Achieving Financial Freedom!

Monthly Archives: February 2020

The Reward of Donations

The bushfire disasters across Australia over the past months have demonstrated the enormous generosity of Australians – from sporting stars, Hollywood heavyweights and business leaders through to ordinary people from across the country, all just wanting to help and make a difference. While the simple satisfaction from doing this can’t be measured in dollars, with the right knowledge and planning aligned to your circumstances and objectives, there are also dollar rewards on offer for the giver come tax time. Taking philanthropy to the next level Australians are generous when it comes to opening their wallet for a good cause. But you may have reached a point in life where you want to make a more substantial contribution with control over how your money is spent. You may also wish to get your children involved to instill shared values. While it hasn’t received much publicity, increasing numbers of Australians are using charitable trusts to give in a more planned and tax-effective way. The turning point came in 2001, when the Howard Government introduced the Private Ancillary Fund (PAF) with the aim of encouraging more individual and corporate philanthropy. PAFs are charitable trusts that can be used by an individual or family for strategic long-term giving. Since then, the number of PAFs and the amount of money contained in them has grown steadily. In early 2018, there were 1600 PAFs, housing $10 billion and distributing $500 million a year.i Claiming a tax benefit According to Philanthropy Australia, in the 2015-2016 financial year, 14.9 million Australians collectively donated $12.5 billion to charities and not-for-profits (NFPs).ii Though donations to accredited charities and not-for-profits are tax deductible, the figures indicate two-thirds of taxpayers don’t bother to claim. It’s well worth keeping track of receipts so you can claim when you think that, for example, a single donation of $5000 to a charity or NFP in a financial year will reduce your taxable income by $5000. A core principle of tax-deductible philanthropy is that, the giver shouldn’t stand to receive any material benefit. For example, if you buy tickets in a raffle run by a charity, you can’t claim a tax deduction on the cost of the tickets. In order to receive a tax deduction for your donation, the recipient must also be registered as a deductible gift recipient (DGR). There are many ways to be charitable, but the impact on your tax bill will vary depending on how you go about it. A more sophisticated approach These days, people who want to take philanthropy to the next level with an ongoing, tax-effective approach have a variety of trusts to choose from. The Private Ancillary Fund
PAFs are the best-known of the new breed of trusts. The money placed in a PAF is tax-deductible and assets in the fund aren’t subject to income or capital gains tax (but do qualify for franking credits). Let’s say a dentist sets up a PAF, and gifts half his $500,000 annual income into the fund. The dentist’s taxable income now drops to $250,000. What’s more, no tax is paid on the returns made on the $250,000 that has been invested in the PAF. The dentist must distribute a minimum of five per cent of their PAF’s net asset value annually, or a minimum of $11,000. After meeting that requirement, the dentist has a relatively free hand about which charities to support and how much they receive. The Public Ancillary Fund (PuAF)
PuAFs work the same way as PAFs, but operate on a larger scale. For example, 10 dentists may set up a PuAF to finance the building of dental hospitals in Africa. As well as gifting part of their incomes, the 10 dentists can (in fact, are obliged to) invite the general public to make tax-deductible donations to their PuAF. Testamentary Trust (or Will Trust)
These are used by individuals wanting to leave money in their will to charity. The two advantages of this type of trust are that, the trustee(s) can distribute the income generated by the trust in a way that minimises the tax burden of beneficiaries, and the assets in the trust can’t be accessed by parties such as creditors. Few people give to get a tax deduction, but by supporting good causes in a tax-effective manner, you can achieve a bigger bang for your philanthropic buck. If you would like to know more about tax-effective giving, give us a call. i J.B.Were Support Report, 4 April 2018, ii

Learning to invest in yourself

Australia has had an extraordinary run of good economic times, but the party is beginning to wind down, with unemployment trending upwards, and wages flat-lining. That’s not an environment where anybody – young, old, self-employed or rusted-on staffer – can afford to coast. If you’re not making the most of your capabilities, you might want to invest some time and energy in your most important asset – yourself. Below, five respected life coaches suggest some life-changing, career-transforming techniques. 1) Work out what you want If there is one thing successful people and organisations share, it’s clarity of purpose. High-performance specialist Phil Owens says, “Finding your purpose is like finding your personal true north; it gives direction to all of your decisions and actions. To find it, he suggests asking: “What is important to me?” and “What do I love doing?” “Be aware that everyone will have a different purpose, and that working out exactly what yours is will probably be a much longer and more complicated process than you expect,” he says. 2) Act mindfully Mindfulness is a concept that’s crossed over from Eastern religion, particularly Buddhism, into the corporate world. Satyam Veronica Chalmers, a trainer at Mindfulness Coaching, says mindfulness can translate into reduced anxiety, improved learning abilities, greater efficiency and improved concentration. Even better, practicing mindfulness is free, and once you get used it, very easy. “Stop periodically throughout the day for at least a minute to focus on your breathing, notice how you’re feeling, notice bodily sensations and take some deep breaths. Set an alarm on your phone to remind yourself to do this,” says Chalmers. 3) Polish up those soft skills What separates the happy high-flyers from the not-so-happy plodders is often people skills, rather than technical ones. Rhett Morris, human endurance expert and owner of Bulletproof People, says successful people are often with high IQ but low EQ [emotional quotient]. By improving their EQ, they can get more out of people they deal with, whether that’s employees, managers or their own friends and family. Morris suggests taking a free online test, such as, followed by an ‘emotional stocktake’ to think about what impact your EQ has on those around you. “Then begin holding yourself as accountable for who you are as what you do, both in the workplace and out of it,” he says. 4) Link your goals Linking your goals to something more motivating than a desire for personal advantage can also boost success. Director of International Centre for Leadership Coaching, Alex Couley points out that humans became the most successful species on the planet by being cooperative. That means, if we set goals with reference to how meeting them will improve the lot of others, we’ll be more motivated to reach them. “For example, someone is more likely to work towards getting a pay rise if they’re planning on using that money to send their child to a good school, rather than just upgrading their car,” says Couley. 5) Investigate your money mindset We’re all at different stages of the wealth-creation journey, but if you feel as if your journey has stalled, try doing a personal stocktake. Money mindset coach, Joanne Newell of Rich Life by Design, says that having your financial house in order involves the following: “You should have an income that reflects the value you provide or create, that income should be substantially more than your outgoings, you should have some quality investments, and you should have a clear understanding of your financial position, which includes up-to-date bookkeeping.” If your finances are less than ideal, Couley suggests spending some time reflecting on any limiting beliefs you might have around money, including those inherited from your family. None of these suggestions is costly or complicated, but all have the potential to improve your career, finances and overall well-being. With the possibility of some challenging times on the horizon, there’s never been a better time to invest in becoming more focused and effective.

Dealing with debt

Australia’s household debt is among the highest in the world and rising, thanks largely to worsening housing affordability and plentiful consumer credit. So how do we measure up, and should we be worried? Most global comparisons measure total household debt as a percentage of net income. At last count, Australia’s household debt to income was almost 200 per cent. Is that a problem? Good debt vs bad debt Debt is not necessarily bad if it’s used to grow wealth and you have enough income to service your loans. After all, borrowing to buy a home has been the cornerstone of wealth creation and financial security for generations of Australians. Borrowing to invest in assets such as shares and property that repay you over the long term, rather than the reverse, is also regarded as good debt. Bad debt arises when you borrow to pay for things that don’t provide a financial return, and that you probably couldn’t otherwise afford, such as that overseas holiday you paid for with your credit card. Unless you can afford to repay the debt in full when you get home, the debt can blow out and linger for years. Most people take on debt in the expectation that the assets they buy will grow in value, and their income will increase over time, reducing their debt burden. But what if these expectations aren’t met? When debt is cheap, it increases the likelihood of investments outperforming the cost of holding the debt. Wages not keeping up One challenge with high household debt, which has increased by 83 per cent in a decade, is when income does not keep up. As a statistic, wage increases have been stuck at or near 20-year lows since 2015. It’s currently tracking at around 2.1 per cent, barely above inflation of 1.9 per cent and half what it was a decade ago. Households are generally considered to be under financial stress when their mortgage repayments or rent account for more than 30 per cent of their income. In the December 2017 quarter, it took 31.6 per cent of the median family income to meet average loan repayments, and 25.8 of median income for median rent payments. So, while interest rates remain low, now is the time to take control of your finances and get on top of debt. Tips for dealing with debt 1. Do a reality check. Add up all your borrowings and the interest you are paying on each. This includes mortgages, investment loans, personal loans and credit cards. While the mortgage is likely to be your biggest debt, it’s also likely to carry the lowest interest rate. 2. Complete a budget. Add up all income and expenditure for the past year. If you haven’t been keeping track of spending, make an estimate using your bank and credit card statements. 3. Make a plan. Using your budget estimate, work out how much income you have left each month to reduce your debts. If you have several credit cards and personal loans, concentrate on paying off the debt with the highest interest rate and highest balance first, and when that’s repaid in full, move onto the next highest. Look at the interest rate on your home loan, negotiate a lower rate with your lender or switch providers. 4. Consolidate your debts. You might also consider consolidating ‘bad’ debts into one account and shop around for the lowest interest rate. Use our office to assist if you wish. Australia’s household debt may be high by global standards, but that only becomes a problem if you are struggling to meet repayments or sinking good money into bad debts. If you would like to discuss a debt reduction strategy, don’t hesitate to call. i ii Adelaide Bank/REIA Housing Affordability Report, December 2017 edition, released 6 March 2018

Insurance – are you self-insuring?

Insurance is not compulsory, and each of us has a choice to transfer the risk to an insurer or self-insure. As a generalization, the population has tended to fully insure, or at least attempt to fully insure a business, home, and motor vehicle more regularly than they have life insurance (even though you can add it to your super). Trauma insurance, income protection, and even health insurance are more commonly left self-insured. The government provides some protection on this front, albeit inadequate to fund an existing lifestyle. The government provides tax deductibility of premiums to encourage employees and the self-employed to take out income protection, as well as provide Centrelink benefits for those who do become disabled with insufficient assets, or other income to support themselves if they are self-insured. On the health insurance front, the government is far more supportive with a very good Medicare system, and a tax system that provides tax relief through a tax rebate to those who take out private health insurance. The number of self-employed people without income protection is the biggest concern we see as planners. Self-insuring income is a high risk. Income protection protects against an accident or illness, paying 75% of income is well above 60%, and we see this as a heavy vulnerability to families with a business owner uninsured. The question to ask is, if I suffered a total loss, what impact would self-insuring have on my life. Often, the land value where a total loss of a family home occurs is similar to the value with the property intact. That is not a reason to self-insure in those cases, just an observation, and does allow for some form of protection in that, they can sell the land and suffer little on paper loss. In these circumstances, the insurance policy wording protects the insurer so you cannot have a double win, and take the cash to rebuild as a claim and then sell the vacant lot. In years gone by when replacement was not compulsory in all insurance contracts, self-arson may have been more prevalent. The home contents are often an area people are under insured, as far too many of us don’t actually realize the full replacement value of our home contents assets, and most insurers offset the actual loss by the percentage of under insurance. If your contents are actually worth $100,000 and you insure for $40,000, you only have 40% of a $40,000 insurance claim, which in itself, becomes a form of self-insurance in some cases. Motor vehicle is similar, the difference between agreed value and replacement value policies can be substantial. Trauma insurance is a relatively new form of personal insurance, that covers us if we have a major medical trauma such as a heart attack, cancer, stroke and pays out a lump sum amount to assist in our recovery without the added stress of needing to get back to work or our business at a time we should be resting. These days, with improved medical attention, getting back to full work is far earlier than it used to be, and having a trauma policy relieves the need to do this, where other forms of insurance may not. It is a comprehensive field, and if you would like to discuss any area of insurance, we have specialists who can assist. Basic Personal (Non-business) Insurance Check List: