I was asked this question last week and the answer is yes.  The proviso however is that you can’t play it.

A recent report on the superannuation system by Jeremy Cooper proposed that SMSF’s should be banned from holding collectables such as art works.  However after considerable outcry from the the arts community, ministers Bowen and Garret (as minister for the Arts), announced that they would not be adopting the Cooper recommendations.

It is envisaged that there will be a tightening around how an SMSF will manage collectables.  The sole purpose test must always be kept in mind of course – which is why you could own a guitar in your SMSF, but you can’t strum it on a Saturday night for a bit of relaxation.  It is likely rules will be put in place regarding the storage of such items – temperature controlled and such.

As to whether collectible guitars are a sensible way to save for your retirement – well I have no idea.  But it’s interesting to see the broad scope of possibilities that exist within the SMSF environment.

CoreData-brandmanagement recently produced some fascinating research on Australian’s experiences and perceptions of financial planning professionals.  The study obtained surveys from 1,054 respondents.

Some of the results I found interesting were:

• When it comes to trust, specialist doctors were the most highly regarded with a rating of 8 out of 10.  Amongst those respondents who had a relationship with a financial planner, the average trust rating for financial planners was not far behind at 7.5.  Yet for those who don’t have a relationship with a financial planner, the score was only 4.5.  So those who engaged the services of a professional adviser seemingly found the adviser professional and trustworthy, yet those with no experience had a negative perception.  Where has this perception come from and why is the perception so different from the reality of those who use financial planners?

• One might expect that those who chose to use a professional financial planner might do so because they have little knowledge or understanding of financial matters such as superannuation or insurance, whilst those who elected not to engage a professional might do so because they have a good level of knowledge and so don’t need the help.  Yet the research found the opposite was true.  When it came to knowledge of superannuation, only 10.3% of respondents who have a financial planning relationship rated their knowledge as poor or very poor, whilst 28.6% of those without a planner rated themselves as having this low level of understanding.  It seems that a benefit of having a relationship with a financial planner was that the client gained knowledge of the investment landscape and the options available to them.

• Consideration of appropriate personal insurances is an area where financial planners often assist their clients.  One question in the survey asked “how important is ensuring you have sufficient insurance cover for the following”.  Interestingly, Comprehensive Car Insurance ranked around 8 out of 10 varying a little depending on the age of the respondent.  Yet Income Protection Insurance ranked around 6 out of 10 for those still in the work force.If your car was a complete write-off the financial loss might be $20,000 to $50,000 for most people.  Yet for most of us, one year off work would cost us far more than that.  And Income Protection doesn’t just cover for one year off work, but potentially would pay a benefit until you reached aged 65 (some even go to age 70), if you need it.  Think about how many more working years you have left and what you earn per year.  Is your car really more valuable than your earnings capacity?

Most Australians would benefit from having a relationship with a professional financial planner.  If you don’t currently have such a relationship, perhaps it’s time to change.

Paul Benson B.Bus, CFP, SSA

Principal – Guidance Financial Services Pty Ltd

A re-elected Gillard Government will allow SMSFs to continue investing in collectables, including artwork, if trustees comply with new guidelines. From 1 July 2011 collectables and personal use assets owned by self managed superannuation funds (SMSFs) must be stored according to new rules to prevent them from giving rise to a personal benefit.

Only around 1% of all SMSF’s own artwork within their fund, yet the proposed change to prevent this form of investment caused concern amongst the art community which risked losing a valuable customer source.

In discussing insurance options with our clients, we often find there is an awareness of either Income Protection insurance, Key Person insurance, and occasionally both.  Most people however are uncertain as to what each does, and when one is applicable over the other.

What does Income Protection and Key Person insurance have in common?

The objective of both cover’s is to provide you, the business owner, with a financial safety net in the event you suffer injury or ill-health.

So how are they different?

Income Protection cover pays a monthly benefit to you until you can return to work.  This benefit is typically up to 75% of your normal income.  A waiting period applies, often 30 days, in which you must support yourself, and then if you remain unable to work, your benefit payments commence.  In most cases they pay for a period of months until you return to work and things return to normal.  Most of the quality products will cover you through to age 65 if required, so if you suffer a long term illness or injury, your Income Protection cover will provide you with an on-going wage which rises in line with inflation.

Income Protection premiums are tax deductable, and as a consequence any benefit paid is taxable.

Key Person insurance differs in that it pays an agreed lump sum.  Whereas the payout conditions for Income Protection are that you are unable to work due to illness or injury, for Key Person insurance, the payout conditions are listed in the policy – cancer, heart attack, stroke etc, as well as death and total and permanent disability. 

So whereas a broken leg that sees you off work from 3 months might trigger 2 months on Income Protection benefits (allowing for a 30 day waiting period), no Key Person payout would apply.  In contrast however, where you are diagnosed with cancer, the Key Person cover will immediately pay out your lump sum benefit, perhaps $100,000 for instance, with no requirement to demonstrate an inability to work.  The benefit amount does not have to be tied to your income, it might for instance be determined based on how much you would need to clear debt, or cover medical costs. With Key Person cover it is very black and white – suffer one of the listed conditions, and you will receive a cheque.

So which one is right for me?

To answer that we really need to have a chat with you and understand your circumstances.  Typically, for a one person business or small business where the owner is crucial to the generation of revenue, Income Protection would be the priority.  For a larger business where, if the owner was away for a couple of months the business would carry on okay, then Key Person cover is more likely to be relevant, as it will only pay on the more significant issues, and can pay a much larger sum.

Having a financial safety net in place is absolutely crucial for business owners and it is amazing how many business owners will get things like buildings and vehicles insured, yet have no cover in place should they suffer a serious medical problem.

Give us a call on 03 9870 6544.  We can review your current arrangements, and provide recommendations and costings for your consideration.

Important Notes

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

© Guidance Financial Services Pty Ltd

Self Managed Super Funds must have annual accounts and audits done, and as such administration services are a non-negotiable.  For those who run businesses, you would be accustomed to your accountant and book-keeper providing these services.  How would you like it if your book-keeper quoted her fees not as a set amount per hour, or a fixed amount per month, but rather as a percentage of your turnover?

“Your business turned over $200,000 last quarter, well our fee is 1% so that will be $2,000 thanks”.  A reasonable person might ask, “but how many hours work did you do to justify me paying $2,000?”  To which the book-keeper would reply something along the lines of, “well the more you turn over, the more complex your work, and so that’s the way we charge.  If my book-keeper told me that, I’d be looking for a new book-keeper, and I hope you would do the same.

There are some fees where a percentage basis makes sense, usually where the percentage calculation acts as an incentive for the service provider.  A perfect example would be a real estate agent’s fees.  You want the agent to get the highest possible price for your property, so paying on a percentage basis acts as an incentive for the agent.  The higher the price they achieve, the more they get paid.  Quite reasonable in my opinion.

However SMSF administration is not in that category.  Indeed this isn’t just an SMSF issue.  All of the Industry and Retail super funds are the same.  Their administration costs are bundled in with the fund manager fees, and the whole lot is charged as a percentage.

Is it really fair that because you have $100,000 in your super fund, you pay twice the fee of someone with $50,000, and 10 times the fee of someone with $10,000?  Is there really 10 times the work?

This issue was top of mind for me because I saw some advertising in the weekend newspapers quoting SMSF admin services “starting at just 0.99%, capped at $4,990pa”.  This is only administration.  Any advice costs extra.  For an SMSF which trades 10 shares a day, this may well be a fair price, but for an SMSF that owns a single property, or perhaps a basket of shares that changes little throughout the year, this appears extraordinarily expensive.  The thing is, with SMSF administration charged as a percentage, we’ll never know if the fund got good value for money.  In fact what I suspect occurs is that some funds subsidise others.

Don’t fall for this trap.  When selecting your SMSF administration provider, pay for what you need.  Percentage based fees make sense in some circumstances, but SMSF administration is not one of them.

If you are looking for an SMSF administration provider (which doesn’t charge on a percentage basis), give us a call on 03 9870 6544.

The Copper report into superannuation was released yesterday.  Significant changes were proposed to the default superannuation options provided by employer superannuation schemes, with the proposal to introduce “MySuper” as the default superannuation option for all Australians.  There were also proposals to improve the back office processing.

It was noticeable however, that very little change was recommended for the SMSF sector, confirming once again that the Self Managed Super Fund sector is performing well and serving the needs of it’s members.  In fact it was telling to learn that of the members of the Cooper Review panel, half had SMSF’s themselves, including Jeremy Cooper.  It is little wonder then that the SMSF sector has grown to be the largest sector within the superannuation environment, and continues to be the fastest growing.

With the proposal now to have most Australian’s start their superannuation journey in the very basic, no frills “MySuper”, it may be that the future of superannuation consists of two phases.  In the early years of a persons life, the MySuper option is adequate for their needs.  At some point in their life, when the balance grows to a point where the person starts to take in interest in how much they have, they move to an SMSF, so that they can work towards achieving their particular goals and objectives in a customised way.  I guess this is a bit like motor cars.  Our first car is pretty basic and cheap, then latter in life, we get a car to fit our particular family arrangement or lifestyle needs.

Most people these days are aware of Self Managed Superannuation Funds, commonly abbreviated to SMSF’s.  Rather than have some faceless fund manager look after what is likely to be your largest financial asset, people with SMSF’s take control over the decision making concerning their fund.  That doesn’t mean they necessarily do all of the day to day administration and investment research (though some do), for their fund.  They get involved in how their money will be allocated, and ensure the investment strategy is tailored with their particular time frame, objectives, and risk tolerance in mind.

Given these advantages, it is little surprise that the SMSF sector is now the largest within the superannuation landscape, and also the fastest growing.

One area of investment which is helping drive the take up of SMSF’s is property investment.  We all know that Australian’s love their property investment.  Whilst SMSF’s have always been able to purchase investment property, in the past they were restricted by the fact that SMSF were unable to borrow.  This has now changed.

Following rule changes in 2007, and several subsequent fine tuning efforts by both the government and the SMSF regulator, the ATO since, using an Instalment Warrant structure to enable your SMSF to borrow and acquire an investment property is now well established.  You can find a diagram showing the Instalment Warrant process here.

So when considering your next property investment purchase, should you buy the property with your superannuation savings?  Here are some pro’s and con’s to consider:

Pro’s

• Lower tax – SMSF’s pay income tax at 15% and Capital Gains are taxed at 10%.  Even better, once you are in the pension phase, there is no income tax or CGT.
• Potentially less volatility than shares.
• Gearing magnifies returns.  By using borrowed funds, you are able to make a larger investment, which therefore has the potential for larger gains.
• SMSF’s a typically cheaper to run than other superannuation funds, with the cost savings more pronounced the larger the balance.
• Your superannuation contributions will go into your SMSF, making servicing of the loan easier.

Con’s

• Lack of diversification – a large part of your retirement savings is tied up in one single (fairly illiquid) asset.  This poses a genuine risk.
• Establishment costs are significant.
• For small balances, SMSF’s are likely to be more costly than other superannuation alternatives.
• There is a higher level of administrative responsibility for the SMSF owners. (This can be outsourced).
• Borrowing to invest always entails risk.  The debt and interest will need to be paid, even if the property declines in value or is untenanted.

Guidance Financial Services can assist you in setting up your SMSF, and provide all the help and advice you need.  Through our accounting partners, when can even take care of the fund’s annual tax return and audit requirements, making an SMSF a painless way to save for your retirement.  Why not give us a call on 03 9870 6544 or send us an email so that we can discuss your need.

Important Notes

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

© Guidance Financial Services Pty Ltd

With more and more people planning on sending their children to private school, saving for this significant expense becomes essential.  Many people however are unaware of the generous tax concessions which exist to help parents and grandparents meet these costs.

Within the Income Tax Assessment Act, there are provisions for “Scholarship Plan’s”, sometimes also referred to as child advancement provisions.  Under these provisions, product providers are able to offer products in which all investment earnings are taxed within the fund at the rate of 30%.  When the account holder subsequently makes a withdrawal, provided evidence (eg. receipts) can be provided that the withdrawal is to reimburse for education costs, the tax that has been paid by the fund, is able to be claimed back, and passed on to the investor.  The net result is that no tax is paid on the investment earnings.

The range of expenses able to be claimed are broad – school and university fees, books, uniforms, even things like music and swimming lessons.  Some product manufacturers are quite restrictive, so take care to read the product brochure before commencing this type of investment.

The product providers will typically have a process to ensure withdrawals are processed in the most tax effective way.  Where withdrawals occur which are not related to education costs, the provider will typically draw down on the original principal first, rather than earnings.  Where the earnings need to be drawn upon however, and the withdrawal is not related to education costs, the investor may need to pay tax where their personal tax rate is higher than the 30% tax already paid.

Education savings plans are a great way to save for your children’s education expenses in a tax effective way.

Important Notes

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

Whatever the type of insurance cover, we all hope we will never need it.  Yet when you buy your home one of the first things to be done is insure it.  Most of us wouldn’t dream of driving a new car out of the car yard before getting some insurance in place.  So why do we pay for something that we hope we will never need?  The answer of course is peace of mind.

So we hand over our precious dollars to purchase insurance, and in return we get peace of mind.  Quite fair and reasonable.  Given it is peace of mind we are buying, then the quality of the insurance policy must be the paramount decision.  The challenge then is how do we assess product quality?  Price gives us a clue.  If one insurance company quotes you half what another quotes, it is reasonable to assume there is a difference in the coverage each policy provides.  But this doesn’t help determine which of the policies is right for you.  Maybe the cheaper policy is entirely appropriate for your circumstances, and by paying more, you are only get cover that you don’t need.

The other challenge in trying to buy yourself peace of mind is, what options are available?  This gets back to the age old problem of “you don’t know what you don’t know”.

Professional insurance advice is essential.  An insurance adviser or broker can find out what the risks are that you face, identify insurance products that will protect you from that risk, and then shop around and find the best provider at the best price.  By getting that advice, you will have the confidence of knowing that in your (or your families) time of need, your insurance will pay.  That’s real peace of mind.

Guidance Financial Services Pty Ltd specialises in the advice needs of business owners and the self employed.  Give us a call on 03 9870 6544.

At Guidance Financial Services, we provide wealth creation and protection advice for business owners and the self employed.  I was speaking with a friend on Friday and mentioned this focus.  He expressed some surprise that business owners and those who are self employed, had unique financial planning needs. As a business owner myself, and working with business owners every day, I am convinced that, whilst a varied and diverse group, we do have issues and needs, which employed workers do not.  So what are they?

• Time poor – the most common attribute of a business owner that I find is not having enough hours in the day.  Now most people are busy in this modern era of 24/7 emails and global teleconferences.  My experience however is that time constraints are more consistently experienced by the self employed.  Everybody wants a piece of their time.
• Greater financial awareness – in my experience, business owners are more likely to have their finger on the pulse regarding where their financial position is – debts, cash in the bank, investments.  Business owners have to pay wages, rent, suppliers and taxes.  Cash flow is king.
• A propensity for greater decisiveness – some people are burdened with procrastination.  We all experience this trait at times, yet business owners, having taken the big step to run their own show, become accustomed to making decisions, and so when calls need to be made, I find business owners far more decisive.
• Far more at risk – Whether it be bank debts, money owed to suppliers, payroll and superannuation obligations, or work place safety concerns, business owners put it all on the line.  Their risk management needs differ greatly from their salaried friends.
• A preference for control – we see this particularly with regards superannuation.  Sending money off to a fund manager is, for a business owner, little different to writing a cheque to the tax man, something you only do because you have to.  Yet when business owners take control of their super through a Self Managed Superannuation Fund (SMSF), their interest in this tax structure as a vehicle in which to build wealth. turns around 180 degrees.
• More likely to refer – business owners recognise that building a business is tough, and as a consequence, in my experience are more likely to recommend your services to others, than is the case with employed clients.  As a business whose main source of clients is referrals from others, this trait is especially valued.

If you run a business or are self employed and have nodded to a few of the points above, then why not work with a financial planning practice who understands your needs?

Give us a call today.