Ask Max: Your questions answered

This week's questions cover certified financial planners, account-based pensions, and claiming tax refunds while living abroad.

PORTFOLIO POINT: Certified financial planners: new v old. The limits around account-based pensions. Cash rates and super funds. Claiming a tax refund while living abroad. Taxes and offshore trading.

Max Newnham has spent 30 years working with – and writing about – small businesses and SMSFs. It’s that experience working with private investors that has led to the Ask Max column, to provide expert advice to Eureka Report subscribers. – James Kirby, managing editor

This week:

  • What the public needs to know about CFPs.
  • The limits around account-based pensions.
  • How can I get a better cash rate from my super fund?
  • Claiming a tax refund while living overseas.
  • Am I eligible for a tax exemption on my US trades?

Certified financial planners

I work in the financial planning industry (as well as being an investor with my own SMSF). I recently moved to the retail sector. For 10 years previously, I worked in financial planning attached to a public accounting practice. As you know, the public are told to look for a certified financial planner as the highest designated accreditation.

The problem is that any adviser who has been CFP-qualified for more than eight or so years has actually only done the equivalent of the Diploma of Financial Planning. The Financial Planning Association changed the criteria for becoming a CFP, but did nothing about all those who qualified under the old rules.

My current boss qualified under the old CFP rules, and I am appalled at his lack of knowledge regarding Centrelink, estate planning and other technical areas. In accounting, if you go to a CPA or chartered accountant, you know what you are getting. I think the public deserves to know what kind of CFP they are seeing. Which government body should be made aware of this?

There is no government body that I know of that you could contact regarding this problem. However, legislation on the Future of Financial Advice reforms will soon be introduced into federal parliament. For whatever reason, the Opposition are not fully supporting the reforms.

The passage of the FOFA reforms will depend on the support of the Greens and independents. You, and anyone else who is concerned about the quality of financial planning advice, should contact the Greens and independents to make sure they understand the importance of passing the reforms in their entirety.

When seeking advice from a financial planner, there are two questions that should be asked. The first is: what areas of advice will be covered in your plan? If the answer does not include estate planning, tax planning and maximising Centrelink entitlements, there is a high likelihood that the planner will be more focused on flogging product than providing comprehensive, strategy-based advice.

The second question is, do you recommend direct investments or do you recommend that your clients use an investment platform? If the adviser says that they are not authorised to recommend direct investments, and investment platforms are the best way to invest, they will more than likely not provide full comprehensive advice and be more focused on how they can make themselves richer at the expense of the client.

Pension fund limits

In your comments about pension funds, you talk about setting aside a certain percentage each year – but are there limits? Also, what happens if there is an unscheduled large expense, such as a car or overseas travel? If a pension is set too high, do recipients have to take that amount or can they take a lesser amount?

For account-based pensions, there is a minimum pension limit that must be paid, but no maximum limit. The minimum limits are based on a person's age and start at 4% for people under 65, and rise to 14% for someone over 94. Transition to retirement pensions have the same minimum pension limits, but also have a maximum limit of 10% that can be taken in one year.

Once an account-based pension has started, there is nothing stopping a member from reducing a pension – as long as the minimum pension level will be met – if it was originally set too high. Where a minimum pension is paid, a member can also request, depending on the rules of the fund, an extra lump sum pension payment during the year to fund unexpected expenses.

Super swap?

I am with Legal Super, which paid 2.2% last quarter. This is paltry compared to bank fixed-term deposit rates. Why so? Are there any other public super firms that might be offering a better interest rate on cash?

There are too many industry funds for me to be aware of all of the cash rates being offered by them. Some of the more progressive industry funds, such as Australian Super, allow members to choose from a wide selection of investments that includes direct shares and term deposits.

Industry funds will be able to tell you what their current cash earning rate is, and there are advisers who specialise in this area. These advisers often have access to software which rates super funds, and can identify the best performers. However, this will come at a cost and could outweigh the benefit of an increased earning rate.

Living abroad

If someone has a home abroad (Thailand) and no home in Australia, and is contracted by a company in Australia (paying Australian tax), but does not live in Australia or spend more than 14 days in the country per year, can that person claim tax back for that year?

In the situation above, the employee will be treated as a non-resident for income tax purposes. This means any income earned up to $37,000 will be taxed at 29%. After $37,000, the normal marginal tax rates apply. The employee would be required to lodge an Australian tax return and may receive a tax refund, depending on how much tax has been deducted by their employer and the amount of deductible expenses able to be claimed.

Offshore taxes

I have established an overseas trading account with E* Trade. Assuming I make a profit, I would expect to pay withholding tax ($US). As a retiree and trading through my SMSF, how would I get the tax from the US so that I enjoy the same tax exemption that I do in Australia?

Unfortunately, taxes paid overseas can only be used to decrease the amount of Australian income tax paid. If the overseas tax credits exceed the Australian tax, they cannot result in a refund. This means dividends earned from overseas companies will not produce a tax refund the same way as fully-franked dividends do from an Australian company.

Max Newnham is a partner with TaxBiz Australia, a chartered accounting firm specialising in small businesses and SMSFs.

Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.

Do you have a question for Max? Send an email to askmax@eurekareport.com.au

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