STATEMENT OF ADVICE PREPARED FOR DR DENZY & MRS DIZZY ADIOUS 01 JULY 2014

Transcription

1 STATEMENT OF ADVICE PREPARED FOR DR DENZY & MRS DIZZY ADIOUS 01 JULY July 2004 Prepared by McMasters (VIC) PTY LTD ABN Corporate Authorised Representative No of Dover Financial Advisers Pty Ltd ABN: AFSL Tulip Street Cheltenham Victoria.

2 PART ONE WHAT THIS STATEMENT OF ADVICE IS ABOUT You have asked us to up-date our advice dated 1 July In particular you have asked what investment strategies should be considered now that the practice is established, the home loan is paid off (via an interest offset account) and you have more than $250,000 in super benefits. Your assets and liabilities are shown here: Cost Value Debt Net value Practice $1.00 $1.00 Nil $1.00 Home $500,000 $750,000 Nil $750,000 Q Super N/A $250,000 Nil $250,000 Cash $200,000 $200,000 Nil $200,000 Total $1.00 $1.00 Nil $1,200,001 Denzy is 45 and Dizzy is 44, and in good health. Your eldest two children are now medical registrars, and finally financially independent. The youngest two children are still at university, and you are supporting them while they concentrate on completing their degrees with the best possible academic results. Sadly, Denzy s parents passed away in 2011, but Dizzy s parents are still living with you and dependant on you. You are interested in: (i) up-grading your home, (ii) buying a rental property and (iii) setting up and running your own SMSF, and investing in Australian shares. Your living costs have fallen since School fees and home loan repayments are gone, and you have four fewer adult bodies to feed. There is surplus cash every month and the question now is how to invest it. This statement of advice sets out our advice on these matters. It confirms the advice provided at our meeting and contains the information you need to decide whether to rely on our advice. The scope of this SOA is limited to the matters discussed within it, and does not consider every single facet of your financial circumstances. You can read more about our general approach to financial planning for GPs here: The GPs' Guide to Financial Planning. Financial services guide The McMasters financial services guide was provided to you on-line as part of the fact finder process and a further copy can be accessed here: McMasters' FSG document. 1

3 PART TWO OUR ADVICE A Preliminary comment: the practice strategy is working Taking over the Dalby practice and introducing telemedicine technology is proving to be a good strategy. Net income has increased by more than $100,000 and the combined profit of the Dalby Medical Trust and the Dalby Service Trust is now more than $700,000 a year. Setting up the Dalby Service Trust to own the valuable telemedicine equipment and provide services to the Dalby Medical Practice was a good move: there were negligence claims against Denzy but thanks to the DST no valuable assets were at risk, which is why we set the DST up back in Your efforts to recruit another GP have not been successful. This means the Dalby Medical Trust s income remains personal services income: the practice does not meet the ATO s rule of thumb for a professional practice being a business. The structure still looks like this: Structure of Dr Denzy s Dalby Practice Practice income Dalby Medical Trust Dalby Service Trust 45% management fee 100% PSI distribution Dr Denzy Dr Denzy s Family members We remind you that the DMT must distribute all of its net income to Denzy, and that it cannot distribute net income to any other person. Denzy is the DMT s only beneficiary, and the DMT s trust deed does not allow any other person to be a beneficiary unless this is permitted by the ATO s rulings on the incorporation of medical practices. We also remind you that the practice must observe the principles set out in Taxation Ruling TR 2006/2 Income tax: deductibility of service fees paid to associated service entities: Phillips arrangements. This can be viewed here: ATO ruling on service entities. You can refresh your memory of service trusts here: McMasters' Guide to Service Trusts. The key points to note are that: 2

4 (i) (ii) (iii) the Dalby Service Trust must really provide the services. This includes space, support staff such as reception, office management and utilities; the Dalby Service Trust must provide tax invoices for these services on a timely basis; and these tax invoices must be paid by the Dalbly Medical Trust on a timely basis. The Dalby Medical Trust, or Denzy personally, remain responsible for Denzy s personal deductible costs including professional development costs, professional indemnity insurances and memberships and registrations. This is consistent with established industry conventions for arms length service entity arrangements. Investing in residential property We are strong advocates of investing in good quality residential property, and keeping it for decades, even generations. The reasons for this, and relevant case studies, are set out in our various manuals. Suffice it to say over the last two decades Australia wide property has averaged about 9.5% return a year, and we believe it is quite probable that it will do so again over the next two decades. Residential property has the added advantage of integrating with your personal lives, through the home, or homes. You definitely deserve a bit more private space than you have had over the last seven years. To this end we can identify two broad strategies that may work for you, both as long-term investments and for lifestyle purposes. These are: (i) arrange for the Dalby Service Trust to buy a town house near your home and rent it to Dizzy s parents on an arms length rent. There is an obvious familial flavour to this arrangement, and similar cases been found to be acceptable by the courts, provided the arrangement is conducted on an arms length basis and a market rent is paid every month; and/or (ii) buy a new bigger family home in Dizzy s name, using the $450,000 in the interest offset account plus your $200,000 cash reserves, and retaining the old home as a long term geared residential property investment. $1,000,000 seems an appropriate price, and the resultant $350,000 or so of non-deductible debt should be paid off as fast as possible using all available cash flow. Both strategies will probably work very well over the next few decades. Both strategies are tax effective, even though each of them has a lifestyle advantage. We see the lifestyle advantage as a bit of a plus. The move is worth making anyway, and the lifestyle advantage just makes a good thing better. Investing in Australian shares Australian shares will probably do very well over the next two decades too. As to which shares, you have two broad options. These are: (i) a parcel of no more than ten blue chip Australian shares, bought under a buy and hold strategy with a time horizon of at least two decades, with all dividends reinvested back into these shares; or (ii) a low cost index fund such as the Vanguard Index Australian Shares Fund, with all distributions reinvested back into this investment. As to who should be the investor, you have three broad options. These are: (i) (ii) (iii) an investment company, with the shares owned by a new family trust. The idea is the Dalby Service Trust distributes and pays net income to the investment company. The investment company pays tax at 30%, and invests the remaining 70% in companies like the NAB, BHP Billinton and Westfarmers. The investment company will eventually pay fully franked dividends to the family trust, and the family trust will distribute these to low tax rate or no tax rate beneficiaries, meaning the ultimate tax rate will be less than 30%; or a SMSF, via a roll over of the existing Q Super benefits, concessional contributions and possibly extra nonconcessional contributions (subject to statutory maximums). The shares will not be sold until the SMSF is in pension mode, and its investment income including realised capital gains is tax-free, meaning the ultimate tax rate will be less than 15%; or you can use both an investment company or a SMSF. 3

5 Under both options you should use a low cost share broker, such as E Trade or Comsec, to keep transaction costs as low as possible. These options are shown diagrammatically here: Structure of Dalby Practice using an investment company Structure of Dalby Practice using a SMSF Structure of Dalby Practice using both an investment company and a SMSF Which is better, investment company or a SMSF? The answer is it depends. But the closer a GP is to pension age, the more likely a SMSF will be better. The position is tabulated here: Criteria SMSF Investment company Tax on interest, dividends and rents 15% prepension 0% post pension 30% less franking credit when dividend paid (can be less than 15% ultimately) Tax on capital gains: asset held for less than 12 months Tax on capital gains: asset held for more than 12 months 15% 30% less franking credit when dividend paid (can be less than 15% ultimately) 10% 30% less franking credit when dividend paid (can be less than 15% ultimately) Tax on contributions or distributions 15% 30% less franking credit when dividend paid (can be less than 15% ultimately) Tax on non-concessional contributions or corpus contributions Nil Nil Preservation to age 55? Yes No Lifestyle assets No Yes Borrowing ability Yes, but restricted Yes. Very unrestricted Risk of harsh compliance penalties Yes No Audit Yes No Cost to maintain Dearer Cheaper In summary, in view of your age and the likely holding period we believe you will probably be better off investing in Australian shares via a new self-managed super fund ( SMSF ). Proposed superannuation strategy At our meeting we advised you to roll your benefits, other than $20,000, in HESTA Fund ( the Old Fund ) to a new SMSF ( The New Fund ). The $20,000 should be retained in the Old Fund to preserve your life insurance benefits and similar benefits. The SMSF should then invest in a small number of blue chip Australian shares, using a low cost share broker such as E-Trade or ComSec, retaining a minimalist bank account to cover short term liquidity needs such as accounting and audit costs, taxation and similar charges. 4

6 Details of the SMSF s investment strategy and its review process are provided below under the heading SMSF Investment Strategy. SMSF Product disclosure statement PDS The New Fund s SMSF PDS was provided at our meeting and a copy can be accessed here: The Dover Guide to SMSFs and SMSF PDS. This PDS describes the New Fund and also provides a useful general description of its class of products, ie SMSFs generally. We recommend you read the PDS closely and contact us if you have any questions about your SMSF or SMSFs generally. Corporations Act switching disclosure rules The Corporations Act requires additional information be disclosed if we recommend one financial product be replaced in full or part by another. Accordingly we advise that: 1) the Old Fund was considered and its characteristics compared to the New Fund; 2) a number of other products were considered, including retail funds and industry funds, and we concluded the New Fund was more appropriate to you than these other products; 3) there are no costs other than those set out below under the heading Commissions and other costs ; 4) no significant potential benefits will be lost; 5) there are no significant adverse consequences; and 6) your existing insurance arrangements have been preserved by leaving $20,000 in the Old Fund. Why is the New Fund appropriate to you and why it is in your best interests? The New Fund is appropriate to you because it: 1) is expected to produce better future returns, net of costs, than the alternatives products we considered, including the Old Fund, retail funds and industry funds; 2) allows you to control your investments; 3) allows you to be 100% sure where your money is being invested at any time; 4) allows you to respond quickly and definitively should circumstances change; 5) will receive large non-concessional contributions when your inheritance is received; 6) is cost effective, reducing total fees, thereby increasing retirement dollars; and 7) you are interested in running your own fund and have the competency to do so. Further SMSF reading Self-managed super is just that, self-managed super. We encourage you to learn as much as you can about SMSFs and the environment they operate in. The following table sets out some useful SMSF resources and we recommend you read these resources to stay up to date with SMSFs. Reading Link Our comments The Dover Guide to SMSFs Super Guide The SMSF Handbook by Barbara Smith The Guide to SMSFs and SMSF PDS SuperGuide Order at Booktopia Covers all you need to know about SMSFs Includes extensive further readings on superannuation An excellent introduction to SMSFs 5

7 Reading Link Our comments SMSF DIY Guide by Sam Henderson Order at Booktopia An excellent introduction to SMSFs Daniel Butler s SMSF newsletters Thinking about SMSFs: ATO publication Thinking about self managed super from the ATO website Excellent newsletters to keep you posted on SMSF changes Sets out the ATO s views on what you need to know about SMSFs SMSF Investment strategy Once the SMSF is set up, and the benefits rolled into it, the investment strategy needs to be determined and formally recorded. We recommend the SMSF invest in Australian shares through E-Trade, and use an ANZ Premium Cash Management Account as a bank account. You can learn more about E Trade here: and more about the ANZ PMCA here: ANZ PCMA Information. A copy of the ANZ MPMCA s product disclosure statement was provided at our meeting and further copy can be accessed at: ANZ PCMA Information. The investment strategy should emphasise blue chip Australian shares paying franked dividends, as franking credits generate tax refunds for SMSFs and give the underlying shares a tax driven head start in the after tax return calculations. The initial portfolio is set out in this table: Company ASX Amount % 1 CBA CBA $40,000 10% 2 BHP BHP $40,000 10% 3 NAB NAB $40,000 10% 4 Telstra TLS $40,000 10% 5 Brambles Industries BXB $40,000 10% 6 Cochlear COH $40,000 10% 7 Seven Group Holdings SVW $40,000 10% 8 Origin ORG $40,000 10% 9 Westpac Banking Group WBC $40,000 10% 10 Coca Cola Amatil CCL $40,000 10% We have limited the portfolio to ten companies. This is to simplify operations and reduce costs, and to ensure we have a chance of beating the market. If the SMSF has more than twelve companies it is probable that it will replicate the market and is improbable it will beat the market, which means you will be better off simply holding an index fund. We have researched each company and the reports have been ed to you. We recommend that we meet each quarter to discuss the portfolio and generally review the performance of the SMSF and what can be done to improve performance. 6

8 SMSF administration We can handle all aspects of the New Fund s administration for you including accounts, tax returns and audit. There is no fee for setting up the SMSF: its part of the service. Our fee for doing this is $3,000 plus GST. The Fund can claim a GST credit for the GST once it is up and running. Commissions and other costs The costs connected to the New Fund and the Old Fund are tabulated here: New Fund Old Fund Commissions Nil Nil Management fees Nil $5, % Two advice meetings $600 SMSF administration $3,000 Total costs $3, % $5, % Best interests duty and the appropriateness of our advice We believe this advice is in your best interests and appropriate to your circumstances, in that it is fit for its purpose and is likely to satisfy your relevant circumstances and financial objectives; and is likely to put you in a better position, according to the standard of a reasonable financial planner. If for any reason your are concerned that this advice is not in your best interests or is not appropriate to your circumstances and financial objectives you should not act on this advice and you should inform me/us of your concerns in writing immediately. Why our advice is appropriate to you and why it is in your best interests Our advice means you will acquire a financial product expected to generate reasonable returns relative to the market, with only a moderate level of risk. Your overall financial position will be enhanced and, in particular, your objective of retiring at age 70 is more likely to be achieved. This means you will be in a better position than otherwise. Distributing personal services income to persons other than Dr Denzy You say that another accountant has told you that your PSI Trust can distribute net income to persons other than you, provided you get a reasonable distribution/salary commensurate with your contribution to the Dalby practice. This appears to come from the ATO document General anti-tax avoidance rules and how they may apply to a personal services business. This document sets out the ATO s views on how the general anti-tax avoidance rules may apply to a personal services business conducted through a company, trust or partnership. This document can be accessed from the ATO website here: ATO website materials. This document include theses sentences: 7

9 If you split personal services income with an associated person, or with another entity associated with you, then Part IVA may apply to that arrangement. However, you can pay remuneration (for example, salary or wages) to an associate (or a service trust for bona fide services related to the earning of your personal services income if that amount is reasonable for the services provided by them. In supporting the claim I would be advisable to have details of the dollar value of the hourly rate of pay and the number of hours being paid (recorded by for example time sheets, diary records or the like) and of the duties involved and how they relate to the work being undertaken by the principal. In particular if you use a family trust or company to split personal services income with an associate (say a family member) and thereby reduce your income tax liability, then Part IVA may apply to that arrangement. For example, Part IVA may apply where a salary is paid to you as the principal worker by your trust or company and that salary is not commensurate with the value of your services, and the remaining income is distributed to associates. Similar sentences can be attributed to the ATO in other forums. In summary, despite the clear word of these paragraphs we recommend you do not distribute any net income from the practice trust to associates. We believe it is unlikely that the ATO will accept that the Dalby Medical Trust can distribute net income to anyone other than Dr Denzy, no matter what it writes on its website. For completeness, we note that the Dalby Medical Trust s deed does not allow a distribution of net income to any person other than Dr Denzy, and requires net income to be distributed in accordance with the ATO s public rulings on the incorporation of professional practices. The next five years We believe you are in a good place right now, at least financially speaking. You are only age 45. It s quite young for a GP. Your practice is in the top quartile for profitability, and you have built up a creditable amount of wealth for such a short time in Australia. Well done. The road ahead looks a lot like the road behind, at least for the next five years or so. Continue to work hard, and invest in good quality assets held in tax efficient structures. Let time do its work. There will be some ups and downs, but as the years go by the asset values will move up, augmented by further (after tax) capital contributions and reinvested investment earnings. We expect your current net wealth of $1,200,000 will double to about $2,400,000 in five years, if you maintain the recommended investment strategy. In 2019 you will be able to work in metropolitan Brisbane, and realistically that s where the family will finally end up. Be assured of your employability, and the effect of ten plus years working solo in a rural environment. Your medical skills will be at a premium and you will be able to pick and choose what practice you work at, and how many sessions you do a week. The name of the game will be health maximisation. At age 55 the kids will be finally off your hands and the two of you will be able to kick back and enjoy life a little more. In summary, the prognosis is good: plenty of work, plenty of money and plenty of time to travel and do some of the things you have denied yourselves so far. Please keep me posted and I look forward to catching up again in a few years time. Appendix: information upon which this SOA is based This section has information about you that we used in preparing our advice. Please advise us if you think this information is wrong or incomplete. 8

10 General Information Name Denzil Adeyemi Dizzy Adeyemi Age Date of Birth 28/03/ /09/1969 Occupation GP Homemaker Taxable Income $250,000 $nil Assets and Liabilities Description Owner Asset Liability Net Value Superannuation Denzil $38,000 $- $38,000 Car 1 Denzil $25,000 $- $25,000 Car 2 Ada $40,000 $35,000 $5,000 Credit card Denzil $- $4,000 ($4,000) Cash savings Denzil & Ada $56,000 $- $56,000 TOTAL $159,000 $39,000 $120,000 Insurance Description Owner Insurer Sum Insured Income protection Denzil QSuper $10,000 / month Life and TPD Denzil QSuper $200,000 Dependents You have 2 daughters (Sally aged 21 and Moonshine aged 20) who are both studying medicine at university and 2 sons (Max 17 and ben, 15) who are both in high school. Risk profile We believe you should be Growth investor, given the high, stable and long income. You expect to practice for at least another thirty years and this is the time frame for all business and investment recommendations. Your investments will be in growth assets such as Australian equities (direct shares and managed funds) and real estate. 9