Cre­ate a fi­nan­cial roadmap

I was hon­oured re­cently by the In­sti­tute of Char­tered Ac­coun­tants for 25 years ser­vice as a Char­tered Ac­coun­tant in prac­tice. Hav­ing passed this mile­stone and grown our ad­vi­sory firm over that time from a hand­ful of clients to over 2,000 across Aus­tralia,

Business First - - CONTENTS - By Al­lan Mckeown

Se­nior ex­ec­u­tives and busi­ness owner oper­a­tors have com­pli­cated lives pres­sured by the de­mands of grow­ing their businesses, ad­vanc­ing their ca­reers and be­ing keenly in­volved in fam­ily ac­tiv­i­ties. Work­ing to ac­cel­er­ate their per­sonal fi­nan­cial suc­cess and gain­ing clar­ity and sim­plic­ity to their fi­nan­cial life usu­ally be­comes an af­ter thought.

From my ex­pe­ri­ence there are five key pil­lars for cre­at­ing and main­tain­ing a suc­cess­ful fi­nan­cial roadmap.

1. Taxation is your big­gest ex­pense

Cost con­trol is a crit­i­cal com­po­nent of busi­ness hy­giene and it should be no dif­fer­ent on a per­sonal level. Two people in al­most iden­ti­cal cir­cum­stances can gen­er­ate sub­stan­tially dif­fer­ent wealth, sim­ply through small in­cre­men­tal tax wise de­ci­sions, they make or fail to make over their ca­reers.

I do not ad­vo­cate flout­ing the tax laws. While there are few le­gal large scale tax min­imi­sa­tion op­por­tu­ni­ties these days, there are a range of av­enues avail­able to boost af­ter tax in­come. Per­sonal de­duc­tions have been re­duced to a min­i­mum how­ever rea­son­able salary pack­ag­ing sav­ings are still avail­able pre­dom­i­nantly through the pack­ag­ing of mo­tor ve­hi­cles that may pro­duce a bet­ter af­ter tax re­sult of around $5 to $10k per an­num. Us­ing an ‘as­so­ciate lease’ to pack­age a ve­hi­cle for a spouse or fam­ily mem­ber can po­ten­tially dou­ble the ben­e­fit.

Op­ti­mise your in­vest­ment struc­ture

A ma­jor thrust of tax plan­ning is to en­sure that in­come is earned by the low­est tax pay­ing in­di­vid­ual or en­tity in a fam­ily group. There is lit­tle op­por­tu­nity to di­vert em­ploy­ment or ‘per­sonal ex­er­tion in­come’ for these pur­poses, how­ever struc­tur­ing your wealth pro­duc­ing as­sets to pro­vide as­set pro­tec­tion and es­tate plan­ning ben­e­fits through the use of fam­ily, unit or hy­brid trusts, some­times in­clud­ing cor­po­rate ben­e­fi­cia­ries should be con­sid­ered. In the last 15 years, Govern­ment leg­is­la­tion and am­bigu­ous court de­ci­sions have pro­gres­sively marginalised the ef­fec­tive­ness of tra­di­tional struc­tures to in­vest and pro­tect pas­sive wealth at an ap­pro­pri­ate tax rate. Tra­di­tional struc­tures are in­creas­ingly in­ef­fec­tive in the 21st century and a re­view may fa­cil­i­tate more tax ef­fec­tive out­comes and es­tab­lish next gen­er­a­tion in­vest­ment struc­tures.

Un­der­stand the tax ben­e­fits of cap­i­tal gains

The sec­ond big-ticket taxation item is to look for op­por­tu­ni­ties to build cap­i­tal ap­pre­ci­at­ing as­sets as op­posed to gen­er­at­ing in­come. The ben­e­fits of cap­i­tal gains tax (CGT) dis­count­ing ef­fec­tively halves the tax rate ap­pli­ca­ble to top mar­ginal rate in­come and can be re­duced fur­ther in cer­tain cir­cum­stances. The CGT is also only paid when the as­set is re­alised rather than each year as it is in re­spect of or­di­nary in­come.

The as­sets you choose to gen­er­ate your cap­i­tal gain are more im­por­tant than min­imis­ing the tax on sale, how­ever re­fer point three be­low.

2. Good debt vs bad debt

Care­ful man­age­ment of your bor­row­ings can re­sult in very sig­nif­i­cant tax sav­ings over a long pe­riod of time. Savvy wealth cre­ators work hard to re­duce non tax-de­ductible debt as quickly as pos­si­ble while build­ing a tax- de­ductible line of credit. The line of credit, as­sum­ing a top mar­ginal tax rate ef­fec­tively halves the in­ter­est cost, a sig­nif­i­cant sav­ing over a 10- or 20-year pe­riod.

The big­gest trap for the un­wary is that once you re­pay a debt es­tab­lished to ac­quire an in­come-pro­duc­ing as­set, a re­draw will not be classed as tax de­ductible bor­row­ings un­less it is used for in­come pro­duc­ing pur­poses. Many people er­ro­neously be­lieve they can ‘re­draw’ the loan against a rental property for ex­am­ple and re­tain its tax-de­ductible char­ac­ter. Pay­ing down a loan for an in­vest­ment property while you still have a home loan is a good ex­am­ple of miss­ing an ideal op­por­tu­nity.

A fur­ther use­ful strat­egy for your own home is to rather than pay down the non tax de­ductible mort­gage, build up funds in an ‘off­set’ ac­count. This re­duces the non tax-de­ductible debt while it is your prin­ci­pal base of res­i­dence. If you choose to move out to a new prin­ci­pal res­i­dence as the debt has not been paid down but off­set you can re­move the off­set funds clear­ing the way for the orig­i­nal mort­gage to now be­come tax de­ductible.

3. Un­der­stand risk vs re­turn

You don’t need to have qual­i­fi­ca­tions in free mar­ket the­ory to ap­pre­ci­ate the maxim that the greater the re­turn the greater the risk of an in­vest­ment.

This is the bal­ance be­tween seek­ing to en­hance wealth and pre­serv­ing it. It is of­ten a fea­ture of bull runs or ris­ing mar­kets; and ex­u­ber­ance and over con­fi­dence can re­sult in some pain when mar­kets cor­rect.

Low re­turn, whilst nor­mally mean­ing there is less like­li­hood of a loss of cap­i­tal, may in­stead mean there are lazy as­sets that need to be more ef­fec­tively put to work.

As you suc­ceed in gen­er­at­ing wealth a port­fo­lio ap­proach to in­vest­ment pro­vides a level of pro­tec­tion from fac­tors that may af­fect cer­tain as­set classes.

Con­cen­tra­tion of your as­sets in one

‘big project’ sub­jects you to the risk of loss if the project or in­vest­ment fails for what­ever rea­son. A fi­nan­cial ad­viser can pro­fes­sion­ally pro­file your risk tol­er­ance so that you prop­erly un­der­stand your likely at­ti­tude to var­i­ous forms of in­vest­ment and mar­ket cy­cles.

Your ma­jor as­set that is of­ten over­looked is your abil­ity to earn in­come. What­ever as­set po­si­tion you are in your cir­cum­stances can change dra­mat­i­cally and the com­pound­ing ef­fect of in­ad­e­quately in­sured loss of in­come though ill­ness or ac­ci­dent could be dev­as­tat­ing. Op­por­tu­nity as­sets While stay­ing true to my com­ments about risk man­age­ment and the im­por­tance of un­der­stand­ing your risk pro­file, to the right per­son there can be an op­por­tu­nity to boost out­comes from your in­vest­ment choices. While avoid­ing the temp­ta­tion to ‘bet the farm’ there can be some con­trar­ian in­vest­ments that might give a higher re­turn for ac­cept­able risk. Whether it’s an in­vest­ment man­ager that looks for ‘empty rooms’ or unloved stocks that haven’t yet been dis­cov­ered or that in­vest­ment property that is some­thing dif­fer­ent in size, lo­ca­tion or al­ter­nate uses, there may be an op­por­tu­nity to out­per­form.

4. Su­per strate­gies

Smart wealth cre­ators max­imise their su­per ev­ery year and stay abreast of the tac­ti­cal op­por­tu­ni­ties that present them­selves as their age pro­file changes and suc­ces­sive Gov­ern­ments fine-tune the area. Salary sac­ri­fic­ing to the aged based lim­its is a must. The com­pound­ing im­pact of ef­fec­tively get­ting a tax de­duc­tion to in­vest your in­come in a low tax en­vi­ron­ment is enor­mous. The abil­ity to gain CGT ex­emp­tion when your fund is in pen­sion mode is an­other sub­stan­tial ben­e­fit.

Fur­ther strate­gies around ‘tran­si­tion to re­tire­ment’ (TTRs) in­volv­ing the cre­ation of con­ces­sional in­come streams and ‘con­tri­bu­tion split­ting’ with your spouse are also po­ten­tially avail­able.

Self-man­aged su­per funds are a grow­ing and pop­u­lar al­ter­na­tive to tra­di­tional su­per funds. They are now the favoured choice for around one mil­lion Aus­tralians, ad­van­tages in­clude greater con­trol, flex­i­bil­ity to ac­quire cer­tain as­sets like di­rect property, tax de­duc­tions for life in­sur­ance pre­mi­ums and es­tate plan­ning flex­i­bil­ity.

5. Get the right ad­vice

There is no area where it is more im­por­tant to con­cede that you ‘don’t know what you don’t know’ than fi­nan­cial ad­vice.

The strate­gies out­lined above whilst im­por­tant are high level only and are rep­re­sen­ta­tive of the mul­ti­tude of tac­tics that are avail­able to min­imise taxation, in­vest wisely and grow your wealth.

Har­mon­is­ing these op­por­tu­ni­ties in a fash­ion that gives you a 360 de­gree view of your fi­nan­cial land­scape will not only as­sist with your un­der­stand­ing of the con­cepts but will in­crease the like­li­hood that you will take the im­por­tant steps nec­es­sary to im­prove your own per­sonal fi­nan­cial po­si­tion while you fo­cus on suc­ceed­ing in cor­po­rate and fam­ily life.

Al­lan McKeown is the CEO and Founder of Pros­per­ity Ad­vis­ers and has over 25 years ex­pe­ri­ence pro­vid­ing taxation and wealth ad­vice to a range of ex­ec­u­tive and high net wealth clients. Pros­per­ity Ad­vis­ers is a Char­tered Ac­count­ing and Fi­nan­cial Plan­ning Ad­vi­sory firm with 120 staff and of­fices in Syd­ney, New­cas­tle and Bris­bane. www.pros­per­ityad­vis­ers.com.au

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