Don’t wait for death or divorce…Knowing how to handle your finances is a necessity

Don’t leave your spouse or partner to manage your family finances. Whatever your role, stay home parent or CFO of a top 200 company you need to have some control over your family finances.

Despite the fact that women hold more than half of the country’s private wealth and make the majority of a household’s purchasing decisions, they tend to push financial decisions to the side, often relying on a spouse or a parent to handle them.

My drive to encourage women to have some control comes from client and personal experiences. When I first met one client she was under a great deal of stress because she had just found out that her husband was having an affair and was about to go through a separation. Her only request was “are you able to help me work out what we have?” She had no idea of their financial position – not an uncommon scenario. She was married to a wealthy executive and had been the parent at home raising her 3 daughters for the past 16 years. From the time her children were born, she let go of any control over the family finances leaving it to her husband to take care of. The extent of her involvement was to sign the documents her husband placed in front of her from time to time. She was content just having access to cash when she needed and credit cards that were paid off by her husband. When he offered a lump sum of cash as a settlement that didn’t really tally even close to the value of some of the assets, she knew that she needed help.

The good news was that she recognised that she needed help. We were able to piece together the family’s financial position that resulted in her settlement being 3 times that offered to her initially by her husband.

A more recent experience involved the death of one my elderly male clients. I had always dealt with him and despite many requests for the wife to join us for meetings it was always “that’s his area, I don’t need to know”.  When the client unexpectedly passed away, the first call with the wife involved a very distressed discussion around “what do I do? Can I keep taking cash out? How do I pay the bills”. Even worse in this example was that the client had not documented many things and had most of their personal information in his head, including the location of his will. While we were able to work with the client to sort out the various concerns, it took unnecessary stress and time.

I also grew up in a household where my mother was the stay home parent while my father handled all the finances. My mother didn’t have access to any of their accounts or credit cards. She relied on a weekly allowance from my father to cover the household costs. When they divorced after 15 years of marriage, my mother walked away with 3 children and no assets. My father had no assets in his name at the time, as he had managed to transfer them to his siblings to manage.

Don’t think it won’t be you. Research shows that 9 out of 10 women will be solely responsible for finances at some point in their lives.

Some simple tips you can follow:

  • Get involved in managing the family’s finances. Understand what is going on with the investments and debt. Review all bank and investment statements monthly. Know where your money is. Keep organised records.
  • Have your own bank account and credit cards. If not at least make sure all the cash and savings accounts are in joint names.
  • Make sure your home is in joint names. This is a must to ensure that the home transfers to you automatically on death.
  • Make sure you have a copy of both wills. It’s important to understand how the assets will flow on death.

Fortunately events like this break down the barriers and encourage women to take the helm. A key part of getting on top of one’s finances, is considering how to handle both immediate, and future, finance.

Share scheme changes herald clever country thinking

A significant concession, and improvement, was announced to the Employee Share Scheme rules on Tuesday by the Federal Government. Employee shares schemes in emerging businesses had faded from relevance over the last 5 years following the implementation by the former Government in 2009 of measures that had the broad effect of taxing any discount on shares or options issued upfront to employees of most businesses.

Taxation occurred at a time prior to the employee shareholder having any cash flow with which to pay their tax bill – clearly a killer consequence. This removed the major form of employee remuneration that emerging businesses could use as an incentive to employees without affecting free cash flow. It also led to clumsy arrangements where a company would have to “loan” the employee the value of their shares to prevent then obtaining any taxable benefit.

The Tax Office become notorious for 20:20 hindsight valuation reviews which left employees unwilling to expose themselves. Many employees just would not buy the idea of their employer becoming a major creditor. What if the shares tanked? The employee could be stuck with repayment of a loan without any benefit.

The shareholder/ employee loan created a variety of difficulties ranging from potential requirements for the employee to use real cash flow to repay the loan under statutory “Division 7A” private shareholder rules. In some cases the loan became a problem for the employer who was required to manage it under the FBT regime. An employee might make a long term commitment to a company and be subject to a vesting period of 3-5 years before they became entitled to deal with the shares. However when this period expired, the employee would be obligated to “cash-out” their loan, often by taking a fully taxable one-off bonus.  This one off bonus often distorted the employee’s real earning position over their period of employment and forced them to be taxed on this component at a tax rate which was unfairly high.

Phasing issues emerged with the 50% CGT discount which generally applies to long term shareholdings. Deficiencies in these rules became so profound for early stage IT companies it became part of the reason emerging businesses began to leave the country. Most notably the IT success story Atlassian. The new rules remove some of the obstacles.

Actions to consider

  • If you presently have any form of share or rights scheme in place, it is likely that it can be “rebooted” under the new rules to drive significantly improved outcomes to employees.
  • Remuneration contracts currently being negotiated should be reviewed for the effect of the new rules.  The rules you thought applied when you inked the deal may not apply for the term of the arrangement.
  • Share schemes are not just for IT businesses.  If you have a SME business where you want to incentivise and tie employees into the growth of your business without a cash flow impact on your businesses – there is no better incentive. Costs of administration have dropped significantly in recent years.
  • If you are an SME owned “stuck” with the problem of how to exit the business and collateralise ownership interests into cash, employee share schemes can be a key tool in opening a dialogue and pathway to business succession.
  • Employee share schemes also have relevance to family businesses where they can be used as a tool to incentivise high performance in the next generation family owners. They are a form of participation which is not just a “gift”. They can be a key tool to assist with perceptions of fairness between family members who are “in the business” and those that are not.

A summary of key points in the new rules

  • Discounted options will generally be taxed when they are exercised (converted to shares), rather than when the employee receives the options.
  • Shares provided at a small discount by eligible start-up companies to will not be subject to up-front taxation, if held for three years. Options under certain conditions will have taxation deferred until sale.
  • Small discounts will be exempt from tax
    • The maximum time for tax deferral is lifted from seven years to 15 years.
  • The existing $1,000 up-front tax concession for employees who earn less than $180,000 per year will be retained.
  • The rules are expected to become effective from 1 July 2015.  Transitional arrangements are presently unclear.

Government initiatives to further boost inward investment

Prosperity Fountainguard Advisers welcomes the Federal Government initiatives announced under the Industry and Competitiveness Agenda that will expand the Investor Visa Programme.

The Government will reform the programme to encourage more high net worth individuals to make Australia home and to better direct additional foreign investment, while maintaining safeguards to ensure the migration programme is not misused. The changes to the programme will:

  • streamline and enhance visa processing, further promoting the programme globally and strengthening integrity measures, to both increase the attractiveness of investing and settling in Australia while ensuring Australia’s interests are protected;
  • align the criteria for complying investments with the Government’s national investment priorities. The investment eligibility criteria will be determined by Austrade in consultation with key economic and industry portfolios;
  • introduce a Premium Investor visa (PIV), offering a more expeditious, 12 month pathway to permanent residency than the SIV, for those meeting a $15 million threshold;
  • and task Austrade to become a nominating entity for SIV (complementing the current State and Territory government’s’ role as nominators) and to be the sole nominating entity for PIV.

We led a nine city investor roadshow throughout China in June, and saw that although there is strong interest in Australia as an immigration and investment destination, and there is a reasonable pipeline of SIV applications, we face strong competition from other jurisdictions. Recent changes in NSW have made this State more attractive with the removal of the need to invest $1.5m in Waratah Bonds recently removed and the Commonwealth measures will only assist to further attract high wealth investors in the future.

Discussions with potential investors in China revealed certainty and clarity of the process were issues that are front of mind for potential SIV applicants when considering which country to pursue.  While the initial detail is scant, it appears the initiatives proposed will assist on those fronts. There is uncertainty in other countries SIV programs at the moment and the Government’s focus to enhance the scheme and encourage investment in the right areas as well as remove red tape will continue to make Australia an attractive destination.

Prosperity Fountainguard have a second investor delegation en route to Shanghai at the moment and they will present to over 20 potential investors in the higher net wealth category who are looking to invest $20m plus in Australia.  The proposed Premium Investor Visa will no doubt assist that group with their decision making and the revised program commencing in 2015 that allows an applicant to gain residency after twelve months is likely to be highly attractive.

We are eager to understand the detail of the new investment eligibility criteria.  These are no doubt designed to temper some of the strong interest in property development.  However, if the measures are too prescriptive, it may serve to stifle investor inflows or move them away from areas that Chinese investors are typically attracted to.

New South Wales fights for a bigger share of Significant Investor Visas as the Federal Government tries to curb leverage

New South Wales (NSW) has introduced measures to increase its competitiveness in attracting Significant Investor Visa candidates. The NSW Government has recently removed the requirement for NSW bound significant investor visa applicants to invest $1.5M of their $5M investment for residency into NSW Treasury Bonds.  At the same time the Federal Government has also flagged likely changes to remove the current practice where many SIV applicants borrow against their $5M investment in Australia and essentially recycle money back offshore.

The NSW Treasurer Andrew Stoner in announcing the changes recently said, “From 1 September, overseas investors considering NSW nominations will be able to choose how to invest every dollar of their complying investment.

“This change will further consolidate NSW’s globally competitive position as a preferred investment destination for investor migrants.

“NSW is more than Australia’s business headquarters – it’s the State that’s driving Australia’s economy. “Rich in business opportunities, with a stable and strong government, and an economy that is robust, diverse, dynamic and easily accessible to the rest of the world, there has never been a better time to invest in NSW.”

It is evident that NSW is keen to increase it’s share of significant investor visa candidates that choose NSW as their preferred place of investment. Of the 1,650 expressions of interest registered at 31 August 2014, Victoria (VIC) represented 846 of the candidates and NSW 550. In terms of granted visa’s again VIC leads the way with 193 granted as against 146 in NSW.

The change in the requirements around investing a portion of the investment in a lower yielding investment is only likely to enhance the share of SIV applicants seeking out Sydney and NSW as their destination of choice. The Federal Government has plans to grow the program to approximately 700 SIV approvals per year, with the view to attracting $3.5 Billion of inbound investment in the Australian economy through the program and it is clear that NSW wants a larger piece of the action.

In further changes to the scheme on 10 September 2014 Immigration Minister Scott Morrison, in a media release stated will no longer be able to recycle their investment funds offshore by using products that allow them to borrow against their SIV compliant investment. Minister Morrison referred to concerns with the significant investor visa scheme, which requires foreigners to invest a minimum of $5 million for four years, as money was being invested and subsequently borrowed against and recycled offshore again. The intention of the scheme is to attract foreign investment and enhance economic activity through longer term investment in Australia.

Mr Morrison flagged changes to the investor rules which would require investments to remain unencumbered or without a debt against them, for the entire four years duration of the visa. This change should only be a positive for the economy in allowing funds to remain in Australia unencumbered over the four years.

Don Lee, Luke Malone, Martin Zhao and Gavin Fernando are Directors of FountainguardProsperity’s Asian Business Desk team who provide a full range of accounting, financial and wealth management advice to the Chinese market.