1. In-House Assets
2. Insurance - Inside or Outside Super
3. Is Heart Disease in Your Genes
4. Debts.... They Grow Up So Fast
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Portfolio Managers'
Investor Insights
December 2009 - January 2010
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Welcome to the December 2009 - January 2010 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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One of the attractions of a self managed super fund (SMSF) is the potential for the fund to enter into financial arrangements with related parties to the fund. Whilst the superannuation legislation specifically prohibits a SMSF from providing financial assistance, or lending money, to members or relatives of members (such as a member’s spouse or children), a fund may, subject to the governing rules of the fund, enter financial arrangements with other related parties (such as a business operated by the members, their relatives or business associates). Such arrangements are referred to as in-house assets.
An in-house asset is a loan to, investment in, or a lease arrangement over an asset of the SMSF, with a related party. Related parties as defined in superannuation law and can be extensive in its reach. A SMSF could conceivably purchase an office or industrial equipment which, in turn is leased to a members’ business. Alternatively, a SMSF could purchase shares in a related parties’ company, or make a loan to the business. There are some specific rules that affect a SMSF investing in in-house assets. Firstly, any such loan, investment or lease arrangement must be conducted on an arms-length basis and on commercial terms. That is, the arrangement should be formally documented, setting out the terms of the arrangement in the same manner as if the loan, investment or lease arrangement was being made with an unrelated third party. The relevant interest rate or lease arrangement must reflect a commercial rate. That is, not more and not less than would apply if the loan or lease were to be obtained from an external party. Where the investment is made in a business, the return on that investment (such as dividends) must be no less or no better than the return payable to other shareholders holding the same class of shares. Non-commercial arrangements risk being treated as “non-arms length” income to the SMSF which will be taxed at a rate of 45%. The second issue to consider in respect to in-house assets is that the total value of the in-house assets a SMSF invests in cannot exceed 5% of the market value of the total assets of the SMSF. Put simply, if the market value of a SMSF’s assets was $1,000,000, the maximum that could be invested in in-house assets would be $50,000. As a result of the downward movements in investment markets many superannuation funds have found that the overall market value of their fund’s assets has fallen. Where a SMSF has also invested in an in-house asset, the reduction in the overall market value of the fund may result in the fund now exceeding the in-house asset limit. Turning to the example quoted earlier, if a SMSF with total assets of $1,0000,000 lent $50,000 to a related party, the in-house assets represent 5% of the market value of the fund’s total assets. The fund’s assets have now fallen to $800,000, and the loan to the related party remains at $50,000, the in-house asset percentage has now increased to 6.25%. Where in-house assets exceed the 5% limit, the trustees must prepare a written plan that quantifies the level of in-house assets and outlines the steps the trustees will take to dispose of in-house assets in order to return the level of in-house assets to the prescribed limit. As a result of the economic events of the past two years, it is expected that many SMSFs will find themselves in a position whereby they are now in breach of the in-house asset limit. As such, action will be required to correct the position. Investing and managing investments in in-house assets can be complex. Trustees of SMSFs should use the services of their professional advisers when considering an investment in an in-house asset, or when managing existing in-house assets. Source: Associated Advisory Practices
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HERE'S A THOUGHT . . .
"To climb steep hills requires slow pace at first." ~ Shakespeare, Henry VIII
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There are several reasons why having insurance in a super fund may make good sense. Firstly, the premium for death and total and permanent disability (‘TPD’) risk cover is tax deductible and proceeds are exempt from capital gains tax (‘CGT’). Members incurring such premiums outside the fund may not entitled to a deduction but do get a CGT exemption.
The premium for income protection cover is also tax deductible but the proceeds are assessable to the fund. This is the same tax treatment as having this type of insurance outside a fund. Where premiums are claimed on the above insurance in a super fund, then an untaxed element can arise in relation to a lump sum payment which can result in more tax being payable on the benefit. For example, a death benefit lump sum that is paid to a non dependent such as an adult child may be exposed to a 31.5% tax rate based on the formula in s 307-290 of the Income Tax Assessment Act 1997 (Cth); this is one downside to claiming insurance in a fund. Having a fund pay for insurance however assists with cash flow. Many have reduced their non-essential expenditure and may therefore be without adequate insurance (as revealed by the recent Victorian bushfires). There have also been some recent developments impacting on insurance that clarify certain grey areas. The first relates to deductibility of premiums for TPD. From 1 July 2011, deductions for TPD will only apply to the extent of a ‘any’ occupation premium so the excess will not be deductible in the case of ‘own’ occupation TPD. The ATO’s draft SMSFD 2009/D1 clarifies that trauma/critical illness insurance can be held in a fund provided the proceeds are received and form part of the fund’s assets until a relevant condition of release (COR) eg, retirement after age 55. (An event such as cancer, stroke or heart attack, by itself, may not satisfy a COR, eg, a 40 year old may suffer a heart attack and re-enter the workforce after a short spell.) The ATO have therefore confirmed that trauma insurance can be held in a fund and that this can be consistent with the sole purpose test. Insurance can also be very helpful where an SMSF enters into a borrowing arrangement. Source: DBA Lawyers Pty Ltd
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HERE'S A THOUGHT . . .
"Worrying is like a rocking chair: it gives you something to do, but it doesnt get you anywhere." ~ Unknown
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When Tania Curtis was told that she had an 80 to 90 per cent blockage in her left main artery and a blood clot lodged in her heart, she thought the angiogram operator at Sydney’s Sutherland Hospital was joking.
A week earlier, the 47-year-old mother of four had been jogging with her personal trainer around an oval in Kurnell when she experienced a sharp pain in her chest – “like a bolt of lightning” - that radiated down her left arm. While the pain lasted only a few minutes during which she “turned grey”, the trainer sent Tania home and told her to get a check-up before exercising again. As fate would have it, Tania already had a doctor’s appointment booked for the next day. And while her electrocardiogram and blood tests came back normal, the doctor fast-tracked an appointment for Tania to see a cardiologist. Tania was convinced that the episode in the park was just a bad bout of indigestion, even when the cardiologist insisted she undergo an angiogram, which was booked in for 19 March 2009 - her 20-year wedding anniversary. But instead of spending that evening celebrating the milestones with her husband John and their children – Ryan, 19, Stephanie, 17, Lynden, 13, and Kathleen, 11 – Tania found herself in intensive care at Prince of Wales Hospital having undergone an emergency double bypass operation within hours of her angiogram. Eight months on, Tania is back in the pink of health and pursuing the fitness program that she had started six months before her life-changing episode in the park. “I came very close to dying and feel very lucky to be here,” says Tania. “My father Norm died from a heart attack in 1971 aged 38. When I was found out that I had to have open heart surgery, I was really concerned about how my mother, Dorella, would react. “Being a woman, I never thought this would happen to me. Women in their early 40s tend to put on weight in the tummy region as oestrogen begins to leave their bodies. The reason I started my fitness campaign was because I wanted to lose this weight, which I thought was to blame for some breathlessness I’d begun to notice when I walked briskly.” Tania, who has been a vegetarian since her mid 20s and doesn’t drink or smoke, says that her genetic predisposition made her a prime candidate for heart attack; it was just a matter of time. “My other arteries were perfectly healthy, so lifestyle factors weren’t to blame for my condition,” says Tania, who is now an Ambassador for the Heart Foundation. “I smoked when I was young but gave up 20 years ago. Had I kept smoking, like my father, or had a bad diet then this would have happened to me a lot earlier. “The cardiologist described my blockage as the ‘widow maker’. Had I not sought medical attention when I did, he says I would almost certainly have died. “Everyone’s signs of an impending heart attack are different. Some people experience a pain in the ear; others get breathless or have a heavy, crushing feeling in the chest. “My father had tingling pain for six months, which the doctors attributed to indigestion because he didn’t fit the profile of someone at risk of heart attack. “My advice is to listen to your body and if it gives you signs, no matter how subtle, that something’s not right, see your doctor. It’s better to have a heap of tests that come back negative than leave your family motherless or fatherless because you were too embarrassed to see a doctor about some seemingly trivial symptoms.” Tania says a CT scan, which is often covered by private health insurance, can rule out or confirm any artery blockages. “In light of our family history, I’ll make sure all of my kids get tested for heart problems when they’re older,” she says. Tania, who went back to her part-time job at Kurnell Public School After School Care a couple of months after the operation, says being fit not only helped her pull through the operation but also sped up her recovery. “The ambulance officer who looked after me on the trip from Sutherland Hospital to Prince of Wales said I had the best ECG results for someone with a 90 per cent blockage that he’s ever seen,” says Tania. “I didn’t really have time to get too upset between when I was told about my heart condition and the operation because everything happened so fast. “What was really scary was waking up at 2am the morning after the surgery in a great deal of pain and not being able to talk or move my head because I had an incubation tube down my throat. All I could do was whistle. “Apparently, this had been left in because I was experiencing problems breathing and waking up after the anaesthetic.” The day after surgery, Tania was walking in her hospital room; within a week, she was convalescing at home. Tania said that while her husband had to go back to work straight away after her operation, she had a lot of help from her family – her two brothers, mum and sister-in-law – while she underwent eights weeks of cardiac rehabilitation as a day patient at Sutherland Hospital. The program involved a couple of hours of education per week, as well as several hours of supervised stretching and aerobic exercises. “In hindsight, blindly embarking on an intensive exercise program with my family history of heart disease, fitness level and a tummy fat was a bit foolhardy,” says Tania, whose only visible side effect from the surgery six months down the track is a deep vertical scar on her chest. “If you’re very unfit, it’s always a good idea to have a medical check-up before pushing yourself too hard on the exercise front.” Tania says she didn’t have to make too many lifestyle changes after her health scare, though she is still trying to shed a few kilos and now takes several forms of medication in addition to the blood pressure pills she was already on. She began exercising again in earnest after rehab finished and now jogs and does several boxercise classes per week. “The only real change I’ve made is to try not to worry so much about trivial things,” says Tania, “to let things wash over me, as my mother likes to say.” While the stark reality is heart disease remains the major killer of Australians, the good news is that most of us can make lifestyle changes to improve our heart health including: - maintain a healthy weight - be physically active - enjoy healthy eating - know your blood cholesterol and blood pressure levels - be smoke free Source: Zurich Life
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HERE'S A THOUGHT . . .
“Only those who will risk going too far can possibly find out how far one can go." ~ T S Elliot
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The 19th century belonged to Britain, the 20th century belonged to America and in the 21st century, China will rule the business world. Whether you like it or not, this transition is already underway and it will intensify over the coming decades.
Throughout history, no empire has managed to rule forever. Instead, empires rise to power, they prosper and spread their influence. Thereafter, they over-extend themselves and then break down in some fashion. In fact, all the glorious empires of history had one thing in common - a spectacular collapse. Now, there can be no doubt that America ruled the economic world for the better part of the previous century. However, this powerful nation has now entered a terminal decline. The recent credit crisis and the failure of some of the largest American financial corporations is compelling evidence that the world's largest economy is well past its prime. Today, America finds itself heavily in debt and to make matters worse, its demographics are also worsening. Unfortunately, the American leaders are attempting to postpone the day of reckoning by taking on even more debt! It is noteworthy that over the past year alone, America's federal debt increased by approximately US$2.1 trillion and its projected budget deficit over the next decade is now slated to be almost US$9 trillion! If this does not shock you, then consider the chart below which shows the total obligations of the US government. As you can see, over the past six years, American unfunded obligations increased by almost 50% from US$79 trillion to US$114.7 trillion! Alarmingly, over the same period, American government revenue rose by only 12%! Now, you do not have to be a genius to realize that no entity can continue to increase its liabilities by more than four times the rate of its revenue. If this spending frenzy continues, commonsense dictates that at some point in the future, the solvency of the American government will come into question. When that happens, foreign capital will flee America, interest-rates will skyrocket and we will witness an epic currency crisis.
Furthermore, it is worth noting that apart from the American government, the Federal Deposit Insurance Corporation (FDIC) is also in serious trouble. In an ironic twist of fate, the FDIC's Deposit Insurance Fund has spent so much money covering bank failures over the past three months that it has completely run out of money! This implies that there is no capital available now to insure bank deposits held at American banks. Given the horrendous deficits and ugly debt obligations, the American government is now left with the following options: a. Raise taxes (not sufficient to meet obligations) b. Cut back on spending (highly unlikely) c. Default (unimaginable) d. Print money (only viable option) Remember, America is the largest debtor nation the world has ever seen and the only way it can repay its obligations is through a process known as quantitative easing (euphemism for printing money). In fact, this stealth confiscation of savings is already well underway. A recent report published by the Federal Reserve revealed that the American central bank purchased half of the newly issued US Treasuries in the second quarter of this year. Needless to say, the Federal Reserve financed these purchases by creating dollars out of thin air - a short- term fix but a long-term disaster. Let us put it bluntly; the days of American hegemony are drawing to a close and within the next two decades, China will become the world's most dominant economy. If you are sceptical about our claim, you may want to note that twenty years ago, China's economy was worth only US$342 billion and as of last year, its GDP had grown to US$4.4 trillion; representing an annual growth rate of 13.6%. Now, if China succeeds in growing its economy by roughly 8% per annum over the next two decades, its GDP will grow to US$20.5 trillion by 2029. At that point, China may well replace America as the world's largest economy. It is worth keeping in mind that whereas American households are up to their eyeballs in debt, their Chinese counterparts have a savings rate of almost 40%! Furthermore, at a time when America and other nations in the West are struggling to stay afloat, China's foreign exchange reserves have surged to US$2.3 trillion! Now, we are aware that many commentators are criticising China for the sheer size of the stimulus unleashed by its leaders. In our view, this ridicule is baseless because instead of spending printed or borrowed money, at least the Chinese are spending their savings. In any event, the stimulus applied by the Chinese policymakers seems to be working. Over the past seven months, money-supply growth in China has risen by 26% and loans have surged by 32%. In turn, this inflationary orgy is creating a residential construction boom. All this economic activity is in stark contrast to America, where despite all the policy-actions, private-sector credit is contracting. Look. The Chinese economy is roaring along...and you can be pretty certain that the country's rapid growth will cause domestic consumption to explode. Already, roughly 900,000 cars are sold each month in China and by the end of this year, the Asian powerhouse will replace America as the world's largest market for automobiles. Interestingly, similar trends of rising consumption can be observed in various household items such as refrigerators, motorbikes, mobile phones and so forth.
So it seems to us that in this low-growth world, investors would do well to take a good hard look at high-growth opportunities like China. Source: Puru Saxena
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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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