As 2018 draws to a close, we look back and reflect on the year which has seen the JBS Team grow and change both individually and as a group. Warren joined Jen as a partner within JBS, Peter got married and the JBS team were there to help celebrate. Both Peter and Liam became Associate Advisers, Aakash is now a permanent resident and we have welcomed Varsha as a new full-time team member. Richard’s and his mates from school Nick and Locky have joined the team to help with administration and all things client services while they complete their university degrees and all celebrated their 21st birthdays. Liam purchased a new car and continues his reign of “Nugget Challenge Champion” in the office. Pj left the Victorian winter behind to conquer the summer in Europe and had an absolute blast. Jen and Bren are loving their lifestyle change and move down to Mt Martha.

From a business perspective, JBS has had an awesome year, we’ve continued with our educational series Join with Jen, Retire Right, and launched Partner Protect so if you haven’t yet seen any of our videos, jump on our website and take a look.

As we reflect on the positive year our team has shared together, there will be people going into this holiday season who are less fortunate than ourselves. Throughout the year, JBS has supported Make A Wish Australia, and in the spirit of giving we have again decided to donate to this charity instead of sending Christmas cards to our valued colleagues, clients and team. You too can make a donation to Make A Wish who grant the wishes of children suffering from life threatening medical conditions.

Holiday Opening Hours

JBS Financial Strategists will be closing on Thursday, 20th December and re-opening on Monday, 7th January 2019. During the holiday closure the business will be supported via email or Jen’s mobile phone for urgent issues.

We would like to thank you for your ongoing support and commitment throughout 2018.

From all the team at JBS, we would like to wish you, your family and your friends a wonderful holiday break, a safe & prosperous New Year, and we look forward to seeing you in 2019.

Below is a little snippet from our recent Team Christmas Event – it was a fantastic day, what a great team we have!

Life insurers will generally offer you the choice to have either Level or Stepped premiums, or a combination on their policies. The type of insurance premium structure you choose will affect the initial cost as well as the total cover over the life of the policy. Generally speaking the duration of the cover may help to determine the appropriate premium structure you should use.

Stepped Premiums – Stepped premiums increase as you age, reflecting the higher likelihood of a potential claim. Stepped premiums have a lower upfront cost over the short-term (when compared to Level premiums), however as you age, the Stepped premiums start to increase, and the longer it is held, the more significant the increase becomes. Therefore, if you plan to hold the level of cover for a long period, generally greater than 10 years, it may be more beneficial to take-up a Level premium.

Level Premiums – Level premiums can provide you with peace of mind as they are designed to remain stable. The premiums will remain stable from the policy commencement until you reach a predetermined age (e.g. age 55 or 65), at this point the premiums will switch to a Stepped premium. Level premiums can still increase due to indexation or other increases to the sum insured. Level premiums can also change if the underlying assumptions and/or expenses of the insurer have changed since the policy started – however this will generally affect the stepped premiums as well.

At the beginning of the policy, Level premiums generally have the higher upfront costs when compared to Stepped premiums. This is due to the increased risk of claim as the insured person ages have already been factored in.

Hybrids Premiums – Some insurers may provide you with the option of a hybrid premium structure that allows you to use Stepped premiums for a portion of the cover, together with Level premiums for the remainder of the cover. This allows the premium structure to be aligned to short-term or long-term needs within a single policy.

From the beginning it’s important that you implement the correct cover and policy structure, as replacement policies can result in Level premiums being calculated based on your age at the time of amendment. If you take out new cover later on, you may also have to undergo medical tests and the like, which could result in the possibility of loadings or exclusions being applied to your policy, if you end up changing. This could result in your new cover becoming more costly or even unattainable and therefore effectively locking you into your current cover with the incorrect policy structure and/or cover.

JBS can assist you with all your personal insurance needs and can help determine the right level of cover for you and assess which premium structure is more suitable for your needs.

We were all really happy when Jen was recently nominated for the FSPower50. The FSPower50 defines ‘influential’ as individuals who have been, or continue to be, instrumental in shaping the future of the financial advice industry.

We are proud to announce that Jenny has again been recognised in the Financial Standard FSPower50 – the 50 most influential financial advisers in Australia for 2018.

Congratulations Jenny! We think it’s fantastic that your hard work as a financial adviser and as a leader in the industry has been recognised. Well done everyone involved!

We often ask ourselves what we should be investing in. Should we invest in shares? What shares should we buy? Is now a good time to be buying shares? Should I instead look at putting my money into a more defensive asset like a term deposit? Or even look at an investment property.

While all these questions are good, the first question we need to ask ourselves is who should own the investment, in other words what structure should we use?

When purchasing an investment we have a number of options available to us when it comes to ownership. Do we own the asset personally, jointly, within superannuation or another trust structure or even within a company of our own.

The majority of investments that we can choose can be owned by any of these entities. There are some exceptions however this article will not go into specifics. For the most part though, one of the main differences between the different ownership options is the tax treatment.

Individuals
When you own an asset as an individual, the earnings are attributed to you personally and hence you will need to pay tax at your marginal rate. You will also be eligible for a 50% capital gains discount when you hold assets for longer than 12 months. As you will be paying tax at your marginal rates, owning assets as an individual can be beneficial for someone with a low income and hence low marginal rate but detrimental for someone who is already on a high income and high marginal tax rate.

Joint
The tax rules around jointly owned assets are very similar to that of an individual with one main difference. The earnings and hence tax is split between each of the owners. A husband and wife for example can split the earnings 50/50 between the two of them. This comes in handy when both partners are on high incomes for example although other options may be preferable.

Superannuation
A common misconception is that superannuation is an asset in itself. This is not the case, it is simply a structure that owns the investments. The main benefit of superannuation funds is that the tax on the income is charged at 15% and capital gains (if the asset is held for longer than 12 months) are taxed at 10%. Current legislation also states that when the superannuation fund is turned into a pension account the tax on the earnings within that pension account attracts 0% tax. This is clearly the best way to hold assets from a tax perspective however the obvious downside is that you aren’t allowed to access the money/investment until you meet a condition of release. The government has also put a cap on the amount of money that you are able to contribute into superannuation each year and also the amount of money that you can transfer into a pension account. These restrictions have been discussed in detail in previous articles so I will not go into them here.

Trusts
There are lots of different types of trusts (superannuation being one of them) however here we will cover unit trusts and discretionary trusts in particular.

In the majority of circumstances the trusts themselves do not pay any tax and instead the tax is paid by the beneficiaries as all income is distributed through to the beneficiaries. For a unit trust, the distributions are paid according to the amount of units owned. For example, if a unit trust has 10 units, and person A owns 7 of those units, then person A will receive 70% of the distribution and hence will be required to pay tax on the amount. As the income flows through to an individual in this example, they will receive a 50% capital gains discount for the unit trust holding the asset longer than 12 months. A unit trust may be applicable for someone running a business with other people who are not part of their family with distributions to be allocated according to the % ownership.

A discretionary trust while similar to a unit trust has one distinct advantage. The earnings can be distributed to any beneficiary on a discretionary basis. That is, you can choose how much of the distribution gets paid to each individual beneficiary and this can vary from year to year. You can therefore allocate more income to those on lower tax rates and less or even no income to those on higher tax rates. This is often used for family owned businesses where money is often allocated to children, non-working spouses or even retired parents in order to keep the tax low and is where the name “Family Trust” originated from. This is the most flexible of structures to hold investments in although you need to remember that all earnings need to be distributed to the unit holders and there are costs associated with the setting up and running of the trust.

Companies
Companies are similar to Unit Trusts in that the amount of income that is distributed to shareholders is determined by the share of the company that they own. If you own 70% of the company you get 70% of the distributions. However there are some big differences.

The first one is that the company pays tax (ranging from 27.5% – 30% depending on the size of the company). This means that as dividends are distributed to the company owners they receive what is known as franking credits to offset the tax already paid by the company.

The second difference is that unlike a trust, earnings can be kept inside the company structure rather than being paid out to the company owners. This can help build the assets inside the company where the tax rate is only 27.5% compared to the individual where that tax rate may be up to 45%.

The main disadvantage when it comes to companies is that they are regulated by ASIC. Unlike other ownership options, there is some compliance that needs to be adhered to when running a company and hence more fees may be payable and more work is required.

Structuring the investments in the right way to ensure the minimum tax payable is extremely important but tax is only one factor that needs to be taken into account. If you want to know more, not just about investments but about setting up the correct structure for your goals and needs please contact our offices today.

In previous articles, we have written about the importance of ensuring that your biggest asset – your earnings capacity is protected.

A question we often get however is how do I know if what I have is ok?

There are many Income Protection policies on offer with many options but one of the biggest differences you need to understand what happens in the event of a claim with an Agreed Value Policy compared with an Indemnity Policy. The wrong option can have catastrophic consequences to your financial position when you need the cover the most.

In order to make the right choice, you must first understand the differences between these two options.

An Agreed Value Policy is signed off at the start, i.e. what level of income they’re willing to cover. It provides you with certainty at the time of insurance application, the amount that you have been insured for will be paid, if you need it.

Whereas with an Indemnity Policy, the benefit amount is estimated at the start but not financially assessed until the time of claim.

In both instances, you generally are able to insure up to 75% of your income, but the difference in the event of claim can be significant.

So which one is advantageous for you?

Indemnity Value Policies are usually cheaper when compared to Agreed Value. However, there is no certainty on the monthly benefits received upon the claim. Although Agreed Value income protection might be a little more expensive, it holds more value as it provides you with certainty on the benefit amount you will receive.

Indemnity value covers are suitable for people with a steady income over the years. However, it is quite common for things to change which may lead to the decline (sometimes only short term) of your income.

Possible reasons for a decline in income (which would impact on an indemnity claim but not an agreed value claim):

– You may be in a stable employment now but have you ever dreamt about starting your own business? Clearly, the goal would be to return to a similar or high income but this move can often lead to a short-term income drop and provide an exposure.

– You may wish to change your career entirely. This could involve further study and again a reduced income for a period of time.

– Your current industry or expertise may be subject to disruption which could affect your earning capacity or require further study.

– You may wish to reduce your working hours or start a family.

– You may have your hand forced and need to give up your career or dramatically alter your hours if a family member becomes very ill.

Unfortunately, one of the most tragic situations we have seen was with a middle-aged man who overtime had his work hours, job performance and income gradually get affected as a result of a debilitating mental health illness. The illness caused him to have to reduce his hours and responsibility and even take periods of unpaid leave. Rather than going on a claim in the initial stages, he struggled through perhaps in denial. The gradual decline in health eventually resulted in a claim; however, the claim was reduced as his pre-disablement income was actually lower than what it was when he took the policy out. Had he taken out an Agreed Value Policy, he would have been entitled to a higher level of income which would have provided much more financial support to him and his family and would have allowed him to focus on his recovery.

For anyone who has default Income Protection cover through work or a Superannuation provider, it is critical to understand these differences as often default insurance is on an Indemnity Policy basis.

It is also important to understand that the older we get the more “uninsurable we become” so locking in a good policy now while you are young and healthy can make a significant difference when you need the policy the most.

At JBS we help people assess their need for cover every day. We provide clients with piece of mind which allows them to get on with their lives in comfort knowing that they are covered. Please contact us so that we can provide you with the same level of comfort.

From the 1st of July 2018, if you are at least 65 years old and meet the eligibility requirements, you may be able to choose to make a downsizer contribution into your Superannuation fund of up to $300,000 from the proceeds of selling your home. Normally after age 65 you would need to meet a work test in order to contribute into Super, the great thing about this is that you don’t need to meet the work test to be eligible.

The contribution will not be counted as a Non-Concessional Contribution and will not count towards any contributions caps. The downsizer contribution can still be made even if you have a total super balance greater than $1.6 million, however if your balance is above $1.6 million you are still restricted to having $1.6 million in the pension phase.

The contribution is only able to be made once on the sale of one home, therefore if you sell a second home you can’t make the contribution again. There is also no requirement that you have to purchase another home or actually downsize your home as the name may suggest. In order to be eligible you must tick all of the following criteria:

– You are 65 years old or older at the time you make a downsizer contribution (there is no maximum age limit)

– The amount you are contributing is from the proceeds of selling your home where the contract of sale exchanged on or after 1st of July 2018

– Your home was owned by you or your spouse for 10 years or more prior to the sale. The ownership period is generally calculated from the date of settlement of purchase to the date of settlement of sale

– Your home is in Australia and is not a caravan, houseboat or other mobile home

– The proceeds (capital gain or loss) from the sale of the home are either exempt or partially exempt from capital gains tax (CGT) under the main residence exemption, or would be entitled to such an exemption if the home was a CGT rather than a pre-CGT asset (acquired before 20th of September 1985)

– You have provided your super fund with the Downsizer contribution into super form either before or at the time of making your downsizer contribution

– You make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement

– You have not previously made a downsizer contribution to your super from the sale of another home.

It is important to note that if your home was owned by just the one spouse, the spouse that did not have an ownership interest may also make a downsizer contribution, provided they meet all of the other requirements.

The maximum contribution you can make under the downsizer rules is $300,000, or $300,000 each if a member of a couple. However, the contribution can’t be greater than the total proceeds of the sale of your home. For example if you and your partner sell your home for $400,000 you’re only eligible to make contributions of $200,000 each, or it can be split in another way such as $300,000 and $100,000.

You must also make your downsizer contribution within 90 days of receiving the proceeds of sale, which is usually at the date of settlement. In some circumstances the ATO may at their discretion extend this 90 day period, but you will need to apply for it. It is also possible to make the contributions in multiple batches, but the total amount can’t exceed $300,000, and all contributions must be made within the 90 day period.

If you’re thinking of downsizing your home and wish to explore your options in relation to making downsizer contributions, please don’t hesitate to contact JBS and we can assess your options and eligibility. It is a really great opportunity to help build your wealth in a tax effective manner.

There are several different factors that determine how much you can afford to spend in retirement. Some of them are investment markets, super balance and lifestyle changes. One step that people generally procrastinate, which is important in their retirement planning, is figuring out how much is needed to spend in the various stages of retirement.

The below chart shows how retirement spending can change over time

Once a desired level of spending is determined, having a good draw-down strategy in retirement allows you to balance your expenses, savings and the way in which the retirement savings are invested.

A good draw-down strategy may allow you to balance the following objective.

1. Maintain a stable and comfortable standard of living in retirement
2. Maximise your Age Pension and any other potential social security benefits
3. Protect the value of your savings against being eroded by inflation and adverse market conditions
4. Provide you with access to your savings to pay for unplanned expenses (without significant penalties for early withdrawal of your capital), and
5. Minimise the risk that you will outlive your wealth, at least for essentials

Case Study
Consider a 65-year-old retired couple who has combined superannuation assets of $500,000 and want to make their savings last 25 years. The below chart shows the impact of different spending strategies for two of the most common account-based pension (ABP) investment portfolio options – conservative and balanced.

If the couple adopted a spending strategy of $50,000 per year, they have at least a 90% likelihood of success for both options (that is, their superannuation assets lasting at least 25 years).

Alternatively, if they spend $56,000 annually, the likelihood of success drops to 56% with the balanced option and 38% with the conservative option. The balanced option has a higher likelihood of success, due to its larger allocation to growth assets. This increases the portfolio’s expected level of both long-term returns and risk. In contrast, the conservative option is made up of more defensive assets.

Impact of spending strategy and investment option on likelihood of super lasting to age 90

Note: Includes the couple’s hypothetical Age Pension entitlements. Results reflect the superannuation and Government Age Pension rules applicable from 1 July 2017.
Source: Willis Towers Watson

What can you do to achieve your desired retirement lifestyle?
It’s important to have a spending and investment strategy in place that is flexible enough to respond to a variety of factors and risks, including the changing patterns of your retirement income needs. Unexpected lump sum expenses, external influences on retirement savings (e.g. adverse market movements) and regulatory changes must be considered.

It is good to have a trusted financial adviser who understands your retirement needs and can help you to make decisions about your investments in the future. We can help you through this process, so feel free to reach out to us.

Offset vs Redraw

When it comes to choosing a home loan, we often simply choose the one with the lowest interest rate. However one thing we should take into account is whether the loan has an option to add an offset account or not.

What is an offset account?

An offset account is a bank account attached to a loan that ‘offsets’ the loan balance. It does not earn any interest but instead reduces the interest payable on the loan.

For example, if you have a $300,000 loan with an interest rate of 4%. The interest payable on the loan is $12,000. If however you had an offset account with a balance of $50,000. The interest payable is calculated on a balance of $250,000 ($300,000 less $50,000) so $10,000.

Note that if instead you paid this $50,000 into the loan then the total loan would also be $250,000 and the interest payable would also be $10,000. The advantage of having an offset however is that the $50,000 is in a bank account and therefore can be withdrawn very easily.

Why not just pay money into the loan and then use a redraw facility?
Having a redraw facility on your loan gives you the option to redraw the extra money you’ve paid into the loan giving you the same flexibility as having an offset account. There is however 1 key difference. When utilising the redraw facility, you are paying down the loan and redrawing whereas with an offset account, you aren’t actually paying down this loan.

So why does this matter? Tax law dictates that the tax deductibility of a loan is determined by its purpose. So if the purpose of the loan was to purchase an income producing asset, then the interest becomes tax deductible. If the purpose of the loan is to go on holiday, the interest is not tax deductible. This is where an offset account shines.

For example, let’s take a $500,000 loan which was initially purchased to buy a home. 10 years down the track, you’ve paid off $100,000 so the loan is now $400,000. You redraw that $100,000 to purchase a new home and borrow an additional $500,000, with the plan to turn your existing home into an investment property.

In this scenario while the initial borrowing amount was $500,000 once you’ve paid it down, only $400,000 is being used to fund the now investment property and is hence tax deductible.

In a separate scenario, you utilise an offset account. You have a current loan of $500,000 with an offset account of $100,000. You then withdraw the $100,000 from the offset account and borrow an additional $500,000 to purchase a new home. In this example the loan for the new home is $500,000 instead of $600,000 however the loan on the investment property is $500,000 instead of $400,000.

By utilising an offset account, even though your total loans are the same, your tax deductible loan is $100,000 more which will provide you with more tax deductions (and hence less tax payable) than if you used the redraw facility.

What are the pitfalls?

An offset account is a bank account and can be easily accessed. This is the offset accounts greatest weakness. If you are the kind of person that struggles to save money or can be tempted by large bank account balances you may find yourself using the offset money to purchase a new car, go on holidays etc. as you will have large cash amounts easily available to you. In contrast, a redraw facility adds that extra step which may stop you from accessing those extra mortgage payments. So while you are thinking you are paying down the loan quickly using an offset account, yes you are reducing the interest payable, however the loan is not getting paid as fast as you may think as you continue to redraw the funds for personal spending.

Selecting a loan

Interest rates aren’t the only thing we need to consider when selecting a loan. We often need to consider the features of the loan. However, features aren’t everything, and they may be features that we do not need and a cheaper loan may be better suited. It is always advantageous to speak to an expert, where they can determine your needs and recommend a product that best suits. An offset account is only one feature. There may be other features that better suit your circumstances or a simple loan with the lowest interest rate may be the best.

If you would like to speak to a loan expert to make sure your loan is the best one suited to you, please call us on 03 8677 0688 and we will happily refer you to an expert.

Many of you would have automatic Insurance through your default Super Fund that you would have been signed up through your employer. But what you may not realise is some of the caveats in these policies.

1. Renewability of Cover:
Some super funds have the ability to cancel your cover when certain events occur. If you were to claim on this policy the insurer can simply decide to not cover you any longer. This puts you at potential risk of not being covered for a significant portion of your life. A retail insurance policy may guarantee your cover as long as your premium is being paid, giving you peace of mind if something was to happen to you.

2. Claims while off work
If you have default income protection cover within your Super Fund it is prudent you check the terms and conditions. Some insurance policies held in Super Fund may have a clause in their Income Protection policies that if you are unemployed for any reason, you will not be covered. For example this could be due to taking a long holiday or going on maternity leave.

3. Stepped vs. Level premiums
A stepped premium will increase each year as you get older, eventually becoming expensive. On a Level premium, you essentially lock in the premium at the age in which you take out the policy, and only indexes slightly each year. Although stepped premiums can be more beneficial in some circumstances, when holding cover for a long period of time level premiums are generally more affordable. Most super funds do not offer cover on level premiums, or if they do the cover usually decreases as you age.

4. Cover whilst overseas
Default cover within your Super Fund may not allow you to remain overseas for any length of time to receive treatment whilst on a claim. In order to meet their definition, you must either be in Australia to claim or return to Australia for treatment. Retail insurance policies may allow you to remain overseas to allow you to receive treatment and stay on claim.

5. Differing definitions of disability
Cover within Super Funds generally will only classify you as fully disabled once you can no longer conduct your occupation at all and needs to remain the case to continue the claim. This is fairly restrictive for members who may want to get back to work in some capacity. For example, there may be a member can work 1 day per week. A retail insurance policy may have a three tier definition of total disability

– Initially, you cannot perform one important duty of your regular occupation

– 10 hour definition – allows members to work up to 10 hours per week whilst on full claim.

– Loss of income definition – allows member to earn up to 20% of pre-disability income without losing any claim benefits.

We note however that these definitions can vary slightly between insurers but are generally very similar.

As always – check the details or give us a call
When comparing insurance within various superannuation plans, we often find that not only are the definitions widely different, but that often if you haven’t reviewed your cover for a while you might find that the premiums have increased significantly and as the insurance is coming from a default superannuation fund, you may be unaware of these changes.

If you would like a review of your current insurance policies and to get a better understanding of what you are and aren’t covered for, feel free to contact JBS.

– Peter Folk –

As long as you’re an Australian resident, you will have some form of personal insurance through Government agencies and bodies such as Centrelink, TAC and WorkCover. Often when asked about personal insurance cover, most people would simply suggest they have automatic cover through Work and their superannuation funds. There are several main concerns here. Firstly there are many misconceptions about what types of covers are offered by government organisations. For instance workcover will only cover you if you get injured at work and not if you injure yourself during out of work hours. Secondly people misunderstand the conditions which needs to be met before the insurance companies accept the claim. Lastly the cover amount may not be sufficient. For example work cover will only cover death for up to the maximum amount of $611,430 per person, which wouldn’t be sufficient if that person happens to have $700,000 of debt.

Let’s firstly have a look at the disability pension through Centrelink. To be eligible you must firstly be between ages 16 to pension age, pass the residency requirements and meet the income / asset test. Once you’ve met all these conditions your disability will then be assessed. To meet the disability requirement, you must be either permanently blind or assessed to be physically / mentally impaired and unable to work for more than 15 hours or more per week for the next 2 years. Furthermore you may be required to participate in support programs going forward. In other words your disability or condition must be very severe and permanent for you to receive support from Centrelink. Then there’s the NDIS (National Disability Insurance Scheme), which again is run by the government for anyone who suffers permanent disability such as permanent blindness, Down syndrome and autism. The biggest misconception regarding what the NDIS offers is the fact that NDIS does not offer monetary support, but rather provides aids and equipment to anyone who is eligible.

Now let’s have a look at the covers offered through WorkCover and TAC. Workcover provides insurance cover for all working Victorians. Each state has their own body, which operate similarly. Both WorkCover and TAC operate on a no fault policy meaning you will be covered at work or on the roads, even if it’s your fault that led to your injury / disability. The main consideration here is that you have to be either at work or on the roads, at the time of the incident. Furthermore it’s important to note that there are limits on how much WorkCover and TAC will payout in the event of death, total disablement and income supplement.

The last type of insurance we will look at is the default cover offered by our superannuation companies. For those of us who have super accounts will also have personal insurance cover attached. There are generally 3 types of insurance offered by industry super funds. Death / TPD or Income Protection. Depending on your super fund you may either have all 3, just one of them or none. Although generally more cheaper to fund, it’s important to point out that default insurance through super funds are very general and will most likely be on reduced cover, meaning the amount insured will reduce over time. This is exactly what you don’t want considering as we get older the chances of us claiming on insurance increases, whilst on the other hand the default cover is reducing on an annual basis.

So here’s a question. If you suffered a heart attack or stroke and required large sums of money for treatment, which of the above insurance covers will pay? The answer is none of them. Overall most of us will have access to some form of default personal insurance. It’s important to understand that these default covers in most cases will not provide you with adequate cover. Having a personalised insurance policy is crucial as it will provide you with customised insurance cover to meet your specific needs.

If you are unsure about what insurance you currently have or would like to review your insurance, please get in touch with the team at JBS to ensure you have the right cover in place.