What can you expect from a financial adviser? Instant Expert: What is the difference between a tax deduction and a tax offset?

Insights into Successful Investing --

Seek Advice -- Part One

If senior executives, sports stars, politicians and entertainers all get expert help to manage their money, why shouldn't you? There are many reasons why it makes sense to seek advice. Some are just common sense.

Expertise

In an increasingly specialised world there are an ever-increasing number of experts we call on to help us. If you listed the experts you consult every year it would probably include mechanics, accountants, doctors, dentists, pharmacists, optometrists, travel agents and gym instructors. Even sports stars rely on expert coaches to remain at the top of their game.

Why do we rely on these experts? Because they are trained to do certain tasks that we are not book flights, fix teeth, devise a fitness program, fit contact lenses etc. That training means that we can rely on them for advice and services that make our lives better and easier. It's no different with managing our money.

Efficiency

Given time, a certain amount of natural talent and a lot of training, we could do a lot of things that we pay others to do. We could spend time researching nutrition, learning biomechanics and anatomy and devise our own exercise program. Or sweat over books till we knew enough of the latest tax laws and accounting legislation to do our own taxes. The reason we don't is that it's inefficient. It's more cost effective in time and money for us to specialise in what we do best and use other experts when we need help.

Tiger Woods makes a lot of money from playing golf. Which is the best use of his time and energy? Learning international tax law or improving his putting? Researching investment products or practicing his bunker shots?

Insights into Successful Investing Seek Advice -- Part Two

What do you get from your financial adviser? So what are the most important services you get from a financial adviser?

A holistic approach

A financial adviser can help you take a holistic approach to your finances. They help you to understand your existing financial position, clarify what your goals are and devise a strategy to help you achieve them. Most importantly, they build a financial plan that is about YOU your age, your plans, your investment experience, your risk tolerance and your lifestyle.

That means that all your financial decisions fit into a logical framework and that the products and services you choose work together to meet your needs.

Asset allocation

Asset allocation is the art and science of allocating your investment between shares, property, bonds, cash and other asset classes. Many different experts believe asset allocation is the single most important investment decision.

Your financial adviser can work with you to devise an asset allocation structure that suits you, helping you use the mix of growth and defensive assets that meet your needs. Ongoing consultation with your adviser also helps you to stick with your asset allocation strategy in the face of short-term events, such as the tendency to become too defensive when markets are falling or too aggressive when they are rising.

Security selection

There are literally thousands of shares, managed funds, trusts, super and retirement income products to choose from. Which is best for you? Your financial adviser has access to the latest professionally-compiled research that allows them to compare these products against each other. That means they can choose the best products for you both in terms of performance, fees and in terms of quality of management and how they fit into your portfolio.

An education

One final and often misunderstood role of a financial adviser is to help you learn more about investing.

It makes sense to hire an expert and even more sense to learn from them. Source: BT Financial Group Extract from Ten Investing Truths Instant Expert: the part when you can learn interesting things and dazzle your guests at dinner parties What is the difference between a tax deduction and a tax offset?

Tax deductions are items of expenditure or allowances that are deducted from an individual's (or an entity, such as a company's) assessable income, in order to determine the amount of income on which tax will be calculated (referred to as taxable income).

Deductions may include a range of general or specific deductions and will generally include expenses incurred in gaining or producing assessable income, or expenses necessarily incurred in carrying on a business for the purposes of gaining or producing assessable income.

Examples of legitimate tax deductions include: rent paid to lease a business premise, interest paid on money borrowed for investment purposes, expenses incurred in repairing an investment property, premiums paid for salary continuance insurance, contributions to superannuation made by an employer or a self-employed person (subject to age based limits), donations to certain charities, approved agricultural investments and the like.

By way of example, let's look at Jonathan's financial position. His assessable income is made up of the following:

Salary $45,000

+Investment income $ 7,500

=Assessable income $52,500

Jonathan is able to claim a number of deductions including:

Work related expenses $ 2,200

+ Interest on investment loan $10,000

+ Donations to charity $ 1,500

=Total deductions $13,700

From this example, Jonathan's taxable income will be $38,800.

Based on the 2005/06 tax scales, Jonathan will pay $7,500 in tax, plus the Medicare levy.

Turning now to tax offsets (or tax rebates as they are also commonly known). Where a deduction reduces the amount of income on which tax is calculated, a tax offset is deducted from the actual amount of tax payable.

Tax offsets may arise for a variety of reasons and include such things as a dependants offset, low income and senior Australians offsets, superannuation pension offset, medical expenses offset, mature age workers offset, and others.

If we take the example above and assume that Jonathan is over 55 years of age and qualifies for the mature age workers offset by being over 55, receives income from employment of less than $53,000, and lodges a tax return he will qualify for a tax offset of $500.

So instead of Jonathan having to pay $7,500 in tax, the offset of $500 will reduce his tax payable to $7,000. (A tax rebate of $500 will be broadly equivalent to having a tax deduction of around $1000 for someone on the highest marginal rate of tax.)

Tax offsets are available for a multitude of purposes and can deliver significant savings to taxpayers where they qualify. It is very important to ensure you get reliable taxation advice to ensure that you are receiving maximum entitlement to deductions as well as tax offsets that you may be entitled to.

Contact your Financial Planner for more details.

Source: Professional Investment Services

Coming up in a future issue: How to be an Heroic Investor, How you can enjoy the tax deductions of a Primary Producer, Which Financial Planner was once a professional ballet dancer? How you can legally pay 3% tax, without moving to a foreign country.

Disclaimer

The information contained herein is of a general nature only, does not take into account your particular objectives, financial situation or needs. Accordingly the information should not be used, relied upon or treated as a substitute for specific financial advice. Whilst all care has been taken in the preparation of this material, no warranty is given in respect of the information provided and accordingly neither BT, Professional Investment Services nor its employees or agents shall be liable on any ground whatsoever with respect to decisions or actions taken as a result of you acting upon such information. Jeremy Britton is an Authorised Representative (#298825) of Professional Investment Services, ABN 11 074 608 558, AFSL 234951. Approval # H172. Privacy Your privacy is important to us. If you do not wish to receive information of this kind in the future, please send an email with REMOVE in the subject line to manager@invest.org.au or phone 0410 468 378. Please note that the email is an automated service and you will receive an email confirmation of your request. Emails may also be suspended for a period if desired.