STATEMENT OF ADVICE PREPARED FOR DR LUCY LO 1 JULY 2013

Transcription

1 STATEMENT OF ADVICE PREPARED FOR DR LUCY LO 1 JULY 2013 Prepared by McMasters (VIC) PTY LTD ABN Corporate Authorised Representative No of Dover Financial Advisers Pty Ltd ABN: AFSL Tulip Street Cheltenham Victoria.

2 Dear Lucy, Our meeting It was a pleasure to catch up with you, see the family photos and generally learn how things have gone over the last ten years or so. It s good to see the financial side of things working out well. It s interesting how such simple strategies, given time, can produce such significant financial results. I look forward to being of service for many more years to come. Please contact us immediately if any part of our advice is unclear or incomplete. There is no problem with another meeting. This statement of advice This statement of advice confirms the advice provided at our meeting and contains the information you need to decide whether to rely on our advice. This is a limited purpose SOA and only covers the advice provided at our meeting. It does not discuss any other matter. Sophisticated investor McMasters Accountants has certified you to be a sophisticated investor. This means the content of this statement of advice does not have to be in statement of advice format under the Corporations Act, however we have included it as good practice. 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. To avoid any doubt we confirm there is no fee for attending the meeting or preparing this statement of advice. This is part of our commitment to you and our relationship over the next thirty years. Your current financial position In summary, you are 38 years old and are a one third owner of a practice. The practice income is about $500,000 a year, and is derived through your family trust. The practice is a business for income tax purposes, under the ATO s public rulings and statements. Your home is worth $1,400,000, with a $400,000 home loan (being paid off fast). You have a positively geared town house (your old home) worth $1,000,000 with a $400,000 loan (not being paid off fast) and $600,000 of super with First State (from the merger with Health Super). You have asked for advice on whether: (i) you should buy a share of the practice premises? And if so who should be the owner? (ii) you should start your own SMSF? And if so what should the SMSF invest in? (iii) your risk insurances need up-dating? (iv) your practice trust could deduct a second car? (v) you need a new will? (vi) you can afford to financially help your parents, who have just arrived from Malaysia. McMasters Advisors Statement of Advice: Lucy Lo 1

3 You have also asked us, confidentially, what the financial implications of splitting with your partner might be? And whether you can afford to do this. Taking each question in turn. Should you buy a share of the practice premises? Dr Smith, who owns half the practice premises, is retiring and he has asked if you want to buy his half interest in the practice premises. Dr Smith is asking for $1,000,000. This is slightly above a recent bank valuation and appears to be a reasonable price. Bank valuations are notoriously low. You are concerned that hard negotiations could sour your relationship with Dr Smith, who you have known since you joined the practice ten years ago and who has always supported and mentored you. Dr Smith is not being paid goodwill as he leaves the practice, and you believe it inappropriate to deny him a good sale price. Dr Smith owns his interest in the premises through his SMSF. He is over age 60 (in fact is over age 70) so the SMSF will derive a tax-free capital gain on the sale. We recommend you buy a half share in the practice premises at $1,000,000, subject to a satisfactory lease with a rental yield of at least 8% indexed by inflation. We have found over the years that investing in practice premises is an excellent strategy. The tenant is sound, and looks after the building and maintains health industry standards of repair and cleanliness. The tenants income is underwritten by the Federal Government, and in this sense is financially much more stable and secure than a nonmedical tenant. We cannot recall a medical practice being unable to pay its rent. Nor can we recall a bank foreclosing on a mortgage securing a surgery loan. Surgery premises are usually capital gains tax free under the small business CGT tax concession rules (provided certain conditions are met), but expert legal advice is needed to confirm this should a sale be in contemplation. McMasters Legal can handle the conveyance for you, set up the SMSF structure and generally make sure all goes smoothly. Our financial planning team can liaise with the NAB for the loan (see below). Who should be the buyer? We recommend you set up a new self-managed super fund called the Lucy Super fund (LSF) and arrange for the LSF to buy the half share in the premises. You should then roll over all but $20,000 of your First State superannuation benefits to the LSF (ie $580,000), borrow $420,000 from the NAB using its geared SMSF loan package and settle the purchase of the property. (These figures have to be adjusted for the effect of stamp duty and other transaction costs). The property will be owned through a bare trust, set up to hold the property in accordance with section 67A of the Superannuation Industry (Supervision) Act. A manual explaining how this works was provided to you at the meeting and a copy of this manual can be downloaded from the McMasters website. The property will generate rent of $80,000 a year. The interest will be about $32,000 a year, meaning there will be a net rent, ie a positive cash flow of about $48,000 a year. Contributions are expected to be $50,000 a year, ie $25,000 a year for each of you and your partner. This means total net cash flow will be close to $100,000 a year (less some minor operating costs). This total net cash flow of nearly $100,000 should be used to pay off the NAB loan. Using the rule of 78 it will take about 4 years to pay off the loan (ignoring rent increases) meaning you will own the property outright by McMasters Advisors Statement of Advice: Lucy Lo 2

4 The primary purpose of owning the practice premises through the SMSF is to provide retirement benefits. There are also significant secondary benefits including preserving your right to practice at the site and making sure you do not have to move should an arms length landlord decided that way. You should ask your practice manager, Barry, to handle setting up the SMSF, the bare trust structure, the NAB loan, the lease and all other documents connected to this strategy. Barry should liaise with our office as needed. Dr. Lucy s Geared SMSF Arrangements Bare Trust Owns 50% of property ollover Holds on trust uture on ibutions ebt Lucy s SMSF Receives 50% of rent and pays 50% of outgoings plus interests on loan The SMSF s investment strategy The SMSF s written investment strategy must include the purchase of the premises, emphasizing the purpose of advancing the members long-term retirement prospects. The strategy should record the Fund s decision to invest in the practice premises and to reinvest net cash flow in debt reduction until the loan is paid off in about The Fund should then invest in blue chip Australian shares, the details of which can be determined as 2018 comes closer. We can help you prepare the investment strategy documents. Taxation of SMSF income The SMSF s net rental income will be taxed at 15%. We recommend the SMSF does not sell the practice premises until you are in pension mode and the SMSF is income tax free. This means no tax will be paid. If the SMSF sells the practice premises before you are in pension mode a tax charge equal to 1/10 th of the capital gain will be paid (ie 15% less a one third exemption) provided the property is held for more than 12 months. Otherwise the tax rate is 15%. These low tax rates mean the after tax return on the property will be much less than if you own the practice premises in your own name or through a related trust or company. McMasters Advisors Statement of Advice: Lucy Lo 3

5 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 financial product. 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 insurance arrangements have been preserved by leaving $20,000 in the Old Fund. Should you up-date your risk insurances? We believe you should increase your risk insurances.. Your existing insurances are as follows: Description Owner Sum Insured Premium Insurer Comments Life + TPD Super $300,000 About $550 a year Health Super Basic Health Super life cover Income Protection Lucy $12,500 per month About $1,950 a year AIA Commissions rebated 90 day waiting period We believe they should be increased as follows: Description Owner Sum Insured Premium Insurer Comments Life + TPD Super $300,000 About $550 a year First State First State (Old Health Super). Commission free Life & TPD Super $500,000 About $1200 a year First State Extra units from First State Commission free Income Protection Lucy $15,000 per month About $2,500 year AIA Commissions rebated 90 day waiting period The total of $800,000 of life & TPD (ie total and permanent disability) cover means your debts of $400,000 on the home and the Kew townhouse (rented) will be paid off. This and the super benefits means you partner Duncan and McMasters Advisors Statement of Advice: Lucy Lo 4

6 the twins will be well provided for, owning a home, a rental property and a large death benefit superannuation pay out. Life insurance through industry super funds: the cheapest option You will appreciate that the cheapest way to buy life insurance is through an industry super fund. There are no commissions. Life insurance through an industry super fund is much cheaper than life insurance from a retail financial institution. Commission rebates McMasters does not accept commissions. We rebate commissions to clients subject to a small handling fee. The details of the McMasters Commission Rebate Scheme are set out here: Commission Rebate Scheme We will arrange for your insurance policy to be placed on the Commission Rebate Scheme and for commissions to be rebated back to you. For the AIA products recommended above, the upfront commission payable is about 90% of the first year premium and an 11% trail commission every year of the annual premium. These commissions are rebated to you as per our commission rebate scheme less a handling fee. 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 and wish to increase the sum insured. Product disclosure statements (PDSs) PDSs are created by the product maker and explain how their products work. Copies of the PDSs for all recommended products can be accessed here: AIA PDS. You can access the First State PDS here: First State PDS. Paper copies are available on request. Reasons for our advice You have high, stable, scalable and long income. Realistically, at age 38, with potentially 30 or more years of working ahead of you, your income and wealth will continue to rise, at an increasing rate. The reasons for our advice include: 1. by having a 90 day waiting period the premium falls (noting that you are not really concerned about no income for between 31 and 90 days); 2. the sums insured are appropriate to your income level and wealth level; 3. AIA has developed an excellent reputation for paying legitimate claims quickly and efficiently as this is their commitment to their customers; and 4. AIA insurance provides good value for your money as opposed to other insurance policies and it is much simpler to have your insurances with the one provider. McMasters Advisors Statement of Advice: Lucy Lo 5

7 Why our advice is appropriate to you and in your best interest Our recommended sums insured are suited to your insurance needs. This is consistent with our needs analysis calculations, and a copy of these calculations is available on request. 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. Holding life insurance in a super fund makes sense. The premium is tax deductible as a contribution, which lowers its after tax net cost. Any benefits paid will be taxed at 15% in the fund s hands. In summary, the advice comprises a reasonable solution to the financial risks you face having regard to your 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. Maximum superannuation contributions The regular large super contributions strategy started ten years ago is paying off. You have built up more than $600,000 of super: well above the average for 38 year olds, and just applying an average earning rate of 7% a year means you are earning an extra $42,000 a year, taxed at just 15%. The strategy has worked. We recommend you continue the strategy, ie you continue to pay the maximum super contributions of $25,000 each year for yourself. Further, we recommend you also pay maximum super contributions for your partner, Duncan. He is genuinely employed by your family trust on a part-time bases for part time administration work. Ideally both your contributions in 12 equal monthly instalments. This translates to about $4,166 a month, or $50,000 a year. This, plus the net rents, means the SMSF will have about $100,000 of income and net cash flow a year At age 60 the investment income and capital gains in the superfund will be tax-free. Had the same investments been in your own name they would have been taxed at your marginal tax rate and be subject to capital gains tax on sale. Benefits cannot be withdrawn until you reach preservation age. That is, they must be left in the fund until you are at least 60 years old. Large spousal superannuation contributions The advice to superannuate Duncan, your partner, $25,000 a year, even though this amount is more than the market value of the work he does, deserves further comment. The ATO accepts that a company, trust, partnership or individual conducting a personal services business can pay superannuation contributions up to the age based limit (ie $25,000) even of this is greater than the market value of the work done. This is recorded in Taxation Determination TD 2005/29 and this determination can be accessed here: Tax Determination TD 2005/29. Estate planning You do not have a will in place at the moment. This is a problem and you need a will. So does Duncan. In summary, we recommend you each execute fresh wills providing that: 1. on the death of one of you everything goes to the survivor; and 2. on the death of the second partner: McMasters Advisors Statement of Advice: Lucy Lo 6

8 a. everything goes to a testamentary trust for the benefit of the children, and lasting until the youngest child turns age 40; b. your siblings and Duncan s siblings act as guardians for your children, and be responsible for their day to day care; and c. your siblings and Duncan s siblings act as trustees for the trust, and invest the money for the benefit of the children. Powers of attorney and binding death benefit notices are also needed. The McMasters legal team will be in touch to discuss this with you and put the will and related documents in place. You can read more about wills, and peruse a sample will creating a testamentary trust in the McMasters Guide to Estate Planning for GPs which can be accessed on our website. Financial help for your parents from Malaysia I understand that your parents have come to Australia to live. They have permanent residency but are not eligible for an Australian old age pension. They are living with you because they do not have significant assets or income of their own and cannot afford to buy a home in Australia. We should meet again to discuss this, possibly at home so your parents can tune in too. Preliminary ideas include: (i) arranging for your family trust to distribute net income to each of your parents, and for your parents to use the after tax amount to pay their living costs; (ii) buying a small town house close to your home in an investment trust, moving your parents in, and having them pay a market rent under an arms length lease to the investment trust. This has a familial flavour, but the courts have held that provided everything is done on an arms length basis the investment purpose will dominate and the arrangement will be effective for income tax purposes, and in its early years will create a tax loss that will be able to be offset against other income. Your Kew town house was originally negatively geared (when you moved out) but now is positively geared, due to rising rents and the expiry of depreciation claims. Within a few years the new town house will be positively geared too; (iii) genuinely employing your parents in the practice, and paying them an arms length salary for their work. Your mother s language skills will be useful at reception, and will make Asian patients feel more at home; and (iv) once genuinely employed on arms length salaries, your parents can be superannuated, with the payments made to your new SMSF. Down the track these benefits can be used to pay a tax free retirement pension to your parents. Financial implications of a possible split with your partner We have not acted for Duncan, as solicitors, accountants or financial planners, and we have only acted for you. This means we do not have a conflict of interest if we comment in the financial implications of a possible split with your partner. We understand Duncan was a student when you met, and stopped studying to look after the household when your children were born. Apart from some clerical work for the family trust Duncan has no significant work experience or expertise and has only modest income generating skills. McMasters Legal has advised that if you separate from Duncan it is likely that a court will allocate between 65% and 70% of your joint assets to Duncan, and that Duncan will have a good case for custody of the children, with your access limited to every second weekend and say one night a week. McMasters Advisors Statement of Advice: Lucy Lo 7

9 Your assets currently comprise: Value Debt Net value Your home $1,400,000 $400,000 $1,000,000 Your superannuation $600,000 Nil $600,000 Your rental property $1,000,000 $400,000 $600,000 Your practice $100,000 Nil $100,000 $3,100,000 $800,000 $2,300,000 70% of $2,300,000 is $1,610,000. We recommend you consult McMasters Legal for more specific legal advice. Your Binding Financial Agreement The more specific legal advice should include advice regarding the Binding Financial Agreement you and Duncan signed in In retrospect this was a good move and it will have an impact on any break of assets and your ongoing financial contributions to the children. But further comment should be left to the solicitors. 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, Terry McMaster is a director of McMasters (VIC) Pty Ltd and also an individual authorised representative of Dover Financial Advisers Pty Ltd. Terry is a beneficial owner of both of Dover and McMasters. Terry is also a solicitor and a registered tax agent. The Corporations Act disclosure requirements: incorporation by reference The Corporations Act and good practice principles require us to disclose matters that may impact your decision to act on our advice and your understanding of our advice. Paragraph 163 of ASIC s Regulatory Guide 175 (RG ) allows us to incorporate these matters into this SOA by reference, in this case through this hyper text link: Additional disclosures forming part of this SOA. We recommend you read this content. A copy of this information was provided to you at our meeting as part of our FSG and an additional copy is available on request. Best interests duty and the appropriateness of our advice I believe this advice is in your best interests and appropriate to your circumstances because it is fit for its purpose and is likely to satisfy your relevant circumstances and financial objectives. It is likely to put you in a better position, according to the standard of a reasonable advice provider. If for any reason you are concerned that this is not the case you should not act on this advice and you should inform me of your concerns in writing immediately. McMasters Advisors Statement of Advice: Lucy Lo 8

10 Our fees The fee for attending the meeting and preparing this statement of advice is nil. Accounting fees are based on time spent on preparing your income tax returns and related work, and are quoted and agreed in writing before any significant work is done. Legal fees will be quoted and the mandatory costs agreement settled before any work is done. We do not accept commissions on insurances and all work arranging your insurances will be charged on a time spent basis: we expect the fee to be less than $2,000 presuming there are no complications. We will let you know as soon as possible if any complications arise. Legal fees, including the wills, the conveyance, the SMSF and loan documents, will be quoted in writing under a costs agreement by McMasters Legal before any work is done. 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 are satisfied with our advice and wish to act on it please sign the client declaration and return it to us and we will implement our advice for you. Client declaration I have received a Financial Services Guide, 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 authorise my Adviser to provide my details to the financial product providers. Signature Lucy Lo Date Adviser declaration I declare that this Statement of Advice is an accurate and complete 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. Signature Date 01/12/2013 Terry McMaster McMasters Advisors Statement of Advice: Lucy Lo 9