General Principles of Financial Planning and Taxation
The planning framework
Financial planning integrates cash flow and budgeting, risk management, investment, retirement and superannuation, tax, and estate planning. The unifying tool is the cash flow statement: surplus funds are allocated to debt reduction, emergency reserves, insurance, investment, and retirement contributions in a sequence appropriate to the client's circumstances. Candidates should be able to build and interpret a simple net worth and cash flow position.
Taxation principles
Know the difference between income and capital, marginal tax rates, tax offsets, franking credits and imputation, capital gains tax (including the discount for individuals and trusts, and the treatment of assets held by superannuation funds), and negative gearing. Understand salary sacrifice and personal deductible contributions to superannuation, contribution caps (concessional and non-concessional), division 293-style additional tax for high earners, and tax-free retirement phase income from superannuation within limits. Know the tax treatment of insurance proceeds and the estate planning consequences of binding versus non-binding death benefit nominations and the treatment of superannuation death benefits paid to dependants versus non-dependants.
Traps
- Assuming a capital gain is fully taxable; the discount and cost-base rules must be applied.
- Confusing the tax deductibility of contributions with their preservation status.
- Forgetting that franking credits are valuable to low-income and superannuation investors but can be wasted in some structures.
- Overlooking the interaction between the age pension, superannuation and assessable income.
Rule of thumb
Always compute after-tax outcomes. A simple check: after-tax return = pre-tax return × (1 − marginal rate), adjusted for franking and the CGT discount where applicable.
Worked example. A client on a 39% marginal rate invests $10,000 in a fully franked dividend paying 5% ($500) with $214 of franking credits. Grossed-up income is $714; tax at 39% is about $278, less the $214 credit, leaving about $436 after tax - an effective yield of roughly 4.4%. Compare this with interest income of $500 taxed at $195, leaving $305.