Investing
Insurance
Lending
Tax
Legal
Wealth Creation
Wealth Brief The Wealth Brief is brought to you by
Edition 10
Suite 1/36 Sunshine Beach road Noosa Heads, Queensland 4567 T: 1300 761 236 E: advice@insuranceChampions.com.au W: www.insurancechampions.com.au
IN THIS ISSUE Top Financial Tips for 2009 Start planning now for the new year! Where are house prices heading? Purchased a boat? Expect an ATO audit Getting your super together The most powerful force in the universe! Coins & art in your Super Fund – lease them out?
THANKS FOR YOUR SUPPORT! Thank you again to everyone who has referred their family, friends and business associates to us in 2008. We really appreciate your support and confidence in us to give the referral. We are always looking to improve in the delivery of our services to you, and want to make sure you are getting what you want from us and would appreciate your feedback. Please take a minute and consider if there is anyone you know who would benefit from our services in 2009.
TOP FINANCIAL TIPS FOR 2009 Start planning now for the new year! 1 Get Professional Advice With the current world financial turmoil, it is now even more important to get professional advice! Professional advice can come from a variety of different sources; this could be a licensed financial planner, an accountant, lawyer or insurance specialist. Don’t wait until after the event to seek advice, any delay could result in unrecoverable losses,
paying too much tax, to be underinsured, or to leave yourself open to legal problems.
2 Sort out your will or update your existing one A current legal will guarantees that your loved ones can be provided for and that your estate is distributed in the way that you wish. It will also document any bequests that you wish to make including charities and non dependents. Do not delay with this important issue, make an appointment for the new year with a qualified professional.
3 Review your insurance Reviewing your current level of insurance is vital to protect you and your family. Any changes to your personal circumstances including increase of loans, changes to your income or addition of dependents, should trigger a review of your personal insurance situation.
4 Set yourself some goals Write down everything you want to achieve, when do you want to retire? How much money will you need? Put a time deadline on achieving certain goals and review these often. If you want to retire on $100,000 a year after tax and allowing for inflation you will need approx $2,000,0000 invested. Will Superannuation be your wealth creation vehicle, will it include property or shares?
5 Could you use your home to accelerate your wealth creation? If you own your home or have sufficient equity, you can gear against your house or set up a separate investment loan that can be used for deposits on property or leverage into shares or managed funds. The interest you pay would normally be tax deductible
and by having a separate loan there will make sure there is no confusion between personal and investment expenses.
6 Have you got all your investment eggs in the same basket? As you have been made well aware in 2008, Investments perform very differently and when the share market is doom and gloom, the property market could be out performing. If you have a diversified investment portfolio of shares, property, managed funds and fixed interest this should reduce the volatility and even out your returns. 2009 is the year to review what you are trying to achieve and make some changes if you are off course.
7 Keep a nest egg aside for emergencies You should have sufficient funds set aside to cover any unforeseen circumstances. As a general rule this should be a lump sum to cover 6 months of your normal expenses. This lump sum could be invested in an account that earns interest, but allows you easy access without penalty. It could be a financial buffer you have built up on a line of credit mortgage or loan draw back facility. The easiest way to make sure your income is replaced is with an Income protection policy. It can replace up to 75% of your income in case a sickness or accident prevents you from working.
8 Get rid off Non-Deductible debt first Your main aim should be to reduce nondeductible debt as soon as possible. This could be your home loan, a non-deductible car loan and credit card debt. You are paying these loans with your after tax dollars and apart from your home loan they are normally depreciating items! Leave tax deductible loans until last as the government is footing part of your interest bill with tax breaks.
9 Get started now So what are you waiting for? We are now approaching 2009 and 2008 just flew by. Take control of you finances and investments and look at the real reasons why you are delaying those important decisions. If you’ve had some bad experiences in the past then work through them, learn from them and get started!
Where are house prices heading? For most Australian investors, property forms a major part of our net wealth. A key asset allocation decision for many investors is whether to hold or sell an investment property, or if they haven’t taken this option earlier, whether now is a good time to invest in residential property. It’s a mixed bag The first thing to remember is that unlike a company share, property is not a homogenous asset. The value of a property varies depending on its location, individual characteristics and local demand. This is quite different to a BHP share that is the same wherever you buy it. Movements in house prices vary from place to place. For example, in the year to March 2008, median house prices rose 17.0% in Adelaide, but only 1.8% in Sydney. Within the Sydney area, coastal properties have shown some growth whilst the western suburbs have lost value. SE Queensland house prices have continued to show solid growth.
Will there be a renewed upturn in house prices? Research suggests that the demand for residential property in 2009 and beyond will be slower due to the effects of the global credit crisis and housing affordability issues, despite lowering interest rates. However, high population growth, job growth, wage increases, and tax cuts should see prices continue to rise, albeit at levels closer to inflation. Continued low vacancy rates may also lift rental yields and further stimulate price growth. Basic economic theory tells us that where there is strong demand and limited supply, prices will rise. You will hear these arguments loudly stated by the real estate and property development sectors. However, there is always another side to every story. The key question for investors is to decide if residential property is good value today and what the prospects are for the future.
Is housing overvalued? Analysts use a number of measures to evaluate property prices and by all of them housing looks very overvalued.
One measure compares average house prices to average wages. Since 1965 the long-term trend has steadily increased from under 5 to about 7.5. Since 2000 the ratio has rocketed up to about 9 meaning an average wage earner on about $57,000 will need to pay $513,000 for a house. Prices would need to fall by about 19% to reach more ‘normal’ levels. Another measure of value is the Price Earnings (P/E) ratio more commonly used in share analysis. This compares rental income (the earnings) to property value (the price). Prices would need to fall by about 29% (or rents rise dramatically) for the P/E ratio to return to the long-term average. Since the 1920s Australian house prices have risen on average by about 3% a year (after inflation) - pretty much in line with GDP growth. To revert to their long-term trend house prices would need to fall by 19%. A 2007 international study concluded that only property in the UK is more overvalued than Australia. Our property is more overvalued than in USA, Canada, Japan, Germany and Hong Kong.
Why are Australian houses overvalued? It is difficult to identify why residential housing is valued so highly compared to other countries. The key factors appear to be: • The speculative housing bubble of the
mid 1990s to 2003 • The high degree of urbanisation in Australia and • Constraints on land supply in and around urban centers. Australia is unique in having about 95% of its population in a few urban centers where house prices are higher than in rural areas. Again demand and supply is the critical issue and it is lack of supply near urban areas that pushes up prices.
Reducing stamp duty or offering grants to homebuyers is not going to improve housing affordability. It will require increasing supply of land and policies to encourage decentralisation away from the major urban centers. Of course there will be local variations in the value and prices of housing but the overwhelming conclusion is that there are better investment opportunities in property overseas or in other asset classes.
What about the future? Demand (and therefore future prices) is impacted by affordability, yields and interest rates. The media has been full of the problems of young people being unable to buy their first home. Unfortunately firsthome owner grants and other subsidies only push up demand and prices. The main factors influencing affordability are house prices relative to income levels and interest rates. Since 2000 affordability has been falling and is at its lowest level since the early 1990s. Static rents and rising house prices has meant that the average gross rental yield is now between 3.9% and 5.3%for capital city houses and between 4.5% and 6.1% for units. After expenses and tax, residential property yields are about 1.5% – 2.0% whereas dividend yields on Australian shares average 5.0% and non-residential property yields are over 5%. However, continued low vacancy rates across the country are expected to drive strong rental growth and lift yields, making residential property a more attractive option. Remember investors choose where to invest based on the relative advantages of different assets and structures. The recent changes have made superannuation a lot more attractive for investors and may sway some to invest in super rather than in direct property.
www.insurancechampions.com.au
Purchased a boat? Expect an ATO audit Sadly, a low risk way of avoiding tax is to just stop lodging tax returns. This is because the ATO is still in the process of developing efficient systems to catch these people. The ATO is in the process of improving one of their systems known as “data matching”. Data matching is where the ATO checks to see whether people who are purchasing luxury items have lodged tax returns. For example, if you purchased a nice flash car and haven’t lodged tax returns for a few years - then expect an audit. The ATO is now concentrating on people who have purchased boats. So, if you have registered a boat with the local authority - then expect an audit. The ATO is only checking the States which means that it is best to register your boat in a “tax haven” like Canberra or the Northern Territory. Our Platinum Members can see the full details here. The ATO wants to identify taxpayers who have purchased high-value vessels and who have not lodged tax returns or who may not have declared all of their income. The ATO feels that ownership of a commercial or recreational marine vessel may be an indicator of conspicuous unreported wealth. The Tax Office says previously matched programmes in for
boats have identified that nearly 25% of identified taxpayers had at least one outstanding tax return. Your boat is electronically matched with sections of the ATO’s data holdings. This is to identify non-compliance with tax lodgements and payment obligations. The ATO call this operation: the Marine Vessels Data Matching Project. Now I rang up some of the registering bodies. They apparently don’t generally have details of the value of your registered boat. Therefore, even a pensioner’s $2,000 rowing boat is picked up. Hopefully the ATO will get experts in that can identify the expensive sounding boats. Records relating to approximately 160,000 persons or entities will be matched. What about commercial vessels that are rented out for huge profits? What about boats that are operated by agents? The agents are in trouble as well if they are not lodging tax returns. A similar project was advertised in Commonwealth Gazette No GN 25 on 28 June 2006.
You can get more information from Marine Vessels Project, Australian Taxation Office, 99 Burelli Street, Wollongong NSW 2500, (02) 4223 2254. Also have a read of the “Data Matching Program Protocol - Marine Vessels Project”. It sets details of the Project. Items covered in the publication include data collection issues, the matching process and actions resulting from the Project: Commonwealth Gazette No GN 28, 16 July 2008, page 2045.
Summary The Tax Office has already picked its way through luxury cars, racehorses, antiques, and private planes. This is just another cynical crowd pleasing attack on ‘conspicuous wealth’ of people that don’t match up with tax returns - either because they are wealthy people not lodging tax returns or not declaring all their income. Brett Davies (lawcentral.com.au)
Getting your super together If you have had many different jobs with different employers over your working career you will probably have superannuation accounts in many different funds. Apart from costing you extra in fees, there are more serious concerns of which you should be aware. Investment strategy Choosing the right investments for your situation is critical to maximising your retirement nest egg. Super is for the long term and just 1% extra in returns every year can make a significant difference. For example, if you were earning $45,000 and just contributing 9% of your pay to super, you would have $141,127 after 20 years if the fund earned 7% pa. If it earned just 1% pa more, you would have $16,409 more!
Paperwork More than one fund means more than one annual report and statement and more
than one account to keep track of. Apart from being a nuisance, the big danger is your super fund loses contact with you. There are billions of dollars in “lost” superannuation accounts in Australia with more ‘lost’ super accounts added to the list each month.
The Australian Tax Office has a database of “lost” members under their “SuperSeeker” service. You will need your Tax File Number and (ideally) details of past employers to enable them to search for lost accounts. They can be contacted on 13 10 20 or www.ato.gov.au.
Lost super
Alternatively a service is available that will search many “lost money” registers including super. service can be found on www.findmysuper.com.au.
Super funds have systems to identify members who are “lost”. It usually means they have had mail returned as undeliverable usually because you have changed address. But they can also declare your account as “lost” if your previous employer is no longer making contributions.
Whichever way you do it, the key is to get your super all together now and make it work for you.
The most powerful force in the universe! When you are investing over a reasonable period of time, the ability to earn “interest on interest” really is your friend. It means you are earning interest not just on your own capital, but also on the interest you earned last year. And over the long term, this might be phrased as “interest on interest on interest on interest on interest …”. A Simple Start Imagine we place $100 in an investment that earns 10% pa. At the end of one year, we’ve earned $10. Imagine we spend all the interest we receive. At the end of each year, our investment amount is back to $100. That’s simple interest. At the end of 10 years, we’ll still have our $100, and we will have received a total of $100 in interest.
interest of $11 in the second year, bringing the total to $121. If we keep going for 10 years, our investment will grow to $259.37 – that’s our original $100 plus $159.37 in interest.
would amount to $1,000 over their lifetime. Left to compound, that same investment would grow to $1,378,061. What a difference time and compound interest can make!
Time Is Money
The other critical factor is the actual rate of earnings. If the earnings rate dropped just 1% to 9% pa, our hundred-year investment would only grow to $552,904.
That may not seem so impressive, but the power of compound interest really cuts in over the long term. If we go back to our simple situation, and take the interest out each year for 30 years, we will earn a total of $300 in interest. But with compounding, the total interest earned would be $1,644.94.
Compound interest contains a power that Albert Einstein supposedly referred to as “the most powerful force in the universe”. When we earn interest on the interest, that’s what compounding is all about. If we re-invest the interest on our original $100, at the end of the first year we will have $110. At 10% pa, that will give earn us
A child born today could easily live to 100. Simple interest on a $100 investment
There are two other things we need to take into account - tax and inflation. They act as reality checks on our investment performance. Let’s assume investment earnings remain at 10% pa and are fully taxable. What will our $100 grow to over 30 years at different tax rates?
0% Tax
15% Tax (Super Fund)
30% Tax (Average Taxpayer)
45% Tax (Top Tax Rate)
$1,774.94
$1,155.83
$761.23
$498.40
As for inflation, even at a low rate of 3% pa, you’ll need $2.43 in 30 year’s time to buy something that costs $1.00 today.
Capital gains are only taxed when an investment is sold, so growth assets have an advantage over those that only produce income. They also cope better with inflation.
There are many ways of minimizing the effects of tax and inflation. Picking the right tax environment is clearly important.
Of course, seeking higher returns generally involves taking higher risk, but some
of those risks can be managed with an effective and professionally constructed investment strategy. Your financial adviser will assist with this and other investment strategies.
Coins & art in your Super Fund - lease them out? QUESTION: Our Super fund holds a range of low-tax low-income yielding but high capital appreciating assets in our portfolio. These are mostly works of art, rare coins, first edition books, and antiques. Our accountant wants us to seek some income yield on these assets. We read with interest your article on chattel leasing and how can we utilise the Chattel Lease at LawCentral to generate income. ANSWER: The Chattel Lease is invaluable as it enables income to be generated at a commercial rate from a passive capitalappreciating fund asset. As lawyers, we do not provide investment advice. However, we are seeing a greater demand amongst
trustees to prepare Chattel Leases and to lease out to non associates or to associates within the in house asset limits certain of the assets in the fund. The objective is to put the asset to work and to generate fund income. Income is generated by regular payments usually directly debited from the lessee’s bank account. A Chattel Lease prepared by Brett Davies Lawyers is an important document as it protects the asset and provides the mandatory record of the transaction that is required for compliance. The Chattel Lease ensures that the arrangement is arms length and on commercial terns by setting out clearly the responsibilities of the parties.
The agreement clearly outlines the assets and ensures that the payments are clearly defined and importantly that that the asset is ultimately recoverable by the trustee. After all, possession is nine tenths of the law. The Chattel Lease is particularly suited for non associate arrangements. With associated arrangements such as leasing to a member or an associate of a member then if the asset value exceeds 5% there is the risk of non compliance as business real property only comprises real estate. A Chattel Lease is a must have agreement if the trustee proposes to release any asset of the fund into the possession of another person. Brett Davies, Lawcentral.com.au
Disclaimer The information in this newsletter is of a general nature and is provided for illustrative purposes only. It is not intended to constitute advice of any kind. The information has been prepared without taking into account the objectives, financial situation, needs or circumstances of any particular person and should not be relied upon. You should not act on the information, rather it is designed for you to contemplate whether you should obtain professional advice if an issue may be of relevance, having regard to your objectives, financial situation, needs and circumstances. Authorised representative no 282461 of AAA Financial Intelligence Ltd AFSL: 312478
©2008 Copyright Insurance Champions Designed by 7 Degrees Creative . Website: www.7dc.com.au