STATEMENT OF ADVICE PREPARED FOR DR DENZY & MRS DIZZY ADIOUS 01 JULY 2009

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 moved to Australia from Nigeria three years ago to make a better life. Denzy is working as an employee GP with Queensland Health, in the remote town of Dalby. The family lives 2.5 hours away in the Brisbane suburb of Indooroopilly to be close to schools and universities. Denzy drives to Brisbane every second weekend to visit the family, and Ada and the kids drive to Dalby every other weekend. Dizzy is a full time home-maker. This includes looking after her elderly parents and parents in law. They recently joined the family in Australia, have no assets and will not qualify for the Australian old age pension for at least ten years. Denzy is working hard and earning a salary of about $250,000 a year. This is a high salary, but it goes quickly on family costs, including two lots of private school fees, HECS fees two university student children and supporting the elderly parents and parents in law. One income is supporting 8 adults and 2 teenagers. You also send money home to Nigeria whenever you can. Things are always tight. As you are new to Australia we believe things should be kept as simple as possible while you learn the ropes and adjust to your new environment. We emphasize owning a home, getting risk insurances in place, starting a significant super strategy and becoming an owner of a business as soon as possible All investments will be long term, even 30 years, as you expect to be in Australia for the rest of your lives, and working for most of them. The good news is it is all good news. Australian GPs, particularly rural GPs, have high incomes and this is unlikely to change for many years. You are in good health and prepared to work hard, so the economic forecasts are fine. This statement of advice sets out our initial thoughts on what you should be doing, and why. 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 Buying a practice We understand that Queensland Health has asked you to take over the Dalby practice. No one else wants it, so there is no goodwill. This is so despite it being very profitable, with gross income of about $800,000 a year, and low operating costs. The practice is busy, is supported by the local community with rent-free premises. Many GPs and practice nurses have been invited to join the practice, but none have accepted: it s just too far away from the city. The practice had been without a GP for two years until you joined in You have now been at Dalby for three years. You can only practice in a remote location/area of need and you cannot practice in Brisbane for at least another seven years. You believe you can build the practice, particularly using telemedicine technology so patients can consult expert specialists without your patients having to travel long distances. The telemedicine technology is expensive but will add greatly to patient services and to practice profits. Overall it sounds like a good opportunity to significantly increase your income without taking any real risk. You should accept the Queensland Health offer and buy the practice for $1.00, subject to the documentation being approved by our legal team. Legal documents The legal documents for the purchase of the practice still need to be checked thoroughly by an experienced solicitor before you final commit and sign up as the buyer. There may be unacceptable conditions, such as: (i) Unexpected employee obligations; (ii) A promise to stay longer than you are prepared to stay (iii) Onerous lease terms; or (iv) Restrictions on the services able to be provided at the site. Please refer the draft purchase agreement and draft lease to McMasters Legal Group before these documents are signed. The practice structure We recommend you set up two new trusts. The first trust will be called the Dalby Medical Trust. It will run the practice. It will use a personal services income (PSI) trust deed, the key feature of which is all net income must be distributed to Denzy, and no net income can be distributed to any other person. This trust deed automatically complies with the ATO s rulings on practice structures; in particular, the requirement that a trust deriving personal service income distribute all net income to the practitioner generating the income. You can read Income Tax Rulings IT 2503 here: Income Tax Ruling 2503 and IT 2639 here: Income tax ruling IT The second trust will be called the Dalby Service Trust. It will lease the practice premises, employ the staff and generally provide the Dalby Medical Trust with everything it needs to run a general practice at the site. The Dalby Service Trust will own all plant and equipment including the expensive telemedicine technology. 2

4 Owning the expensive telemedicine technology in a separate discretionary trust quarantines this investment from patient litigation risks and is strongly recommended. The Dalby Service Trust will use a standard family trust deed and its net income will be distributed between its beneficiaries each year depending on circumstances. Service trusts are not that popular these days, but work well when a practice has: 1. Above average income, and/or 2. Below average costs; and 3. Is run by a solo GP or is in rural location and can use the higher 45% management fee rather than the 40% fee usually stipulated by the ATO. In your case all three conditions are met and we expect a service trust will work well, particularly as you have low tax rate family members as beneficiaries. A service agreement will be in place, and tax invoices will be rendered and paid on a timely basis. ATO views on service trusts The practice needs to observe the principles set out by the ATO in Taxation Ruling TR 2006/2 Income tax: deductibility of service fees paid to associated service entities: Phillips arrangements and this can be viewed here: ATO ruling on service entities. You can learn more about service trusts here: McMasters' Guide to Service Trusts. This manual includes a draft service agreement and a draft tax invoice. Living away from home allowance Dr Denzy will be paid a living away from home allowance of $50,000 to compensate him for the extra costs connected to living in Dalby, away from his family home in Brisbane. Practice structure diagram The structure looks like this: Structure of Dr Denzy s Dalby Practice Practice income Dalby Medical Trust 45% management fee Dalby Service Trust 100% PSI distribution Dr Denzy Dr Denzy s Family members 3

5 The Dalby Service Trust will charge the Dalby Medical Trust a management fee equal to 45% of gross income, ie $360,000, or a commercial amount. This is in line with the ATO s public rulings and similar statements on service entity arrangements. This is a simple and easy way to run the practice and isolates the plant and equipment, particularly the expensive telemedicine technology, from the risk of patient litigation. Dizzy is a director of the DST trustee company, and is employed part time as a practice manager on an arms length salary of $50,000 a year. Dizzy is also superannuated up to her age-based limit of $25,000 a year. The Dalby Service Trust s net income will be distributed between the beneficiaries of the trust, ie family members, in accordance with their needs. Tax profile The Dalby Practice Trust is expected to make about $300,000 profit (before any salary is paid to Denzy). The Dalby Practice Trust will pay Denzy a salary of $250,000 including super and pay the remaining $50,000 of profit to Denzy as a genuine tax-free living away from home allowance. The Dalby Service Trust is expected to make $300,000 profit a year before Dizzy is paid her salary. The total net income of $600,000 will be distributed as follows Beneficiary Income Tax Denzy s salary $225,000 $81,900 Denzy s super $25,000 $3,750 Denzy s LAFHA $50,000 Nil Dizzy s salary $50,000 $14,650 Dizzy s super $25,000 $3,750 Two cars $50,000 Nil Non-resident beneficiaries $12,000 $3,480 Under age 18 children $800 Nil Over age 18 son $22,967 $2,544 Over age 18 daughter $22,967 $2,544 Father $22,966 $2,544 Mother $22,967 $2,544 Father in law $22,967 $2,544 Mother in law $22,966 $2,544 Total $600,000 $122,794 or 20% This means the family has $434,706 available after tax and after superannuation. This is more than enough to live comfortably and at the same time pay off the home loan as fast as possible. This is why we believe owning a practice is the best investment for a GP. There is no other investment or business opportunity with such a high expected return and such a low risk. Some GPs question us when we say low risk but the reality is running a general practice is a very low risk enterprise. Few practices do not make good profits, and the exceptions are usually dysfunctional or inappropriately located. 4

6 We have never seen a practice in a remote location like Dalby not make good profits. The Dalby practice is virtually a medical monopoly: you will be the only GP in town, and it s income is guaranteed by the Federal Government: the practice is 100% bulk billing. Bulk billing The practice s pricing structure deserves some comment. The purchase contract requires you to continue to bulk bill patients for at least five years. A few years ago a clause like this would mean the practice is not going to be as profitable as otherwise. However, this has changed and the item numbers for bulk billing rural practitioners, combined with the other incentives for rural practitioner, suggest the Dalby practice will be very profitable. B Buying a home In our meeting, you stressed that you want to buy a home within a year. We think you can do it quicker than that. Your cash flow will be very good from day one in the new practice, and GP specialist lenders will recognise this and in effect lend you money on the security of your high (and insured) expected future income. For asset protection reasons the new home should be bought in Dizzy s name only. Nominal ownership, ie whose name it is in, is not relevant for family law purposes but is very relevant for all other purposes, particularly protecting assets from litigious patients. The buy decision should be based on investment potential, as well as family convenience, needs and preferences. The home is a long-term investment, and will never be sold. It should be kept as an investment when you ultimately up-grade. If an investment is not sold, capital gains tax is not payable. A property can be passed down through generations without triggering a capital gains tax liability. The wealth tied up in a property can be readily accessed without selling by borrowing against it if necessary. It is best to look in areas displaying good capital growth. In Brisbane these are areas within 10 kilometres from the CBD, including Indooroopilly where you live now. A nice house in Indooroopilly will cost at least $500,000. Lenders who specialise in lending to GPs will usually lend up to 95% of the home s value, plus stamp duty, without charging Lender s Mortgage Insurance (LMI). Stamp duty is about 3.5%, so you will need 10% of the property price, that is, around $50,000 as a deposit. Interest offset account The deposit should be no bigger than it has to be. Any extra cash you accumulate should then be put into an interest offset account. The interest offset account has the effect of reducing the interest paid on your mortgage by $1 for every $1 earned in the offset account. For example, let s assume you purchase a home worth $500,000 with a 10% deposit ($50,000) and borrow the remaining $450,000. Your interest is calculated on the $450,000, but if you put $200,000 in an interest offset account, interest will be calculated on $250,000 of the loan, not $450,000. In other words, instead of the bank charging you 6% non-deductible interest on the $450,000 home loan, and paying you 3% assessable interest on the $200,000 deposit, it instead charges you 6% on just $250,000. The interest offset account allows you to transfer your equity to a new home when you eventually upgrade, and retain the old home as a negatively geared investment: this strategy is strongly recommended and has worked very well for many other clients over the last 20 years. Most GPs regret the sale of the old family home within a year or two. We habitually recommend the old home be retained as an investment when GPs up-grade: simple advice that has stood the test of time and worked wonders for many of our clients. 5

7 C Insurances Income Protection Insurance The biggest risk to your lifestyle and financial security is Denzy being unable to earn an income due to injury or illness. You need income protection insurance. We recommend a waiting period of 90 days. You will have sufficient cash and other reserves to allow you to meet personal obligations for the first three months of any extended illness or injury before the new policy will commence paying benefits. The 90-day waiting period significantly reduces the premium, which means you can end up having a much larger sum insured for the same premium. This makes sense to us: we are concerned with serious long-term illness or injury, not manageable short term illness of injury. The maximum term that benefits will be paid is until you are 65 years old. Your income protection premiums will be fully tax-deductible. As explained below, in addition to this tax refund, you will also be entitled to a rebate of the commission every year, making the policy even more attractive. The recommended policy, AIA, has an excellent reputation. Our past experiences have been favourable and the premiums are good value for your money, relative to comparable policies. For all intents and purposes, we believe AIA s policy is worded more appropriately and is therefore more suitable while still providing the same payout benefit. Denzy already has income protection insurance in his Q Super fund, but this cover is only for the first 2 years off work. Additionally, where income protection is held outside superannuation, you only need to comply with the terms of the insurance contract to receive a pay-out, whereas when income protection insurance is held inside your super fund you not only have to comply with the terms of the insurance contract, but also meet the requirements of the super legislation. In summary, the advice comprises a reasonable solution to the financial risks you face having regard to your needs and your existing financial resources. Life and total and permanent disability (TPD) Insurance Denzy has life and TPD insurance of $200,000 as part of his QSuper membership. This is not adequate cover, particularly in view of Denzy s commitments to his parents and parents in law, and other relatives back in Nigeria. The cheapest way of arranging extra life and TPD insurance is through Q Super and, of necessary, other similar industry super funds. We recommend Denzy have at least $1,500,000 of life and TPD insurance cover. This cover should be with the Q Super insurance assistance service, the details of which are on the Q Super website. Q Super does not pay commissions to any person. The underinsurance problem The recommended sums insured are less than the amounts that would be recommended by many other financial planners, and some would say you are under-insured. You are aware of this, and have compromised on the sums insured due to competing claims on your budget. The recommended sums insured are sensible compromises and, in summary, we believe they are appropriate to you having regard to your overall financial profile. Let me know if you are concerned about this or wish to increase the sums insured. 6

8 Product disclosure statements (PDSs) A PDS is a document created by the product maker to explain how their product works. Copies of all relevant PDSs were provided at the meeting and further paper copies are available on request. Electronic copies can be accessed here: AIA PDS and on the Q Super website. Commissions and the Commission Rebate Scheme McMasters does not accept commissions and rebates them to clients subject to a small handling fee. The details are set out here: Commission Rebate Scheme We will arrange for your insurance policies to be placed on the Commission Rebate Scheme and be rebated to you as soon as possible. For the AIA products recommended above, the upfront commission payable is $1,280 and an 11% trail commission every year of the annual premium. For example, if the premium is $1,000 the annual commission will be $110. Reasons for our advice The reasons for our advice include: (i) by changing your income protection insurance to a 90 day waiting period the premium falls (noting that you are not really concerned about no income for between 31 and 90 days); (ii) the sums insured are appropriate to your income and wealth level, and are closer to the economic costs connected to the insured event occurring; (iii) AIA has developed an excellent reputation for paying legitimate claims quickly and efficiently as this is their commitment to their customers; and (v) AIA insurance provides good value for your money and it is much simpler to have your insurances with the one provider. Why our advice is appropriate to you and in your best interest The 90-day waiting period on your income protection insurance makes sense, because you have significant funds set aside for emergency. Being off work for 90 days is not really a problem. Being off work forever, or at least a very long time, is the real risk. This is a reasonable solution to the financial risks you face having regard to your needs, your children s needs and your existing financial resources. We considered a range of alternative financial products and, in summary, determined that AIA is best for you for the reasons outlined above. If you are concerned that this advice is not in your best interests or is not appropriate you should not act on it and you should put your concerns in writing immediately. E Estate planning You do not have wills in place. It is important for wills to be prepared. As discussed during our meeting, a simple will, will work perfectly fine given your simple circumstances. Things do not have to be complicated. We recommend that in the event of one premature death, everything goes to the survivor and, in the unlikely event of a double premature death, everything goes to a testamentary trust for the benefit of your four children. This trust will last until the youngest child is 35 years old. Our legal team will contact you to prepare the wills and related documents. You can read more about wills here: Estate planning for financial planners. This manual was originally prepared as a training manual for financial planners, but doubles well as a guide for GPs. This manual explains how testamentary trusts work and includes sample wills so you can get an idea of what the wills look like. 7

9 F Superannuation Denzy is a member of QSuper. His super benefits are invested in the Balanced investment option, which means that about 65% of the funds are invested in defensive assets such as cash and bonds, and only 35% are invested in growth assets such as shares and real estate. Given that it s a long time before you can access your benefits (over 20 years), you have plenty of time to generate wealth within your superannuation. Economic theory predicts it is probable, but not certain, that growth investments such as shares will outperform bank deposits and similar low risk investments over the long term, say twenty years and more. You can instruct Q Super to adopt this strategy by logging on to its Member Online website and following the instructions to switch your investment option to Australian Shares. Let us know if you need any assistance with this. We are quite happy with Q Super. It is a low cost, commission free fund with good corporate governance. It is stable and safe, and an appropriate place for your superannuation benefits. Q Super membership includes low cost life insurance of about $180,000, but this amount falls progressively over time. The sum insured can be increased by applying for extra units on the Q Super website. Corporations Act switching disclosure rules The Corporations Act requires additional information be disclosed if we recommend one financial product be replaced in full or part by another financial product. Accordingly we advise that: 1) the Balanced investment option was considered and its characteristics compared to the Australian Shares investment option; 2) a number of other investment options were considered, and we concluded that the Australian Shares option was more appropriate to you than these other products; 3) there are no costs other than under the heading Super fees comparison ; 4) no significant potential benefits will be lost; and 5) there are no significant adverse consequences to this change. Why are the recommended accounts appropriate to you and in your best interests? The Australian Shares approach is appropriate for you because it: 1) is more suited to your risk profile; 2) is expected to produce better future returns, net of costs, than the alternative products we considered; and 3) it is cost effective, reducing total fees, thereby increasing retirement dollars. The relevant fees based are summarised in this table: Superannuation fees comparison Q Super Australian Shares Q Super Balanced Status Recommended Current Initial Balance ($) $38,000 (approx.) $38,000 (approx.) Admin fee (p.a.) $84 $84 Investment costs (p.a.) $27 $106 TOTAL $111 $190 8

10 Your super is expected to grow at a faster rate by switching to a high growth investment option and you will a save on fees each year. The higher growth rand lower fees, compounding over time, will significantly increase your final super balance. Product Disclosure Statement ( PDS ) The Q Super product disclosure statement can be accessed Here: insert PDS. You should download the product disclosure statement and read it, and also read the related documents provided by QSuper including the details of its fees and the general information regarding superannuation. These documents are deemed to be part of this statement of advice for disclosure purposes. PART THREE OTHER MATTERS Capacity in which advice is provided Dover Financial Advisers Pty Ltd ( Dover ) ABN holds Australian Financial Services License (AFSL) Dover is located at 71 Tulip Street, Cheltenham, Victoria, McMasters (Vic) Pty Ltd ABN is an authorised representative of Dover. Mina Andrawis is also an individual authorised representative of Dover Financial Advisers Pty Ltd. All taxation advice is provided by McMasters (Vic) Pty Ltd ABN as a registered tax agent. Our fees The fee for attending the meeting and preparing this statement of advice is nil. Legal fees are charged on a timespent basis. A quote will be provided before any work commences. We charge $1,056 for setting up the income protection insurance, but this will be taken out of the upfront commission and the balance is rebated to you. We also charge $176 each time we rebate the trailing commissions to you. The next step You should read this SOA carefully and contact us if anything is not clear or requires further explanation. There is no problem with another meeting: just let us know. If you decide to proceed please sign the client declaration and return it to us and we will implement our advice for you. Client declaration I have received a FSG, all documents incorporated into this SOA by reference and copies of all PDSs referred to in this SOA. I have read this SOA and I understand its content and accept its recommendations. I authorize my Adviser to provide my details to the financial product providers. Dr Brad s signature. Date. Adviser declaration I declare that this Statement of Advice is an accurate record of my advice. I declare that I only provided advice on products for which I am authorised to advise on and that these products are appropriate to my client. Terry s signature. Date. 9

11 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. 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 and Ada $56,000 $ $56,000 Total $159,000 $39,000 $120,000 Description Owner Insurer Sum insured Income protection Denzil Q Super $10,000 / month Life and TPD Denzil Q Super $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 You believe you should be High Growth investor, given your 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 high growth assets such as Australian equities (direct shares and managed funds) and real estate. 10