What is a franking credit?

When an Australian-listed company posts a profit, it is standard practice to redistribute those profits to its shareholders in the form of a dividend. As the profits have already been subject to Australian company tax of 30 per cent the shareholder is entitled to a rebate (partial to full) from the ATO for tax already paid if their marginal tax rate is less than 30 per cent.

On the dividend statement, the company tax paid is referred to as a ‘franking credit’.

In the case of retirees that pay zero tax, franking credits are 100 per cent refundable, which means they can significantly boost the returns for pension phase investors.

The importance of franking credits for retirees

The graph below compares the after tax return of a $1 dividend franked vs unfranked for pension phase investors, super funds and individual investors on the top tax rate of 49 per cent. As you can see per dollar of dividend the zero tax rate applied to pension phase investors allows them to benefit most from a fully franked dividend, leaving them approximately 22 cents and 70 cents better off than super and top tax rate investors respectively.

The after-tax value from a $1 dividend franked vs unfranked for differentAustralian investors.

What difference does franking make?

The table below, compares the performance of the standard S&P/ASX Accumulation Index with that of a new ‘tax aware index’ (the S&P/ASX 200 Total Return Tax-Exempt Index) which fully values franking from the perspective of tax exempt investors such as charities or pension phase investors. The additional returns from franking credits are close to the current cash rate and, when accumulated over three years add an extra 7.2 per cent to returns.

Performance of Australian shares before and after franking for the three years to 31 December 2014

As you can see, over time franking credits can have a significant impact on your returns, particularly if you are in pension phase or are a tax-exempt investor. Therefore, if you are a retiree or nearing retirement, you need to understand the benefits of franking and how you can structure your investment portfolios effectively.

Source: Plato Investment Management

To find out more, speak to your Leenane Templeton financial planner today on 02 4926 2300.

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One of the longest-term decisions many investors will make is whether to setup a self-managed super (SMSF) fund with individual trustees or a corporate trustee.

It is a decision that could have financial and personal implications for as long as the SMSF remains in existence including when a member leaves the fund and/or a new member joins.
 
Indeed, some SMSF members would not fully recognise the key differences between having individual trustees or a corporate trustee until a member dies. Of course, this consideration is particularly pertinent given the ageing of the population.

Under superannuation law, all members of an SMSF must be either individual trustees or directors of a corporate trustee of the fund. An SMSF with individual trustees must have at least two individual trustees yet a corporate trustee can have only one director.

The tax office’s latest-available SMSF annual statistical review records that 92 per cent of the SMSFs established in 2013/14 had individual trustees – a rise of two per cent over three years.

As the tax office observes, ‘there has been a consistent shift away from corporate trustees’. This could partly be attributable to some investors focusing on what may seem the easiest and most hassle-free way to setup an SMSF – perhaps without weighing-up the long-term differences between the two types of trusteeships.

Others planning an SMSF would no doubt carefully compare the features of each type of trustee – perhaps in consultation with their financial planners – and then choose the best perceived course for their circumstances.

Interestingly, 77 per cent of SMSFs in existence on 30 June 2014 had individual trustees. In other words, 33 per cent have corporate trustees against 8 per cent for new SMSFs.

A proportion of SMSFs would have begun with individual trustees and later switched to a corporate trustee, perhaps after the death of a member.

The tax office, as regulator of self-managed super, urges would-be SMSF members to understand the differences between the two types of trustees. It could be worthwhile gaining advice about the issue from an SMSF specialist.

On one hand, individual trustees – with each member acting as a trustee – can cost less to establish because a company is not setup to act as a trustee. However, the ATO points out that there are other considerations apart from initial cost.

An SMSF with individual trustees must hold its assets in the name of all those individuals as trustees of the fund. If an individual trustee is replaced, the names on the funds’ ownership documents must also change. ‘This can be costly and time consuming,’ the tax office warns.

By contrast with a corporate trustee, assets are held in the name of a company as trustee. If trustee directors change, the assets remain in the name of the same company.

If a fund has two individual trustees and one dies, the fund must appoint another trustee to continue as an SMSF. (This is because of the requirement that a fund must have at least two individual trustees.) Yet if an SMSF has a corporate trustee, a deceased trustee director may not have to be replaced because a corporate trustee can have a single director.

In other words, a corporate trustee will continue to control an SMSF and its assets after the death or incapacity of a member.

To find out more about establishing an SMSF or to discuss your current SMSF trusteeship, speak with your Leenane Templeton financial planner on 02 4926 2300

The post An SMSF trustee decision for the long, long haul appeared first on Newcastle Financial Planners & Financial Advisors.

Most of us take for granted that we have to get our car serviced regularly. It’s not something we look forward to, but we know we have to do it – or it will let us down when we most need it.

A regular review of your financial plan is just as important – and for the same reason. Life changes so quickly we can forget important updates to our financial planning, particularly insurance as shown by this real life event.

Josh and Kate had their first child late last year. A close friend who knew Josh was quite casual about finance matters reminded him that their circumstances had now drastically changed. He suggested it would be a good idea to talk to his financial adviser about their insurance situation given their newfound responsibilities.

The adviser discovered that Josh and Kate had last updated their life insurance when they bought their first home three years previously. He emphasised that with the new baby, things had changed dramatically for the couple, and having insurance that only covered their mortgage would leave a shortfall should something happen to one of them.

When it was suggested they increase their cover from $250,000 (the mortgage) to $750,000, Josh was stunned! But then the adviser explained: should something happen to Josh, $400,000 would be drawn down over the long term to replace his income and allow Kate to look after their son. Otherwise she could use these funds to hire a nanny if she went back to work. Part of the remaining lump sum could be invested for their son's future education – this being one of their current savings goals that they would not want to change.

This one option removed considerable pressure from Josh and Kate in their new roles as parents.  Having appropriate life insurance in place gives you and your family options should the unthinkable occur.

Does your financial plan need reviewing?  Chat with Leenane Templeton today on 02 4926 2300

The post Service your future regularly appeared first on Newcastle Financial Planners & Financial Advisors.

Newcastle Financial Planners like yourself, hear every day of what is happening on the stock exchanges of the world and the ups and downs of the Australian economy.  We receive one minute grabs and only occasionally do we hear or read more in depth commentary. Many of our Newcastle Financial planning clients are keen to keep track of the economy by following certain indicators.

According  to a recent survey by Dun & Bradstreet the majority of Australian business executives are experiencing  increased confidence  that business is improving and they expect profits will increase during the December 2010 quarter.  So what signs are there for financial planners and investors to look out for to determine what economic recovery looks like?   To assist investors we believe that there are four simple signs.

1. Employment – Generally, the correlation between an improving economy and an increase in employment figures are an indication of economic growth.  However, there are issues to look at beyond  the headlines, such as jobless recoveries where there has been enough stimulus to get businesses going again but not enough to stimulate or sustain hiring more people.  Also, whilst unemployment figures are often given a lot of weight by the media, it is important to remember that there are time lags as well as increases in part-time work which may have an attendant drop in the full-time rate.
2. Consumer Confidence and Spending – In addition to the present resources boom in Australia, the economy relies on consumer spending, so spending can be one of the first signs that the man in the street has increasing confidence in the economic recovery.  Whilst in the longer term consumers may realise that they should save more and buy less, it is the rebounding of spending that quickly heralds increased confidence of an economic recovery.  As Australia is an island and as we have, over the years, become less of a producer and manufacturer of goods, most of what we purchase comes from overseas, so our import figures will also increase with additional spending.
3. Business Indicators – Optimism by the business community and the attendant opportunities and embracement of expansion following consumer spending gives signals of economic recovery.  Businesses will rely on receiving an increasing number of new orders, higher production levels with timely deliveries from suppliers and increasing employment and inventories all indicate good economic conditions as well as increased competition to ensure they do not lose any market share in the recovery phase.
4. Bank lending – In Australia part of the community confidence for the economy relies on home ownership (whether for personal living or investment) so bank lending is an area for both business and personal needs.  Whilst public companies are not entirely dependent on banks to grow their businesses, small businesses, as the main employer in the country, do not have the opportunity to expand without the assistance of bank lending, and without that expansion a stable recovery and higher employment is not possible.

One of the best ways to keep up to date with the economy as it has performed is to visit our Economic News updates called month in review, these reviews look at the economic indicators released in the previous month reviewing for example the unemployment rate, retail sales, construction and housing growth, US economic indicators, Australian Equities, Global equities, REITS (Listed Property Securities) Fixed interest and the S&P ASX 200 stock performance for the previous month.

visit our other Newcastle financial planning sites

 www.leenanetempleton.com.au

www.financialplanner-newcastle.com.au

www.newcastle-accountant.com.au

www.selfmanagedsuperfundstrategies.com

Disclaimer

The information contained in this Newcastle financial planning blog is based on information believed to be accurate and reliable at the time of publication.  Any illustrations of past performance do not imply similar performance in the future.

To the extent permissible by law, neither we nor any of our related entities, employees, or directors gives any representation or warranty as to the reliability, accuracy or completeness of the information,  or accepts any responsibility for any person acting, or refraining from acting, on the basis of information contained in this communication.

This financial planning information is of a general nature only.  It is not intended as personal advice or as investment recommendation, and does not take into account the particular investment objectives, financial situation and needs of a particular investor.  Before making an investment decision you should read the product disclosure statement of any financial product referred to in this newsletter and speak with your financial planner to assess whether the advice is appropriate to your particular investment objectives. financial situation and needs.     For further details visit www.financialplanner-newcastle.com.au for self managed super visit    www.selfmanagedsuperfundstrategies.com  for Leenane Templeton visit www.leenanetempleton.com.au and for Newcastle Accountants visit www.newcastle-accountant.com.au

PLEASE READ OUR FULL DISCLAIMER

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