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Complex Financial Advice
ASIC Superannuation Competency Units covered in this manual are:
FNSFPL602A Determine client requirements and expectations for clients with complex needs
FNSFPL508A Conduct complex financial planning research
FNSFPL604A Develop complex and innovative financial planning strategies
FNSFPL605A Present and negotiate complex and innovative financial plans
FNSFPL606A Implement complex and innovative financial plans
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Table of Contents
Chapter 1– Introduction ......................................................................................................................... 4
Chapter 2- Determine client requirements and expectations for clients with complex needs ............. 5
Client requirements and expectations................................................................................................ 7
Fact Find .............................................................................................................................................. 8
SMART goal setting ............................................................................................................................. 8
Investment risk ................................................................................................................................. 10
File note ........................................................................................................................................ 10
Chapter 3- Conduct complex financial planning research .................................................................... 12
Types of research .............................................................................................................................. 14
Research organisations ..................................................................................................................... 15
Australian Tax Office ......................................................................................................................... 15
Chapter 4- Develop complex and innovative financial planning strategies ......................................... 16
Superannuation re-contribution strategy ......................................................................................... 17
Case study ..................................................................................................................................... 19
Transition to retirement strategy ..................................................................................................... 21
Case study ..................................................................................................................................... 21
Task ............................................................................................................................................... 22
Debt recycling strategy ..................................................................................................................... 23
Case study ..................................................................................................................................... 25
Task ............................................................................................................................................... 27
SMSF borrowing money to purchase property................................................................................. 28
What are the costs ........................................................................................................................ 28
Borrowing in a SMSF ..................................................................................................................... 29
File note ........................................................................................................................................ 30
Chapter 5- Present and negotiate complex and innovative financial plans ......................................... 32
Chapter 6- Implement complex and innovative financial plans ........................................................... 34
File note ........................................................................................................................................ 34
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This guide should be read in conjunction with the following additional reference materials:

Financial Planning in Australia (latest edition)

Australian Master Financial Planning Guide (latest edition by CCH)

www.ato.gov.au
IMPORTANT PLEASE READ
1. The following information within this document was created in 2013. Due to changes that
occur on a regular basis with the financial planning landscape you may need to update this
document.
2. You are expected to read your text book and the references provided within this document.
3. To complete this course you must have access to the internet and be able to download the
resources required.
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Chapter 1– Introduction
Complex financial advice is a common area for financial advisers. Having a solid understanding of the
sophisticated strategies available equips a financial planner to provide better outcomes by achieving
client goals. When appropriate more advanced strategies can lead to clients having a lower tax
liability, greater investments working for them and generate passive income.
It doesn’t take much for a client’s financial plan to become complex and it is important to note that
there are various levels of complexity. It is hard to define a general specific point where advice
moves from standard advice to complex advice. The definition will largely be determined by either
the individual adviser or their firm’s service offering.
It is fair to say that when multiple strategies are being employed to achieve a client’s goal it can be
considered complex financial advice. For example recommending a client refinance their home loan
to use equity to invest in equities and put in place appropriate insurances can be considered a
complex strategy as the financial advice areas being covered include:
-
Mortgage refinance
Gearing
Tax minimisation
Investment planning
Insurance (life, TPD, income protection & trauma)
Estate planning (potentially)
Any of the above areas in isolation are standard advice components. However, as in the above
example, when they are pooled together could be considered as complex advice. Each of the areas
impact each other so it is important to always look at the big picture and structure so that the best
outcome is created in achieving the client’s goal(s).
Strong communication skills are required when working on complex financial advice. This starts with
knowing exactly what the client’s goals are and being able to concisely document them. Without
knowing where the clients wants to be it is impossible to create a meaningful financial plan
(strategy). The next step is to then effectively communicate the strategy to the client so that they
understand the proposed advice, the benefits, any limitations/consequences and are then in a
position to make an educated/informed decision on how they wish to proceed.
The following chapters walk you through the process in providing complex financial advice.
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Chapter 2- Determine client requirements and expectations for clients
with complex needs
With trillions of dollars pouring into superannuation, an ageing population and increasing
strain on the public pension system, the Government has long been aware of the need to
help support Australians to make wise choices about their money both during their working
life and into retirement.
In 2010, the Government announced that it would start a process to create new laws
designed to encourage Australians to seek financial advice and boost consumer confidence
and trust in obtaining financial advice. These laws are called the Future of Financial Advice
(FoFA) reforms.
Two years on, the new rules became law on 1 July 2012. The financial advice industry has
twelve months to make the transition to comply with these laws which become compulsory
on 1 July 2013.
What are the new laws governing financial advice?
Below we summarise the changes for you in a simple table. We also explain how financial
planners who are members of the Financial Planning Association have additional standards
to meet above and beyond the law which give you extra peace of mind when getting advice
from an FPA member.
Area of advice
Before 1 July 2013
After 1 July 2013
Adviser (commission) payments
from investment and
superannuation products.
Financial planners could be
paid a commission by product
providers which meant that
their advice to you could have
been biased.
Financial planners can no
longer be paid a commission by
product providers.
Client first
(Best Interest)
Financial planners are not
bound by law to act in your
best interests.
Financial planners are bound
by law to offer advice in your
best interests. You have
additional grounds to lodge a
complaint if you believe that
this is not happening.
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Ongoing service
Your financial planner did not
have to tell you the fees you
pay on an ongoing basis.
Your financial planner must
send you an annual fee
statement every year. You may
be asked if you want to
continue your relationship with
your financial planner every
two years. If you say no or
don’t reply, your access to that
financial planner will stop.
Not all financial planners are the same
Genuine professionals go above and beyond the law. Financial planners have a professional
obligation to look after clients in the following ways:

Explain any limitations in the advice they can give, either in product types (eg
insurance or investments) or in product providers (eg products from a limited range
of companies)

Not to misrepresent their skills, competency, experience, expertise, capacity or
benefits they might receive

Clearly explain their professional services and document the professional
relationship agreed on by a client (including the specific services they will provide)

Before they provide any professional services, how they will charge and the costs the
client will bear if you decide to go ahead

Explain the product and administration costs associated with their recommendation.
How do the new laws affect you?
The new laws affect financial advice given after 1 July 2013. From this date, it is expected
that the process of getting financial advice may be clearer and the way adviser services are
paid for are more transparent.
Our regulating body, ASIC, has a great Moneysmart website to help Australian’s learn about
managing their money and achieving financial goals. This site contains some of the best
tools and resources available.
See frequently asked questions for consumers from the Australian Government.
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Client requirements and expectations
When financial planners commiserate about their clients with their managers or colleagues
the most often cause of this is that expectations could have been managed better.
Promising the world and under delivering will more often than not result in a
disappointment.
Successful financial advising hinges on an accurate analysis of your client’s requirements – if
you get the requirement wrong, you’ll get the solution wrong and your relationship with the
client will be short lived. Requirements are what the client wishes to achieve. They can be
simply stated as their goals or objectives.
Expectations are deeper and broader than "requirements:"
Expectations are your client's vision of a future state or action, usually unstated at first but it
is important that the adviser uncovers their expectations and ensures they are realistic. An
example of an unrealistic expectation is someone who wants to spend all of their household
income and be in a position to continue the same quality of life once they retire at age 55.
When there are conflicting goals it is important the client is made aware of the conflict and
prioritises their goals. In this example, is retiring at age 55 more important than leading a
lavish lifestyle today? Or would you prefer to continue to spend all your money now (no
savings plan) and work for the rest of your life?
Setting realistic expectations is a very important skill in financial planning. Doing so is in the
client's best interest as it will keep their focus on the bigger picture so they can work
towards achieving their goals.
Expectations cut two ways:
1. They are a primary measure of your success. In your client's mind, satisfaction is how
close you have come to their expectations. Not how close you were to the wording of the
advice document or the scope of work but to their expectations. It may not even be the
actual end results of the plan but the process with which you arrive there.
2. Expectations drive all of your client's actions and decisions. It's not their everyday duties
or their "assigned role" or your very rational explanations that drive them, but their
expectations.
Chapter 1 of Financial Planning in Australia 5th edition explores the financial planning
environment. Chapter 2 focuses on ethics and compliance whilst chapter 3 explores the
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client adviser relationship. Read through these chapters now to gain a solid understanding
of these areas. This will give help provide a marco view of the financial planning
environment.
Maslow’s Hierarchy of Needs
People are believed to require emotional states before they can progress to higher levels of
requirements. This is important as you may be asking a client to do something they are not
ready for. Click here to see Maslow’s Hierarchy of Needs.
Fact Find
The client questionnaire is sometimes referred to as the "Fact Find". It is a document which
under 945 (a) provides substantive proof to understand your clients relevant financial and
social situation. See chapter 3 page 130 of Financial Planning in Australia text book for a
brief fact find document.
To read about the relationship of the fact find and section 945 Click here
To see an example of a Fact Find Click here
SMART goal setting
Client goals should always be SMART. This is an acronym explored in detail below. Clients
will need help with ensuring their goals are SMART and this is an important role of the
adviser during the initial meeting(s) as the clients goals need to be clearly articulated. If not,
it will be very hard to measure progress and indeed to have a concrete objective to strive
towards.
Specific: A specific goal has a much greater chance of being accomplished than a general
goal. To set a specific goal you must answer the six “W” questions:






Who:
What:
Where:
When:
Which:
Why:
Who is involved?
What do I want to accomplish?
Identify a location.
Establish a time frame.
Identify requirements and constraints.
Specific reasons, purpose or benefits of accomplishing the goal.
EXAMPLE: A general goal would be, “I want to buy a home.” But a specific goal would say, “I
want to buy a home for $800,000 and have a $160,000 deposit by December 2018.”
Measurable - Establish concrete criteria for measuring progress toward the attainment of
each goal you set.
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When you measure your progress, you stay on track, reach your target dates, and
experience the exhilaration of achievement that spurs you on to continued effort required
to reach your goal.
To determine if your goal is measurable, ask questions such as……
How much? How many?
How will I know when it is accomplished?
In financial planning this is often expressed in dollars.
Attainable – When you identify goals that are most important to you, you begin to figure
out ways you can make them come true. You develop the attitudes, abilities, skills, and
financial capacity to reach them. You begin seeing previously overlooked opportunities to
bring yourself closer to the achievement of your goals.
You can attain most any goal you set when you plan your steps wisely and establish a time
frame that allows you to carry out those steps. Goals that may have seemed far away and
out of reach eventually move closer and become attainable, not because your goals shrink,
but because you grow and expand to match them. When you list your goals you build your
self-image. You see yourself as worthy of these goals, and develop the traits and personality
that allow you to possess them.
Realistic- To be realistic, a goal must represent an objective toward which you are
both willing and able to work. A goal can be both high and realistic; you are the only one
who can decide just how high your goal should be. But be sure that every goal represents
substantial progress.
A high goal is frequently easier to reach than a low one because a low goal exerts low
motivational force. Some of the hardest jobs you ever accomplished actually seem easy
simply because they were a labour of love.
Timely – A goal should be grounded within a time frame. With no time frame tied to it
there’s no sense of urgency. If you want to save $10,000, when do you want to save it by?
“Someday” won’t work. But if you anchor it within a timeframe, “by 1 st May 2018”, then
you’ve set your unconscious mind into motion to begin working on the goal.
Your goal is probably realistic if you truly believe that it can be accomplished. Additional
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ways to know if your goal is realistic is to determine if you have accomplished anything
similar in the past or ask yourself what conditions would have to exist to accomplish this
goal.
Investment risk
Investment Risk
Understanding that you as a financial planner cannot control and this is included with your
advice. Things such as - Political risk , Economic risk , Market risk, Specific Investment risk to name
a few. So then, how important is investment risk profiling a client.
Things you cannot control (click here) need to be discussed with your client. It is surprising to know
that many people believe you have the ability to know what is going to happen tomorrow and will
be able to act today. This is simply not the case and needs to be "crystal clear" in the clients mind.
Risk profiling - Read the article on Risk Profiling "Snake oil or fact" - Financial Planning in Australia
5th edition Chapter page 142.
An example of a Risk profile
Activity - Complete your own profile using the resources below. At the conclusion of reading this,
you should be able to discuss the difference in both risk assessment methods, and explain several
issues for and against, in each model.
Look at a working investment risk assessment Click here.
File note
It is imperative accurate file notes are kept throughout the whole advice process. The first file note
will be regarding the initial conversation the adviser had with the client with a much more elaborate
file note from the first meeting. Below is a template of an initial meeting file note.
Meeting Date & Time:
Attendees:
Location:
Duration:
I provided client with FSCG. I confirm that the document was fully explained. Version number: 10.3d
Reason for meeting:
Scope of advice that was agreed on:
- Superannuation
- Wealth protection (insurance)
- Retirement planning
- Tax minimisation
Scoped out areas agreed on:
- Investment planning
- Estate planning
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Consequences of scoped out areas:
The following was discussed:
Risk profiling process, the client’s response and understanding of their risk profile
Needs and objectives and any unrealistic expectations
Initial and ongoing advice fees. We agreed that the following fees will apply:
SOA fee $
Ongoing ASF ($ or %)
The list of services that were agreed is as stated in FSCG under Platinum Package.
I explained the use of electronic authorisations and the implications of using this service.
Client Acknowledgement Form read and signed by client.
(Below is an example of risk tolerance conversation file note)
We had an in depth conversation about options regarding investment platform and allocation options. It was
discussed that a 100% growth assets allocation is volatile when compared to portfolios with a defensive
allocation. Given it is a goal of the client to build their portfolio capital value; investing in defensive assets is
very unlikely to achieve this goal. This is due to interest rates presently at very low levels and the risk of a
negative capital return through investing in bonds should interest rates increase in the coming years.
Given the current global economic uncertainty the clients would like measures to be taken to reduce downside
exposure as opposed to holding more traditional long only growth managed funds. The clients acknowledge
and accept there will still be high levels of volatility when compared to defensive assets and are happy to
proceed with a 100% growth portfolio. The monthly and annual returns of the growth assets were shown to the
clients so that they can gain an appreciation of the likely volatility of a growth fund. We also showed the price
movements of the Australian and World Share Market indices in comparison to a 70/30 growth index fund
since September 2006. This period encompasses a bull, bear and sideways market periods.
We discussed that through the use of specialised fund managers that accommodate advanced fund manager
strategies there will be a much higher cost. This could see platform and fund manager costs as high as
approximately 2.4%pa. Client is happy to proceed with advice on this basis.
We discussed alternative investment options available including a more traditional growth orientated portfolio
which can only make money in a rising market. Through the use of index funds it is possible to construct an
investment portfolio with very lows fees. The total fees of this option could be as low as 0.85% pa. However we
discussed that fees are not the only consideration in achieving overall goals.
Clients were made aware that on a year to year basis a negative portfolio return is still very likely as the
majority of their funds will be still linked to share market price movements.
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Chapter 3- Conduct complex financial planning research
Research is a critical aspect of financial planning as it underlies the rationale for the basis of advice.
This will help determine whether the clients’ current direction is appropriate in achieving their goals
or whether there are alternatives that are likely to better achieve their goals.
Research can be an onerous task. Fortunately, financial planners receive a considerable degree of
support and access to resources, from their dealer group or head office, in terms of software,
journals, reporting and professional development workshops.
Research is made up of a number of attributes. They include:
1.
2.
3.
4.
Evaluate the client's current situation and identify the issues
Identify research requirements and any external issues that need to be covered
Extract and analyse information in according to your research requirements
Summarise research information succinctly, preferably in point form
Each key issue above has a number of sub categories or elements Evaluate the client's current situation and identify the issues
a) Verify the integrity of information provided
b) The client objectives are identified and quantified in terms of calculations based on
estimates and known social/ economic, environmental and risk qualifications
c) The basis of the strategy is developed in accordance with established and confirmed
objectives
Identify research requirements and any outer lying issues that need to be covered
a) Objectives of your research including strategy, and product are established against client
requirements and expectations.
b) A wide range of relevant internal and external resources are accessed
c) Timeframes are established and requests for information prioritized to ensure milestones
are met
Extract and analyse information in according to your research requirements
a) Data is amalgamated and grouped together to establish relevancy
b) Any trends within your research are identified to provide meaningful information on
performance of possible strategies, products and markets
c) Any risks that are assessed or identified are taken into account within your strategies and
any associated products identified are also selected taking into account possible risks that
are identified.
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d) Financial products are recommended within the established time frames to ensure currency
of your decision making and also to ensure that compliance objectives have been adhered
to.
e) Prioritized selection of client requirements and goals are analysed.
f) Issues that require specialist research or advice are identified and appropriate advice
obtained and provided.
Summarise research information in point form
a)
b)
c)
d)
Information is checked against research specification
Any trend and risk analyses is prepared and checked against research specification
Any qualifications on current or a need for further research is documented
Research is presented by the financial planner
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Types of research
Qualitative Research
Objective / purpose
Quantitative Research

To gain an understanding of underlying reasons and
motivations

To quantify data and generalize results from a sample to
the population of interest

To provide insights into the setting of a problem, generating
ideas and/or hypotheses for later quantitative research

To measure the incidence of various views and opinions in
a chosen sample

To uncover prevalent trends in thought and opinion

Sometimes followed by qualitative research which is used
to explore some findings further
Sample
Usually a small number of non-representative cases. Respondents
selected to fulfil a given quota.
Usually a large number of cases representing the population of
interest. Randomly selected respondents.
Data collection
Unstructured or semi-structured techniques e.g. individual depth
Structured techniques such as online questionnaires, on-street or
interviews or group discussions.
telephone interviews.
Data analysis
Non-statistical.
Statistical data is usually in the form of tabulations (tabs). Findings
are conclusive and usually descriptive in nature.
Outcome
Exploratory and/or investigative. Findings are not conclusive and
Used to recommend a final course of action.
cannot be used to make generalizations about the population of
interest. Develop an initial understanding and sound base for
further decision making.
Source: Snap Surveys
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Research organisations
In financial planning there are several organisations that dedicate themselves to researching
financial product platforms and investment options. They include:
1. Morningstar
2. VanEyk
3. Lonesec
Task - click on each of the above links and take a look around each website to find out the services
provided. With Morningstar you able to create a login for free. See if you can find their
analysis/rating for the Integrity Australian Share fund.
Internal and external information
Economic issues, such as balance of payments, exchange rates fiscal and monetary policy, interest
rates, business cycles and trends, are just some of the issues you need to be up to date with as a
financial planner. The RBA website contains a host of statistics on the Australian economy. Many of
these are relevant to financial planners.
Task – go to the RBA website and see if you can find out returns for the Australian share market –
document F7.
Understanding economic trends and the relationships between theoretical and practical application
is vital for long term success in any work environment or profession. The more information you
understand on the economy the greater value you will be able to build with your clients as they will
have more trust in you as a financial adviser.
Australian Tax Office
As a financial Planner we cannot give tax advice, however when discussing and understanding cash
flow it is important to understand about any existing income tax issues such as Capital Gains liability,
income and tax deductions held by the client, so you can add value to your services, through more
meaningful advice.
If the tax implications of advice are not taken into consideration an adviser could become liable. At
the same time it is important a financial adviser understands their limitations in giving tax advice and
refers the client to a qualified accountant for personal tax advice. As an adviser we are only
permitted to give limited general tax information to clients.
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Chapter 4- Develop complex and innovative financial planning
strategies
‘Complex and innovative financial planning strategies’ may sound daunting however you will be
surprised by how much you already know. Complex strategies are usually developed through
combining two or more strategies together to produce a better outcome for the client than each
strategy in isolation. An example of this is the transition to retirement strategy which where a
personal commences a superannuation pension and makes additional before tax contributions to
super. This particular strategy becomes more complex when looking into the finer details such as:




How much should be transitioned from super to pension phase?
What % drawdown should be taken from the pension?
How much additional money should be contributed to super to give the optimal outcome?
After financial fees is the client likely to be better off – is the strategy in the client’s best
interest?
The complex and innovative financial planning strategies covered in this module are:
1.
2.
3.
4.
Superannuation re-contribution strategy
Transition to retirement strategy
Debt recycling strategy
SMSF borrowing money to purchase property
A basic level of understanding is expected as these areas have been covered in either at the Diploma
level or modules 1-4 in the Advanced Diploma course.
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Superannuation re-contribution strategy
Implementing a re-contribution strategy converts the taxable portion of a members superannuation
benefits into tax-free components. Ultimately, resulting in a reduction of the potential tax payable
when super is passed on to the beneficiaries following your death. This strategy can only be
implemented if a condition of release to access your superannuation benefits is met and the
member is also eligible to make a contribution back into superannuation.
As touched upon above the re-contribution strategy can have income tax and estate planning
benefits:

Income tax benefit: A re-contribution is beneficial for those aged between preservation age
(currently 55) and age 60 expecting to receive a superannuation income stream. You will not
pay tax on the tax free portion of your superannuation income, but the taxable component
will be taxed at marginal rates less a 15% tax offset.
If the member does not plan on commencing an income straight away the re-contribution
strategy can still be implemented to provide potential tax benefits later on.

Estate planning: This strategy can also be utilised where there is some likelihood that your
superannuation benefits will be inherited by those not considered to be ‘dependants’ under
taxation law, such as adult children. A re-contribution can reduce the lump sum tax payable
from death benefit proceeds, or in some cases, the adult beneficiaries will not be required to
pay any tax at all (see table of tax rates on next page).
Superannuation benefits are categorised into tax-free and taxable components depending on how
the original contributions were made into the fund. In the current superannuation environment,
lump sum withdrawals from superannuation must be made in accordance with the proportioning
rules, that is, proportionate amounts drawn from taxable and tax-free components. There is no tax
payable on tax-free components.
The re-contribution strategy involves withdrawing a lump sum, paying any necessary tax on the
withdrawal and re-contributing these funds into superannuation as a non-concessional contribution.
Generally a member will not have to pay tax on lump sum withdrawals you make from super if you
are aged 60 or over. Following the re-contribution strategy the superannuation balance will
potentially consist of all, or more, tax-free component. When the member passes away and the
benefits are received by non-tax dependant beneficiaries (such as adult children), there will be little
or no tax payable by them.
The following table illustrates the tax rates applicable when superannuation death benefits are paid
as a lump sum.
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Source: Consultum Financial Advisers
Remember a concessional contribution forms part of the taxable (tax element) element for most
Australian’s. It is only a minority of Public Servants who receive taxable (untaxed element). What this
means is most non-dependents have to 15% tax (excluding Medicare levy) when they receive a lump
sum super benefit as a result of death. If the deceased member’s super benefit is distributed
through their Will i.e. their Will is the binding death benefit nomination then no Medicare levy is
charged.
It is prudent to at this point review preservation ages as retirement after this occurs is often the
condition of release met for most Australian’s to access their preserved superannuation funds.
Date of birth
Preservation age
Before 1 July 1960
55
1 July 1960 – 30 June 1961
56
1 July 1961 – 30 June 1962
57
1 July 1962 – 30 June 1963
58
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1 July 1963 – 30 June 1964
59
From 1 July 1964
60
Source: ATO
Remember that permanent retirement is required for members < 60 to access their super, cessation
of an employment contract if aged between 60 and 65 or if age 65 is attained this in its own right is a
condition of release whether retired of still working.
Funds that are unrestricted non-preserved can be accessed at any time. The tax treatment becomes
more favourable for those over the age of 55 with the low rate cap applying. To refresh your
memory on the low rate cap amount visit the ATO website.
Case study
We will work through a case study to show how the re-contribution strategy can be applied and the
potential benefits.
Shane, 58 years of age, has $500,000 in his super fund with $100,000 tax free and $400,000 taxable
component. Shane retired on 30th June last financial year and seeks advice on how he can tax
effectively fund his retirement and minimise the tax liability for his adult children beneficiaries.
Re-contribution strategy solution – For the 2013/14 financial year the low rate cap for tax free lump
sum withdrawals from super for members aged 55-59 is $180,000. Note this cap relates to the
taxable component. Since Shane has 20% of his super tax free we are able to withdraw a greater
amount and re-contribute tax free.
Amount available to withdraw tax free is $180,000/(1-0.2) = $180,000/(0.8) = $225,000
Of this amount $180,000 (80%) is from the taxable component and $45,000 (20%) is from the tax
free component.
After the $225,000 is withdrawn and then re-contributed as a non concessional contribution (NCC)
the super account will have the following components:


Tax free $180,000 + 0.2 x $275,000 [which is $500,000 - $225,000] = $235,000
Taxable $500,000 - $235,000 = $265,000
The tax free percentage of the super fund has increased from 20% to 47%.
If Shane then transitions his super to pension phase and draws down a superannuation pension
income 47% of this income is non-assessable and the remaining 53% will receive a 15% tax offset.
This is a far better outcome tax wise than if he had commenced the pension without participating in
the re-contribution strategy where only 20% was non-assessable income.
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Further to this, if Shane was to pass away today his adult children would have to pay tax up to
$66,000 (16.5% x $400,000) whereas this liability has now been reduced down to $38,775 (16.5% x
$235,000) or if we advise him to pass his super through to his Estate/Will the tax for his adult
children would be $35,250. This is a reduction in tax for his adult children of $30,750! Naturally, any
person would prefer their children have $30,750 rather than the ATO!
Alternative strategy
Shane could withdraw the $225,000 from super using the low rate cap and tax free proportion and
commence a superannuation pension using this amount. This would see the $225,000 in the pension
tax free. Once Shane is 60 he could withdrawal the remaining $275,000 and re-contribute to super,
collapse the $225,000 pension and setup a new pension with the $500,000 which is now completely
tax free. Doing so won’t make a difference to Shane as after attaining age 60 the whole pension
income is tax free however what it does do is reduce the tax liability of his Estate (adult children)
once he passes away down to zero.
It is important to remember the two year bring forward rule was triggered by Shane when the
original $225,000 was re-contributed. This means his NCC cap is $450,000. Combining the two NCC
together would breach this cap so it would be imperative than Shane make the additional $275,000
in the 4th financial year from the original contribution.
There are some disadvantages of a re-contribution strategy to be aware of. These include:





Transaction costs such as buy/sell spreads may apply while transferring the funds.
By implementing this strategy, the member’s assessable and taxable income may increase
for a particular financial year. A higher assessable income and taxable income may lead to
pay more tax due to loss of tax offsets, Medicare levy surcharge or reduce some Family
Assistance from Centrelink.
The member may be liable to pay tax for the withdrawal from superannuation if aged below
60 and depending on the components of your superannuation.
When re-contributing, any amount that is in excess of a specified limit, the non-concessional
cap, will incur penalty tax at 46.5%.
Any potential anti-detriment payments (refund of contributions tax paid during the
accumulation phase) that a surviving beneficiary may be entitled to may be reduced or even
lost as the value of these payments are proportional to the amount of taxable component
present in the member’s account at death.
Can you think of other ways the re-contribution strategy can be effectively implemented?
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Transition to retirement strategy
The transition to retirement strategy commonly referred to by the acronym ‘TTR’, looks to boost the
retirement savings through combining two tax effective strategies. The strategy is available to super
account members who have reached preservation age. This strategy was initially introduced to
enable members to reduce the number of hours they work each week whilst subsiding their reduced
income through moving some of their superannuation from accumulation to pension phase and
drawing down an income.
For example John is 61 years of age and earns $50,000 net each year working 5 days a week and a
super balance of $210,000. John reduces his workload down to 4 days a week and is now earning
$40,000 per annum. John transfers $200,000 to pension phase and elects to drawdown 5% or
$10,000 from his new pension fund. Since he is 60 years of age the entire pension income is received
tax free increasing John’s disposable income from $40,000 (earned income) to $50,000.
The TTR strategy is more commonly known for replacing income salary sacrificed into super through
the drawdown of a superannuation pension. The strategy becomes much more appealing to
participants once they reach 60 years of age as it is at this time the superannuation pension income
is tax free. Before the age of 60 the pension income is taxed as follows:
 Tax free component is received tax free
 Taxable component receives a 15% tax offset on the members marginal tax rate
Case study
Andy is 55 and earns $100,000 a year. He intends to keep working full-time into the foreseeable
future. Andy has $220,000 in super.
As Andy's financial adviser you have been asked to explore whether a TTR strategy could be useful.
1. Andy transfers most of his super to an account-based pension. This saves money as he no
longer pays tax on investment earnings (remember a pension account doesn’t pay any tax
on income or capital gains irrespective of the account holders age).
2. Andy salary sacrifices some of his pre-taxed income into super. This saves income tax, but
reduces his take-home pay.
3. Then, he withdraws between 4% and 10% (minimum and maximum drawdown for transition
to retirement pension if member is < 65 years of age and no other condition of releases has
been met) of his pension balance each year, which boosts his overall income back to his
current level.
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*Note based on 2013/14 financial year tax rates
As to whether it makes sense for Andy to commence the transition to retirement strategy at present
will depend on the fees the financial adviser is going to charge. Once Andy turns 60 the strategy will
definitely be worthwhile with the over savings being an additional $3000 per annum taking the total
benefit of the strategy above $5000. It is important to note that Andy may benefit from participating
in the strategy next financial year when the concessional contribution cap increases to $35,000 per
annum for those aged 50 or above.
Task
1. Have a think about whether the superannuation re-contribution and TTR strategy could be
used in conjunction to create a better outcome? A trigger points for when this is appropriate
is when the member has an unrestricted non-preserved benefit component in their super.
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2. What would be the outcome for a client that didn’t need to replace their current salary and
was therefore able to salary sacrifice a greater amount into super than the pension
drawdown replaced?
Debt recycling strategy
The debt recycling strategy uses equity in a principle place or residence (non-deductable debt) and
invests these funds into growth assets (e.g. shares or managed funds) with the aim of the growth
assets increasing in value (after tax and fees) at a faster rate than the cost incurred (interest rate) in
financing the investment.
How does Debt Recycling work?
Typically the steps to this strategy involve:
Step 1
Client has a home with a mortgage and some equity in home
Step 1
Step 2
has a home
with equity
a mortgage
andand
some
equity
Client borrows
against
in home
uses
loan in
to home
invest in income producing
assets
Step 3
Income from investment is used to pay off non-deductible debt (home loan)
Step 3
Step 4
Income from
investment
is used
pay off non-deductible
(homewhich
loan) is also
Interest
on investment
loan
is taxtodeductible.
This creates adebt
tax saving
paid into the non-deductible debt
Step 5
At the end of the year, client further borrows the amount by which the non- deductible
debt has reduced in the year to purchase additional investments
Step 6
Repeat 1 to 5 again next year, until all non-deductible debt is replaced by deductible
debt
Note: This is one way of how a debt recycling strategy can be structured.
Benefits
Potential benefits of using a debt recycling strategy include:


Client can create an investment portfolio sooner, instead of waiting to invest until the home
loan is paid off. This occurs by borrowing to invest in the investment portfolio, and changing
non-deductible debt into deductible debt.
The income and tax savings from the geared investment portfolio are directed into the nondeductible debt, reducing the time it takes to pay it off.
Target clients
This strategy is suitable for the following clients:

Have a home with a mortgage and have equity in the home
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



Are comfortable with, and have the capacity to borrow an amount each year to invest in
income producing investments
Are in stable employment, and have sufficient cash-flow/income to meet the interest costs
on the investment loan
Would like to accumulate wealth outside of superannuation over the medium to long term,
and
The borrower should be on a marginal tax rate of 32.5% or higher
Key issues
As the Debt Recycling strategy requires the client to gear into an investment portfolio, the risks
attached to this strategy need to be carefully considered:







The investment risk attached to the investment portfolio increases because the borrowed
amount increases the client's exposure to the market.
Gearing provides an opportunity to increase gains when markets are rising. However, when
markets are falling, losses are magnified.
If the interest rate is not fixed for the whole term of the investment, a rise in interest rates
will result in an increase in interest repayments. This may place further burden on an
investor's cash flow, particularly if investment returns or income are lower than expected.
Risks are compounded where returns from investments are nil or reducing at the same time
as interest rates are increasing.
Assets purchased with borrowed funds may actually fall in value, even to a point where
investors can't recover the funds required to repay the debt. This means that although an
investor might receive extra tax deductions over time, they might actually lose capital value,
and carry over significant debt, when they eventually sell the asset.
It requires discipline to direct the investment income and tax savings towards the home loan
each year. While the investment income can be easily identified, the client will require
assistance to identify the tax savings each year (if any), and then ensure they are directed to
the home loan. Therefore a yearly review between planner and client is recommended
(perhaps at the time the tax return is lodged).
There are other variations of the debt recycling strategy:
o Client borrows an amount in Year 1 only, and not each year thereafter. The loan
amount is invested, and the income and tax savings are paid into the home loan. It
will take longer to pay off the home loan compared to the typical debt recycling
strategy, however total debt will reduce over time, rather than remain static.
o In times of volatile investment markets, choosing to use a loan facility and drawing
down the loan over a number of years, to take advantage of dollar cost averaging,
rather than draw the full amount in year 1.
 In considering any gearing strategies, planners will have to be aware of the maximum
debt to asset ratio permitted by their financial planning dealer group (AFSL holder).
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Case study
John and Betty are aged 43 and 41. Both are working full time and earn $100,000 & $32,500 per
annum respectively.
They live in a house worth $600,000. They have a home loan of $250,000, payable over a 30 year
term, with a current interest rate of 8% pa. Their principal and interest repayments are currently
$1,834 per month.
Their living expenses are $60,000 per annum.
Their employers contribute 9% pa of their salaries into super. They do not make any voluntary super
contributions.
They would like to pay off their home loan sooner, while at the same time accumulate some wealth
outside super, which can be accessed if required before their super preservation age of 60.
They meet with their financial planner, and after examining their situation, she has identified that
they have some surplus income which could either be invested or directed towards their mortgage.
The financial planner then raises with them the possibility of using a debt recycling strategy.
Step 1:
John and Betty meet the requirements for considering a debt recycling strategy. They have sufficient
equity in their own home, and would like to consider borrowing an amount against the home to
invest in income producing investments.
Step 2:
With their planner, they determine that they are comfortable with a total level of debt of $300,000,
so John, being on the higher marginal tax rate, will borrow $50,000 to invest in an Australian Share
managed fund.
The $50,000 will be borrowed on a 30 year term, 8% pa interest only loan, with interest repayments
of $333 per month.
The assumed returns for the managed fund are 3%pa income (70% franked) and 5.5% growth.
Fees and charges for both the borrowings and the investment are ignored for the purpose of this
case study.
Step 3:
Given the assumptions listed in Step 2, the investment income from the managed fund for the first
year is $1,500. John arranges for $1,500 to be paid into the home loan at the end of the year. This
will reduce the principal on the home loan.
Step 4:
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The interest expense on the investment loan is $4,000 for the first 12 months. The tax savings for the
first year will need to be identified, so as to ensure that amount can also be paid into the home loan.
The following table shows how the tax saving has been determined in this case.
The debt recycling strategy produces a tax saving of $1,239. John uses existing cash-flow to also
invest this amount into the home loan at year end.
Step 5:
By year end, the home loan principal has reduced by $4,828, as a result of the home loan
repayments made during the year, plus the payment of the $1,500 investment income and $1,239
tax savings.
John further borrows $4,828 against the home, and invests into the managed fund.
The interest repayment on the investment loan will increase from $333 per month to $366 per
month, funded from existing cash-flow.
Step 6:
This process is repeated again each year until all the non-deductible debt becomes deductible debt.
Results
The results from using a debt recycling strategy are as follows:
^ Gross value of assets
# Assumes John redeems entire investment and remains in 38.5% marginal tax rate
* Ignores available surplus income
By using the debt recycling strategy, the home loan can be paid off in 16 years. At the same time,
John will have an investment portfolio of $478,431, with a commensurate deductible debt of
$300,000.
John has a number of options at this stage. He can keep this portfolio, and he can invest the
amounts which were previously paid as home loan repayments, or he can use these amounts to pay
off the deductible debt over time.
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For illustrative purposes this example assumes that John redeems the entire investment portfolio,
pays capital gains tax at his marginal tax rate of 38.5%, and uses the net amount to pay off the
deductible debt. After doing this, he has a net amount of $148,534.
To achieve this, John must be disciplined enough to direct the investment earnings and the tax
savings towards the home loan each year. At the same time, John and Betty need to have surplus
cash-flow to meet the interest expense on the increasing level of deductible debt.
The graph below shows the level of investment income and tax savings directed into the home loan
over the 16 year period, as well as the increasing interest expense on deductible debt paid out of
surplus income.
Source: www.amp.com.au
Task
Have a think about the impact on the debt recycling strategy if interest rates i) increased or ii)
decreased. Using the above case study work out the increase in servicing costs of the loan if interest
rates increased by 2%.
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SMSF borrowing money to purchase property
A SMSF can only buy property if the fund complies with the rules.
The property:

Must meet the 'sole purpose test' of solely providing retirement benefits to fund members

Must not be acquired from a related party of a member

Must not be lived in by a fund member or any fund members' related parties

Must not be rented by a fund member or any fund members' related parties
However, a SMSF could potentially purchase a business premises from a SMSF member(s), allowing
the individual to pay rent directly into the SMSF at the market rate.
What are the costs
SMSF property sales may have many fees and charges. These fees can add up and will reduce the
SMSF balance.
The costs involved include:

Upfront fees

Legal fees

Advice fees

Stamp duty

Ongoing property management fees

Bank fees
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Borrowing in a SMSF
Borrowing through an SMSF for property investment purposes must be done under what is referred
to as a limited recourse borrowing arrangement. These arrangements can be quite complicated and
may require professional advice. For example, under these arrangements, the property must be kept
separate from the fund’s other assets. This ensures that if the fund defaults on making loan
repayments, the bank and any interested parties will only have recourse over the property, but not
to other fund assets. In order to achieve this, the borrowing rules require you to establish a security
trust which will recognise the beneficial interest of the SMSF in that property and the rights of the
lender. The trustee of this security trust holds the property in trust with the SMSF as the beneficial
owner.
The purpose of the bare trust is if for whatever reason the loan repayments are defaulted upon then
the other assets in the SMSF cannot be used to pay back any debts. For example, if a SMSF has $1
million in assets and also has a property worth $400,000 with a loan attached for $300,000. Should
the property be demolished due to a flood and the insurance doesn’t cover this event (this actually
happened in several instances in the Queensland floods in 2010) then the bank that lent the
$300,000 is unable to claim the other assets in the SMSF (i.e. the $1m). All they can claim is the
home value which in the event described above would mean the bank could only claim back
whatever the value of the land is (remember the house was demolished by the flood).
Another important factor when borrowing to invest in property is that loan conditions in an SMSF
are different to those for regular housing loans. The maximum loan amount relative to property
value will generally be lower and a range of conditions and risks need to be considered.
Geared SMSF property risks include:

Higher costs - SMSF property loans tend to be more costly than other property loans which
must be factored into the investment decision.

Cash flow - Loan repayments must be made from your SMSF which means the fund must
always have sufficient liquidity or cash flow to meet the loan repayments.

Hard to cancel - If the SMSF property loan documentation and contract is not set up
correctly, unwinding the arrangement may not be allowed and the trustee may be required
to sell the property, potentially causing substantial losses to the SMSF.

Possible tax losses - Any tax losses from the property cannot be offset against a member’s
personal taxable income outside the fund.

No alterations to the property - Until the SMSF property loan is paid off, alterations to the
property cannot be made if they change the character of the property.
Source: www.moneysmart.gov.au
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Borrowing inside a SMSF is a very complex issue and several legal experts are required to facilitate
the transaction. This includes a mortgage broker, a lawyer and a financial planner. The following
chart displays the complexity of a SMSF with gearing to purchase a property.
File note
It is important that each stage of the financial planning process is file noted. The strategies and
products considered need to be documented on file so that there is evidence the planner has
explored the options available to achieve the client’s goals and documented why the chosen
strategy and product are chosen and why the alternatives were discounted. The following page
provides a working paper template for superannuation advice research. As can be seen it very
comprehensive.
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Superannuation
Client name:
Date:
Recommended strategy/s.
Why?
Alternative strategies.
Reasons for discounting
alternative strategies
Recommended product/s
Why?
Alternative product/s
Reasons for discounting
alternative product/s
If you are replacing the
client’s investment/s, what
is the rationale for doing
so?
What material feature/s is the client going to lose, gain or maintain?
Recommended ownership
structure and the reasons
why the alternative
structures were
discounted.
Expertise to advise
Do you believe you have the expertise to provide this advice?
If no, you must either take steps to ensure you meet the perceived
gap in expertise or decline to provide the advice.
Steps taken where there is a gap in expertise:
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Yes
No
Chapter 5- Present and negotiate complex and innovative financial
plans
When presenting complex and innovative financial plans it is imperative that the adviser
understands all the figures in the Statement of Advice (SOA) and how exactly the recommended
strategy is expected to put the client in better financial position in terms of assessable income, tax
position and net worth across several timeframes (e.g. 1, 2, 5, 10 years and/or at retirement).
When presenting complex plans it is imperative that the client(s) has a solid grasp of the strategies
being recommended so that they understand the potential benefits, risks and consequences. Not
doing so may lead to litigation down the track as seen with Storm Financial during the GFC. It is
imperative that the SOA along with the adviser’s presentation places the client is a position where
they can make an educated and informed decision as to whether they wish to implement in part or
whole the advice provided. Ensuring the adviser has provided the most appropriate advice for the
client start with the initial meeting and information gathering stage so that the clients goals, current
situation and risk tolerance are clearly understood.
Whilst it is important to go through the actual SOA itself, when presenting complex strategies it is
often better to create a separate presentation that is only several pages long detailing the
recommended strategy and outcomes. This will help the client to understand the key points and
benefits.
The Authority to Proceed within the SOA is the document where the client acknowledges the advice
is in line with what they sought, they have been through and understood the SOA and document
how they wish to proceed with the advice.
The adviser must make detailed filed notes or record client conversations throughout the advice
process (if their dealer group permits recording conversations and the client has agreed to this) so
that there is a clear paper trail on discussions.
Below is a sample file note template to be used following the presentation of the SOA.
Meeting Date & Time:
Attendees:
Location:
Duration:
I confirmed the client's position before presenting the SoA.
Any new personal information provided:
I presented and explained the SoA to the client
Decisions that were agreed on:
Concerns of the client:
Response to client concerns:
Follow up items and by whom:
Comments I made:
Reasons for any decisions / alterations:
Warnings I discussed with the client:
PDS/SPDS/IDPS type and version number:
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I confirm that the client understood the following:
•
Fees and charges of the product/s and/or recommendations:
•
Any investment risk related to the product:
•
Benefits of the strategy;
•
The loss of benefits and consequences of any replacement of product
We discussed and agreed on the following ongoing services as part of the ongoing advice fee:
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Chapter 6- Implement complex and innovative financial plans
Following the clients acceptance of the advice it is time to implement the financial plan. This is
usually driven by the financial planner as they know exactly what needs to be done and by who and
when. It is best practice to include a schedule in the SOA so that the client and adviser each know
who is responsible for each action required.
The implementation stage of a complex plan may involve:






Liaising with solicitors for legal matters (Wills, EPOA, trusts, SMSF)
Liaising with clients accountant to ensure they are across and agree with your advice so
there aren’t any unexpected tax implications (e.g. capital gains event)
Preparing application forms for new accounts, rollovers and insurance
Ensuring applications are received by product providers and monitoring their progress
Keeping in touch with the client so they are informed at all times of where everything is at
Preparing or liaising with a broker if finance or refinance is required
File note
Below is an example of a template for the implementation of a financial plan file note.
Company:
Date application lodged:
What documents were lodged and method of delivery:
Details of cheques received and method of delivery:
Follow up items and by whom
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