PONSONBY PROFESSIONALS

Logan Granger: Business Finance Guarantee Scheme

Updates to the Business Finance Guarantee Scheme have just been announced in the last month. The scheme has been revisited to provide a higher level of loans to an increased number of businesses to help in the recovery from the impact of COVID-19. The aim of the revised scheme is to support business recovery and growth plans.

The central feature of the scheme is that the government is guaranteeing 80% of the risk of scheme loans, while the banks are covering the remaining 20%. This assumption of most of the risk by the Government (taxpayers) will encourage banks to make business loans that may otherwise have appeared too risky, thereby increasing the survival chances of such businesses.

There are standard criteria for scheme loans (outlined below), but otherwise a normal lending process will be followed by the banks. The banks have put their application forms online so you can view and compare them, but we would expect that banks will be giving priority to existing customers.

Eligibility criteria Entity • New Zealand based business case you will also have to think carefully about putting your personal

• Impacted by COVID-19 • Annual turnover of up to $200 million (previously $80 million) • Not be on your bank’s credit watchlist as at 31 January 2020 (for retail customers) or 30 September 2019 (for non-retail customers)

Loan • Maximum loan of up to $5,000,000 (previously $500,000 (with the maximum amount being determined by your bank) • Can be drawn as one loan or several loans • Maximum term of 5 years (also determined by your bank) • Primarily to support operating expenses and investment in recovery and growth • Cannot be used to pay dividends or for on-lending outside borrower’s guaranteeing group • Cannot be used to refinance or repay more than 20% of your existing business debt or overdraft facilities • Cannot be used to refinance or repay an existing loan advanced on or after 16 March 2020 or any loans or facilities that mature on or before 31 December 2020 We will be able to assist you put this information together to ensure

Ineligible entities Scheme loans cannot be made to fund anyone engaged in:

Property development and property investment. Local government (i.e, a local authority, a council-controlled organisation or a council organisation for the purposes of the The supply of recreational cannabis. The processing of whale meat. The manufacture of cluster munitions, nuclear explosive devices, anti-personnel mines, tobacco, and civilian automatic and semiautomatic firearms, magazines or parts. Any activity that is illegal in New Zealand. Any other activity notified by the Crown to banks in writing, with effect from the date of that notification.

Apply for a loan? You may meet the qualifying criteria as above and the bank’s own lending criteria. But, as with any commitment, you also need to weigh up the pros and cons of taking on the additional debt. We fully expect that banks will require personal guarantees and in that assets on the line, at least in respect of the 20% not guaranteed by the Government.

While the information requirements might differ depending on your bank and your circumstances, generally you should expect to provide the following information in support of your application:

Your last set of financial statements for the business. A copy of your most recent tax return. A cash flow forecast detailing your income and essential expenditure for at least three months and what a return to more normal business might look like over two to three years. A personal statement of position.

Local Government Act 2002). you are providing a robust plan of how things look for your business and how you will service the loan.

If you are unsure if your business qualifies, talk to your banker or your Jacal advisor as they can help you to work out if you do fit or what other help you could seek. (LOGAN GRANGER)  PN

Disclaimer – While all care has been taken, Johnston Associates Chartered Accountants Ltd and its staff accept no liability for the content of this article; always see your professional advisor before taking any action that you are unsure about.

JOHNSTON ASSOCIATES, 202 Ponsonby Road, T: 09 361 6701, www.jacal.co.nz

Funding your retirement lifestyle

As investors are acutely aware, the effect of Covid-19 on global markets is likely to result in a recession at least as bad as that experienced with the Global Financial Crisis in 2008-2009.

The response of central banks, both here and overseas, has been to significantly lower what were already low official cash rates.

This approach has had a direct impact on the bank interest rates earned by depositors in New Zealand, providing an unexpected benefit to the children and grandchildren of retirees, or at least to those still in business or paid employment.

But for many retirees who are risk averse and not investment savvy, the immediate and troubling effect of the reduced return on their bank term investments is a significant reduction of the interest income they depend upon to fund their retirement lifestyle.

To illustrate this, Mr and Mrs Senior Citizen were earning a net return after tax of $30,000 p.a. on their ‘safe’ $1,000,000 4.5% term deposit with a major trading bank. This amount, combined with a net tax-paid benefit from NZ Superannuation of $30,000, gave them $60,000 p.a. ($5,000 per month) to live on.

Being debt free and with no dependent children, they felt financially secure in retirement and were comfortably able to fund their preferred lifestyle. A net $5000 per month meant that they were not rich, but they certainly weren’t poor. They were enjoying annual overseas holidays, they felt able to assist their families financially if the need arose, and they were confident of leaving their children a significant inheritance after they died. How things have changed over a few short months. Following the rollover of their term deposit, the net tax-paid interest rate is now 1%, giving them a net income of just $10,000 which, combined with NZ superannuation, provides $40,000 to fund their retirement lifestyle. This means they can no longer fund their lifestyle from their income alone.

The natural reaction to this dilemma, as we have seen in the past, is for our retired couple to chase return to increase their net income.

This is a recipe for disaster as we saw only ten years ago, when ‘mum and dad’ investors lost their retirement nest eggs through investing their savings in finance companies such as Bridgecorp Finance, Hanover Investments, Capital & Merchant Finance and Lombard Finance.

However, all is not lost for our retired couple if they seek advice from an experienced and suitably qualified financial planner.

The solution is for them to invest in a balanced, probably conservative, investment portfolio, and be prepared to experience more investment return volatility in exchange for better overall returns than they would get from term bank deposits, and also to be willing to access their investment capital on an incremental basis.

Past experience has shown that $1,000,000 sensibly invested can comfortably fund an annual cash drawdown for an indefinite period. If the investment capital is less, e.g. $500,000, an annual drawdown of $30,000 can be maintained for over 25 years, assuming a real return of 2% after tax, inflation and fees.

If you are worried about funding your retirement lifestyle in the current low-interest environment, please contact me on M: 021 444 339 or E: greg@oneplan.co.nz  PN

ONEPLAN, T: 0800 1plan4u, www.oneplan.co.nz

0800 1PLAN4U or 09 309 3680

Talking Trusts: Rose & Alister’s story

Rose and Alister had both been married before and both had children from their previous marriages.

However, they had been together for nearly fifteen years and considered all of their assets to be joint. They had set up a trust about ten years ago on the advice of Tammy McLeod their accountant to protect their assets from business risk – they owned a small engineering business which they both worked in. Their children were all adults now and while they were close to Rose’s two daughters, Alister’s son and daughter simply did not get on well with Rose at all. Rose felt that they were greatly influenced by their mother. could be done. She also suggested reviewing the memorandum of wishes for the trust to make sure that the settlors’ wishes were very clear as to what information is given to the beneficiaries.

Rose’s lawyer also talked about some other things that Rose and Alister could do to make their trust more robust. One was to appoint an independent trustee. They had always had their accountant as an independent, but he had recently advised them that since the law was changing, he felt a bit nervous about his increased liability under the scrutiny of the Act, and he no longer wanted to be a trustee. He had suggested to Rose and Alister that they could set up a company to be trustee and that only Rose and Alister needed to be the shareholders and directors of that company.

Rose was very concerned as to what would happen if Alister died. She worried that his children would turn on her and that they would make claims against the trust and Alister’s estate, as while all four children were to be treated equally, the intention was that no distributions would be made to children until both Rose and Alister had died. She also advised on other elements of the new law – that all trustees was relieved to know that while the trust landscape was changing,

It also seemed to Rose that Alister’s children always had their hands out and had the attitude that Rose and Alister had plenty of money. Rose was glad that most of their money was in the trust as she thought that would help to protect their assets from Alister’s children. However, she had heard about the new Trusts Act which was coming into force in January 2021 and felt very nervous as to how that would impact their trust.

Rose knew that after January 2021 beneficiaries would have a statutory right to more information about trusts including financial information, such as the assets, liabilities and income of the trust. going to achieve all that you need it to.

She was worried that Alister’s children would learn what was in the trust and then make further demands on the trust’s resources. She went to see her lawyer to see what could be done.

to see if there was some way in which the deed could be amended to limit the information available to the children. She said every trust was different and that there was no blanket rule as to whether this Rose’s lawyer explained that this could make Rose and Alister’s trust vulnerable as if Alister’s children were to challenge the trust if Alister died, then the first line of attack would be that there was no independent trustee.

should hold copies of the core documents and that at least one trustee should have copies of all documents relating to the trust. This made Rose feel a little nervous. She and Alister would really need to brush up on their record keeping abilities. However, her lawyer reassured her that if they appointed a professional trustee, that trustee would help them to put in place systems and procedures to make sure that they were adhering to the new statutory requirements. Rose there were still measures that could be put in place to put her mind at rest.

The changes to trust law are wide reaching and will have an impact on trusts going forward. It is so important to get specialist advice to ensure that your trust complies with the new law and that it is still Rose’s lawyer explained that she would need to review the trust deed

If you feel you could use some specialist trust advice, don’t hesitate to contact Tammy McLeod or the Trust team at Davenports Law by calling 09 883 4400 or visiting davenportslaw.co.nz.  PN