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Definitions

Executor

The Executor of the Will is the person who administers the Estate after death. This person is expected to carry out the following:

  • read and understand the Will
  • organise payment of funeral costs
  • prepare a final tax return
  • arrange payment of any liabilities
  • arrange the sale and/or transfer of real estate
  • distribute assets as determined in the Will.

 


Power of Attorney

An Enduring Power of Attorney (EPA) allows you to appoint other people to make decisions on your behalf, in the event that you

will not be able to make them yourself.

 

If you become incapacitated and do not have an EPA, your family may need to obtain an order from the court to be granted

decision-making authority.

 


Discretionary Trusts

Establishing a trust is a way of preserving assets or funds for a particular person or group. Under your Will you can create a tax

effective trust designed to provide income to fund your children’s education, or leave a gift for underage or disabled beneficiaries.

Trusts require professional planning to ensure they are flexible to withstand the tests of time and the changing needs of society.

 


Income Protection

These policies provide cover for income lost due to the inability to work through sickness or accident. They pay a regular income

stream either fortnightly or monthly, depending on the policy provisions. The amount of cover you can purchase is restricted,

normally to 75% of your monthly income earned.

 

MAXIMUM COVER AVAILABLE
Contracts will cover up to 75% of income, with superior policies acknowledging the role of salary packages in determining income.

Many policies only consider PAYG salaries, thereby leaving the insured at a substantial financial disadvantage if unable to work.

Many contracts allow a further 15% to be paid into a superannuation fund of the client’s choice, effectively providing for 90%

covering the salary.

 


Trauma Insurance

Trauma or crisis insurance is designed to pay a lump sum on the diagnosis of an insured medical event covered in the policy.

 

Trauma policies can cover the following medical conditions, including:

  • Heart Attack
  • Coronary By Pass Surgery
  • Malignant Cancer
  • Stroke
  • Paraplegia/Quadriplegia
  • And many more.

 


Life and TPD Insurance

Term life insurance is the preferred policy accounting for over 90% of new contracts written each year. This policy does not

provide a savings component and initially can be inexpensive to purchase when compared to traditional life insurance policies.

 

These policies provide for the payment of a lump sum in the event that the insured dies within a specified period of time (term).

The main disadvantage with term life insurance policies is that there is no surrender value payable.

 

Total and Permanent Disablement (TPD) contracts are normally attached to term life policies and pay a lump sum on the total

and permanent disablement of the insured. Total and permanent means 100%. Payments can be denied if it is found that the

claimant is not 100% totally and permanently disabled.

 

Payment of a lump sum TPD can be made:

  • If unable to work;
  • For loss of a limb(s) or sight; and/or
  • If unable to perform basic daily living activities.

 


Positive Gearing

Positive gearing occurs when you borrow to invest in an income producing asset and the returns (income) from that asset exceed

the costs of borrowing.

 

An example would be if you borrowed to invest in shares, and the market then boomed to the extent that the increased value of

your shares exceeded the expenses of the loan.

 


Negative Gearing

Negative gearing occurs when you borrow to invest in an income producing asset and the costs of borrowing exceed the returns

(income) from that asset.

 

Negative gearing on a rental property, for instance, occurs when the annual interest payable on the loan used to acquire the

property, plus other expenses incurred in maintaining the property, exceeds the annual rental income the property generates.

 

The reason negative gearing can be attractive is that under current Australian Taxation law, an investor may be able to claim a

deduction for the loss, which can be offset against other taxable income, such as salaries, business income or other investment

income. (Provided it is an Australian income producing investment.) Of course, if there is no growth in the value of the asset, you

could lose money even after the tax benefit is taken into account.

 


Imputation Credits

Until 1987, company income in Australia was effectively taxed twice: once in the hands of the company and then again in the hands of

shareholders after distribution as dividends. The Government introduced Dividend Imputation to avoid 'double taxation' and make

investing in Australian companies more attractive to investors.

 

Here is how it works.

  • Company profits are taxed.
  • Profits may then be paid to shareholders as dividends with tax credits attached. These tax credits are referred to as imputation credits
  • which represent the proportionate amount of tax already paid by the company. The total taxable value of this dividend is the actual
    dividend received plus the imputation credits.
  • Shareholders are then taxed at their individual marginal rate. Thanks to dividend imputation, shareholders can claim back the tax that
    was paid by the company through the imputation credits they received.

 


Margin Loan

Taking out a margin loan is simply borrowing money to invest in shares or managed funds using your existing cash, shares or managed

funds as security. This increases the total amount you can invest, which increases your potential returns.

 


Margin Call

A margin call is triggered when the balance of your margin loan exceeds your loan limit by more than the allowed buffer. If the value of

your loan security falls, the loan limit falls, and so does the value of the buffer. If the new loan limit drops below your outstanding loan

balance by more than the new buffer, you will be subject to a margin call.

 


Allocated Pensions and Annuities

An allocated pension or annuity is one of a number of products that you can buy with a lump sum from a superannuation fund, or paid

from a self-managed superannuation fund, to give you an income during your retirement.

 

Setting up an allocated pension or annuity

  • Allocated pensions are purchased from superannuation funds using superannuation money (that is money paid out from a superannuation
    fund or retirement savings account (RSA's)). Money from these sources is known as an eligible termination payment or (ETP). Allocated
    annuities can be purchased from a life insurance company using superannuation money.
  • An investment account is set up with this money from which you draw a regular income. Minimum and maximum limits are set on the income
    that can be drawn each year. These limits are set based on your age. Each year the income selected must be within these limits.
  • You may choose how your money is invested by the fund manager (known as 'investment choice'). Fund managers have different investment
    strategies, which you can select, that carry different levels of risk and, therefore, potentially different levels of return.

 

Income

  • Income is payable until there is no money left in the account. If you die before this happens, the account balance will be paid out as a lump
    sum to your dependant, to your estate, or the income payments can continue to be paid to a beneficiary, such as a spouse or dependant.
    You can choose a reversionary beneficiary for the income stream, such as a dependant or spouse.
  • Allocated pensions and annuities give you the flexibility of having access to your money at any time. You can withdraw some or all of the
    money as a lump sum (this is known as full or partial commutation), though there may be tax consequences.
  • The level and duration of income payments is not guaranteed. This is because the account balance is affected by withdrawals, fees and
    investment returns.

 

Tax

  • Income from an allocated pension or annuity is assessable income for tax purposes. However, the amount of assessable income may be
    reduced by a deductible amount (that is an amount excluded from your assessable income), which, generally speaking, represents the
    return of your personal after-tax contributions (known as undeducted contributions).
  • For income streams purchased with superannuation money only, an additional tax offset of 15% may also apply to some or all of the
    income stream. This rebate will reduce your tax payable. In most cases, you must be over age 55 to be eligible for the offset.

 

Shares

Managers can invest shares listed on the stock exchanges of the world, ie: a public company divides its ownership into portions called
shares. The primary objective with share investment is capital growth through the value of the share, but they also can pay income
in the form of dividends. Dividends are the company’s distribution of a portion of its profits that are payable to shareholders and can
also have significant tax benefits attached under the Dividend Imputation System.

 

Shares are generally medium to high-risk investments in that you rely on the company to perform well and grow over time. Given the
level of risk associated with share investments, it is recommended that most investors invest for the medium to long term in order to
smooth out returns.

 

Different managers may invest principally in all or specific market areas:

  • Australian Shares
  • Australian Industrial Shares
  • Australian Resource Shares
  • Australian Imputation Shares
  • Australian Emerging Companies
  • International Shares
  • Specific International Regions
  • Specific Countries

 

Additionally the portfolio may be weighted towards more or less speculative stocks, or may be designed for income rather than capital
growth or vice versa. The use of Australian Imputation stocks is the aim of some managers in order to produce tax effective income
coupled with reasonable growth. International managers may hedge the currency risk or may not. They may also invest around the
globe or only in specific countries or regions.

 

Advantages of Share Investments:

  • They provide for a good long-term capital growth and performance through careful selection and consideration.
  • Most Australian Shares have some form of imputation attached, ie: the company has already paid tax on the income, thus potentially
    enabling the investor to a tax credit.
  • Anyone can own shares, as there is no minimum and can be accessed via a Managed Fund.

Disadvantages of Share Investments:

  • Value of shares may fluctuate at a high rate in the short-term.
  • Dividends are not guaranteed in that the company is not obliged to declare dividend payment.
  • Ordinary shareholders are usually towards the bottom of the list for repayment of capital when a company winds up or liquidates.

 


Property

There are two ways a manager can invest in property. They can either own it directly or they can invest in listed property trusts
that own it directly. The term listed refers to listing on the stock exchange.

 

Listed property trusts are considered by many to be an equity investment as the units are listed on the stock exchange and are
therefore subject to market sentiment. This is true to an extent but the underlying assets of the trusts are properties and they
are generally less volatile than the rest of the market. Listed trusts will normally produce quite good levels of income, which is
reasonably tax effective, together with reasonable levels of capital gain over time. A major benefit of listing is immediate liquidity
as the units may be sold to a ready market at any time.

 

Unlisted property investments are now subject to stringent rules, which in turn make them a relatively illiquid investment with long
redemption periods. Provided this suits the investor and it is a smaller part of their portfolio, investors need to be well aware of
the lack of liquidity before investing as you cannot sell separate parts of the property.

 

Managers who invest in listed funds can give investors the benefit of a spread of property throughout the market and this can be
appropriate in a portfolio, especially for the smaller investor.

 


Fixed Interest

Fixed Interest investments are also known as debt securities and they have a fixed rate of interest payable. Typically, an investor
lends their money to an organisation, such as a bank, in return for a fixed return to be payable set at a future date. Fixed Interest
investments tend to be low to medium risk for Australian Fixed Interest and medium to high risk for International Fixed Interest
(known as International Bonds).

 

Examples of Fixed Interest Investments include:

  • Term deposits.
  • Commonwealth government bonds & debentures;
  • Semi government bonds & debentures;
  • Corporate bonds & debentures;
  • First & second mortgages

 

Term deposits are deposits with a bank, building society or credit union for a specified period of time and in return, the investor
receives a fixed rate of interest for the duration of the deposit. This rate is known prior to the deposit being made. Term deposits
can range from one month to five years in duration.

 

Bonds are issued by government and semi-government bodies in Australia and overseas. You can invest in a bond from one to thirty
years in duration and at maturity, the borrower will return the money to the investor plus interest.

 

Managers who invest in mortgages are seeking to produce income only through lending of money on the security of first mortgages.
Income is usually fully taxable.

 

Mortgage trusts normally lend up to 66% of sworn valuation of property and in some cases may insure the mortgages as well. They
will also maintain some funds in short term money market instruments to meet withdrawals and while waiting to lend. There is not u
sually an entry fee to these trusts but there is often an exit fee in the early years of an investment.

 

Mortgage trusts can be a sound source of income as part of an investment portfolio. Income can be paid monthly, quarterly, half yearly
or annually depending on the rules of each trust. In a falling interest rate market they can maintain higher rates of interest than other
investments for some years. Conversely in a rising market they may produce lower rates. Timing is therefore important in selection of
this investment.

 

Risk level is higher than most other fixed interest investments but is commensurate with the returns offered.

 

Advantages of Fixed Interest Investments:

  • Are easily accessed by investors.
  • Provide the investor with a certain income amount over the term of the deposit/investment.
  • Are very low risk investments and the risk of losing capital is very minimal.

 

Disadvantages of Fixed Interest Investments:

  • An interest rates rise after you purchase the investment generally means there is a fall in value.
  • International bonds are affected by currency fluctuations.
  • Investment is locked in for the full term, otherwise there are penalties for an early exit.

 

Why would you choose a financial adviser from Best Wealth Creation in Townsville?

Our personalised advice includes input from a team of experts in financial planning, tax, investment, superannuation, estate planning and philanthropy based on your requirements. This comprehensive approach helps ensure we can identify the most effective way to enhance your financial circumstances. Our advice can also be supported through an ongoing relationship with Best Wealth Creation which allows you to choose the level of our ongoing participation in your financial affairs.