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Personal Wealth Management > Week 6 > Flashcards

Week 6 Flashcards

1
Q

Tax Planning

A

BE AWARE OF CHANGES ANNOUNCED BY THE LABOUR PARTY AND ALSO ANNOUNCEMENTS BY THE FEDERAL GOVERNMENT IN THE ANNUAL BUDGET
Awareness of tax planning issues and strategies is of paramount importance to financial planners in their provision of comprehensive financial planning services
The awareness is based on maximising the real rate of return of the taxpayer taking into account:
inflation factor
taxation incident

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2
Q

Tax effective common strategies

A 
Gearing - Negative gearing
Income splitting
Buying tax-effective investments
Salary packaging
Income vs capital growth
Business structures
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3
Q

Building wealth with borrowed money

A

‘Gearing’ simply means borrowing money to invest.

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4
Q

Gearing

A

Gearing describes the use of borrowed money to buy investment assets.

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5
Q

Benefits of Gearing

A

Increase in value of leveraged asset.

Service debt from existing income.

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6
Q

Risks of Gearing

A

‘Servicing’ of borrowed funds.

Decline in asset value.

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7
Q

Negative Gearing

A

Negative gearing occurs
where an investor buys an asset using borrowed funds, and
the costs of owning the asset are higher than the income from the asset.
Popular because the ATO allows losses to be claimed against personal income.
Most common types are rental properties, share portfolio or investment in managed funds.

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8
Q

Positive Gearing

A

Positive gearing is the use of borrowed funds to purchase an income producing asset where the income is greater than the interest expense and other associated costs.
Not considered tax effective.
Good retirement income strategy.
Risk-minimisation strategy for investors particularly if seeking long-term capital gains.

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9
Q

Margin Lending

A

Margin lending occurs when a lender advances funds and the amount borrowed is secured by investment assets.
Money is generally borrowed to invest in shares and managed funds.
This value is set at the beginning of the loan and will change as the market value of the portfolio changes.
It is appropriate strategy for high risk investors.

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10
Q

BENEFITS

Margin Lending

A 
Greater access to wealth-creating assets
Diversification
Liquidity
Personal income tax benefits
Direct investing and management
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11
Q

RISKS

Margin Lending

A

Capital losses
Funding interest payments
Funding margin calls
Fluctuating value of the portfolio

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12
Q

Margin Lending- Mechanics

A

The maximum amount you can borrow against each security is called its Security Value, and is determined by the Loan to Value Ratio (LVR) assigned to that security.
The Lender determines the LVR and is highest for stocks with high capitalisation and low for small or speculative stocks.

LVR= Amount of loan / Total investment portfolio

The LVR must be maintained and if it is exceeded a margin call must be made
Lender may provide a buffer ( usual 5 -10%) above the LVR of the stock or portfolio before a margin call needs to be made.

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13
Q

Margin Lending- Issues

A 
Investor profile must be high risk tolerance
Diversify portfolio
Monitor your investment
Maintain a low LVR ratio
Maintain emergency cash for margin calls
Use Options to protect severe downturns
Interest rate costs
Reinvest Dividends
Read terms of the loan agreement
Who owns the shares?
Seek Financial Advice
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14
Q

Income splitting

A

Overall tax can be reduced through shifting certain income from a high marginal rate taxpayer to taxpayers at lower marginal rates.
Shifting income to minors is not feasible.
Is only possible for investment income. Income from personal exertion and income of certain professional partnerships (e.g. accountants) cannot assign income.
Strategies:
setting up trusts
diverting income to minors through family trust: $416
investments in name of non-working spouse

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15
Q

Tax effective investments

A

Investments in shares (dividend imputation)
Superannuation (income earned within the fund taxed at maximum of 15%)
Friendly society and insurance bonds
Investment in forestry schemes eg plantations
- tax deductible

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16
Q

Salary sacrifice- Superannuation

A

Rather than an employee taking all of their remuneration in the form of fully assessable income, the employee takes some of their remuneration in the form of concessionally taxed benefits:
Superannuation, or fringe benefits eg cars, car parking
Has the effect of reducing the impact of the tax on the individual taxpayer, whilst simultaneously providing the same cost and taxation relief for employers
A number of benefits are subject to FBT
cars, loans

17
Q

Income vs. Capital

A

Certain investments provide for capital growth rather than an income stream which can be beneficial for an investor:
Fixed Interest & cash income generally fully assessable.
Property & Shares (Growth assets ) receive income and capital gains concessions.
taxing of capital gains as compared to income
tax on capital gains deferred until gain is realised.

18
Q

Forms of business ownership

A

Benefits of setting up alternative structures to a sole trader -companies, trusts, partnerships
splitting of income
limited liability
deferring of income until dividends paid
companies can contribute super on behalf of employees whilst sole traders are allowed a deduction for contributions of up to $25,000.

19
Q

Capital Gains Tax

A

Capital gains tax (CGT) is a tax on realised capital gains.
CGT applies to the sale of assets acquired on or after 20 September 1985.
Net capital gain equals total capital gain for the year, less total capital loss from current year and previous years.
Net capital gain is added to assessable income.
Capital losses can only be offset against current or future capital gains.
Prior to Business tax reforms, (effective 21 September 1999), the capital gain was determined based on the indexation method.
For assets acquired after 21 September 1999, the capital gain included within an individual’s assessable income will be based on the CGT discount method provided it has been held for at least 12 months

20
Q

Assets not subject to CGT

A

Disposal of assets that are assessable under ordinary income rules. Total nominal gain included within taxable income:
assets disposed of in the normal course of business
(e.g. share trader, property developer)
assets purchased with the intention of making a profit on sale
Some Exempt assets
An individual’s principal residence
All motor vehicles
Personal-use assets disposed of where cost is less than $10,000 and no capital gain made

21
Q

FBT

A

Fringe benefits tax (FBT) is a non-cash benefit supplied by an employer to an employee.
Introduced in 1986 to overcome loss of tax payable resulting from employees being paid non-cash payments that were not taxable.

22
Q

FBT benefit to employer

A

reduction in overall income

may be some reductions in add-on costs of employees (payroll tax, workers compensation)

23
Q

FBT benefit to employee

A

reduction in taxable income

reduction in Medicare Levy

24
Q

Basis of FBT

A

For a FBT liability to arise the following conditions must be present:
an employer-employee relationship
a benefit is provided to an employee
the benefit is provided as a result of the employee’s employment
FBT is levied on the employer
FBT is a self-assessment system
the FBT year runs from 1 April to following 31 March
FBT rate changed to 45% for year ending March 2019

25
Q

Excluded benefits

A

Non-cash benefits provided to employees are subject to FBT provisions except for the following:
superannuation
work related items such as mobiles and laptop computers
exempt taxi travel
minor benefits

26
Q

Car benefits

A

A car benefit will arise when a car is available for private use by the employee.

2 methods of determining the taxable value of car benefit:
statutory formula method
operating cost method

27
Q

Statutory Formula method

A

slide 42

28
Q

Operating cost method

A

slide 44

29
Q

Operating costs

A 
normal operating costs
where the car is owned:
depreciation and imputed interest on the value of the car are included [depreciation charged at 25% [for cars purchased after 1/7/2002]and interest imputed at 5.20% (2018 benchmark interest rate)]
where the car is leased:
all leasing costs
30
Q

Emissions Trading Schemes

A

Climate change – the biggest market failure the world has ever seen?
The world is heating up, it is caused by humans, and we have the chance to address this problem.
The Cap: those who continue to pollute at the old levels will have to pay, and the charges will increase as the supply is squeezed. Over time this will make them LESS competitive
Those who change early will be rewarded for their action. Over time they will become MORE competitive.
How: Divides world into two parts – Annex 1 countries (developed world) and non-Annex 1 countries.
Reduce Annex 1 emissions by (an average of) 5.2% below 1990 levels (over the period 2008 -2012)

Personal Wealth Management (11 decks)

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