1. SMSF Borrowing
2. The Big Picture
3. Personal Injury Settlements
4. 50 Great Ways to Help You Save Money!!!
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Portfolio Managers'
Investor Insights
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Welcome to the November, 2009 edition of Investor Insights.
Please feel free to forward this newsletter to any friends or associates that may find the information beneficial.
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Bank v private funding
Most of the major banks now offer SMSF loan products for ‘instalment-warrant’ style borrowings. However, we are noting more and more advisers who are attracted by the related party loan arrangements. This could be a loan from a family trust, company or even one or more SMSF members. In many cases these related party loans could in turn be funded by a typical bank loan. The ATO has confirmed that the borrowing laws do not preclude an SMSF trustee from borrowing from a related party lender, provided all other laws are complied with. Therefore, if properly implemented, related party borrowings are legitimate and can be an alternative to a direct bank loan to an SMSF. Benefits of private funding arrangements The terms on which an SMSF trustee borrows from a related party must be arm’s length, so it should not make any difference to an SMSF whether it borrows from a bank or related party. However, private funding arrangements generally offer greater flexibility. Flexibility A related party may, for instance, source moneys to on-lend to an SMSF from its existing cash resources or borrow from a bank (including via an existing loan facility) or a combination of these. Being able to draw on equity in non-super structures is an advantage for clients who are restricted by the contribution caps. By drawing on non-super assets, clients can harness gearing within their SMSF. The arm’s length interest is then payable by the SMSF to the related party lender. Many find this advantageous compared to paying the same interest to a bank. If the related party borrows to on-lend to the SMSF, the related party’s own borrowing is not subject to SIS laws which means it can borrow against any assets it chooses, including the family home or other assets outside the fund. More options for refinancing The ATO is currently considering whether re-financing is permitted under s 67(4A). Some argue it is not since it is not a borrowing to acquire an asset. There is also a general concern that, if any restrictions were introduced in future to stop or limit SMSF borrowing, any existing borrowing would hopefully be ‘grandfathered’ and it may become critical that the loan stays in place to preserve any special grandfathered status. SMSF trustees who borrow directly from a bank are limited given the possibility that re-financing is not permitted under s 67(4A) (or if loans cannot be refinanced to remain grandfathered). On the other hand, if they have borrowed from a related party, the back-end finance behind the related party could be re-financed and this may be able to be passed on to the loan to the SMSF. Process when borrowing from banks Bank loans can give rise to delays involved with the approval process and the establishment costs also need to be considered (including the bank’s lawyers’ fees to review and sign-off on all documents). A related party might also allow greater flexibility for providing finance in respect of certain assets such as shares. SMSF trustees must borrow from a related lender on arm’s length terms, however the fact that a number of banks currently do not offer a facility for shares does not necessarily mean the arrangement is not arm’s length. The courts have said of the expression ‘arm’s length’ (for the purposes of that term in the SIS Act): a useful test to apply is whether a prudent person, acting with due regard to his or her own commercial interests, would have made such an investment. [APRA v Derstepanian (2005) 60 ATR 518]. Potential for the related lender to make a profit Related parties who lend to SMSFs often make a profit, even if the related party must borrow to on-lend. This is because the related party’s own cost of finance is generally lower than the interest rate it charges the SMSF (which, when benchmarked to what SMSFs are charged in the market, will generally reflect a premium due to the strictly limited recourse nature of SMSF loans). In effect, a related party often ‘marks-up’ the interest rate when it on-lends. Of course, SMSF trustees must comply with the sole purpose test and should not borrow to help a related entity make a profit. However, provided the terms are arm’s length and the borrowing and asset purchase are consistent with the SMSF’s investment strategy, this should not create concerns about the sole purpose test, even if the loan happens to return a profit to the related party. Managing a private funding arrangement When borrowing from a related party, clients should be aware that the ATO has stressed the importance of borrowing on arm’s length terms (see TA 2008/5 and the ATO’s Q&A guide to super borrowings). A related party borrowing could attract closer scrutiny and clients and advisers should be prepared to implement the loan carefully. However, this can be managed and if done properly, should not create undue risks. Clients who have collected and retained objective evidence of what is offered to SMSFs in the market place (eg, loan-to-value ratio and interest rate, etc) will be able to demonstrate that their loan is indeed on arm’s length terms. Of course, the parties should document the loan via a binding loan agreement to show there is a genuine loan and that they are dealing at arm’s length. This should be prepared by lawyers with expertise in SMSF borrowings. We have found many standard documents contain numerous clauses which would infringe the SIS laws and may give rise to undue tax risks. SMSF loan documents must also carefully tie in with the unique role of the ‘bare trustee’ (aka security trustee) so it is preferable to have the entire arrangement documented by lawyers with SMSF and tax expertise. Source: DBA Butler
To learn more about SMSF borrowings, Portfolio Managers is having a seminar on this topic on 9 November. Please contact your Financial Adviser if you would like to attend.
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HERE'S A THOUGHT . . .
"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." ~ Winston Churchill
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The Aussie dollar evokes different emotions and reactions from consumers, investors and businesses. For consumers the high level of the currency is viewed positively, the perception being that it will translate to cheaper international travel and cheaper imported goods.
But the strong Aussie certainly isn’t viewed as an unambiguously positive event by investors and businesses. Retailers benefit from a firmer currency as do media companies. But for those companies with substantial overseas operations, the firmer Aussie dilutes foreign revenues and profits. And for Aussie businesses more broadly, the higher currency creates challenges for the rural and tourism sectors, manufacturers and exporters more generally. Some may believe that the firmer currency is a temporary development. Perhaps. But there are a number of factors to consider. Certainly the Aussie dollar has only recently returned to the US90 cent range after a sojourn to the low US60’s earlier this year. And the currency is being supported by the fact that our economy is doing a lot better than others. Interest rates in Australia are also higher than overseas and are rising. So it is understandable that some may see the firmer dollar as a temporary development while other economies catch up. But there are also the longer-run factors at work. Australia is arguably the biggest beneficiary from industrialisations underway in China and India. Those economies will place huge demands on the world’s resources in coming years – and many of those resources or raw materials will be supplied by Australia, Since the Aussie dollar floated in December 1983 it has averaged US72 cents. But over the past three years, the Aussie dollar has been much higher, averaging just under US82 cents. And for a fifth of that time the Aussie dollar has held above US90 cents. The bottom line is that investors and businesses need to redo their sums. If the Aussie averages US80c or US85c in the future, it will substantially boost prospects and profitability for some firms while actually bringing into question the potential viability of other businesses and even entire industries. Both the Reserve Bank Governor and Treasury Secretary have warned of the major structural changes that lie ahead for Australia as a result of the industrialisation underway in China. More Australians need to take heed of the warnings. Source: CommSec
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HERE'S A THOUGHT . . .
"The world is all gates, all opportunities, strings of tension waiting to be struck." ~ Ralph Waldo Emerson
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Personal injury is not a topic we like to talk about but unfortunately for many, the risk of personal injury seems to be increasing. We often see stories in the printed media, radio and television reporting of someone suffering serious injury, often as a result of the deliberate or unintended conduct of another person.
The legal system provides for financial compensation to be awarded in cases where an injury has been caused by the negligence or breach of a statutory duty of another person or entity. Depending in the circumstances of an individual case, substantial damages may be awarded by way of compensation. In some cases this may amount to millions of dollars. So, what happens to this money when an award has been made as compensation resulting from an injury? The compensation may be given directly to the injured person, or to their legal personal representative if they are no longer able to manage their financial affairs, or the injured person’s affairs may be managed by the Public Trustee. As compensation will generally include an amount to replace future earnings, it is essentially the pre-payment of a wage or salary a person might otherwise have reasonably expected to have earned had they not been injured. That being the case, the prudent management of the damages payment is paramount as it will be expected to last for many years to come. In certain circumstances, the contribution of personal injury compensation to a superannuation fund was seen as an appropriate strategy for managing the payment of an ongoing income stream in a tax effective manner. With the recent introduction of limits on the amount that can be contributed to superannuation as a non-concessional contribution (i.e. an “undeducted” contribution), the benefits of contributing compensation payments to a superannuation fund may have been overlooked. The taxation laws make special provision for people who receive a damages settlement and seek to contribute it to a superannuation fund. Provided certain conditions are met, a person may be able to contribute many millions of dollars to superannuation, and then immediately commence drawing a tax–free pension from that superannuation fund. In general terms, an “eligible personal injury payment” may be either of the following: § A payment made under a written settlement agreement or claim for damages for personal injury or a court order for such a claim, or § A workers compensation payment taken as a lump sum. For a compensation payment to be excluded from the non-concessional contribution “cap”, at least two legally qualified medical practitioners must have certified that because of the personal injury, it is unlikely the injured person can ever be gainfully employed in a capacity for which they are reasonably qualified because of education, experience or training. To qualify for the compensation payment to be excluded from the non-concessional contribution cap, the contribution must be made within a prescribed time frame. Furthermore, an election notice must also be provided to the superannuation fund to which the contribution is being made. It is also generally unlikely that a person aged 65 or older will be able to contribute under this provision. Once a contribution is made to a superannuation fund, it is preserved, meaning that it can’t be accessed until a condition of release has been met. There are a number of conditions of release including reaching age 65, retirement on or after reaching preservation age (currently 55), and in the event of permanent incapacity. The definition of permanent incapacity is virtually identical to that mentioned previously. In general terms, a person could receive a compensation payment, make a contribution to a superannuation fund, and then commence to drawn a very tax effective pension from that superannuation fund. The rules around making contributions under the personal injury election, and the commencement of a pension or income stream are subject to both taxation and superannuation laws, and the specific rules of the superannuation fund to which the contribution is intended to be made. With this in mind, professional financial planning advice should be sought before acting. Source: Professional Investment Services
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HERE'S A THOUGHT . . .
"Ability is what you're capable of doing. Motivation determines what you do. Attitude determines how well you do it." ~ Lou Holtz
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Here are some great ways that can help you better manage your finances and save you thousands each year!
Personal finances tips: 1. Before you can start to save you should always work out your spending habits and how much money you have left at the end of each month. Click here to help you create a realistic budget that could save you thousands! 2. If starting a budget is too difficult or daunting, start by keeping a diary. Commit to carrying around a notepad in which you record all your purchases. This should include everything from your insurance bills to your morning coffee. Each entry only needs a date, a description and a dollar value. After a month, review your records and this can form the basis of your budget. Once you can see exactly where you are spending all your money, it will be easy for you to identify which purchases you could easily trim off to save a little every month. Paying off your bills, loans and credit cards: 3. Do a credit card check - Go to www.infochoice.com.au or www.canstar.com.au to find out if there are better offers. 4. Avoid late fees and penalties when you forget to pay your bills on time by setting up a direct debit through your bank account. 5. If you make fortnightly mortgage repayments instead of monthly repayments you can make an extra monthly payment each year. With one extra annual payment, you could dramatically reduce the repayment time of your mortgage! 6. Given variable interest rates have fallen considerably in the past year, if you keep paying the higher repayment you'll wipe years off your loan. 7. Check out an offset account in conjunction with your mortgage repayment and use that account to pay bills instead of your every day savings account which only earns a minimal interest rate. Make the most of tax time: 8. Organise all your receipts (in a shoe box) so you can claim your full allowable deductions during tax time. 9. If you have school-age children, keep all your receipts as you may be able to claim the Education Tax Refund. 10. If you add to your super from before-tax money (ie. make a concessional contribution) you could reduce your annual tax bill! Insurance and superannuation tips: 11. Go to www.iselect.com.au to choose the best health fund for you and your family. 12. Insure your home, not the land. Although your home and its contents are at risk from fire, theft, windstorms and other perils the land your house sits on, is not. 13. Stop smoking today. Besides the cost and it being bad for your health, smoking accidents account for more than 23,000 residential fires every year and you will pay higher premiums on your insurance as well. In addition, some insurers offer reduced premiums if no-one in the home smokes. 14. CommInsure1 and AAMI are the only two insurers in the Australian market that offer total building replacement cover – regardless of the cost. 15. Life insurance can be cheaper through your super fund. 16. If your total income is less than $60,342, and you make a $1,000 after-tax contribution to super by 30 June this year, the government could give you up to $1,000. Household related savings tips: 17. Sign up to Skype and get free phone and video calls over the internet. 18. Check out www.partykids.com.au for kids party ideas. 19. Find a bulk-billing doctor. 20. Check out the Chemist Warehouse at www.chemistwarehouse.com.au. 21. Porridge is cheaper and more filling than cereal. It’s also more comforting during winter! 22. Plan meals for the week. 23. Don't buy lunch at work – take your own. You can save hundreds of dollars doing this. Gas, electricity and water savings tips: 24. Switch off your hot water and all electrical appliances when on holidays. 25. A fan-forced oven uses less energy than a conventional oven. 26. Just before you go to bed or when you go out, turn off all lights and any power points for unnecessary appliances eg. TV, stereo units. 27. Use energy-saving light bulbs. 28. Front-loading washing machines use less energy and water than top-loading automatics. 29. A half-filled dishwasher uses the same amount of energy as a full load, so fill it to capacity before each wash cycle. 30. Fit an AAA-rated low-flow showerhead. 31. Keep a bucket in your bathroom and use it to collect the water while waiting for the shower to warm up. You can then use the water collected to water your garden. 32. Take four-minute showers or less. 33. Fix leaking taps straight away. If you have to wait for a plumber, place a pot plant under it to reduce water wastage. Transport and auto savings tips: 34. Use supermarket petrol discount coupons. 35. Fill up on Tuesday or early Wednesday. 36. Avoid hard acceleration and braking when driving. Slower speeds give better fuel economy and also save lives! 37. If you regularly use public transport, buy a weekly, monthly or quarterly ticket. General shopping tips: 38. Write a grocery list before shopping and stick to it. 39. Look for coupons and vouchers that give additional discounts at www.hotdockets.com.au, www.clevercoupons.com.au, www.whypayfullprice.com.au, www.coupongold.com.au and www.valuvouchers.com.au. 40. Over-60s, where possible, ask for a seniors discount and call Senior Shopper offers on 1300 366 265 to find the best deals. 41. Buy in bulk from the growers or farmers markets. 42. Buy birthday and Christmas presents early. Mid-season, end of financial year and mid-year clearance sales are now on. Holidays and travel tips: 43. Camping is the best budget holiday. 44. For $1 a day, you can get a bargain one-way driving holiday at www.standbycars.com.au. 45. Book discounted flights with Jetstar on their Friday Frenzy between 4-8pm. Virgin Blue also have "red-hot" deals. 46. Online booking sites like www.wotif.com.au and www.lastminute.com.au are perfect for spur-of-the-moment deals. Entertainment and lifestyle tips: 47. Go to the movies on "cheap Tuesdays". 48. Cut-back on your alcohol intake. A month of not drinking any alcohol will save money and can also improve your health. 49. You can buy discounted wines and other alcoholic drinks at www.langtons.com.au, www.graysonline.com.au, www.sterlingwine.com.au or www.wickman.net. 50. Shave your head and save hundreds a year on haircutting fees. You can also raise much needed funds for the Leukaemia Foundation by signing up to the World’s Greatest Shave campaign! |
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This newsletter contains general information only and does not take into account the investment objectives, personal circumstances or financial needs of any particular investor. You should therefore obtain professional financial advice before making any investment decision based on the information provided in this document. In the event that this newsletter contains information about a particular financial product, you should also obtain a Product Disclosure Statement in respect of that product prior to making any decision to acquire that product.
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