clientcasestudy1008.jpgWhen two successful business people needed help defining an exit strategy, one financial planner put together an elegant blueprint that has helped his clients strike a perfect work and family balance. Mark Story reports.

When much of your wealth is tied up in your business, how you exit that business can make the world of difference to your retirement strategy. Prior to selling his quarter stake in a steel distribution business back in 2004, Peter Franklin had little to do with financial planners.

Shortly after entering the workforce back in the mid-1960s, Peter bought a block of land in the Blue Mountains, and also started putting a certain percentage of his earnings towards retirement. Peter went on to buy and sell several blocks of land – without professional advice – and then, with wife Christine, he purchased the family home at Sydney’s Seven Hills in 1974.

It wasn’t until the late 1990s, when the couple decided to acquire an investment property, that they sought financial advice. The firm responsible for their tax returns, BFG Financial Services (BFG), also offered financial planning services, so they looked to them to help establish a negative gearing strategy (on a Central Coast rental property).

It wasn’t until Australia’s wave of demutualisations (notably AMP in 1998), starting in the mid- 1990s, that the Franklins developed an appetite for the share market. In conjunction with their first BFG adviser, the Franklins decided to sell their investment property and to consolidate their holdings of demutualised stocks.


An opportunity then arose for Peter to increase his stake in the firm he’d established with four colleagues back in 1991, so BFG recommended borrowing via a BT margin lending facility. Now that the Franklins were more comfortable with direct equities, it was decided that a portion of the BT loan would also be used to accelerate their wealth accumulation strategy (on an eight- to 10-year plan) by acquiring a portfolio of Australian equities.

A decision by Peter’s older partners to retire triggered the decision to sell the business back in 2004. As the sale of his shares in the business represented a significant part of his retirement plan, Peter again approached BFG for advice. It was at this point that the Franklins met with a new financial planner, Kevin Goodson, who had assumed responsibility of their portfolio.

Softening the blow clientcasestudy1008-2.jpg

With the wisdom of hindsight, Goodson says Peter and his colleagues would have fared considerably better had they delayed selling the business. However, few, if any, could have foreseen the introduction of capital gains tax (CGT) concessions a year after the sale.

“As the CGT was always going to be an issue, I knew I needed assistance with how and when the shares would be sold, and what to do with the proceeds,” recalls Peter.

There was no real way of minimising the tax hit (of about $250,000) on the sale of Peter’s $700,000 in shares, so Goodson decided that the best solution was to sell the shares in three separate tranches.

“By lodging [the tax return] after October 31 and maximising the income tax return extension, [that] meant that we could use the sale on the initial tranche of shares to fund the CGT,” says Goodson.

“It meant that Peter could manage cash flow without having to take out more debt.”

One of the pre-conditions of the business sell down was that Peter would work for the new owners for another two years. And with Peter hoping to join Christine (who had given up working in 2000) in retirement at the end of that period, Goodson suggested that he salary sacrifice into super as much as possible to boost his existing AMP super fund.

Second wind

While Peter effectively retired at age 58, after a two-year stint with the new owners, he and Christine promptly decided to set themselves up as the Australia and New Zealand agents for a Brazilian-based steel foundry. The plan, says Peter (tongue-in-cheek), was to juggle part-time work with the unpaid child-care centre they run for their two grandchildren.

“We plan to continue making regular visits to family in Singapore, and want to rediscover Australia’s wine regions,” says Peter.

“We’re especially fond of cab savs from the Clare Valley.”

It was going to be some time before their business delivered any real revenue, so Goodson recommended paying out non-deductible loans – including the remaining $125,000 St George Bank loan on the family home – and retaining $50,000 within a high-yield, ING at-call account to help with the transition to retirement.

“While I was very receptive to Kevin’s recommendations on where to invest the proceeds from the business, my initial feeling was that it should encompass shares, property and managed funds,” says Peter.

“I was keen to achieve a certain amount of annual income in retirement ($55,000), but how we got there was something I happily left to Kevin.”

Good spread

Based on this basic brief, Goodson made several initial recommendations that would provide good diversification (consistent with the Franklins’ conservative investment profile) over the ensuing year. The first of these was to roll over Peter’s AMP Super and reinvest it through an investment service, The Portfolio Service (managed and operated by Questor Financial Services). Given the Franklins were classified as “balanced” investors, Goodson recommended an asset allocation strategy comprising: cash (10 per cent), fixed interest (15 per cent), listed property trusts (15 per cent), international shares (10 per cent), and Australian shares (50 per cent).

“Much of the pre-July ‘07 strategy meant complementing pending government regulations on super,” advises Goodson.

“But as we were running close to the reasonable benefit limit at the time, some funds were invested after 30 July, 2007.”

In an attempt to provide good diversification, the basket of 10 to 15 Australian shares were all held directly, while all international equity exposure was held via four managed funds. Meanwhile, three listed property trusts (LPTs) and four fixed interest funds were held via The Portfolio Service.


Goodson says much of the post-July ’07 strategy is now focused on implementing a transition to- retirement strategy, once Peter turns 60 at the end of August. And while Peter might have been wrong-footed with the timing of new CGT regulations, he’s won with rules that allow him to continue working while maximising his income and tax concessions.

By using a transition-to-retirement pension, Peter will pay no tax on the earnings on the assets that back his pension nor on the transition-to-retirement pension (as he will be over 60). Once Peter turns 60, the plan is to immediately roll about 99 per cent of managed funds into a transition-to-retirement pension facility offered via The Portfolio Service structure.

Paying down the remainder of the margin lending facility later this year will also put the Franklins into a debt-free position, Goodson says. Part of Goodson’s recommendation is also to convert Christine’s superannuation into an account based pension, once Peter turns 60, to provide additional income. While taxable until age 60, it will still be tax-effective due to Christine’s $6000 tax-free threshold, plus the applicable 15 per cent tax rebate. The return on the underlying assets is also tax-free while in the pension phase.

“As Christine and I expect to be around for many years to come, we wanted a retirement strategy that would not only provide income for today, but expose us to asset classes with capital growth upside over the long term,” says Franklin.

While establishing a self-managed super fund (SMSF) did come up for discussion, neither Peter nor Christine wanted to dedicate so much time to managing their investments. And while there are no immediate plans to sell the family home, Peter says selling and downsizing to their beach-house rental property at Corlette, on the lower Northern Coast, is a future possibility. Even though they still regard themselves as conservative investors, Peter says the investment journey they embarked on with Goodson has made them better-informed investors.

The net effect, adds Peter, is that they’re confident to make investment decisions that would have been regarded as too risky in years past.

Interestingly, while their risk profile hasn’t changed, they’re now more confident about riding the market’s dips. And while their share portfolio is down, following the sub-prime meltdown, they plan to ride out market volatility without making too many changes. With the wisdom of hindsight, Peter wishes they’d started investing in direct equities a lot earlier.

“Given our standing start, we’ve found the assistance of a financial planner invaluable,” admits Peter.

“Had we done it on our own, we would have had to rely on friends to guide us, rather than someone experienced and qualified to do so. Ironically, we’re paying less now – around one per cent of our total portfolio – than we were under the old commission structure.”

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