Its common to sit down with a client couple in, say, their early sixties with, say $5m of assets between them. On enquiry you discover they have three adult children, all married, with young kids who are doing it a little tough and who would appreciate an early inheritance.
If Grandma lives to be say 90, then the kids will be in their sixties before any wealth passes to them.
It makes sense to extend the benefit of the family wealth now, while it can be appreciate. One good way to do it is to lend each child say $200,000 to pay off their home loan, with the interest on tick, ie not paid unless you ask for it. This saves the child the equivalent of nearly $27,000 of pre-tax income a year (ie say $14,000 of non-deductible interest). This cash can be used for school fees, family holidays, principal repayments or whatever your child prefers. It just cannot be wasted. The loan is documented as a loan and secured by a second mortgage (or at least a caveat documenting an un-registered second mortgage: this saves legal fees). In the ordinary course of things the loan remains outstanding forever. But if the child divorces the loan is called in, and is kept out of the marriage asset pool. Once the dust settles and its all over the loan amount is re-extended and life goes on again.
We find strategies like these are really helpful and make Grandma and Grandpa much happier than otherwise. Seeing the grandkids happy and doing well creates more pleasure than a bit more ink on a bank statement ever will.
Tuesday, December 02, 2008
Monday, February 18, 2008
Beware Damsels in Distress
By Adrian McMaster
On Wednesday of this week, the Eureka Report ran an article by James Frost in which he discussed the fact that the number of homes being offered for sale has risen in Melbourne. The article then discussed the relative merits of buying distressed property. It prompted my own thoughts on the matter, which may well be run in the ER this week. Regardless, here they are:
James Frost’s recent article on distressed residential property sales was fascinating. I was particularly intrigued by the psychology that can come into play when a property is being sold under duress. James quotes buyer’s agent Peter Kelaher:
Peter Kelaher adds: “It’s not unlike a deceased sale. They tend to attract a lot of people. In the 17 years I’ve been in real estate I’ve never seen a deceased estate go for a song. They’re always sold above market value. You need to be completely across property values in the area.”
Deceased estates always selling above market? This seems counter-intuitive. Aren’t the survivors desperate to sell for whatever they can get? Didn’t the guy who wrote Rich Dad Poor Dad make all his money from distressed sales? Don’t you always get a bargain from a distressed sale? Apparently not: and psychology explains why.
Behavioural finance, where psychology meets economics, has long told us that the two main culprits in financial mistakes are greed and fear. In the case of increased demand for distressed sales, greed is your guy. Greed is a given for we humans. We’ve always had it: it is one of the original ‘deadly sins’ and they were first published in the 6th century, and it is a fair bet that Pope Gregory pinched the idea from someone else before then. In the case of the distressed sale, greed has a willing accomplice: a sense of urgency. Potential buyers see or hear that the property is a distressed sale. Thus, they conclude two things: that they can buy the property for less than it’s worth (greed) and that it must be sold quickly (urgency).
Urgency works hand in hand with greed because it discourages people from doing their due diligence. Concluding that there is little time to think, people don’t think at all. The logic that ‘he who hesitates is lost’ may be true on the battlefield. It is not true in investment markets.
Creating a false sense of urgency is an old trick for people who would like to part you from your money. In June 2007, one of the large fund managers sent all their sales representatives an offer: they would pay double the usual commission on undeducted contributions that these ‘advisers’ could convince their customers to make before the 30 June (they hid the purpose a little by extending the offer to the end of August). You might remember that 30 June 2007 was the supposed ‘deadline’ for people to be able to make up to $1 million of undeducted superannuation contributions.
As the huge volumes that rolled into superannuation in June 2007 showed, this kind of approach worked. The technique once again let greed play Bonnie to urgency’s Clyde. In this case, the greed was on the part of the ‘adviser,’ who could double their cut from the contribution. The customers succumbed to the urgency, which was in most cases false: the ‘deadline’ had actually been announced almost twelve months previously. What’s more, following the 30 June an individual could still make $450,000 of undeducted contributions. The 30 June was only a ‘deadline’ for all those people who came into possession of a spare $1 million on the 29th. That is, both of them.
And, of course, as of September 2007 people with large amounts outside of super who want to invest it in within super no longer need to make an undeducted contribution at all. They (or some related entity) can simply lend the money to their SMSF, with the added benefit that, unlike an undeducted contribution, the loan can be recalled prior to their reaching the preservation age. People who now have to wait until they turn 55 or 60 to regain access to their money, as has to be done in the case of those who made undeducted contributions prior to 30 June 2007, are actually worse off.
In June 2007 no-one knew that the rules regarding borrowing within a superannuation fund would change in September. People who made undeducted contributions did so in good faith. But this is just another case of a sense of urgency being misplaced: when it comes to money management, the opportunity of a lifetime comes around about once a week. Never rush and – even more importantly - never let yourself be rushed. People who try to rush you are basically calling you greedy. Take offence and take your leave.
And if you are about to sell a property, here’s an obvious tip: regardless of why you are selling, let it slip to the agent that you really love the property but the interest payments are killing you. After all, whoever heard of an agent keeping secrets? Unless the buyers are reading this, their greed will do the rest.
Posted by Adrian
On Wednesday of this week, the Eureka Report ran an article by James Frost in which he discussed the fact that the number of homes being offered for sale has risen in Melbourne. The article then discussed the relative merits of buying distressed property. It prompted my own thoughts on the matter, which may well be run in the ER this week. Regardless, here they are:
James Frost’s recent article on distressed residential property sales was fascinating. I was particularly intrigued by the psychology that can come into play when a property is being sold under duress. James quotes buyer’s agent Peter Kelaher:
Peter Kelaher adds: “It’s not unlike a deceased sale. They tend to attract a lot of people. In the 17 years I’ve been in real estate I’ve never seen a deceased estate go for a song. They’re always sold above market value. You need to be completely across property values in the area.”
Deceased estates always selling above market? This seems counter-intuitive. Aren’t the survivors desperate to sell for whatever they can get? Didn’t the guy who wrote Rich Dad Poor Dad make all his money from distressed sales? Don’t you always get a bargain from a distressed sale? Apparently not: and psychology explains why.
Behavioural finance, where psychology meets economics, has long told us that the two main culprits in financial mistakes are greed and fear. In the case of increased demand for distressed sales, greed is your guy. Greed is a given for we humans. We’ve always had it: it is one of the original ‘deadly sins’ and they were first published in the 6th century, and it is a fair bet that Pope Gregory pinched the idea from someone else before then. In the case of the distressed sale, greed has a willing accomplice: a sense of urgency. Potential buyers see or hear that the property is a distressed sale. Thus, they conclude two things: that they can buy the property for less than it’s worth (greed) and that it must be sold quickly (urgency).
Urgency works hand in hand with greed because it discourages people from doing their due diligence. Concluding that there is little time to think, people don’t think at all. The logic that ‘he who hesitates is lost’ may be true on the battlefield. It is not true in investment markets.
Creating a false sense of urgency is an old trick for people who would like to part you from your money. In June 2007, one of the large fund managers sent all their sales representatives an offer: they would pay double the usual commission on undeducted contributions that these ‘advisers’ could convince their customers to make before the 30 June (they hid the purpose a little by extending the offer to the end of August). You might remember that 30 June 2007 was the supposed ‘deadline’ for people to be able to make up to $1 million of undeducted superannuation contributions.
As the huge volumes that rolled into superannuation in June 2007 showed, this kind of approach worked. The technique once again let greed play Bonnie to urgency’s Clyde. In this case, the greed was on the part of the ‘adviser,’ who could double their cut from the contribution. The customers succumbed to the urgency, which was in most cases false: the ‘deadline’ had actually been announced almost twelve months previously. What’s more, following the 30 June an individual could still make $450,000 of undeducted contributions. The 30 June was only a ‘deadline’ for all those people who came into possession of a spare $1 million on the 29th. That is, both of them.
And, of course, as of September 2007 people with large amounts outside of super who want to invest it in within super no longer need to make an undeducted contribution at all. They (or some related entity) can simply lend the money to their SMSF, with the added benefit that, unlike an undeducted contribution, the loan can be recalled prior to their reaching the preservation age. People who now have to wait until they turn 55 or 60 to regain access to their money, as has to be done in the case of those who made undeducted contributions prior to 30 June 2007, are actually worse off.
In June 2007 no-one knew that the rules regarding borrowing within a superannuation fund would change in September. People who made undeducted contributions did so in good faith. But this is just another case of a sense of urgency being misplaced: when it comes to money management, the opportunity of a lifetime comes around about once a week. Never rush and – even more importantly - never let yourself be rushed. People who try to rush you are basically calling you greedy. Take offence and take your leave.
And if you are about to sell a property, here’s an obvious tip: regardless of why you are selling, let it slip to the agent that you really love the property but the interest payments are killing you. After all, whoever heard of an agent keeping secrets? Unless the buyers are reading this, their greed will do the rest.
Posted by Adrian
Friday, February 15, 2008
Now is the time to buy shares
Early 2008 is a great time to be buying shares.
Sure, the market is all over the shop. But the fundamental indicators are sound and the weight of opinion is the market will continue to rise throughout 2008, even if there are some bumpy patches. Unemployment is nearly at an all time low, investor confidence is at an all time high. Rents are rising, suggesting property values will soon surge and the commercial property market is tight and getting tighter. Every month billions of dollars are paid as mandatory superannuation contributions, and they have to be invested somewhere, and the franking credit rules almost mandate it will be the Australian share market.
Australia is on India and China's doorsteps and is perfectly placed for trade and exchange: our resources sector is sitting pretty.
And have you ever met an unemployed doctor or dentist? Provided you pay your income continuance insurance premiums on time there is little chance your cash flow stream is going to dry up.
Economic history and economic theory predict the return on Australian shares will, probably, over time, be signficantly greater than the cost of funds: the 30 year average is now about 15% pa including capital gains. So on raw scores, before we consider tax, borrowing to buy shares makes sense. And when you factor in the favorable rules for capital gains, family trusts and super funds, borrowing to buy shares, or borrowing to pay deductible superannuation contributions, which are then invested in shares, makes a huge amount of sense.
Early 2008 is a great time to be buying shares.
Make an appointment to see Adrian McMaster at either our Brighton office or our Sydney office. Adrian can be contacted on 03 9592 9888 and adrian@mcmasters.com.au.
Apart from leading our financial planning practice, and being the author of the Doctors' Guide to Investing and the Doctors' Guide to Financial Planning, Adrian is a practising psychologist and runs Dover Financial Training, which trains accountants and others to be financial planners. Have a look at www.dover.com.au for more of Adrian's work. Adrian also writes a regular column for Alan Kohler's Eureka Report, which combines psychology and investment theory with quirky comments on what people do and why.
Sure, the market is all over the shop. But the fundamental indicators are sound and the weight of opinion is the market will continue to rise throughout 2008, even if there are some bumpy patches. Unemployment is nearly at an all time low, investor confidence is at an all time high. Rents are rising, suggesting property values will soon surge and the commercial property market is tight and getting tighter. Every month billions of dollars are paid as mandatory superannuation contributions, and they have to be invested somewhere, and the franking credit rules almost mandate it will be the Australian share market.
Australia is on India and China's doorsteps and is perfectly placed for trade and exchange: our resources sector is sitting pretty.
And have you ever met an unemployed doctor or dentist? Provided you pay your income continuance insurance premiums on time there is little chance your cash flow stream is going to dry up.
Economic history and economic theory predict the return on Australian shares will, probably, over time, be signficantly greater than the cost of funds: the 30 year average is now about 15% pa including capital gains. So on raw scores, before we consider tax, borrowing to buy shares makes sense. And when you factor in the favorable rules for capital gains, family trusts and super funds, borrowing to buy shares, or borrowing to pay deductible superannuation contributions, which are then invested in shares, makes a huge amount of sense.
Early 2008 is a great time to be buying shares.
Make an appointment to see Adrian McMaster at either our Brighton office or our Sydney office. Adrian can be contacted on 03 9592 9888 and adrian@mcmasters.com.au.
Apart from leading our financial planning practice, and being the author of the Doctors' Guide to Investing and the Doctors' Guide to Financial Planning, Adrian is a practising psychologist and runs Dover Financial Training, which trains accountants and others to be financial planners. Have a look at www.dover.com.au for more of Adrian's work. Adrian also writes a regular column for Alan Kohler's Eureka Report, which combines psychology and investment theory with quirky comments on what people do and why.
Monday, February 11, 2008
Trigger events: be careful drawing super benefits before age 60
The new simple super rules provide that a member can withdraw benefits:
(i)at age 55, if they have stopped work;
(ii)between ages 55 and 65 if they terminate an office or employment, which for example includes ending one part time employmentbut continuing another; and
(iii)at age 65, without a change of employment.
Benefits paid before age 60 may be taxed, subject to tax free concessions and 15% tax rebates. But benefits paid after age 60 will be tax free.
As a practical matter few clients withdraw their benefits before age 60. But if you do you should first speak to Brett Rose to clarify the tax results and make sure you do not pay too much tax. There are a number of simple strategies that can be used to reduce or elimate tax on benefits paid before age 60. Each case is different and specific advice should always be sought.
(i)at age 55, if they have stopped work;
(ii)between ages 55 and 65 if they terminate an office or employment, which for example includes ending one part time employmentbut continuing another; and
(iii)at age 65, without a change of employment.
Benefits paid before age 60 may be taxed, subject to tax free concessions and 15% tax rebates. But benefits paid after age 60 will be tax free.
As a practical matter few clients withdraw their benefits before age 60. But if you do you should first speak to Brett Rose to clarify the tax results and make sure you do not pay too much tax. There are a number of simple strategies that can be used to reduce or elimate tax on benefits paid before age 60. Each case is different and specific advice should always be sought.
Sunday, January 20, 2008
ATO View on breaches of the SMSF law
The ATO has historically taken a sensible approach where SMSFs have breached the law. The key points are disclosure and rectification. The auditor must disclose the breach and must also be able to show rectification. If everyone is back where they started and there is no misccief then the ATO seems to take a softline. Have a look at this extract from a recent ATO newsletter about a SMSF inadvertently borrowing:
Case Study - An SMSF Borrowing
Trustees of self managed superannuation funds must not borrow money or maintain an existing borrowing of money under the Superannuation Industry (Supervision) Act 1993 (SISA). There are a few exceptions to this rule and trustees should ensure that they understand these exceptions and do not operate outside of these.
Case study
A self managed superannuation fund had effected and maintained a borrowing. This borrowing did not meet any of the exceptions outlined in section 67 of the SISA.
As such the fund had a borrowing which had breached section 67 of the SISA.
The audit report prepared by the fund’s auditor for the year in question was qualified and an auditor contravention report was lodged.
No outstanding lodgments or other contraventions were identified.
Following discussion with their auditor, the trustees decided to make a full disclosure to the Tax Office. The Tax Office contacted the fund upon receipt of both the disclosure and contravention report. An undertaking was proposed by the trustees of the fund and accepted by the Tax Office. The terms of the undertaking were that the fund would repay the loan immediately with interest.
The trustees adhered to the terms.
Case Study - An SMSF Borrowing
Trustees of self managed superannuation funds must not borrow money or maintain an existing borrowing of money under the Superannuation Industry (Supervision) Act 1993 (SISA). There are a few exceptions to this rule and trustees should ensure that they understand these exceptions and do not operate outside of these.
Case study
A self managed superannuation fund had effected and maintained a borrowing. This borrowing did not meet any of the exceptions outlined in section 67 of the SISA.
As such the fund had a borrowing which had breached section 67 of the SISA.
The audit report prepared by the fund’s auditor for the year in question was qualified and an auditor contravention report was lodged.
No outstanding lodgments or other contraventions were identified.
Following discussion with their auditor, the trustees decided to make a full disclosure to the Tax Office. The Tax Office contacted the fund upon receipt of both the disclosure and contravention report. An undertaking was proposed by the trustees of the fund and accepted by the Tax Office. The terms of the undertaking were that the fund would repay the loan immediately with interest.
The trustees adhered to the terms.
Sunday, January 13, 2008
Saving money on life insurance
Life insurance is essentially a bet that you will hopefully lose. It is my firm intention to waste a portion of my money every year on my life insurances. Paying for a life insurance policy will be a waste of money in the event that:
a) you don't get sick; and
b) you don't die young.
So waste, waste, waste is my motto.
But it is important to only waste the necessary amount. Clients are often surprised by two approaches that we take to life insurances, particularly in the area of income protection insurance.
Income protection insurance is insurance that pays the holder a regular income if they unwell and can no longer work. It is sometimes called income continuance insurance or disability insurance. We regularly recommend that clients implement two strategies to reduce their income protection premiums.
The first is to take a 90 day waiting period (or longer if the client wishes). As the name implies, a waiting period is the period of illness before which the insurer will not make a payment. A 90 day waiting period means that the policy holder needs to have not earned income (including sick leave if they are an employee) for 90 days before the insurer will start to pay them. The insurer will start paying from the 91st day that the policy holder is unable to earn income due to an illness or injury that is covered by the policy (typically everything that is not self-inflicted or pre-existing).
Most advisers recommend that a 30 day waiting period be used. And if you get sick for 45 days, then you may be grateful for a such a policy. But the fact is that a period of 90 days off work is unlikely to cause extended financial duress for most of our clients. A period of less than 90 days can be coped with. It might mean talking to the bank manager about reducing/suspending loan repayments, using up savings or even popping things on the credit card. But none of these things are hard or expensive. Therefore, a short illness is rarely a calamity.
What is a calamity is when the client becomes unwell for an extended period which cannot be covered by the bank manager's goodwill and accumulated savings. And this is what should be insured against: economic calamity, not short term inconvenience.
On a similar theme, especially for our higher income clients, we sometimes recommend that they insure an amount less than 100% of their income. Most income protection policies will only pay 75% of the pre-claim income anyway, but we typically suggest that a doctor earning, say, $300,000 consider insuring only $150,000 of income. In the event of a claim, this lower amount will be paid. But again, $150,000 is a high income to receive and thus economic calamity is typically avoided. Once again, remember that the client is so unwell as to be unable to continue to work.
Many clients choose to insure every last available dollar of income. This is fine too - as long as they are doing it deliberately.
Both of our typical recommendations have the same effect on premiums. Premiums for 90 day waiting periods are considerably lower than for 30 day wiating periods. This is for the obvious reason: very few people are unwell for more than 90 days. Similarly, the amount that the insurer might need to pay in the event of a claim will determine the premium that they charge. So, our recommendations reduce the premium you pay on the bet you hope to lose.
Remember, most financial advisers are paid a percentage of the amount that their customers spend. Therefore, a cynic might suggest that there is little incentive for a commission-based adviser to recommend cheaper policies...
a) you don't get sick; and
b) you don't die young.
So waste, waste, waste is my motto.
But it is important to only waste the necessary amount. Clients are often surprised by two approaches that we take to life insurances, particularly in the area of income protection insurance.
Income protection insurance is insurance that pays the holder a regular income if they unwell and can no longer work. It is sometimes called income continuance insurance or disability insurance. We regularly recommend that clients implement two strategies to reduce their income protection premiums.
The first is to take a 90 day waiting period (or longer if the client wishes). As the name implies, a waiting period is the period of illness before which the insurer will not make a payment. A 90 day waiting period means that the policy holder needs to have not earned income (including sick leave if they are an employee) for 90 days before the insurer will start to pay them. The insurer will start paying from the 91st day that the policy holder is unable to earn income due to an illness or injury that is covered by the policy (typically everything that is not self-inflicted or pre-existing).
Most advisers recommend that a 30 day waiting period be used. And if you get sick for 45 days, then you may be grateful for a such a policy. But the fact is that a period of 90 days off work is unlikely to cause extended financial duress for most of our clients. A period of less than 90 days can be coped with. It might mean talking to the bank manager about reducing/suspending loan repayments, using up savings or even popping things on the credit card. But none of these things are hard or expensive. Therefore, a short illness is rarely a calamity.
What is a calamity is when the client becomes unwell for an extended period which cannot be covered by the bank manager's goodwill and accumulated savings. And this is what should be insured against: economic calamity, not short term inconvenience.
On a similar theme, especially for our higher income clients, we sometimes recommend that they insure an amount less than 100% of their income. Most income protection policies will only pay 75% of the pre-claim income anyway, but we typically suggest that a doctor earning, say, $300,000 consider insuring only $150,000 of income. In the event of a claim, this lower amount will be paid. But again, $150,000 is a high income to receive and thus economic calamity is typically avoided. Once again, remember that the client is so unwell as to be unable to continue to work.
Many clients choose to insure every last available dollar of income. This is fine too - as long as they are doing it deliberately.
Both of our typical recommendations have the same effect on premiums. Premiums for 90 day waiting periods are considerably lower than for 30 day wiating periods. This is for the obvious reason: very few people are unwell for more than 90 days. Similarly, the amount that the insurer might need to pay in the event of a claim will determine the premium that they charge. So, our recommendations reduce the premium you pay on the bet you hope to lose.
Remember, most financial advisers are paid a percentage of the amount that their customers spend. Therefore, a cynic might suggest that there is little incentive for a commission-based adviser to recommend cheaper policies...
Thursday, January 10, 2008
Vanguard's thoughts on SMSFs borrowing
The most complete summary of the new rules is in our Dollar Notes section of www.mcmasters.com.au.
But Vanguard's thoughts on the matter are worth noting too"
Super changes open the gearing door by Robin Bowerman*
Gearing is one of investing's visceral pleasures. When it is good it is very good. When it turns bad it can be catastrophic.
For super funds gearing has been an investment approach that has been strictly off limits but a recent change to the law means that may be about to change and the ramifications of it for individuals running their own self-managed super funds could be dramatic.
Given the impact of the June 30 changes you might have thought a period of regulatory calm to allow investors, fund administrators and advisers to catch their breath was to be expected.
But the change to the law to ratify the use of instalment warrants in super funds has - if the legal experts in the industry are correct - opened a much wider door than simply applying to instalment warrants.
The background to this is that instalment warrants initially were thought to be allowable investments for a super fund then the tax office came to the view that a warrant did represent a borrowing and therefore was not allowable. But by then warrants had become such common instruments both within SMSFs and larger super funds that the tax office sought to have the law changed to reflect market reality.
That has now been done and the new laws took effect from September 24.
The changes do not mean a super fund has open season to go out and start borrowing against fund assets. But according to the managing director of Smart Super, Andrew Bloore, it is now possible for a super fund to invest through a specific type of trust known as a debt instrument trust - a vehicle that facilitates the instalment warrant.
For people not familiar with instalment warrants the best real-world example was the Telstra share float where investors paid an initial amount and with the second instalment paid later to complete the share purchase.
So by investing through an instalment warrant structure it means super funds may be able to gear any of the usual investments a super fund can buy. Andrew Bloore gives the example where a SMSF has $500,000 in cash, a matching $500,000 is borrowed from a lender and the debt instrument trust then buys the investment - perhaps a residential property for example. The super fund receives all the rental income and gains.
This may sound relatively straightforward but Bloore warns that it will be critical for the proper procedures and process to be followed otherwise the loan could be deemed a "non-excepted borrowing" which makes the entire fund non-complying.
Also the usual restrictions around related parties still apply.
Any change like this should come with big health warnings. First it may take some time for the market to understand where the boundaries are in terms of product's designed for super funds. Inevitably there will be product promoters who will abuse the intent of the change and potentially force a rethink within the tax office and government if they see revenue impacts they were not intending.
So being patient, take the time to educate yourself on the changes and letting the market test and draw the boundaries seems a sensible approach. Getting strong technical and legal advice will clearly be critical and after all that you will get back to the original question - is gearing a good idea?
These changes seem to clear the way for super funds to use gearing. But just because you can do something doesn't make it a good idea.
* Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to www.vanguard.com.au and register with smart investing.
But Vanguard's thoughts on the matter are worth noting too"
Super changes open the gearing door by Robin Bowerman*
Gearing is one of investing's visceral pleasures. When it is good it is very good. When it turns bad it can be catastrophic.
For super funds gearing has been an investment approach that has been strictly off limits but a recent change to the law means that may be about to change and the ramifications of it for individuals running their own self-managed super funds could be dramatic.
Given the impact of the June 30 changes you might have thought a period of regulatory calm to allow investors, fund administrators and advisers to catch their breath was to be expected.
But the change to the law to ratify the use of instalment warrants in super funds has - if the legal experts in the industry are correct - opened a much wider door than simply applying to instalment warrants.
The background to this is that instalment warrants initially were thought to be allowable investments for a super fund then the tax office came to the view that a warrant did represent a borrowing and therefore was not allowable. But by then warrants had become such common instruments both within SMSFs and larger super funds that the tax office sought to have the law changed to reflect market reality.
That has now been done and the new laws took effect from September 24.
The changes do not mean a super fund has open season to go out and start borrowing against fund assets. But according to the managing director of Smart Super, Andrew Bloore, it is now possible for a super fund to invest through a specific type of trust known as a debt instrument trust - a vehicle that facilitates the instalment warrant.
For people not familiar with instalment warrants the best real-world example was the Telstra share float where investors paid an initial amount and with the second instalment paid later to complete the share purchase.
So by investing through an instalment warrant structure it means super funds may be able to gear any of the usual investments a super fund can buy. Andrew Bloore gives the example where a SMSF has $500,000 in cash, a matching $500,000 is borrowed from a lender and the debt instrument trust then buys the investment - perhaps a residential property for example. The super fund receives all the rental income and gains.
This may sound relatively straightforward but Bloore warns that it will be critical for the proper procedures and process to be followed otherwise the loan could be deemed a "non-excepted borrowing" which makes the entire fund non-complying.
Also the usual restrictions around related parties still apply.
Any change like this should come with big health warnings. First it may take some time for the market to understand where the boundaries are in terms of product's designed for super funds. Inevitably there will be product promoters who will abuse the intent of the change and potentially force a rethink within the tax office and government if they see revenue impacts they were not intending.
So being patient, take the time to educate yourself on the changes and letting the market test and draw the boundaries seems a sensible approach. Getting strong technical and legal advice will clearly be critical and after all that you will get back to the original question - is gearing a good idea?
These changes seem to clear the way for super funds to use gearing. But just because you can do something doesn't make it a good idea.
* Robin Bowerman is Head of Retail at index fund manager Vanguard Investments Australia. To receive this column by email each week go to www.vanguard.com.au and register with smart investing.
Subscribe to:
Posts (Atom)