilising the current contribution caps to affect a withdrawal and re-contribution for estate planning purposes.
4. If receiving a Transition to Retirement income stream, consider if it is worthwhile continuing that income stream once the tax concessions are gone or if it can be transferred to an Account Based Pension instead (i.e has condition of release been met).
5. Wait to make any contributions under the CGT Cap (sale of business proceeds).  This can affect your ability to contribute other amounts prior to 30 June 2017.
6. For SMSF members who have made contributions from 1 July 2016 that will be turned into pension immediately, make sure you take a bit more pension than the amount listed on your SMSF accounts cover letter to cover the minimum pension withdrawal requirement for the additional pension.

Importantly, if you believe you have greater than $1.6M in super benefits, including your defined benefit pension, contact us ASAP to discuss any pre 30^th June action that may be advantageous.

ATO Data Matching Program – Online Selling & Uber Drivers

As many of you know, the ATO gathers data from numerous sources to match against the information that you provide on your annual tax return.  The most common ones are the banks for interest income, the share registries for dividend information and the health funds for private health insurance information.

Right now, the ATO are focusing on online selling, in particular, taxpayers who have sold $12,000 or more of goods and services online for the 2016, 2017 and 2018 income years to ensure that people who are considered to be conducting a business are reporting their income appropriately.  To this end, the ATO will be collecting data from eBay Australia and New Zealand Pty Ltd and it is likely that additional providers, such as Gumtree, will be required to provide information in future years.

The Federal Court has recently confirmed that the ATO’s stance that Uber drivers are conducting a business is valid so they have released some guidance.  Uber drivers must keep records, have an ABN and be registered for GST, pay GST on the full fares received, lodge BASs and declare ride sourcing income on their tax returns.  As the ATO will be receiving data directly from Uber it is not worth trying to hide this information, and failure to comply will result in penalties.

If you are unsure if you are conducting a business or indulging in a hobby or you are an Uber driver in need of GST help, please contact our accountants for assistance.

Staff Updates

It is with pleasure that we advise that Jessica Jalkanen, who went on maternity leave in late 2016, has returned to work this month on a part time basis and will be available to answer any queries you may have.

Have your details changed?

To ensure that all your correspondence is going to the right place and that you are kept up to date with the latest information, if you have moved house or changed your phone number or email address, please email admin@veritassolutions.com.au with the new details.

Superannuation reforms now legislated

The following changes to superannuation law have now been legislated and passed through parliament after much debate.

• The introduction of the $1.6 million transfer balance cap – this affects those with superannuation pension account balances exceeding $1.6 million as at 30^th June 2017.  The account balances referred to includes all superannuation pension accounts – pensions from defined benefit funds (which require a special calculation), self-managed super funds, industry funds, retail funds and the like all get added together to work out your balance.
• The concessional contributions cap has been reduced to $25,000 from 1 July 2017.  The Government will also include notional (estimated) and actual employer contributions in the concessional contributions cap for members of unfunded defined benefit schemes and constitutionally protected funds.  This will affect CSS, PSS and Military super members who are currently making additional contributions via salary sacrifice.  Many will no longer be able to make additional concessional contributions from 1 July 2017.
• Also 1 July 2017, the 10% test has been removed, meaning all individuals can claim a tax deduction for personal superannuation contributions  up to the new cap rather than having to utilise salary sacrifice.  It will depend on your personal circumstances to which method will suit you best but it does provide more flexible options to be able make extra contributions.  If you chose to make personal contributions and wish to claim a tax deduction you will need to make sure you complete the required declaration form with your super fund.  If your super fund is not notified they will treat the contribution as a non-concessional contribution by default.
• Individuals with a balance of less than $500,000 in superannuation will be able to carry forward unused concessional contributions caps for up to 5 years from 1 July 2018.
• The non-concessional contributions cap has been reduced to $100,000 from 1 July 2017 and is no longer available to those with account balances totalling more than $1.6 million in superannuation.
• Transition to retirement pensions (TTRPs or TRISs) will no longer have tax exempt status in the super fund from 1^st July 2017, with earnings on those accounts taxed at 15%.

If you would like further details on these changes or are unsure if this affects you, please contact our office to discuss.

Macquarie Bank Cash Management Account – Important Changes Starting in February

Macquarie will be introducing the following new fees to their CMA product which a majority of our SMSF clients and many personal clients use, starting from February 1, 2017.

• A $10 fee for any withdrawal requests received by paper, email or fax for less than $20,000. A free service is available for online transfers up to $20,000 using your internet banking account.
• All cheque requests going forward will be issued as bank cheques, incurring a $10 fee each. There will be no change to cheque books. You won’t be charged a fee for any cheques issued from your cheque book although the $30 fee to purchase a cheque book remains.

To help you avoid these fees, there are several options that allow you to make payments and view transactions free of charge, including:

• electronic funds transfers (up to $20,000 a day)
• unlimited transfers to nominated bank accounts
• BPAY® payments (subject to BPAY® biller code limits) free of charge via online and mobile banking.

With just a couple of clicks, you can set up online banking at macquarie.com.au as well as download the Macquarie Mobile Banking app onto your smartphone (iOS or Android) to view your balances and transact on the go, wherever and whenever you want.

Did you know your contact details can keep your accounts safe?

To keep your account secure, Macquarie Bank need your current mobile number and email address.

Macquarie Bank sends secure codes via SMS or email confirmations to verify changes or transactions on your account, so it’s important they have your most up to date mobile number and email address. That way, Macquarie Bank staff can contact you to confirm payments and transactions or alert you if something looks suspicious when and as it happens.

Updating your contact details is easy – simply call Macquarie Bank on 1800 806 310 or call our office and our staff can assist with the necessary documents.

Letters from the Australian Business Register (ABR)

We have been informed that the ABR is reviewing their data online and Self-Managed Super Fund trustees may receive an email or letter informing you that your ABN details are out of date.  If you receive such a letter from the ABR, please forward it to our office and we can review the register and confirm your details online.

Do you rent your place with Airbnb?

With Airbnb becoming more popular, the number of homes being listed in Canberra alone more than doubling in the past year, it is important to remember that the money you earn from renting out a room in your house is rental income.

This rental income needs to be declared in your tax return for the relevant financial year to avoid penalties and fines from the ATO. Airbnb is one area the ATO are using data matching technology to catch out undeclared income.

If you are renting out a room you can only claim expenses related to the part of the house being rented out and you need to apportion the expenses accordingly.  This is generally done based on the floor-area used solely by the renter, plus a reasonable amount based on the renter’s access to common areas.  Common expenses that can be apportioned include:

• interest on loans for the property
• council rates
• gas/electricity
• property insurance
• cleaning and maintenance costs

Expenses can only be claimed for when the room is available to rent. If you use the room for personal reasons between renters (eg as an office or for storage) you cannot claim deductions during this time.

Also note that CGT may apply if you sell the property used to earn rental income, even if the property is your main residence.

Deceased Estate Administration

Estate planning has long been an area of expertise amongst financial planners, with much effort being put in to establishing thorough Wills and Binding Death Benefit Nomination to ensure the desired outcome in the event of a persons death.  This estate planning process provides executors with instructions on what to do when a loved one dies, but doesn’t tell them how to go about administering an estate.

At Veritas Wealth Solutions we are sadly often faced with clients who have lost a loved one, be it a spouse, parent, sibling or family member and consequently we have become experienced in all facets of estate administration. The truth about estate windup is that most of the process requires taxation or financial planning expertise rather than legal expertise, whether it is the sale and distribution of assets, notification to various organisations including the ATO and Centrelink, or preparing tax returns for the deceased, the estate or the resulting testamentary trusts.

Importantly, there are many decisions that are made during the administration of an estate that can affect the tax outcome and the long term wealth of the beneficiaries.  Ensuring the estate is wound up in the most tax effective manner and that appropriate structures are utilised is the main focus for us at Veritas.

We are also experienced in the administration of Superannuation Death Benefits and effective application of both Binding and Non-Binding Death Benefit Nominations. Not everyone with Superannuation dies with a Death Benefit Nomination in place and this isn’t necessarily a bad thing. In many cases the most effective distribution of assets can be achieved when the executor has flexibility over the method of distribution (there are of course situations when BDBNs are absolutely recommended).

Being an executor can be a stressful time, especially trying to deal with the administration of the estate whilst grieving for the deceased. At Veritas Wealth Solutions we can make this process much simpler by taking over most of the required tasks to ensure a smooth windup of estate assets.

Hopefully most clients have a thorough estate plan prior to death, however many executors may still be faced with complex and extensive administration of assets. If you have a loved one die and require assistance with the windup and administration of the estate please do not hesitate to contact the team at Veritas Wealth Solutions.

Superannuation Changes

Non-Concessional Contributions Cap

As most of you know, on 3^rd May 2016, the treasurer announced a lifetime non-concessional contributions (NCC) cap of $500,000 which messed up countless retirement plans.  In a welcomed backflip due to parliamentary opposition, this proposal has been scrapped.  In place is a reduction in the annual NCC cap to $100,000 from 1^st July 2017 (subject to legislation).

This means the NCC cap for this current financial year remains at $180,000, and there is no need to try to calculate how much you have contributed from 2007.  If you are under 65, the 3 year bring forward rule is still available.

It isn’t all good news though, because from 1 July 2017, individuals with a balance in superannuation of more than $1.6 million at 30 June of the previous financial year will no longer be eligible to make non-concessional contributions.  An individual will also not be able to make NCC that mean their balance would exceed the $1.6 million threshold.

Transfer Balance Cap of $1.6 million

Effective from 1^st July 2017, the $1.6 million cap on superannuation in pension phase accounts will commence.  This applies to both current retirees and individuals yet to retire, and applies to each individual.  Individuals with pension balances of more than $1.6 million will need to take action to avoid penalty tax on any earnings on the excess.  There are two choices:

1. You can transfer the excess above $1.6 million into an accumulation account within your existing super fund; or
2. You can withdraw the excess above $1.6 million out of the super system.

This measure has yet to be legislated, but it is likely that it will become law.

Work Test to Remain in Place

The Coalition intended to remove the over-65 work test (must work 40 hours in 30 days in order to contribute to super) but have decided to retain it.

Transition to Retirement Pensions

The Coalition still intends to remove the tax exempt status of earnings supporting a transition to retirement pension, subject to legislation.  This means that earnings in the pension fund will be subject to 15% tax.

Removal of 10% test for Concessional Contributions

In order for an individual to claim a tax deduction for a concessional contribution to their super fund, they must be self-employed or have earned less than 10% of their income from an employer.  This requirement will be removed from 1 July 2017, allowing all individuals under 75 to claim tax deductions for personal super contributions.

In the absence of legislation to give effect to all these measures, we recommend you seek advice before acting.  If you have any questions on how these proposed changes will impact you or what opportunities they may create, please contact our office.

Spring clean your finances

Spring is a great time of year to review your finances.  Whether it be checking your mortgage provider is offering a competitive rate, reducing your household costs or just time to rethink about consolidating those multiple superannuation accounts.

Here at Veritas we can assist with superannuation reviews and understanding your insurance needs.  Remember switching super may also close valuable insurance cover so it is always best to understand the full consequences before rolling your benefits into another fund.

Do your kids need help with budgeting? Or help in setting goals?  Don’t forget we also have gift vouchers available that can be useful presents for your children.  We can help them on the path to financial success with our financial coaching and planning expertise.

Handy resources:

https://www.moneysmart.gov.au/tools-and-resources/news/spring-clean-your-finances

New Tax Tables from 1 October 2016

As announced in the 2016 Budget, there was a change to the personal income tax rates, increasing the 32.5% tax threshold from $80,000 to $87,000. This change applied from 1 July 2016.

Employers need to take note as this means new tax tables and payroll software updates will apply from 1 October 2016. The updated tax tables can be downloaded from www.ato.gov.au/taxtables or contact your payroll software provider for the relevant updates.

Beware scammers and be safe online

We have had quite a few clients call up about scammers doing the rounds pretending to be from the ATO so we thought it was a great time to provide resources to help you if you receive an unexpected call requesting personal information.

www.scamwatch.gov.au provides up to date information about current (and old) scams occurring in the community.

Never divulge any personal information to someone who calls you or knocks on your door.  If in doubt hang up and contact the organisation they propose to be from directly or check their website to see if they are aware of any scams.

www.staysmartonline.gov.au provides great resources on how to keep your personal and financial information safe when using the internet.

Some basics on how to protect yourself online

• If you are unsure about the sender, delete the message—don’t reply or try to unsubscribe to the email or SMS as it will confirm your address and you may receive more spam.
• Never send your personal, credit card or online account details out in an email.
• Don’t access banking and other online accounts from an email link—use a bookmarked link or type the address into your browser.
• Always check the website address carefully, scammers often set up fake websites with very similar addresses.
• Always read the terms and conditions carefully, ‘free offers’ often have hidden costs.
• Check the business name at www.asic.gov.au (Australian businesses only). You can also search for the business name or scheme through a search engine.
• Install software that protects your computer from viruses and unwanted programs and keep it up-to-date.

Like to know more? Use the search terms “stay safe online”.  This will provide additional resources for you to read.

Important changes to the Centrelink Age Pension in 2017

From 1 January 2017, there are some important age pension changes that could impact your benefits and warrant some pre-emptive action.

What’s changing?

The lower asset threshold that determines your eligibility for the full age pension will increase. This threshold varies, depending on your relationship status and whether or not you own a home. It’s also indexed periodically by the Government. To find the current thresholds visit www.humanservices.gov.au.

In addition, the age pension payable will be reduced by $3, for every $1,000 you hold in assets above this threshold.  The current reduction amount, known as the ‘taper rate’, is $1.50 per $1,000.  This will lower the asset test upper threshold after which no pension is payable.

How will these changes impact your entitlements?

Your age pension entitlements are assessed under both an income and assets test. The impact of these assets test changes on your entitlement to age pension will depend on a range of factors.

If we look at the current and new asset test thresholds for a homeowner couple for example, the lower threshold will increase from $296,500 to $375,000 on 1 January 2017. This means more people will be eligible to receive a full pension under the asset test assessment. However, the income test may override the asset test (depending on the type of assets and income) and reduce their pension payment.

In contrast, the asset test upper threshold after which no pension is payable will reduce from $1,175,000 to $818,000* for a homeowner couple on 1 January 2017, resulting in many pensioners losing entitlement to pension altogether.

What to do next?

The thresholds in the above example apply exclusively to home-owning couples and the dollar values would be different if you are single and/or not a home-owner. The best way to determine how you may be affected is to make an appointment with your adviser to review your financial position and determine if any strategies can be implemented to improve your entitlement to the pension going forward. The earlier you do this, the more you may be able to take advantage of any suitable strategies.

To find out how the changes could impact you and discuss strategies that may assist you, contact our office to make an appointment with one of our advisers.

* Actual cut-out thresholds are dependent upon the rate of pension payable and therefore the cut-out thresholds that will apply at 1 January 2017 are not yet known. We have assumed some indexation of the current maximum rate of age pension.

Asset Test comparison

Information for current threshold valid for 20^th September to 31 December 2016

Staff Updates

As most of you know, Ken has returned from his extended leave and is back on deck and hard at work.  If you have any queries, please don’t hesitate to contact him.

It is with great pleasure that we advise that on 12^th August 2016, Jessica Jalkanen gave birth to a very healthy baby boy, weighing in at 4.19kgs (just under 9 pound 3).  Jaxon Thomas Brown and Jess are both home and doing very well.

Staff Updates

From 1^st August 2016, Jessica Jalkanen is taking maternity leave.  Any email queries that you usually direct to Jess can be sent to Allison Burman (allison@veritassolutions.com.au), or alternatively you can call the office on 02 6162 1522.

Ken Wild has been enjoying his extended leave but we are sure that he is looking forward to returning to work at the beginning of August.  For queries in the meantime, please continue to contact Allison Reid, Rose Geary or Jodie Dickson.

A Will is not enough – where will your Super go?

Superannuation is managed by Trustees and regulated by trust deeds and superannuation law.  When you die, your superannuation balance does NOT form part of your estate nor is it automatically covered by your instructions specified in your Will.  The Trustees of your superannuation fund, whether it be a self-managed fund, retail or industry fund, have the power to exercise their discretion in dealing with a deceased members benefits.

We recommend all members put in place a Binding Death Benefit Nomination (BDBN) with your fund(s), preferably non-lapsing (if available).  If a BDBN is in place, a trustee no longer has discretion about how to pay your death benefits as they are bound to what is specified in the nomination in the proportion you have stated.  Unfortunately, when no nomination is in place, or the nomination is non-binding, the Trustee has complete discretion on how the benefits will be allocated.

All clients with industry and retail funds should check their latest member statement to make sure a binding death benefit nomination is in place.  If not, this form should be readily available from the funds website to complete.

Our Self-Managed super fund clients should have in place Non Lapsing Binding Death Benefit Nominations.  If personal circumstances have changed recently, please contact the office so we can prepare a new form for signing.  If you do not have a copy of your nomination, we can email/mail a copy to you as you should have these with your personal records.  Please let us know.

Estate planning is a complex area so we recommend you seek specialist advice to assist with understanding taxation consequences and to make sure your intentions will be followed through.  Please contact our office if you need any further information or assistance.

Insurance in a SMSF

If you are thinking of getting insurance in a SMSF, there are a few things you should consider first:

1. The benefit of insurance is that it provides protection for the members of the super fund that are listed on the policy. It may also be more tax effective for the super fund to be claiming the expense than yourself personally. There are also cash flow benefits of using the money within the super fund to pay for the insurance, rather than from your personal income.
2. The disadvantages of insurance is that the premiums you pay from the super fund may be higher than you would pay personally, and there may be tax payable on some of the benefits paid. Also, using the super fund’s cash to pay for the insurance will reduce the member’s retirement balance. In some cases the member may have the option to contribute money into the super fund to pay for the insurance, however this contribution will count towards their contribution caps.
3. The types of insurance products that SMSF can purchase include life insurance, standard income protection and Total and Permanent Disability (TPD) insurance with own occupation definition.
4. Making an insurance claim through your SMSF can be a complicated process, with a requirement to meet a “condition of release” according to the SIS Act in order to access the insurance payout.  In some circumstances it may be more appropriate to hold some types of cover outside of the fund, thereby removing the requirement to meet the difficult “condition of release” from super.

If you would like more information for whether getting insurance in your SMSF is right for you, please feel free to make an appointment with our financial advisor.

ATO target areas

Each year the ATO targets specific items which they consider to be at high risk of being claimed as incorrect deductions.  Individuals’ tax deductions are being scrutinised this year, with the ATO reminding people that they are entitled to claim a deduction if the 3 golden rules apply:

1. Make sure you spent the money yourself and were not reimbursed
2. Make sure it’s related to your job
3. Keep a record to prove it

The ATO are focusing on deductions for phone and internet, car and travel expenses and self-education, however if they are work related expenses then you are entitled to claim what you are owed, but no less and no more.

The ATO are also focusing on the so-called sharing economy.  Uber drivers, people who let out rooms on Airbnb or storage on Spacer and many other apps connecting people who need with others who have are being warned to declare every cent of income earned in this way. If you are going about something in a business-like way, then everything from the first dollar is considered taxable income.  Uber drivers are also required to pay GST on every dollar, but this has not filtered through to other services as yet.  If you are unsure of what your obligations are or you need help with your bookkeeping, record keeping or tax return preparation, please contact our office and have a chat with one of our accountants.

These targeting measures are designed to catch out those people making false and fraudulent statements so if you do make an honest mistake then you have nothing to fear.  Simply alert your accountant or the ATO to get it sorted out. If you are unsure what you are entitled to claim, check the ATO Website or contact our office for more information.

A few interesting facts about retirement

Given the financial demands of everyday life, planning your retirement may be a relatively low priority. You may also think that you have plenty of time to plan. But before you put off planning for your retirement any longer, here are some key facts you should consider.

Your retirement could last 30 years or more

A male currently aged 65 has a future life expectancy of 19 years and for females currently aged 65 it’s 22 years. But these are just the averages and they are increasing steadily. As these trends continue, your retirement could stretch to three decades, or maybe even longer.

You shouldn’t rely on the age pension

The full single rate age pension only provides around 25% of average weekly male earnings. What’s more, qualifying for the age pension may become more difficult in the future, given our population is ageing.

You shouldn’t rely on an inheritance

Your parents may end up spending all their savings and may even need to downsize their home to help make ends meet. So, if you’re relying on an inheritance to fund your retirement, you could be disappointed.

You might not have enough super either

With some of your money going into super through compulsory employer contributions, you’re off to a good start. But assume that those employer compulsory contributions will mean you have enough super to get you through your retirement and you could be in for a nasty surprise. Research conducted by Rice Warner Actuaries revealed that Australia has a shortfall in super of close to $1 trillion, which means many Australians may not have enough super to fund their retirement.

So what can I do?

Start planning now

Thankfully, with a bit of preparation, it’s possible to plan for a long and comfortable retirement. Strategies like salary sacrificing into super, making lump sum contributions or using a transition to retirement strategy (pending the election result), are all smart strategies to consider to boost your super, and some of them generally have tax benefits too. It’s also possible to use your super to start a pension that pays you a regular income. Some pensions even guarantee to pay you an income for the rest of your life, negating the risk of outliving your savings.

Talk to a retirement planning expert

The best way to see how your retirement savings are currently tracking, and find out what you could do now to increase your super for retirement, is to call our office and speak to our financial adviser, Ken Wild. He can help you set realistic goals and put a plan in place to achieve them.

Small Business

• The company tax rate for businesses with annual turnover of less than $10 million will be reduced to 27.5% for the 2016-17 financial year.  It is proposed that by 2027, the company tax rate will have reduced to 25% for all companies.
• The small business entity turnover threshold will increase from $2 million to $10 million from 1 July 2016 so more can access the reduced company tax rate and other income tax concessions, including the $20,000 instant asset write off.   Note that the turnover threshold has not increased for access to the small business capital gains tax concessions.

Individuals and Families

• The threshold at which the 37% marginal tax rate commences will increase from $80,000 to $87,000 from 1 July 2016.  The maximum tax saving is $315 per year.
• The low-income thresholds for Medicare levy and surcharge have been increased for the 2016 financial year.  If you would like more details on these thresholds, please contact our office.
• The Private Health Insurance rebate will not be indexed for the next 3 years.

GST and Other Taxes

• Tobacco excise will be increased by 12.5% annually for the next 4 years, taking the excise on a cigarette to almost 69% of its average price.
• GST will be applied to low value goods that are imported by consumers from 1 July 2017.  Overseas suppliers that have Australian turnover of $75,000 or more will be required to register for, collect and remit GST for goods supplied to Australians.

Superannuation

• Concessional contributions cap has been reduced to $25,000 for all taxpayers from 1 July 2017.
• Individuals with a super balance of less than $500,000 will be allowed to make additional concessional contributions over the cap, where they have not reached their cap in previous years effective from 1 July 2017.  The amounts are carried forward on a rolling basis for 5 consecutive years but only unused amounts accrued from 1 July 2017 can be carried forward.
• The current restrictions for people aged 65 to 74 from making super contributions will be removed from 1 July 2017.  People under 75 will no longer have to pass the work test to contribute.
• From 1 July 2017, the ‘10% rule’ will be abolished and all individuals up to age 75 will be allowed to claim an income tax deduction for personal superannuation contributions.
• A lifetime non-concessional contributions cap of $500,000 has been introduced, effective from 7.30pm on 3 May 2016 (immediately).  The lifetime cap takes into account all non-concessional contributions made on or after 1 July 2007.  This replaces the existing annual cap of $180,000 per year.  Contributions made before commencement cannot result in an excess, but contributions after commencement will need to be removed or they will be subject to penalty tax.
• From 1 July 2017, a balance cap of $1.6 million on the total amount of accumulated superannuation an individual can transfer into tax-free retirement phase will be introduced.  If an individual has more than $1.6 million, they can maintain the excess in an accumulation phase account where earnings are taxed at 15%.  Members already in pension phase with balances above $1.6 million will be required to reduce their retirement balance to $1.6 million by 1 July 2017 by converting excess into accumulation phase accounts.  Amounts over the balance cap will have a tax levied, in a similar method to excess non-concessional contributions.
• Super funds will no longer be able to claim a tax exemption for earnings of assets supporting a Transition to Retirement Pension as of 1 July 2017.
• The ability to treat superannuation income stream payments as lump sums will be removed from 1 July 2017.
• The Div 293 tax income threshold (when high income earners pay additional contributions tax) has been reduced from $300,000 to $250,000 from 1 July 2017.

Superannuation Changes – What Do They Mean for You?

Whilst we have sympathy with the intention to limit the largesse of the super system for the truly well off, some elements of the measures proposed change the ground rules quite considerably and will have an immediate adverse impact on many retirees and near retirees in particular.

There is some element of retrospectivity also with the changes to the tax treatment of in particular transition to retirement pensions and the immediate restriction on after tax (non-concessional) contributions to $500,000 per person over their lifetime.  This cap also seems low in today’s world where many Australians have assets in excess of that but would not see themselves as “rich”.

There are also some equity issues. For example a couple with $2.5m combined pension assets split 50/50 will pay no tax on the earnings of their pension accounts. Another couple with $2.5m split $2m and $500,000 will pay tax of $3,750 and now with the changes to the contribution caps are most unlikely to be able to adjust the account balances to rectify the situation.

The ability of the self-employed who have not had the benefit of compulsory employer contributions to catch up as they near retirement is impacted by the changes to both contribution caps also. Some offset to that is the very sensible rule change removing the token work test for the over 65’s and allowing contributions to be made until 75.

We also foresee a number of administrative issues arising, for example, with the tracking of non-concessional contributions from the start date of 1 July 2007. Records will not be easily obtained from fund managers and the like who held super investments that were later closed upon rollover to a new scheme. Innocent mistakes are likely to be made where contributions were overlooked and then penalties may be imposed.

All of the changes have some way to run, of course, with an election and having to be passed into law so the outcome may be many months away. This means something of a hiatus in terms of planning for many people as we await the outcome. We will be monitoring developments and when the outcome is clearer we will be able to advise on what strategies to employ for the future within the new legal framework.

Staff Updates

Notice of Extended Leave

Ken Wild will be on extended leave for all of June and July 2016.  If you foresee any issues arising during that period that you would like to discuss with Ken before he takes leave, please make contact with our office to schedule an appointment as soon as possible so we can put in place the appropriate strategies or actions.

In Ken’s absence please contact the following staff members if any unexpected issues arise:

• Jodie Dickson – financial advice and investment related matters (email jodie@veritassolutions.com.au)
• Allison Reid – administrative matters (email allison.reid@veritassolutions.com.au)
• Rose Geary – administrative matters (email rose@veritassolutions.com.au)

Team Additions

Many of you will have already had the pleasure of dealing with her, but we would like to extend a very warm welcome to our team to Rose Geary.  Rose joined us towards the end of the 2015 year as part of our Client Services team assisting Ken to deliver great outcomes.  She comes to us well qualified, possessing a Bachelor of Commerce and Law and previous experience in a financial services environment.

Team Subtractions

With sadness, we advise that Maureen Wild will be moving on to pursue other opportunities after many wonderful years as a valued member of our team.  Maureen’s last day will be Wednesday 27th April 2016 and while we will miss her expertise and smiling face, we wish her well in her future endeavours.

SMSF Minimum Pension Withdrawal Reminder

A quick reminder for our SMSF trustees about the importance of withdrawing the minimum pension amount from your superannuation fund before Thursday 30^th June 2016.  You can find each member’s minimum pension withdrawal amounts for 2016 in the covering letter we included with your 2015 financial statements.  If you have any questions to do with your minimum pension requirements please call our office to discuss with one of our accountants.

Changes to Motor Vehicle Deductions for the 2016 Financial Year

The number of methods available for calculating your motor vehicle deductions has been reduced from four to two. The two methods that you can use for the 2015/2016 financial year are the log book method and the cents per kilometre method.

Log Book Method:

The log book method remains the same as previous years where you can claim the business use percentage of the vehicle. The expenses that you can claim under this method include the running costs and decline in value. You cannot claim capital costs (eg, the purchase price of the car, principal costs on money borrowed to buy it, and any improvement costs). The log book must be kept for a minimum of 12 consecutive weeks and is valid for the next 5 years.

Cents per Kilometre:

Previously, the rates for claiming a deduction of cents per kilometre were based on the engine size of your vehicle.  In order to simplify this, the ATO has replaced these variable rates with a single rate of 66 cents per km regardless of the engine size of your vehicle.

Exceeding Your Maximum Pension Withdrawals for TRIS

A Transition to Retirement Income Stream (TRIS or TTRP) is a special type of pension that allows a member to access their superannuation benefits while still working once they have reached preservation age.  There are specific restrictions which state that the maximum allowable withdrawal is 10% of the member’s balance.  When a member has a TRIS and they exceed this maximum pension withdrawal limit within the financial year, they have breached the super laws and regulations that the super fund must abide by. The trustees of the fund need to be aware that the following may apply:

• The fund may become non-compliant and the trustees penalized.
• The TRIS will cease for tax purposes from the start of that financial year, meaning that the fund will not receive any current exempt pension income for year (will have to pay more tax!)
• As the TRIS has ceased, any payments made during the year are not considered pension withdrawals and will be counted as super lump sums for income tax purposes and Superannuation Industry (Supervision) (SIS) Regulation purposes.
• These lump sum payments will then be included in the member’s assessable income and may be taxed at the taxpayer’s marginal tax rates, without the benefit of any tax offsets. These payments are treated as early access to member benefits which is a breach of the SIS payment standards.

If you are unsure if you can withdraw certain amounts from your SMSF, please contact our office to discuss with one of our accountants before making the withdrawal.

The Hidden Influences of Your Brain – Part 2

In last quarter’s newsletter, we followed Mark & Meg as they purchased a car and discussed a number of hidden decision-making biases that they were exposed to. This quarter we will look at some common investment errors that result from underlying behavioural biases.

While Mark & Meg are a married couple and share the family income and expenses, they have quite different risk preferences and perspectives on investing. Both had assets before they met so have continued to manage their investments separately. Mark is a self-directed share investor, managing a portfolio of individual stocks. Meg mostly prefers to invest in managed investments.

Mark buys Ivoprotein Industries Ltd

Mark is considering a new investment opportunity that he recently read about, Ivoprotein Industries. It’s a small listed company that has developed a gene-based therapy that reduces appetite and can help the overweight. It has received FDA approval in the US and has signed up a distribution agreement with a major pharmaceuticals company. Sales are growing rapidly (albeit off a small base) and, given the global obesity epidemic, the potential market size is huge. Ivoprotein’s share price has risen from 5.5c just 18 months ago to 48c today.

What behavioural biases can you spot?

There is a collection of biases that are likely to predispose Mark to buy Ivoprotein. Firstly, there is a lot to like about Ivoprotein, and a lot to be excited about. An innovative new product; high sales growth; high share price growth; an expanding market opportunity (pun intended); a salient and easily understood investment story. These characteristics are likely to engage the reward pathways in the emotional centres of Mark’s brain making him feel good about the stock. In the complex and uncertain world of share market investing, feeling good about something can be an easy shortcut when deciding what to buy. However, unfortunately, good feelings don’t necessarily predict good performance!

Secondly, as we saw with assessing Audi’s maintenance record, we are subject to a range of information processing errors. These may lead Mark to extrapolate Ivoprotein’s share price growth, sales growth and commercial successes into the future. However, due to a phenomenon called “regression to the mean”, other things being equal, Mark should expect Ivoprotein’s stellar run to revert to closer to industry average performance for equivalent biotech stocks.

Thirdly, based on the success rate of other promising biotech companies like Ivoprotein, we would expect there to be a very small chance that Ivoprotein will go on to become a highly profitable global drug company. However, just like the small chance of winning the lotto, we tend to weight these small probability events more heavily in our decision-making process than we should.

The effects that lead Mark to buy Ivoprotein are common to many “growth” stocks, and have far-reaching implications for investment markets and strategies. We will explore these in later posts.

Meg sells Australian Equities Fund

While Mark watches the stock market daily, Meg tunes in to financial matters only occasionally. There are too many other things going on in her life, and it isn’t a passion of hers. However, it seems to her that whenever she reads something about financial matters it is bad news: there is a war starting somewhere or a central banker causing market to fall. Meg is going to sell some of her Australian Equities Fund to help pay for her new car. To reduce her risk, she’s wondering whether she should convert more of her fund to cash.

What behavioural biases can you spot?

Like Mark, Meg is subject to both emotional and information processing biases. A major cause of Meg’s thinking is likely to be her “loss aversion”. Loss aversion means, in part, that we fear losses roughly twice as much as we enjoy equivalent gains. Every piece of negative news increases Meg’s anxiety, making her increasingly predisposed to sell as the market falls. Of course, selling after market falls is the opposite of the conventional wisdom – meaning that Meg is at risk of selling at the worst time and being under-invested during a subsequent market rebound.

Meg is also subject to the “availability bias”. In theory, a fully rational investor should process all available relevant information before making an investment decision. Clearly this is not realistic, particularly for Meg given her competing priorities. We are therefore likely to act on information that comes to our attention. In Meg’s case, the information she relies on is what is presented to her via mainstream news channels. As a result, it has been filtered to reflect perceived news-worthiness, perhaps biasing it towards sensationalist (negative) events.

Mark sells Tintop Resources Ltd 

Like Meg, Mark needs to free up some cash to help purchase the new car. He also needs to fund the acquisition of Ivoprotein. To do this he is thinking of selling his investment in Tintop industries. Mark bought Tintop for $2.33 a few months back. Since then it’s done well – rising to $2.81, netting him a healthy 20% gain. “I’ll lock in my profit,” Mark says to himself.

What behavioural biases can you spot?

While it may be completely necessary for Mark to sell something to fund his car purchase and other investments, choosing Tintop suggests Mark may be subject to the “disposition effect” which is the tendency to sell winners (ie investments on which we have made a gain) and hold onto losers. It is a function of two underlying effects: “mental accounting” and “loss aversion”.

Traditional finance theory suggests that a fully rational investor should view each investment in the context of its contribution to overall portfolio risk and its contribution to achieving their long-term financial goals. However, many investors consider each investment in isolation. This is a form of mental accounting. Given the complexities of investment markets and our finite brain capacity it serves a useful purpose. It simplifies investment decisions to a manageable level. However, it leaves us exposed to making individual stock selection decisions that do not improve overall portfolio performance.

We discussed part of the “loss aversion” effect with Meg’s decision to sell some of her Australian Equities Fund. Mark is experiencing a different aspect of it. Mark’s gain makes him feel good. However, the bigger the gain, the less additional satisfaction he derives. Conversely, were that gain to evaporate, his positive feeling would diminish rapidly. Studies suggest that investors consciously or subconsciously envision this scenario, and anticipate the regret they would feel if they didn’t sell when they had the chance. With diminishing pleasure from further gains, and large potential regret from not selling, off-loading Tintop may feel like a natural thing for Mark to do.

Unfortunately the disposition effect leads to bad outcomes for investors – leading them to sell stocks (winners) that continue to rise, and to hold stocks (losers) that continue to fall.

The Duties of a Company Director – Part 2

In last quarter’s newsletter, we discussed the basic duties required of Company directors.  The following are further requirements that directors must fulfil in order to comply with the Corporations Act 2001.

Your annual statement

Each year within a few days after your company’s review date ASIC will send your company an annual statement.

The annual statement sets out the company’s details recorded in ASIC’s register, such as the names and addresses of its directors and secretary, registered office, principal place of business, ultimate holding company (if any), share details and members’ details.

If these details are correct and no other changes have occurred that require you to notify ASIC, then within two months after the review date you need to pay the annual review fee shown in the invoice that accompanies the annual statement, and the director(s) need to pass a solvency resolution.

If any details on the statement are no longer correct, you must update them. You have 28 days from the statement’s issue date to do so.

Pass a solvency resolution

The company’s directors must pass a solvency resolution within two months after the company’s review date, unless the company has lodged a financial report with ASIC within twelve months before the review date.

A positive solvency resolution means that the directors think that there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. You don’t have to lodge notification of a positive solvency resolution with ASIC, payment of the company’s annual review fee is taken to be a representation by the directors that the company is solvent.

A negative solvency resolution means that the directors think that there are not reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. If the directors pass a negative solvency resolution ASIC must be notified within seven days after the resolution has been passed.

Changes in your company’s details

ASIC must be informed of certain changes to your company, some of the common changes are listed below. The Corporations Act requires officeholders to inform ASIC of these changes within a certain time period otherwise late fees may apply.

• Change of place you keep your Company Registers
• Change of officeholders or details of officeholders
• Resignation of director or secretary
• Change of registered office
• Change of company name
• Issue of new shares
• Change to members (shareholders)
• Changes to ultimate holding company
• Division or conversion of shares
• Negative solvency resolution
• Solvency resolution not passed
• Change of company review date

If you would like further information about the duties and responsibilities of a director, please contact our office.  Further details can also be found on the ASIC website.

Thank you for your Support – Client Referrals

Veritas Wealth Solutions is grateful for the continued support we receive from our clients. A significant number of our new clients continue to come from your referrals. So a big thank you to all our clients who have passed our name onto family, friends and work colleagues. We strive to provide high quality advice and customer service to all our clients and your referrals infer we are achieving our goals.

Staff Updates

Veritas Wealth Solutions would like to congratulate director, Jodie Dickson and accountant, Allison Burman for recently being awarded industry professional certifications. Jodie has recently been accredited as a Certified Financial Planner® (CFP®) from the Financial Planning Association of Australia (FPA), recognised globally for upholding world class professional standards in the financial planning. Allison has recently achieved her Certified Practicing Accountant (CPA) qualification from CPA Australia. This qualification takes multiple years to achieve, including after-hours study and exams and professional experience. Please join us in congratulating Jodie and Allison on their outstanding achievements.

Certified Financial Planning Professional Practice

Did you know Veritas Wealth Solutions is recognised as a FPA Professional Practice? 100% of our financial planners meet the Certified Financial Planner® (CFP®) professional status and our practice certification demonstrates that we are committed to the highest professional and ethical standards.

Gift Vouchers Available for Financial Planning Initial Consultation

Do you want to give your siblings, children or grandchildren a good financial start in life? We have available gift vouchers that provide an initial financial planning consultation (approx. 60 – 90 minutes) with our financial planners Ken Wild and Jodie Dickson. Cost for the gift vouchers is $165. This could be the start they need to get on track and achieve a financially secure future.

New Year Financial Health Check – Are You on Track for the 2016 Financial Year?

Whilst many people make New Year resolutions to set personal goals, January is also an important milestone in the financial year.  Reviewing your finances now allows you time to implement new strategies and/or make sure existing plans are running accordingly to schedule.  We have included some items that should be checked or planned for now rather than in June of the financial year when it is often too late to implement.

• For those working – check your Super Concessional Contributions (this includes Super Guarantee, Salary Sacrifice and personal contributions) to make sure you do not exceed your cap ($30,000 for under 49 years old, $35,000 for 49 and over) or look at making further contributions to make the most of what is still available. Remember deductible super contributions are only tax deductible in the financial year they are received in your super fund account and often the last quarter or monthly contributions are not received until the next financial year.  Ask your employer or check your super fund account if you are unsure of the amounts that have been paid for this year so far.
• For retirees – check that you are on track with your minimum pension withdrawal amounts. Scheduled fortnightly and weekly payments can sometimes fall short due to the timing of weeks in the financial year i.e. 25 payments rather than 26.
• Be proactive – for those that tend to leave paperwork to the last minute start organising your accounts and tax paperwork now. This alleviates stress by not leaving it until the last minute and also assists in getting an idea of your current financial and tax position so you can utilise the next few months effectively and then;
• Talk to us at Veritas Wealth Solutions to see what you can possibly take advantage of over the next few months or have any questions answered in regards to your financial goals before June 30 arrives.

The Hidden Influences of Your Brain – Part 1

Behavioural Biases

What time did you get out of bed this morning?  How did you decide which sock to put on first?  Did you have toast or cereal?  Some of these decisions might have been made consciously.  You set the alarm clock, for example.  But many decisions are made subconsciously – the result of a habit, or an unnoticed behavioural cue, or a distant throwback to a something that helped our ancestors survive on the savannah perhaps.

What may surprise you is how many decisions fall into the subconscious category.  While it is not precisely measurable, neuroscientists estimate that 80-95% of decision-making occurs subconsciously.  That’s right – despite that our internal dialogue and subjective reality that tell us we are the masters of our own minds, the reality is otherwise.

In this article and the next newsletter we will examine:

1. Major decision-making biases that our brains expose us to;
2. Common investment errors that result;
3. Distortions these biases create on financial market prices and returns;
4. Five tips on how to avoid investment decision-making traps; and
5. How investors actually respond to these issues and opportunities today.

As we go, we will challenge you to identify hidden influences in a range of investment and everyday life scenarios.  If you’d like to join us on this journey, you can start below, where we analyse Mark & Meg, a married couple as they decide to buy a new car.

Mark & Meg buy a car

Mark & Meg are a middle-aged professional couple in their 50s.  Mark is a business banker at a major bank, while Meg works part time as a senior architect at a mid-sized local firm.  With their mortgage now under control and the kids starting to become more independent, they feel it’s time to upgrade their car.  It’s their family car, and Meg will be the main driver.

Drive to the dealer

On the way Mark & Meg discuss their preferred option – an Audi A4.  It’s a stylish 4-door sedan that they both like.  Meg’s parents have driven Audis for years and rave about how good they are.  Recently one of the Meg’s friends bought an Audi A4, which Meg enjoyed taking for a test-drive.

What behavioural biases can you spot?

While recommendations from friends can be helpful, we tend to rely on social cues from others more than we should.  In one famous study people were asked to judge which two of a small number of lines corresponded in length.  It was an easy task, less than 1% of people got it wrong.  However, to make it more difficult, the experiment was then altered.  People were put in a room with 9 actors, each of whom chose before the test subject, and each of whom selected the wrong line.  In that context, only 25% of people were able to consistently choose the correct answer.  The surprising outcome from this study is that for most people, social influences are strong enough to overcome the clear objective truth.  And, in case you are wondering, the social influence wasn’t just peer pressure – a similar effect was observed when subjects were told how others had responded, but were able to answer in private.

Being strongly influenced by our peers came in handy for our distant ancestors, much of whose brain structure is the same as what we now carry around in the modern world.  The caveman who stopped to question why everyone was running, soon became dinner.  If social influence is powerful where the correct answer is clear to the naked eye, we should expect it to be stronger in the complex world of investment decisions.

Parking the car

Mark & Meg soon arrive at the dealer and find a park around the back.  As they step out of the car Mark notices something red on the footpath.  He quickly recognises it as a $20 note.  In one fluid motion he picks it up, shows Meg his lucky find, and happily plants it snugly into his wallet.

What behavioural biases can you spot?

Mark, and perhaps Meg too, are have been “emotionally primed” by this experience.  Positive feelings associated with a small lucky find can have significant effects.  In one study, subjects who found a small amount of money just prior to being asked to reflect on their life, reported being happier with their life overall than those who had not.  The emotional priming can come from a range of sights, sounds and smells.  In another study, being exposed to a happy face influenced people to drink more beer.  This was effective even when they saw the happy face for no longer than a few micro-seconds – not long enough to even be aware they had seen it!

A significant part of our sub-conscious brains are used for processing emotions.  Fear helped our ancestors clamber up a tree before they had been able to consciously process the sinister movement in the shadows.  It is the protective effect of fear, in particular, that has made it one of the strongest influences on our behaviour, and one with significant implications for investment decisions and markets.  In Mark’s case, the positive emotion that results from his lucky find may lead him to be more confident in his decision to buy a car.  Consistent with experimental evidence, it is not inconceivable that by finding $20 Mark is now willing to pay $1,000 more for the car!

Comparing options

Inside the dealer, the smartly dressed and well-spoken salesman, Paul, helps them understand the benefits of their proposed purchase.  Mark is keen to understand the after-sales support that will be available.  He recently read a story where the author had a scary experience with his Audi failing on a busy motorway.  The driver feared for his life as he manoeuvred away from a looming truck and felt let down by Audi.

What behavioural biases can you spot?

Theoretically, to make a proper assessment, Mark should compare long-term reliability data across different makes and models.  Instead, we tend to be influenced by vivid stories and personal experiences.  The more vivid, emotional and personal, the greater the impact.  This is why charities present pictures and stories of individual children, rather than statistics about the millions of needy.  We are more likely to give money to help a single impoverished child, than to hundreds of their impoverished classmates.

There is a cluster of related cognitive errors here:

• We are overly reliant on evidence from small samples of data.
• We rely too much on recent experience and expect it to continue.
• We overweight low probability outcomes and underweight almost certain outcomes.

In Mark’s case, these effects may make him feel Audi’s maintenance record is worse than it actually is.  For investors, these biases contribute to the “value effect”, which we will explore in later posts.

Negotiating the price

Mark and Meg have decided.  They are going to buy a black A4.  It’s two years old and has done 38,554 kms.  The sticker price is $45,000 (drive away, no more to pay), but Paul says he could talk to his manager about doing them a better deal.

What behavioural biases can you spot?

The sticker price may be unreasonable, but it will serve as a strong “anchor” for negotiations, drawing Mark & Meg’s estimates of value toward it.  Anchors affect us, even if we believe we are ignoring them.  For example, in one study real estate agents were asked to value a property.  Some were given the vendor’s price estimate; others were not.  Theoretically, it should not matter – the agents were asked to provide an independent appraisal.  But it did.  Those who were given the vendor price provided estimates significantly closer to that amount.
Anchors can affect us even if we know they are irrelevant – and even if we know they are completely random!  Numbers that are shown to us as a result of spinning a pinwheel or rolling dice have been shown to affect our estimates of the proportion of African nations who are members of the UN, or the number of months jail time an offender should serve, respectively.  For Mark & Meg, the sticker price is likely to act as the most salient anchor.  However, given the evidence, it is not inconceivable than the 38,544 km on the clock will also have an anchoring effect on their estimate of value.

In the case of investors, the purchase price is a powerful anchor, helping to create the “disposition effect” – an investment patterns that we will explore in the next newsletter.

The Duties of a Company Director

Directors and company secretaries have a number of responsibilities under the Corporations Act 2001 which are legal requirements and compulsory.  General duties imposed on directors and officers of companies include:

• the duty to exercise your powers and duties with the care and diligence that a reasonable person would have which includes taking steps to ensure you are constantly aware of the financial position of the company and ensuring the company doesn’t trade if it is insolvent
• the duty to exercise your powers and duties in good faith in the best interests of the company and for a proper purpose
• the duty not to improperly use your position to gain an advantage for yourself or someone else, or to cause detriment to the company, and
• the duty not to improperly use information obtained through your position to gain an advantage for yourself or someone else, or to cause detriment to the company.

Duty to not trade while insolvent

Directors’ have a duty to prevent your company trading if it is insolvent. A company is insolvent if it is unable to pay all its debts when they are due. This means that before you incur a new debt, you must consider whether you have reasonable grounds to believe that the company is insolvent or will become insolvent as a result of incurring the debt.

You may expose yourself to criminal prosecution, substantial fines or to action by a liquidator, creditors of the company or ASIC to recover amounts lost by creditors due to your actions.

Your personal assets—not just your company’s—may be at risk.

Duty to keep books and records

Your company must keep adequate financial records to correctly record and explain transactions and the company’s financial position and performance.

Although the Corporations Act does not require small proprietary companies to prepare financial statements, unless requested by ASIC or shareholders, they are considered a valuable tool for managing and monitoring your company’s financial position and performance for tax purposes or for raising finance.

For the purposes of an insolvent trading action against a director, a company will generally be presumed to have been insolvent throughout a period where it can be shown to have failed to keep adequate financial records.

What are financial records?

Some of the basic financial records that the law may require a company to keep include the general ledger, recording all the company’s transactions and balances, cash records, debtor and sales records, creditor and purchases records, wage and superannuation records, asset register, inventory and investment records, tax returns and calculations, and deeds, contracts and agreements.

Other records your company must keep include:

• registers of members (shareholders)
• registers of option holders (if you have them) minutes of general meetings
• minutes of meetings of directors
• financial records that enable an assessment of the company’s financial position and performance and are sufficient for financial statements to be prepared (and audited if necessary) for at least seven years after the transactions are completed.

How to Find Your Lost Superannuation

Millions of Australian’s have billions of dollars of unclaimed superannuation just waiting to be claimed. If you change jobs regularly, had part-time jobs though school or university or move house often, then you are likely to have super accounts that have been forgotten just sitting there waiting for you to claim them. There are a number of ways to search for and claim your super, but here are two simple ones.

Visit the ATO’s Super Seeker website and provide your tax file number, name and date of birth.

If you have a myGov login, the easy option is to log into your myGov account.  You will need to have the ATO as a linked service in order to access the superannuation section. Click on the Services button then on the ATO link. It will take you to an ATO online services page where you can click on the Super tab and see all of your super fund accounts. From this page you can choose to rollover your super accounts into your preferred superannuation fund.

Macquarie Cash Management Account – New charges & changes

From October, Macquarie will now be charging $2.50 per paper statement delivery if you have a cash management account. This affects the majority of our SMSF clients.

For clients that we use email regularly to communicate with, we have changed the preference on your account to deliver statements online so that you will incur no charges. Statement delivery options can be changed at any time via your Macquarie Online client banking portal.

Other important changes introduced by Macquarie:

• You can now transfer up to $20,000 per day electronically
• Chequebooks are no longer automatically issued/replaced & cost $30 (for 30 cheques)
• Email is now the primary contact method
• Periodic payments can now be managed online
• Bank cheques now cost $10

If you need instructions on how to access Macquarie Online, please call our office on 02 6162 1522 or email admin@veritassolutions.com.au.

Making the most of Macquarie online banking

To minimise new cheque book costs, those who withdraw pension payments can organise a periodic payment to a nominated personal account. Use your personal account to live off and pay bills so as to minimise the amount of cheques being written within the SMSF account. These period payments can now be managed online.

Quick Tip for SMSF clients – how to make it easier for our SMSF accounts staff

When making electronic payments via EFT or BPAY in your SMSF account, completing the reference field with a good description can help our accounts team process the annual SMSF financial statements more efficiently rather than needing to query you regarding every transaction. Using descriptions such as “Pension Payment” or “Asset XYZ purchase” or “XYX Asset Expense” can be really helpful.

Self-Managed Superannuation Fund – Trustee Education

Are you a trustee of a self-managed super fund and want to know more about your duties as trustees? We can direct you to the multiple resources available to assist you in understanding your obligations as trustees of an SMSF or any other information you need to know. At Veritas Wealth Solutions, we believe that all SMSF trustees should have an up to date understanding of what it means to be a trustee and are happy to answer your questions or provide more comprehensive resources. If you would like to know more please call our office on 02 61621522 or email us at admin@veritassolutions.com.au.

2015 Superannuation Essentials Conference

Our resident SMSF expert, Jodie Dickson, has been invited to present a session at the 2015 Superannuation Essentials Conference run by Legalwise Seminars, on 29^th October 2015 at the Hyatt Hotel in Canberra. She will be providing a high-level overview on recent ATO rulings, interpretative decisions and other announcements impacting on the SMSF sector. She will also discuss emerging and topical SMSF strategies and SMSF policy predictions for the year ahead. There are several other presentations from various accounting, legal, audit and financial advisory fields. If you would like further information please contact our office.

Are Investment Bonds Right for You?

Investment Bonds (otherwise known as Insurance Bonds) are long-term investment vehicles which may offer tax efficiency to some investors. Investment Bonds are technically life insurance policies under the Life Insurance Act 1995 and require a Life Insured and beneficiaries to be nominated. Investment Bonds can be issued by life insurers and friendly societies. Historically, these bonds incorporated a life insurance element, however most are now purely investment vehicles focusing on wealth creation.

Investment Bonds are designed to be held for at least 10 years, although investors can access their funds at any time. Regular contributions are permitted. A wide range of investment options are available within an Investment Bond structure, including diversified funds, multi-manager funds, Australian share funds, international equities, fixed income and capital guaranteed. Investment Bonds do not distribute regular income to investors. Instead, income is effectively re-invested into the bond to achieve a compounding effect. The current tax system makes Investment Bonds a tax-effective way to generate long-term returns. Investors contributing a lump sum or regular amounts for ten years or more receive ‘tax paid’ returns provided certain conditions are met. Income from investments is taxed at the corporate rate of 30% by the Investment Bond Issuer, meaning investment earnings are not required to be included in an investor’s tax return.

Who should invest in Investment Bonds?

Investment bonds may be suited to:

• Investors with a long-term investment horizon (10+ years)
• Investors with a tax rate higher than 30%
• Investors aged between 65 and 74 who do not currently meet the work test for superannuation
• Investors who have reached their annual contribution limits in superannuation
• Parents / grandparents wishing to invest on behalf of children
• Lower income earners and retirees looking to maximise their potential eligibility for income-tested tax offsets
• Investors seeking to stay under the Commonwealth Health Care Card income limits
• Investors who do not require regular income

Key Features

Tax Paid

One of the features of investing in Investment Bonds over a mainstream managed fund is that it is a tax paid investment. Issuers of Investment Bonds pay the corporate tax rate of 30% on the earnings on the investor’s behalf. Conversely, an investment in a mainstream managed fund generally requires tax to be paid on earnings at an investor’s marginal tax rate. Dividend imputation credits can further reduce the amount of tax payable.

The following table shows the potential taxation consequences of investing in an Investment Bond versus a Managed Fund. The table assumes investment income of $100,000 and a marginal tax rate of 45%.

Funds are accessible

Unlike superannuation where strict conditions of release (including reaching the preservation age) must be satisfied before accessing funds, investors in Investment Bonds have access to their investment at all times.

Regular Contributions are permitted

Unlike superannuation, there are no government-imposed contribution limits.

Assets Test Treatment

Investments held in Investment Bonds are treated as financial assets and are counted as assets under the assets test. Investment Bonds can be used as security for a loan, which is generally not possible with superannuation assets. If a loan is taken out and is secured against the Investment Bond, all financing costs (including interest paid) in relation to the loan may be deductible.

Capital Gains Tax

• Any investment growth received by the investor should ordinarily not be subject to CGT.
• There are generally no CGT consequences for investors who switch between underlying investments strategies within the Investment Bond’s structure i.e. switching between the high growth to capital stable option.
• Where no consideration is passed (gift or inheritance), ownership of the Investment Bond can generally be assigned to another person without any CGT consequences.
• Ownership of the Investment Bond can be transferred to a minor without incurring any CGT consequence under a ‘Child Advancement Option’. A ‘Child Advancement Option’ is a system where the policy is automatically transferred to the child at a nominated age between 10 and 25.

Minors Tax Rates

Earnings on Investment Bonds owned by children under 18 (but over 10) are taxed at 30% (children under 10 cannot invest in an Investment Bond in their own name but can if a parent/grandparent owns the policy).

Death, Illness, Financial Hardship

The Australian Taxation Office (ATO) has advised that the following events constitute a maturity resulting in no assessment for tax:

• Death of the owner of the Investment Bond
• Accident, illness or other disability of the owner of the Investment Bond
• Severe financial hardship

10 year tax rule

If an investor has held an Investment Bond for 10 years or more, earnings do not need to be declared in tax returns and no additional personal tax or capital gains tax is payable. If an investor does withdraw prior to the ten year period, they will need to declare the earnings in their tax return. Tax offsets are available for withdrawals made within the specified withdrawal periods outlined below:

• Within 8 years – All of the earnings are taxed at the marginal tax rate with a tax offset of 30%
• During the 9^th year – 1/3 of earnings are tax paid, 2/3 of the earnings are taxed at the marginal tax rate with a tax offset of 30%
• During the 10^th year – 2/3 of earnings are tax paid, 1/3 of the earnings are taxed at the marginal tax rate with a tax offset of 30%
• After 10 years – All earnings are tax paid

The 125% Rule

Investors can make additional contributions to their Investment Bond each year of up to 125% of a previous year’s contributions with the benefit of these contributions being treated as if they were invested at the same time of the original investment. Upon expiry of the full ten year term these additional contributions also acquire a tax paid status. If additional contributions exceed 125% a previous year’s contribution, the ten year term will re-set and a new ten year period is deemed to commence. The following examples outline Investment Bond maturity dates under different scenarios:

• Investors can contribute as much as they wish during the first year.
• If investors make additional contributions in excess of the 125% limit, the 10 year period to achieve tax paid status will re-set to the beginning of the investment year that the excess payment was made (as per Example 2, the contribution made in Jan- 2018 causes a re-set as it exceeds 125% of the previous contribution).
• If investors do not make an additional contribution during an investment year, no further contributions can be made without re-setting the 10 year period (as per Example 2, no contribution was made in Jan-2021, causing a re-set when contributions resume in 2023).
• Investors can continue to take advantage of the 125% opportunity after the 10th year, in which case earnings on each additional contribution receive immediate tax paid status

Risks

Some of the risks that should be considered prior to investment include:

• Underlying investment fund risk
  Different investment funds have different risk / return profiles. A fund’s profile can be affected by factors such as its strategies, managers, investments, the markets in which it operates and their volatility. Leverage, currency risk, derivatives or less liquid investments might be used by some investment funds. Poor performance of an investment fund can affect the returns and value of the relevant Investment Bond.
• Financial strength of the provider
  There is the risk that the life company or friendly society issuing the Bond could potentially fail in its financial obligations to its investors.
• Taxation risk
  As is the case with any investment there is no guarantee that the taxation treatment of Investment Bonds will remain the same.

Who can invest in Investment Bonds?

• Individuals aged 16 years and over
• Children aged 10 – 16 with parental (or guardian) consent
• Parents/grandparents on behalf of children of any age
• Organisations, Companies and Trusts
• Joint Owners