The clients came to us initially with a simple PAYG tax return for Mr X and a passive investment company requiring accounts and tax returns.
Mr and Mrs X fit perfectly into our desired client profile:-
- Successful and motivated individuals – Mr X is the CEO of a publicly listed company.
- Referral from another of our key clients.
- They were not looking for the cheapest advisers but they wanted to be able to access value adding services such as strategic planning, and budgeting.
Mr and Mrs X were not ready for a full financial planning or retirement planning scenario, however they were keen to undertake an education process and wanted to achieve some diversification in their investments which included large shareholdings in Mr X’s employer.
We agreed that we should take a step by step approach to get their finances and wealth creation plan in order. They are both extremely busy people who wanted a high level of pro-active advice and servicing.
1. Analysis of Salary Sacrifice Potential
Once Mr X turned age 50, he wanted to investigate the possibility of making salary sacrifice superannuation contributions
After analysing the family’s current position both within and outside of superannuation it was agreed that, they would be better placed reducing their substantial non-deductible debt instead.
2. Planning for Mr X’s Annual Bonus
Mr X has been successful in his employment and receives a significant annual bonus if various performance hurdles have been met.
Mr and Mrs X wanted to consider possible scenarios for tax-effectively dealing with the significant bonus that they expected would be due.
Mr and Mrs X’s Private Bankers suggested a number of “tax-effective” investment arrangements for dealing with the bonus. Mr X asked us to review the advice given, explain the pros and cons more fully and to analyse the cashflow and taxation impacts based on the information given.
After discussion of the investments, Mr and Mrs X indicated that they were uncomfortable with the level of risk involved for the potential returns available.
After further discussion it was decided that, instead, they would apply the bonus to their non-deductible debts and would apply all future bonuses, windfalls from the company share purchase plan and surplus income to repay their debts as soon as possible.
3. Tax-effective Planning for the Investment Company
The investment company had made significant capital gains during the year, thanks to a successful employee option plan for Mr X.
Our aim was to minimise the taxation impact to the family of these gains while maintaining their wealth accumulation goals.
After analysing the options available it was finally agreed that the company would pay tax on its capital gains and pay out the profits as a fully franked dividend to Mrs X (the sole shareholder). Mrs X would make a maximum tax deductible superannuation contribution, enabling the imputation credits to be refunded and starting the superannuation savings process for Mrs X.
4. Cashflow Budgeting
Mr and Mrs X have substantial income but also large expense commitments. They were keen to find out how much surplus income they potentially had and could redirect either to debt reduction or alternative investments.
We started on a budgeting process and analysed all of their current and expected expenditure, finally establishing a monthly surplus income which could safely be committed to building the family’s wealth.
5. Investment Property Analysis
As Mr X already had a significant share portfolio, they had decided they would like their next investment to be in property.
A number of domestic and international properties were investigated.
After receiving basic income and expense estimates from both Mr and Mrs X as well as local real estate agents, we were able to provide them with a detailed analysis of the annual costs to maintain the properties, the taxation impact on Mr X’s tax return as well as estimated taxation and return impacts on the eventual sale of the properties.
The international properties required extensive research to determine the differing taxation and GST implications. We were required to liaise with international accountants in that regard.
It was eventually agreed that the international properties were the most appealing and offered the best chance of future profits. Two properties were purchased and have been offered as tourist accommodation since.
The ongoing funding of these properties have been added to the previous cashflow budgeting and surplus income remains for other ventures.
6. Business Analysis
In their international travels , Mr and Mrs X gained a greater appreciation of the tourism opportunities.
Mrs X has a history of employment with travel agencies and felt that there may be good opportunities available in assisting Australians with their travels .
Again, we were able to assist in formulating the cashflow projections and determining whether their current income surpluses could sustain the business through its initial years.
The business started simply as a service to help with planning of travel itineraries and assisting with the planning of accommodation.
The business had proved to be popular and we have now facilitated full travel agent licensing to expand the business further to be able to offer direct airline ticketing and accommodation.
7. Review of Insurances
With the ever increasing complexities of their affairs, increasing levels of debt and the responsibility for 2 young children, we suggested that it would be timely to review their insurance position in case of a serious accident or illness or even untimely death.
We have identified and quantified the family’s needs and we have put in place appropriate insurance coverage for them.
A regular review of their position will ensure that the insurance coverage can actually decrease as the children get older and as their debts reduce.
Mr and Mrs X now have:
- An understanding that contributions to superannuation in addition to his SGC are not required for Mr X
- An understanding that Mr X’s bonuses should be off-set against non-deductible debt
- Utilized their passive investment company to reduce their overall tax liability for the family
- Two investment properties overseas
- A fledgling travel company
- A flexible and adaptable family budget which is kept relevant and up to date with each change in their affairs
- A non-deductible debt reduction plan
- A superannuation plan for Mrs X
- Comprehensive insurance coverage to protect the family in the event of death or disability
