Gold Coast Financial Planning

Glossary

A B C D E F G H I J K L M N O P Q R S T U V W X Y Z

Age Pension age

The age at which you are entitled to receive the Centrelink and Department of Veteran Affairs (DVA) benefits. The current Age Pension age is 65 years for males and 63 years for females (for the DVA they are 5 years less, respectively).

Agreement for sale and purchase

A legal agreement containing rights and obligations, including the seller's obligation to sell, and the purchaser's obligation to purchase a property for an agreed price.

Alimony

Money payable by a person to their spouse (including de facto spouse) or former spouse after they are separated or divorced.

All-in-one account

An all-in-one account is a home loan, savings and transaction account in one.

Approved deposit fund (ADF)

A fund approved by the Australian Taxation Office to receive Eligible Termination Payments.

Approved early retirement scheme payment

A payment received by employees terminated as part of the reorganisation of the employer's operations under a scheme approved by the Commissioner of Taxation as an approved early retirement scheme.

Assets test

The test on your assets to determine if you are eligible for Centrelink entitlements. Under this test you can have a certain amount of assets before your full entitlement to Centrelink is reduced or cuts out. The level at which your pension begins to be reduced varies depending on whether you are single or married and whether you own your own home.

Asset-test exempt income streams

Some lifetime and term annuities and pensions that meet certain payments standards, will not be included in the assets test for social security purposes under new rules introduced in September 1998.

Asset class

A broadly defined category of financial assets. The most commonly referred to asset classes are cash, fixed interest, shares and property.

Baby bonus

This payment rate is effective from 20 March 2008 and is only paid for babies born or adopted on or after 1 July 2004. Baby Bonus is paid as a non-taxable lump sum payment. Payment is made into a bank or credit union account and not through the tax system. This payment is not subject to an income test. This payment is not subject to an assets test. For more information visit CentreLink .

Basic variable rate home loan

A 'no frills' variable-rate home loan with either no additional features, or very few.

Before tax annual income

Before tax annual income is assumed to be:

for salaried employees with no ownership interest, this will be your current total annual salary package
for salaried employees with an ownership interest, this will be your current annual salary package plus or minus your share of the business' latest financial year profit or loss (before tax and after expenses)
for partners in a partnership, this will be your drawings plus or minus your share of the partnership's latest financial year profit or loss (before tax and after expenses)
for sole proprietors this will be the gross business income, less the cost of goods sold and less all tax deductible business expenses

Beneficiary

The person or company you choose to receive your money after death.

Bona fide redundancy payment

A payment made by an employer to compensate for the loss of a job as a result of that position no longer existing. All or some of this payment may be tax-free.

Burglary insurance

Burglary insurance covers you for the theft of stock or contents after forced and violent entry into your business premises.

Buy/sell arrangements

Covers you if you wish to sell your business should you suffer illness or death - where you are able to identify a buyer in advance (e.g. another partner in the business).

Capital Gains Tax

Capital gains tax (CGT) is the tax you pay on any capital gain you include on your annual income tax return. It is not a separate tax, merely a component of your income tax. You are taxed on your net capital gain at your marginal tax rate.

Capital guarantee

Guarantees the return of your capital and may also guarantee interest once credited to your account.

Capital secure or capital stable

Refers to a fund where the underlying investments are usually a low risk.

Cash management

A unit trust or investment trust where money from many investors is pooled to purchase a range of short term money market investments.

Choice of fund

Where you are an employee under a federal award, from 1 July 2005, you will be able to choose the fund you wish your Superannuation Guarantee Contribution (SGC) to be paid into. Your employer must provide you with a form that allows you to choose your fund. If you do not complete this form, then your SGC will continue to be paid into a fund chosen by your employer.

Co-contribution

An Australian Government initiative to assist eligible individuals to save for their retirement.
You may be eligible for the government co-contribution if you are:

an Australian resident
an employee earn less than $58,980 a year
make personal after tax super contributions to a complying super fund

If you are eligible for the co-contribution, the government contributes $1.50 for every $1 you put into your super, up to a maximum co-contribution of $1,500 a year.

Commutation

The process by which an income stream or portion of an income stream is converted back to a lump sum. To 'commute' an allocated pension means to withdraw a lump sum.

Complying annuity or pension

An annuity or pension which meets certain prescribed payment standards which could qualify the recipient to receive a higher reasonable benefit limit (RBL).

Deeming

Under the pension income test and allowance income test, any income you get from financial investments is assessed under one simple set of rules, known as deeming. Deeming assumes your financial investments are earning a certain rate of income, no matter what income they are actually earning. For more information visit CentreLink .

Default fund

Under the 'Choice of Fund' legislation, the default fund is where your superannuation contributions will go if you do not make an active choice. It will be the current employer fund given under the award. If there is no award, your employer must select a default fund.

Direct investment

Investments bought by an investor directly from a seller, either personally or through a broker, adviser or agent (for example: shares bought through a stockbroker, property through a real estate agent).

Diversification

Spreading investment funds across a number of different asset classes and within asset classes.

Dividend imputation or imputation credit

Dividend paid out of profits on which Australian company tax has been paid is known as franked dividends, which carry imputation credits under the dividend imputation system. Imputation credits represent the tax already paid by the company and can be used by investors to offset tax payable on other income.

Dollar cost averaging

Investing a set amount of money regularly means you will buy more units when prices are low and less units when prices are high. As a result, the actual dollar cost of the total investment will average out over time.

Eligible Termination Payment (ETP)

A payment received on retirement, resignation or retrenchment or from a superannuation fund that is given special tax benefits.

Enduring power of attorney

A power of attorney is a legal document that allows another person to act on your behalf. An enduring power of attorney is one that remains effective after you have lost mental capacity. It will remain in force until death.

Estate

The net value of all your assets and liabilities.

Estate Planning

Estate planning is a process to ensure that when you die, the right funds and assets are passed on to the right people at the right time- via your will or due to the way you have set up ownership of your assets. Estate planning requires the involvement of skilled legal and financial specialists.

Excessive component

The Excessive component of an Eligible Termination Payment (ETP) is the amount of the ETP that is in excess of the member's Reasonable Benefit Limit (RBL). The Excessive component, when received as a lump sum, is taxed at the highest marginal tax rate.

Executor

The person named in a will to handle the property and affairs of someone who has died. The executor must collect and manage the property, pay debts and taxes, and then distribute what's left as specified in the will.

Financial plan

A financial plan is developed by a financial planner in accordance with your requirements. It sets out your current financial situation and your financial goals, taking into account your priorities and attitude to risk. It then sets out investment, wealth preservation and protection strategies that can help you meet your goals. It may also include estate planning strategies. A financial plan should be reviewed regularly and updated to take account of your changing circumstances.

First Home Owner Grant (FHOG)

The First Home Owner Grant is a joint Commonwealth and State Government initiative introduced on 1 July 2000. It gives eligible first home buyers or builders a one-off $7,000 payment. This grant is not means tested either by income, assets or the value of the property.

Fixed interest investments

Normally for terms of one year or more, fixed interest investments (sometimes referred to as 'securities') include government and semi-government bonds, debentures, mortgage trusts and fixed terms deposits. They generally provide a regular fixed income with capital repaid at the end of a fixed term.

Guaranteed annuity

A retirement investment that provides you with a guaranteed fixed income stream when you invest a lump sum. You choose upfront whether you want to receive this for a fixed term, or for the rest of your life. You can also choose how often you want to receive the income payments and whether you want the payments to increase each year with inflation.

GST

GST is a broad-based tax of 10 per cent on most supplies of goods and services.

HECS

The Higher Education Contribution Scheme was introduced by the Commonwealth Government in 1989 and is a scheme whereby students contribute towards the cost of their higher education.

For most students there are two options available for the payment of the charge. Students may pay the fee "up-front" and receive a 25% discount for the payment or "defer" payment, in which case their liability is discharged through the taxation system when their income reaches certain predetermined levels. If the student defers the payment until they are in the workforce, the amount owed increases in line with the Consumer Price Index (CPI).

By planning, funds can be available to pay HECS upfront, and receive the 25% discount, rather than repay a debt that is linked to the CPI.

Immediate annuity

An annuity where periodic payments to the annuitant begin straight away once it is bought. This differs to a deferred annuity, where the payments begin at a future specified date.

Imputation credits

Taxation credits shareholders may be entitled to when they receive franked dividends.

Income continuation insurance

Insurance which pays you up to 75% of your income if you are unable to work due to accidents or illness for an extended period of time. Sometimes referred to as 'income protection insurance'.

Income splitting

A simple strategy for couples where investments are put in the name of the partner (husband, wife, de facto) who has the lower income and lower tax bracket. This helps both partners pay lower marginal tax rates.

Income stream

One of the most tax-effective ways to provide for your retirement, income stream products act like a salary after retirement, providing you with the security of a regular income. Types of income streams include guaranteed term annuities, allocated annuities and lifetime annuities - also known as private pensions.

Income test

The test on your income to determine if you are eligible for Centrelink entitlements. Under this test you can earn a certain amount of income before your full entitlement to Centrelink is reduced or cuts out. The level at which your pension begins to be reduced varies depending on whether you are single or married.

Investment trust

An investment trust pools the funds from individual investors. By purchasing units in an investment trust, you harness the buying power of pooled funds and take advantage of professional investment expertise. It sometimes called a 'unit trust'.

Investment trust objective

Each investment trust has a clear investment objective so you can determine its suitability for your investment goals.

Key features statement

A printed document describing the features of a superannuation product.

Key person insurance

Insurance on the life of the key person in a business, so that in the event of disablement or death, the business receives sufficient funds to tie it over until a replacement is found.

Land tax

Land tax is levied where the unimproved value of land exceeds a certain figure.

Liabilities

Debts owed to a person or company. For example, the amount you owe on your credit card, to friends or to the bank.

Licensed Securities Dealer

A person who holds a licence granted by the Australian Securities and Investments Commission which authorises the person to carry on a securities business or to operate a managed investment scheme or both.

Life insurance

Life insurance provides a lump sum payment on the death or terminal illness of the insured person. If it has an investment component, a lump sum may also be paid on surrender or maturity of the policy.

Limited power of attorney

A power of attorney is a legal document that allows another person to act on your behalf. Limited power of attorney means the power is limited by time, for example, or limited to a specific act. It will generally cease to be effective if you lose mental capacity.

Line of credit

A revolving line of credit accessed by cheque book that you can use again and again, up to the credit limit, for any worthwhile purpose.

Lump sum disability insurance

Provides a lump sum payment of money if the insured person becomes permanently disabled and totally unable to work.

Lump sum ETP tax

If you take your super as a lump sum (rather than rolling it over) you may have to pay lump sum tax.

Margin call

If you have a margin loan and the value of the investment decreases below the value of the security you provided, you'll be required to:

Lodge further assets as security for the loan, and/or
Invest further cash or other funds to reduce the loan, and/or
Sell assets, using the net proceeds to reduce the loan.

This is known as a margin call.

Margin lending

Margin lending is borrowing money to invest in shares or managed funds, using your existing investments as security for the loan.

Managed investment

Investors funds are pooled together to purchase a range of assets for a particular fund or trust. By pooling together small amounts they can be invested across a range of assets in the same asset class, or various asset classes, reducing the overall risk of market fluctuations. The fund is managed by an investment manager and management fees and charges are usually payable. Income earned is credited to the fund or trust.

PAYG tax

Pay as you go (PAYG) is a system for paying instalments in advance on what you expect to earn from business and investment income. Your actual tax liability is established when the tax office assesses your annual income tax return. If there's a shortfall, you will have to pay in; if you paid too much you’ll receive a refund

PAYE tax

Pay as you earn (PAYE) is a system whereby your employer acts on behalf of the government by deducting the correct amount of tax from your salary before paying you.

Payroll tax

Payroll tax is a state tax payable when an employer’s wage bill exceeds a certain amount. The tax is based on the total wages paid to all employees

Pension Bonus Scheme

The Pension Bonus Scheme rewards people who continue working past the Age Pension age and defer claiming the pension.

Prenuptial agreement

A prenuptial agreement is a legal arrangement outlining what happens to each partners' assets if the marriage breaks down.

Preservation age

The age at which a person may acquire access upon retirement to accumulated preserved superannuation benefits.

Preserved amount

The portion of an Eligible Termination Payment that cannot usually be accessed until retiring after reaching preservation age.

Probate

The court process to obtain a certificate which authorises the executor, under a deceased person's valid will, to handle the deceased person's assets and affairs following the person's death.

Product Disclosure Statement (PDS)

An offer document for a financial product. Broadly speaking, it contains information that a person would reasonably require for the purpose of making a decision whether to acquire a financial product. This includes information about the product features, fees that apply, any adviser commission, benefits and risks of investing and what to do if you have a complaint.

Property

In addition to residential property, this asset class includes industrial, commercial, retail and rural property. The investment can be made directly or through a managed fund. Property is usually viewed as a longer term growth investment.

Purchasing power

The extent to which a sum of money or benefit retains its ability to purchase goods or services over a period of time. Investors generally aim to improve or at least preserve the purchasing power of their money or assets against increases in the inflation rate over time.

Reasonable Benefit Limit (RBL)

The maximum amount of concessionally taxed eligible termination benefits a person can receive.

Redraw facility

This allows you to withdraw money (from additional payments you have made) from your home loan.

Residual capital value

A lump sum payment made from an annuity or pension at the end of the plan term or following the death of the last annuitant or pensioner.

Return

The total earned from an investment including capital growth, or loss, and income.

Rolling over

Transfer of an eligible termination payment to an ADF, superannuation fund, immediate annuity or allocated pension/annuity.

Salary sacrifice

Salary sacrifice is an arrangement by which an employee agrees to forego part of their future salary or wages in return for their employer providing benefits of a similar value.

Split home loan

A combination of variable loan and fixed interest loan.

Spouse contributions

According to Australian Tax Office, Spouse contributions are where individuals can make contributions on behalf of a spouse. The contributing spouse may be entitled to a tax offset. Spouse contributions count as non-concessional contributions of the spouse to whose superannuation account the contributions are made.

Standard variable rate home loan

You usually pay a higher interest rate than the basic variable rate but generally it has other features (such as allowing extra repayments).

Statement of Advice

When an adviser produces a financial plan for you, by law they must produce a written Statement of Advice. This outlines the advice you have been given and why it is suitable for you.

Superannuation

A long-term savings vehicle primarily used to save for retirement. Under current superannuation and taxation laws, superannuation is one of the most tax effective ways to save for retirement.

Superannuation contributions

Amounts invested into your superannuation account. Depending on your circumstances, these contributions may be made regularly or at intervals.

Superannuation Guarantee Charge

The Superannuation Guarantee Charge (SGC) is a mechanism to ensure that employers contribute at least a prescribed minimum amount to a superannuation fund or Retirement Savings Account (RSA) for the benefit of their employees. SGC commenced 1 July 1992. The amount is currently 9% of an employee’s salary.

Superannuation surcharge tax

In May 2005, the Federal Treasurer, Mr Peter Costello, announced the abolition of the superannuation surcharge as part of the 2005-06 Federal Budget. The bill to give effect to this change received Royal Assent on 12 August 2005.

As a result, surcharge does not apply to any superannuation contributions made, or termination payments received, on or after 1 July 2005. Tax (up to a maximum of 15%) payable on certain super contributions if your adjusted taxable income exceeds the specified threshold for the relevant year. This was abolished on 1 July 2005.

Term allocated pensions

A retirement investment purchased with superannuation money that provides you with a regular income for a fixed term based on your life expectancy. The income payment amount is calculated annually according a formula set by the Government and may fluctuate with movements in the value of your account balance. Term allocated pensions are also known as market-linked income streams.

Term life insurance

Insurance that provides a lump sum payment on death or terminal illness of the insured person. It has no surrender or cancellation value. Premiums generally increase with age.

Testamentary trust

A testamentary trust is simply a trust established by someone's will. Rather than all the deceased's assets being distributed by the executor upon death, some or all of the assets remain in the trust for the benefit of a specific group of beneficiaries named in the will. Trust income distributed to children, of any age, will be taxed at normal marginal rates, rather than the penalty rates that normally apply to minors' unearned income.

Note: the trustee can have full discretion as to who receives trust income and capital or restrictions can be provided.

Testamentary Trusts are of benefit:

for families with small children
where extra income would be needed to support the surviving family members should a parent die
where minimising tax is important.

Total and permanent disability

A person is generally considered totally and permanently disabled if they have suffered a disabling injury or illness, which is regarded as total and permanent either because:

the illness or injury prevents them from ever carrying out work for which they are reasonably suited by education, training or experience (or, in some cases, their own occupation) and they are under the regular care and attention of a doctor; or
they have suffered permanent loss of certain limbs or eyes or a combination of them.

Trauma insurance

Trauma insurance provides a lump sum payment on death or terminal illness of the insured person. It has no surrender or cancellation value. Premiums generally increase with age.

Undeducted contributions

Undeducted contributions are contributions made to a super fund for which no tax deduction is claimed. These contributions do not attract contributions or surcharge taxes, and earnings are taxed at a maximum rate of 15%. When undeducted contributions are withdrawn, no tax is payable on the contributions themselves (though tax may be payable on any earnings) and they are not counted towards Reasonable Benefit Limits.

Undeducted purchase price (UPP)

The undeducted purchase price is an amount used to calculate the tax free payments of an annuity. It is generally equal to the total of all undeducted contributions.

Unearned income

Sources of unearned income include interest, dividends, pensions, rentals, royalties and annuities etc.

Unit trust

A unit trust is an investment fund where the money of a number of investors is pooled and invested in either one asset class or a variety of asset classes (depending on the fund chosen). Your interest in the trust is represented by the number of units you hold.

Unrestricted non-preserved amounts

The portion of an Eligible Termination Payment that is not subject to preservation requirements and is accessible.

Variable rate home loan

A variable rate home loan means the interest rate moves up and down with the market.

Volatility

A measure of the variability of returns - their ups and downs. It is often used in the context of investment risk.