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Glossary of Terms - Big Sky Financial Solutions

Glossary of Terms



Allocated Pension – is an amount paid regularly from an investment account in which the level of annual income payments falls within a range determined by government regulations. Payments are made until all capital is withdrawn or you die (in which case the balance of the investment is available to your estate or to the person nominated as your reversionary pensioner (spouse) who may continue to receive a pension until account balance falls to zero (usually around age 80 – 85 as a guide).

Annuity – is a regular income paid to you by an insurance company in exchange for a lump sum. The income stream received is a combination of return of capital and of investment earnings. Annuities now can be fixed term and may be taken out by people of any age. However, there are special advantages for Age Pension applicants in taking out an annuity for either lifetime or since 20 September 1998 “life expectancy annuities” (LEAs) are available for periods between 5 and 15 years or more and depending on age, can be exempt from the Assets Test, provided they are taken out after or on reaching Age Pension age.

Bear Market – represents a consensus by economists and market watchers that the stock market has suffered a downtrend and could continue to suffer a downtrend at least for the foreseeable future.

Beneficiary – is a person who is entitled to receive part or all of the estate of a deceased person or the benefit from a superannuation plan annuity or pension.

Bequest – is a gift of personal property under the terms of a legal will.

Bonds – are fixed interest investments, usually for the medium to longer term. They are issued by governments, companies or other entities (the borrowers) who pay the investor interest throughout the life of the bond. The level of security varies with the quality of the offering institution.

Brokerage – is the fee paid to a stockbroker for providing the service of buying or selling shares. Fees are charged according to a scale which takes account of the total value of shares traded. The fee may vary from one broker to another and is included in the purchase price (or deducted from the sale price) i.e. it is not paid separately.

Bull Market – is the reverse of a bear market; i.e. investors expect a prolonged upturn in the stock market.

Capital Gains Tax (CGT) – is levied on the capital profit made on the sale of assets acquired after 20 September, 1985. It is only levied when an asset is disposed of and cost value is adjusted for inflation. The family home is generally exempt. The rate of tax payable depends on your marginal tax rate in the year of sale (i.e. financial year to 30 June). After 1/10/99 only 50% of gain taxed if the asset is held for longer than twelve months, and there is no inflation allowance as with previous method until that date. Consult your accountant/financial planner on ways and means of minimising any capital gains tax liability.

Capital Guaranteed Fund – a fund in which the original capital and usually the declared investment “bonuses” are guaranteed by the fund manager.

Capital Stable Fund – a fund which usually carries a little more risk than a Capital Guaranteed Fund because it includes not only low risk fixed interest investments but also investments in low risk equities (shares). There have been times, however (e.g in 1994), when value of “capital stable” investments dropped in value 10-15% over a period of several months.

Cash Management Trusts – are unit trusts that allow investors to pool their money in order to take advantage of investment opportunities in the short term money market. They provide ready access to investors’ funds and are therefore ideal for meeting short term cash requirements and unforeseen expenses. Security of the investments is high since they include securities offered by government or banks but not shares or property. They do not provide any growth on the capital invested.

Commission – is money paid by an organisation to a financial planner for placing investments with that particular organisation. The commission is paid out of fees deducted from your investment.

Commutation – is the action of changing from one kind of superannuation payment to another; e.g. surrendering pension or annuity payments to receive a lump sum payment instead, i.e. cashing in at “today’s value” a future income stream.

Compound Interest – is interest which is allowed to remain with the investment capital and thereby becomes merged or compounded with the principal. It is a very effective way of growing an investment since the amount working for the investor grows at a faster and faster rate – compound interest has been humorously called the “8th Wonder of the World”. For example, if $10,000 is invested in a capital guaranteed (or managed) insurance bond paying, say 10% p.a. it will double in value after 7-8 years – refer “Rule 72” below.

Consumer Price Index (CPI) – is a measure of the movement in prices of a specific group of goods and services. It is used in wage and pension determinations by the Commonwealth Government.

Defined Benefits Fund – a superannuation fund that pays a member of the fund a defined amount of super money (i.e. pension) that is linked to salary level at retirement and length of service (e.g. in the State public service normally 66% of average salary over the last 3 years provided after, say, 30 years of service.)

Discretionary Trust – allows a trustee (who holds an interest in property for the benefit of another who is known as the beneficiary) complete discretion to distribute capital and income to the beneficiaries specified in the Trust Deed. A non-discretionary trust would restrict the trustee’s freedom. Discretionary trusts are used mainly for a family’s affairs.

Diversification – spreading funds across various sectors of investment markets and/or fund managers to minimise risk.

Dividend – is that portion of a company’s after-tax profits which is paid to its shareholders, usually at six-monthly intervals (known as an interim dividend after 6 months profit results and a final dividend after a full 12 months results are declared).

Dividend Imputation – gives investors in companies that pay Australian corporate tax rate (currently 30%) credit for the tax paid by the companies over the next couple of years. This makes dividends from most Australian companies “tax free” to many shareholders. It also reduces the tax payable on income from other sources by low income earners.

Eligible Termination Payment (ETP) – is the name given to the lump sum paid to a person who terminates employment or withdraws from a superannuation fund and which the Tax Office determines to be eligible for concessional tax treatment. While ETPs include payments from a superannuation fund, severance pay (e.g. redundancy) and commutation payments from a pension or annuity, they do not include lump sum payments for unused annual leave or long service leave.

Equities – stocks and shares that do not yield fixed interest, e.g. ordinary shares in companies like BHP, CBA, etc.

Estate Planning – refers to the actions which a person may take to arrange their affairs in order to maximise the value of their estate, minimise tax liability and give consideration to what should be included in a legal will, the appointment of an executor, provision for the power of attorney and the use of testamentary trusts.

Executor (Male) or Executrix (Female) – is the person who is nominated in a legal will to execute the instructions of the will for the benefit of its beneficiaries.

Family Trusts – are often used to minimise tax by diverting income from high income taxpayers to those who are in lower tax brackets. Most Family Trusts are discretionary trusts – i.e. they provide the trustees with the discretion (flexibility) to pay income where it will be most tax effective.

Financial Planner – is a professional person approved by the Australian Securities and Investments Commission (ASIC) as qualified to provide advice on all aspects of financial planning. This planning advice in the form of a Statement of Advice is important at all stages of adult life regardless of the level of financial resources.

Franking Credits – dividends of Australian companies that pay full company tax are known as fully franked dividends. Shareholders in such companies receive franking credits. In other words, a tax or franking credit is available to you as a shareholder so that tax is not paid twice on the company’s profit. It should be noted that surplus franking credits from 1 July 2000 will be refundable and that some Australian companies pay franking credits at less than 100% because they derive income from overseas.

Funeral Bonds – are investments that provide for payment of funeral costs. For pensioners, funeral bonds earn income that is tax exempt and savings grow in a tax-free environment. They also provide a relatively secure investment, the value of which does not count for the pension Assets Test.

Gearing – borrowing money to invest, usually in property, shares or other income-producing investments.

Gifting – is the process of giving money away in order to enhance the quality of life of the recipient. It may also reduce one’s assets under the Assets Test for the Age Pension.

Income Stream – is the term normally applied to the money earned from your investments. “Income Stream” products include life expectancy annuities (LEAs), allocated pension plans and lifetime annuities and are usually covered by Commonwealth Government legislation for tax and pension treatment.

Income Splitting – is the action of apportioning income between family members instead of all of it going to one person. The effect for couples is to reduce total tax liability by allowing one or other or both of the partners to move to a lower tax bracket. Family trusts are often used for income splitting by diverting income to children and non-working spouses.

Income Test – is one of the two major tests (the other is the Assets Test) used to determine eligibility for an Age Pension. The Income Test is used to determine the amount of income your assets should generate (e.g. “deeming”) or actually earn (e.g. rent). This amount of income is then compared with thresholds set by Centrelink in order to calculate pension entitlement.

Intestate - is the term applied to dying without making a legal will which is wholly or partly invalid. If a person is intestate, the estate is dealt with by government under the laws of intestacy, i.e. Public Trustee in each State. If the will validly disposes of only part of the estate, then the balance of the estate is administered under intestacy provisions.

Life expectancy – is the period of time that a person can expect to live, on average, given their present age. On the basis of statistics, life expectancy tables are drawn up which are used as a basis for retirement investment products such as fixed term annuities.

Listed Property Trusts – are trusts that invest in property and are listed on the Stock Exchange. Their value is determined by the stock market and can rise or fall.

Lump Sum – is the term used to describe the amount of money provided on retirement by the superannuation fund as an alternative to the payment of a pension. Some superannuation funds provide only a lump sum benefit, others a pension with a lump sum alternative.

Managed Investment Funds – are the pooled investments of many people under the control of a skilled fund manager. Since the amount of funds in the pool is large, the investments can be spread by the fund manager over a range of investment types. The fund manager makes the investment decisions (for which a fee is charged) and if the fund earns a good income the investors receive the benefit.

Master Trusts (or Funds) – allow you to spread your investments over a range of trusts (each of which has its own spread of investments such as fixed interest securities, property and shares both Australian and international) by using one trust, a Master Trust. All of your investment flows through the chosen Master Trust, minimizing your paper work and allowing you to change your investment strategy with minimal cost. Master Trusts continue to grow in popularity.

Medicare Levy – is the amount of money paid regularly by taxpayers which is used by government to assist in providing public health services. The level is deducted from wages and salaries as a fixed percentage of income or paid annually by non salary earners.

Option – an option is an agreement which gives the option holder the right to buy or sell a specific security at a stipulated price and within a set period of time. If the option is not exercised during that time, the money paid for it is forfeited.

Portfolio Planning – is the task of arranging investments in a way that suits the particular investment profile of the individual investor. It is best done with assistance from a qualified personal financial planner who will take account of the investor’s personal wishes in the matter of risk-taking in order to achieve peace of mind for the investor.

Power of Attorney – is a document usually drawn up by a solicitor by which a person appoints another person (the attorney) and sets out what the attorney is authorized to do. It is used to cover emergency situations in which, because of absence, accident or illness, a person is unable to take essential actions of their own behalf (such as withdrawing money from a bank account and signing documents). One needs to consider very carefully who is the appropriate person to be given your power of attorney, particularly if that person is not your spouse. Enduring Power of Attorney provides for a nominated person (e.g. spouse) to hold power of attorney for you where a medically qualified person certifies that you cannot sign documents. You should consult your solicitor for detailed advice.

Preservation – is maintaining superannuation benefits until the minimum age at which they can be taken.

Probate – is a certificate granted by the court that certifies that a will is valid, thereby giving authority to the executor to administer the terms of the will.

Prospectus – is a document issued under the control of the Australian Securities and Investment Commission (ASIC) that provides detailed information to enable the public to make an informed decision about investing money in the product. A prospectus must be issued by anyone seeking money from the public for investment in securities.

Reasonable Benefit Limit (RBL) – refers to the amount of money a person can have in superannuation and rollover funds that is given favourable tax treatment. These amounts are indexed to average weekly ordinary time earnings.

Rebate – an amount that is to be subtracted from the amount of tax payable.

Redundancy – occurs where an organisation carries out structural change in order to cut costs and, in the process, lays off staff (i.e. makes staff redundant). Redundancy has become very common in Australia in large and small organisations. It involves payment to the redundant employee of a lump sum which is intended to provide financial support while they search for another job. Most redundancy payments are tax free up to certain limits.

Retirement Income Stream – is the term applied to the income derived in retirement from a pension or from investments or a combination of both. The government’s retirement policy incorporates certain types of investments that are approved income streams with special advantages. These include allocated pensions and life expectancy annuities.

Retirement Savings Accounts (RSAs) – are established, managed and controlled by banks or insurance companies. They provide a safe place for retirement savings but, because of their low investment returns, they may not suit the longer term needs of retirees.

Reversionary Option – for a pension or annuity allows you to nominate a second person (in most cases it must be a dependant e.g. spouse/partner) who will continue to receive all or part of the annuity or pension if you die.

Risk Management – is the control exercised by the investor over the risks involved in the different categories of investment. Some investments are virtually risk-free (e.g. bank fixed deposits) while others are high risk (e.g. shares in a small prospecting company).

Superannuation (and Superannuation Guarantee Charge) – has become an increasingly important part of arrangements for retirement in Australia. Organisations arrange and contribute to superannuation funds that provide, upon an employee’s retirement, a lump sum payment, or a regular pension or a combination of both. Employers are required to pay into a superannuation fund the Superannuation Guarantee Charge (SGC) on behalf of their employees.

Tax Deduction – is an amount that reduces a person’s taxable income and so reduces the tax to be paid. It favours high income earners because they pay a higher rate of tax on their earnings than low income earners.

Tax Rebate (also sometimes called a Tax Credit) – is an amount that reduces the tax to be paid by the full amount of the rebate. Tax rebates treat all taxpayers equally by giving the same amount of rebate regardless of income level.

Undeducted Contributions – are part of the superannuation environment and are contributions of money placed into a superannuation account for which no tax deductions have been claimed (they are therefore “undeducted”). They are returned to the retiree largely tax-free as part of his/her retirement strategies.

Wealth Creation – involves the building of assets by means of careful investment into asset based investments, usually over a long period of time so as to achieve an income stream that will ensure a continuation of a high quality lifestyle in the years beyond retirement.

Will – a will is a legal document often prepared with the assistance of a solicitor and properly witnessed. It is designed to give effect to a person’s wishes for the disposal of their possessions after their death. A will requires regular updating during a person’s lifetime and includes the appointment of an executor to attend to the administration of the will.