Solutions Newsletter - September 09, Edition 81

Quote of the Month

An investment in knowledge pays the best interest.

Benjamin Franklin

When The Going Gets Tough

If I’ve heard it once, I’ve heard it a hundred times this past twelve months and each time it breaks my heart a little more.  That is, learning about the losses people have suffered in the share market and/or with their superannuation. 
We’ve all been affected at some level but when I hear of folks having to put off retirement or new mums forced back to work early, it really strikes a nerve.  However, it’s important to note the positives – yes there are positives. 

For one thing, if you’ve experienced losses than you had money to lose.  Good for you.  Secondly, it was a Worldwide Global Crisis – diversification or different investment types may have lessened the blow but it still would have had an impact.  Hopefully this does not make you shy away from investing.  Investing is a long-term strategy and for those who didn’t have to sell their assets, the losses at this stage, are only on paper.  Finally, take the opportunity to learn from it.  Whatever that lesson might be for you.  Whether it be to diversify more, change stock types or if you no longer have faith in shares, invest in property.

Most importantly though, get educated.  There is a level of risk in all investment avenues, sound knowledge will help you make calculated decisions rather than blind gambles.  Remember, the biggest risk of all is to do nothing.  So when the going gets tough, the tough get educated and choose to secure tomorrow… today!

Letter of the Month

Reader Question:

I hate to admit it but I'm afraid to invest.  I don't understand how it works and I'm frightened I'll make a mistake and lose what little savings I do have.  Where do I start and is there anything you can suggest to squash my fears?
M. Wormleton


Well, there may or may not be an instant cure for your fear but let me just say that's it common to feel this way when undertaking something new that is out of your comfort zone.  It's encouraging to see that even though you have these fears your question 'where do I start?' tells me you are not going to let these stop you.  A few ways you can help manage these feelings are:
a)  Learn what you can about your investment, there are never any guarantees but the more you know the less the risks will 'spook' you.
b)  Get insured - there is a range of ways to protect yourself and your investments, everything from landlord insurance for investment properties to income protection insurance for yourself.  Insure what you can and you will sleep better for it.
c) Have a plan - Go in with a clear plan of what you hope to achieve.  If you can keep the reasons for why you are investing at the forefront of your mind, it will help you weather the rougher times and remind you it is worth it.

As for where to start, I suggest you ask yourself some key questions:
1.  How much of a deposit do I have and what can I comfortably commit to investing each week?  (you don't want to overextend yourself, this will just intensify your fears)
2.  Will I need to 'cash out' in under five years?  (if you are likely to need the money you are investing in a hurry, if your circumstances are uncertain or if you have a short term goal then you may need to consider a more liquid investment such as a managed fund or share purchase where the sale of the asset can be done quickly).  Mind you, investments offer the best returns over the long-term so try to factor this into the equation. 
3.  What am I more excited by?  (it's important to invest in an area that you are interested in.  If you believe in property and feel this is a more secure investment, you will naturally become excited by this and get more involved.  If following company developments and watching CNN share reports is where your interest lies then the stockmarket is for you.  If neither spark any interest, look for a 'set and forget' investment type - managed funds or a property handled by a professional property manager may be the way to go).
4.  Why am I investing?  (people invest for a variety of reasons, determine why it is important to you and continually remind yourself of this).

Once you have the answers to these questions, the right investment vehicle will present itself.  If you are still unsure, don't be afraid to ask for assistance to help find the investment strategy that works for you.

Take Note: Trust Deeds & Capital Gains Tax

Trustees will need to review their trust deeds following recent decisions regarding the taxation of capital gains made by trusts.     

Background
The meaning of the words 'a share of the income of the trust estate', as used in the 1936 Tax Act has long been the subject of debate.

Recently, this issue was litigated in Bamford versus The Commissioner of Taxation.    
In that case, the Federal Court ruled in favour of Bamford, that the trust deed will determine what constitutes 'the income of the trust estate'. The effect being that if a trust deed allows the trustee to treat a capital gain as income, then the capital gains, where they are distributed, will be assessed to the beneficiary who receives those capital gain distributions. 

The Tax Office has announced that it will appeal this decision in the High Court.  Until this appeal is resolved, the Tax Office has announced, via a Practice Statement released on 20 August, that it will continue to apply the Commissioner's view of 'a share of income of the trust estate'. That view is that what the trust deed says will not matter. The meaning of 'the income of the trust estate is tax law income (which excludes capital gains). By way of example:  

• The tax liability for a trust's capital gains would follow the distribution of the non-capital gains tax income of the trust in proportion to the distributions of that income. Therefore, a beneficiary who is not entitled to receive a capital gain could therefore be taxed for it, and
• Where non-capital gains income is made by the trust but is not distributed, any capital gains made by the trust will be taxed to the trustee at 46.5% regardless of who the capital gain was actually distributed to.

Under the Tax Office approach, what the trust deed says will not matter.

Recommended Action:
In light of the Bamford decision, to provide maximum flexibility it is important for trustees to review their trust deeds and ensure that they contain a power for the trustee to determine whether receipts are to be treated as capital or income.  This will allow trustees to most favourably deal with all types of income earned by the trust.  

Source:  Australian Taxation Reporter

Australian Dollar Rises to 13 Month High

During early Asian deals on Wednesday, the Australian dollar rose to a new 13-month high against the US currency driven by a rise in regional stocks. The aussie also climbed to a 12-week high against the Canadian dollar and a 6-day high versus the European currency.

Led by gains in energy, materials and financial stocks, the Australian market rallied sharply in early trades today, and despite turning a bit range-bound subsequently, remains quite buoyant with most of the front line stocks holding their gains.

The benchmark S&P/ASX 200 index is trading up 57.3 points, or 1.2%, at 4,721. The broader All Ordinaries index is trading at 4,729, up 57.9 points, or 1.2%, over its previous close.

Against the US dollar, the Australian dollar edged higher to 0.8791 during Wednesday's early Asian deals. This set the highest point for the pair since August 22, 2008. If the aussie-dollar pair gains further, 0.917 is seen as the next target level. The pair that closed Tuesday's North American session at 0.8737 is currently trading at 0.8769.

The Australian currency showed strength against the European currency during today's early Asian deals. At 7:20 pm ET, the aussie reached a 6-day high of 1.6860 against the euro, compared to 1.6939 hit late new York Tuesday. The euro-aussie pair is presently trading at 1.6906 with 1.672 seen as the next target level.

Source: www.rttnews.com

Super Alert!! Too Much Super Can Mean Extra Tax

Caps apply to contributions made to your super fund for a financial year. Any super contributed over the cap amount is subject to extra tax. The cap amount and how much extra tax you pay once you exceed it, depends upon whether the contributions are:

Concessional - which are generally made to a super fund for or by you in a financial year and are included in the assessable income of the super fund:   employer contributions (including the 9% compulsory employer contributions known as Super Guarantee contributions), salary sacrifice contributions, personal contributions claimed as a tax deduction (mainly used by self employed people). 

Non-concessional - which are generally made to a super fund by or for you in a financial year and are not included in the super fund’s assessable income:   after-tax personal contributions where a tax deduction is not claimed, spouse contributions, child contributions.

** The Federal Government co-contribution does not count towards either cap.

From 1st July 2009, the maximum amount you can contribute to super from pre-tax income, without incurring additional tax of 31.5%, has halved.

	Concessional cap *	Transitional concessional cap*	Non-concessional cap
2009-10 financial year	$25,000	$50,000	$150,000
2008-09 and 2007-08 financial year	$50,000	$100,000	$150,000
Tax on amounts over the cap	31.5% (in addition to the 15% paid by the super fund)	31.5% (in addition to the 15% paid by the super fund)	46.5%
Other information	Any concessional contributions in excess of the cap will also count towards the non-concessional contributions cap	Any concessional contributions in excess of the cap will also count towards the non-concessional contributions cap	If you are under age 65 at any time during the financial year the contribution is made, you can bring forward two years of contributions, effectively allowing you to contribute up to three times the cap at once, or at any time during the three financial years.

* If you are 50 at any point during the financial year, the higher cap will apply to you.

*The $25,000 concessional cap will be indexed annually from 2010-11 onwards to average weekly ordinary time earnings (AWOTE) and rounded down to the nearest multiple of $5,000.

If you are considering making extra contributions to super, ensure you understand all the implications. 

Source:  www.ato.gov.au

Property Investment: Don't Buy It, Build It!

If you're considering entering the investment property market, have you thought about building a new home rather than buying an existing one?

The benefits of building a brand new investment property are as numerous as they are convincing:

Lower cost base: Building a new home is considerably more affordable than buying an established property, requiring less capital and providing a smoother entry point.

Greater return on investment: Starting your investment from a lower cost base increases your rental yield. Current strong rental prices will greatly increase your profit margin, and with historically low vacancy rates supporting strong rental yields, your return on investment is greatly improved.

Building your portfolio: As well as being a more affordable way to expand your portfolio, building an investment property also maximises the value of your portfolio in relation to your existing loans. Lowering the loan to value ratio (LVR) of your portfolio effectively creates more equity, giving you more bargaining power with the banks for future investments.

Lower repairs and maintenance costs: Covered by new home warranties, your repairs and maintenance costs are lower.

Tax benefits: Established homes do not attract the same level of depreciation benefits as new properties. New homes are eligible for a much broader suite of depreciation benefits, resulting in significant tax advantages.

Lower Stamp Duty:  On existing properties, stamp duty is calculated on the entire purchase price whereas house and land packages calculate stamp duty on the land component only.

Until Next Time...

So as the dust settles this month (literally, if you've been part of the dust storm on the East Coast), we wish you all the  best with your financial cleanup.  We hope you take our advice and seek to further your own education - which could range from reading and research to talking with professionals like Rubicon and asking the many questions you might have.  Remember, when we stop learning and growing we stop truly living! 

Here's to a prosperous end of year quarter for you and your family.  Although we say it often, it doesn't make it any less true, the best years are ahead!

The Rubicon Team