This is a hypothetical example based on a real client experience. Names and details have been changed
Case study #1: Wealth creation and debt reduction
Michelle and Cameron are middle aged, with three children and a sizable mortgage. When they came to me three years ago, they had a home worth $870,000. Cameron had three related mortgage backed investment loans in his name totalling $552,000 and an investment portfolio worth $600,000. Cameron was the primary bread-winner on a good six figure salary. Michelle had a small part-time job, but was looking to retire as soon as possible. Their children had just graduated from college and as a couple they were starting to think of life after the kids had left home.
Cameron had $420,000 in super but Michelle only had $24,000 in her super at that time. Michelle had no other investments.
The clients found their debt somewhat troubling. Their investment portfolio had performed only adequately.
They came to us looking for a more sophisticated approach to their financial planning needs and had discerned that we brought an international approach to investing and a professional thoroughness that was lacking with their current Australian financial planning firm. They both wanted to make sure that their cash-flow was protected now and that they would have sufficient assets to enjoy a comfortable lifestyle in retirement. Michelle was eager to retire, but felt she had to keep working until they built up some equity in their family’s investments.
After discussing their values, and what was important to them about life, we recommended that Cameron and Michelle refinance their investment debt, both to simplify their investment debt and to lower the overall interest expense. By referring them to our exclusive mortgage adviser, they were able to reduce their mortgage expense by over 1%. We also simplified their debt structure down from three investment loans to one.
We took a sophisticated view of their total family assets by restructuring them into one integrated investment portfolio held across various tax structures. This allowed us to rearrange their investments into the most appropriate vehicles from a tax-efficiency perspective, whilst simultaneously building an overall investment portfolio that provided the return they needed, within the confines of what risk they felt comfortable with.
We also had Cameron increase his super contributions such that he saved a further $6,000 pa in tax and increased contributions into Michelle’s super as well.
Simultaneously, we were also able to restructure their risk protection insurance, in such a way as to provide top quality adequate cover, in the most tax efficient manner.
Today, Cameron and Michelle are enjoying life as empty nesters. Cameron’s super has risen to $650,000. Their investment portfolio went from having only $48,000 net equity to over $360,000 of net equity, an increase of 54% in net equity relative to their starting balance. Their loan balance has been reduced to $350,000, a drop of 43% in three years. Their overall investment and super assets have increased to $1.5 million from $600,000.
Furthermore, they are enjoying their life, which is enabling them to start living their dreams. Last year Michelle was able to retire early from work, and she is now enjoying the extra time to spend with family. Cameron has been able to buy the vehicle he was dreaming of. They are both thrilled to be well down the road to total financial independence.
Case study #2: Expatriates preparing for repatriation
Francois and Claire moved to Australia from Ottawa as young newlyweds on a temporary visa many years ago. Like so many snowbirds, they fell in love with the great weather and easy going Australian culture. After successful careers, their longing for family back in Canada overcame their distaste for artic winters. The decision was made to move back to Ottawa in two years’ time. They needed advice and wisdom around maximizing their future retirement assets and minimizing the impact of this potentially significant tax event. As they held a sizable investment portfolio and an investment property, they were concerned about the impacts that such a move might have upon their wealth.
In order to minimise the future tax on sizable capital gains that will be triggered when they depart Australia, we recommended that Francois and Claire take action now to mitigate such a potential liability. We advised them to realise a certain amount of capital gains each year on their investment portfolio until their emigration back to Canada. Simultaneously, we will have them increase their super contributions each year such that their additional contributions will approximately offset the net taxable capital gains. This strategy ultimately minimises the amount of tax Francois and Claire would otherwise have to pay due to deemed disposition rules that will be triggered on the day of their departure.
Furthermore, we helped the clients to obtain specific Canadian tax advice on how their investment property and investment portfolio would be taxed and the nature of deductions that might be claimed, when filing with CRA. This advice included how Canada would treat Australian sourced interest expense incurred in borrowings related to each of the investments here in Australia.
With these major contingent liability issues resolved, we helped Francois and Claire implement strategies to make the most of their superannuation, especially with an eye to their return to Canada. Our ongoing advice, coupled with a close working relationship with both their Canadian tax and financial advisers, allow us to address issues that may arise in the future. Further strategy planning may be explored depending on how the next Canada Australia tax treaty deals with pensions and registered plans.
Today, Francois and Claire are ‘happy as Larry’ enjoying the freedom that comes from knowing that they have a coherent and comprehensive plan and that their ultimate retirement lifestyle will be fully funded. They look forward to the freedom to travel back and forth between Australia and Canada. We will continue to advise them up to their departure and throughout their lives, in regards to their Australian assets. In conjunction to their advisers back in Canada, with whom we have a close working relationship, they now face a future with confidence.