Our attempt to assess the likelihood of a range of economic outcomes with a 3 year view.

There has been talk for some time of a two-speed Australian economy, with the resources sector booming whilst other parts of the economy trend sideways. Momentum appears to be growing for this to be a global phenomenon. The developing economies of China, India, and Asia more broadly, appear to be growing strongly, even while the old developed economies of the US, Europe and Japan, struggle to stay out of recession.

India reported economic growth of over 8% last quarter. Significantly this growth was fuelled by local consumption. In fact it was noted that the middle class (most important for consumption) in India is now larger than the entire population of the United States.

China continues to grow at around 10% and whilst a long way behind India, their middle class is growing as wages rise. As these economies develop, they are becoming less reliant on selling exports to the developed nations, and so are less exposed to these economies when they suffer a slow down.

Fortunately, here in Australia, we have many businesses that benefit from trade to these growing economies. Most obviously our resource companies such as BHP and Rio. Recent export figures for the June quarter saw the largest reduction in our current account deficit (imports minus exports) in almost 50 years.

But it’s not just our miners that benefit. These growing economies have large populations, as they get wealthier they demand more food, especially proteins. Australia is a significant exporter of agricultural commodities.

Our construction companies such as Leighton’s, have pushed into Asia, as have the ANZ bank and to a lesser extent the CBA. You also have companies such as Pacific Brands (best known for Bonds underwear), who were on the brink of extinction but are now profitable by moving production to Asia whilst running the design and marketing locally.

If the US can get it’s unemployment rate down, there is enormous potential for economic growth in that country. But it is becoming clearer by the day, that even if the US economy just limps along, much as Japan has over recent years, Australian investors still have reason for optimism over the coming years. What we produce is in demand, and we are in the right part of the world.

If you enjoyed the Rudd Government $900 tax free payment and you thought the First Home Owners Grant (which peaked at $36,500) was generous, then how does a Government tax free payment of $109,228 sound?

Tax Offsets and Tax Free incentive payments estimated at $109,228 per property are now available through the National Rental Affordability Scheme (NRAS) to investors who purchase new investment properties. The incentives have previously been made available to large institutions but are now accessible to individual property investors.

NRAS is set to change the property investment landscape for at least the next 10 years. The incentives will turn many property investments from a negative cashflow position to positive cashflow. As such, there will be many people who will find property investment attractive for the first time, and many existing investors who will want to restructure their property investments.

When the NRAS incentives are combined with existing tax deductions the tax savings can be substantial. In one example we’ve seen a 79% tax saving was estimated for a young couple with two children buying their first investment property.

Under NRAS, the Australian Government aims to stimulate the supply of new affordable rental dwellings by up to 50,000 by June 2012 through providing incentives to:

• increase the supply of affordable rental dwellings;
• reduce rental costs for low to moderate income households; and
• encourage large scale investment and innovative delivery of affordable housing.

NRAS investors are eligible to receive a National Rental Incentive for each approved dwelling where it is rented to eligible low and moderate income households at 20% below market rates. According to the most recently available Australian Bureau Statistic figures the average household income of a tenant renting from a private landlord was $78,104. Households earning up to $125,960 are eligible to rent NRAS approved properties so an “average tenant” will most likely be eligible for an NRAS property.

For very many investors giving up the 20% rental income in exchange for tax free incentives will mean turning a negative cashflow investment into a positive cashflow investment. As a result many people who have been unable to enter the property investment market because of the negative cashflow demands of investment property will now become property investors for the first time.

The Scheme offers annual incentives for 10 years. The two key elements of the Incentive are:

• A Commonwealth Government Incentive indexed for 10 years and currently at $6,855 per dwelling per year as a refundable tax offset or payment; and
• A State or Territory Government Tax Free Incentive indexed for 10 years and currently at $2,285 per dwelling per year.

The incentive is indexed annually at the CPI rate for rent which has been an average of 3.9% over the last 10 years. The most recent CPI increase for rent was 5.4%.

The current incentive indexed at 3.9% gives a total 10 year incentive of $109,228.

It is important to note that the Australian Government incentive is a tax offset not a tax deduction. A tax offset is of greater benefit because it is a direct reduction in the tax payable whereas a tax deduction is a reduction in the taxable income which is then taxed. The State Government incentive is also tax free.

This is a genuine win, win, win situation. Investors get real and substantial financial benefits, tenants get more affordable rental properties and the Government achieves its social policy goals without doing the work themselves.

The NRAS package including an on-line choice of properties across many locations throughout Australia is available from Onyx (www.onyx.net.au). Onyx has been providing strategic property and finance advice to property investors across Australia for nearly a decade.

Important Notes

This information has been prepared by Onyx Domain Pty Ltd.  Neither Guidance Financial Services Pty Ltd or Financial Wisdom Ltd recommend or endorse Onyx Domain Pty Ltd and it is essential that any person, corporation or other entity, conducts their own research and due diligence before proceeding to engage their services.

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

I was asked this question last week and the answer is yes.  The proviso however is that you can’t play it.

A recent report on the superannuation system by Jeremy Cooper proposed that SMSF’s should be banned from holding collectables such as art works.  However after considerable outcry from the the arts community, ministers Bowen and Garret (as minister for the Arts), announced that they would not be adopting the Cooper recommendations.

It is envisaged that there will be a tightening around how an SMSF will manage collectables.  The sole purpose test must always be kept in mind of course – which is why you could own a guitar in your SMSF, but you can’t strum it on a Saturday night for a bit of relaxation.  It is likely rules will be put in place regarding the storage of such items – temperature controlled and such.

As to whether collectible guitars are a sensible way to save for your retirement – well I have no idea.  But it’s interesting to see the broad scope of possibilities that exist within the SMSF environment.

CoreData-brandmanagement recently produced some fascinating research on Australian’s experiences and perceptions of financial planning professionals.  The study obtained surveys from 1,054 respondents.

Some of the results I found interesting were:

• When it comes to trust, specialist doctors were the most highly regarded with a rating of 8 out of 10.  Amongst those respondents who had a relationship with a financial planner, the average trust rating for financial planners was not far behind at 7.5.  Yet for those who don’t have a relationship with a financial planner, the score was only 4.5.  So those who engaged the services of a professional adviser seemingly found the adviser professional and trustworthy, yet those with no experience had a negative perception.  Where has this perception come from and why is the perception so different from the reality of those who use financial planners?

• One might expect that those who chose to use a professional financial planner might do so because they have little knowledge or understanding of financial matters such as superannuation or insurance, whilst those who elected not to engage a professional might do so because they have a good level of knowledge and so don’t need the help.  Yet the research found the opposite was true.  When it came to knowledge of superannuation, only 10.3% of respondents who have a financial planning relationship rated their knowledge as poor or very poor, whilst 28.6% of those without a planner rated themselves as having this low level of understanding.  It seems that a benefit of having a relationship with a financial planner was that the client gained knowledge of the investment landscape and the options available to them.

• Consideration of appropriate personal insurances is an area where financial planners often assist their clients.  One question in the survey asked “how important is ensuring you have sufficient insurance cover for the following”.  Interestingly, Comprehensive Car Insurance ranked around 8 out of 10 varying a little depending on the age of the respondent.  Yet Income Protection Insurance ranked around 6 out of 10 for those still in the work force.If your car was a complete write-off the financial loss might be $20,000 to $50,000 for most people.  Yet for most of us, one year off work would cost us far more than that.  And Income Protection doesn’t just cover for one year off work, but potentially would pay a benefit until you reached aged 65 (some even go to age 70), if you need it.  Think about how many more working years you have left and what you earn per year.  Is your car really more valuable than your earnings capacity?

Most Australians would benefit from having a relationship with a professional financial planner.  If you don’t currently have such a relationship, perhaps it’s time to change.

Paul Benson B.Bus, CFP, SSA

Principal – Guidance Financial Services Pty Ltd

Following weak economic data out of the US this week, we have increased the likelihood of a double-dip recession scenario from 10% to 15%, with a corresponding reduction in likelihood for the anaemic and patchy growth scenario from 75% to 70%.  Our estimate of strong growth fuelled by low interest rates, remains stable at 15%.

Important Notes

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

© Guidance Financial Services Pty Ltd

A re-elected Gillard Government will allow SMSFs to continue investing in collectables, including artwork, if trustees comply with new guidelines. From 1 July 2011 collectables and personal use assets owned by self managed superannuation funds (SMSFs) must be stored according to new rules to prevent them from giving rise to a personal benefit.

Only around 1% of all SMSF’s own artwork within their fund, yet the proposed change to prevent this form of investment caused concern amongst the art community which risked losing a valuable customer source.

Entries are currently being called for this years BRW Fast 100.  This is a great PR opportunity for growing businesses.  Our clients Lotic have been a past winner of this competition.

For details, go to www.brw.com.au/fast100

In discussing insurance options with our clients, we often find there is an awareness of either Income Protection insurance, Key Person insurance, and occasionally both.  Most people however are uncertain as to what each does, and when one is applicable over the other.

What does Income Protection and Key Person insurance have in common?

The objective of both cover’s is to provide you, the business owner, with a financial safety net in the event you suffer injury or ill-health.

So how are they different?

Income Protection cover pays a monthly benefit to you until you can return to work.  This benefit is typically up to 75% of your normal income.  A waiting period applies, often 30 days, in which you must support yourself, and then if you remain unable to work, your benefit payments commence.  In most cases they pay for a period of months until you return to work and things return to normal.  Most of the quality products will cover you through to age 65 if required, so if you suffer a long term illness or injury, your Income Protection cover will provide you with an on-going wage which rises in line with inflation.

Income Protection premiums are tax deductable, and as a consequence any benefit paid is taxable.

Key Person insurance differs in that it pays an agreed lump sum.  Whereas the payout conditions for Income Protection are that you are unable to work due to illness or injury, for Key Person insurance, the payout conditions are listed in the policy – cancer, heart attack, stroke etc, as well as death and total and permanent disability. 

So whereas a broken leg that sees you off work from 3 months might trigger 2 months on Income Protection benefits (allowing for a 30 day waiting period), no Key Person payout would apply.  In contrast however, where you are diagnosed with cancer, the Key Person cover will immediately pay out your lump sum benefit, perhaps $100,000 for instance, with no requirement to demonstrate an inability to work.  The benefit amount does not have to be tied to your income, it might for instance be determined based on how much you would need to clear debt, or cover medical costs. With Key Person cover it is very black and white – suffer one of the listed conditions, and you will receive a cheque.

So which one is right for me?

To answer that we really need to have a chat with you and understand your circumstances.  Typically, for a one person business or small business where the owner is crucial to the generation of revenue, Income Protection would be the priority.  For a larger business where, if the owner was away for a couple of months the business would carry on okay, then Key Person cover is more likely to be relevant, as it will only pay on the more significant issues, and can pay a much larger sum.

Having a financial safety net in place is absolutely crucial for business owners and it is amazing how many business owners will get things like buildings and vehicles insured, yet have no cover in place should they suffer a serious medical problem.

Give us a call on 03 9870 6544.  We can review your current arrangements, and provide recommendations and costings for your consideration.

Important Notes

This information is of a general nature only and has been prepared without taking into account your particular financial needs, circumstances and objectives and should NOT to be construed as legal, professional or financial product advice. You should obtain a Product Disclosure Statement and consider obtaining personal financial advice from an Australian Financial Services Licensee, or representative thereof before making the decision to acquire, vary or dispose of any financial product.

Whilst all reasonable efforts are made to ensure that the information contained herein is accurate and reliable the parties make no representation or warranty regarding the correctness or reliability of the information provided.

© Guidance Financial Services Pty Ltd

Self Managed Super Funds must have annual accounts and audits done, and as such administration services are a non-negotiable.  For those who run businesses, you would be accustomed to your accountant and book-keeper providing these services.  How would you like it if your book-keeper quoted her fees not as a set amount per hour, or a fixed amount per month, but rather as a percentage of your turnover?

“Your business turned over $200,000 last quarter, well our fee is 1% so that will be $2,000 thanks”.  A reasonable person might ask, “but how many hours work did you do to justify me paying $2,000?”  To which the book-keeper would reply something along the lines of, “well the more you turn over, the more complex your work, and so that’s the way we charge.  If my book-keeper told me that, I’d be looking for a new book-keeper, and I hope you would do the same.

There are some fees where a percentage basis makes sense, usually where the percentage calculation acts as an incentive for the service provider.  A perfect example would be a real estate agent’s fees.  You want the agent to get the highest possible price for your property, so paying on a percentage basis acts as an incentive for the agent.  The higher the price they achieve, the more they get paid.  Quite reasonable in my opinion.

However SMSF administration is not in that category.  Indeed this isn’t just an SMSF issue.  All of the Industry and Retail super funds are the same.  Their administration costs are bundled in with the fund manager fees, and the whole lot is charged as a percentage.

Is it really fair that because you have $100,000 in your super fund, you pay twice the fee of someone with $50,000, and 10 times the fee of someone with $10,000?  Is there really 10 times the work?

This issue was top of mind for me because I saw some advertising in the weekend newspapers quoting SMSF admin services “starting at just 0.99%, capped at $4,990pa”.  This is only administration.  Any advice costs extra.  For an SMSF which trades 10 shares a day, this may well be a fair price, but for an SMSF that owns a single property, or perhaps a basket of shares that changes little throughout the year, this appears extraordinarily expensive.  The thing is, with SMSF administration charged as a percentage, we’ll never know if the fund got good value for money.  In fact what I suspect occurs is that some funds subsidise others.

Don’t fall for this trap.  When selecting your SMSF administration provider, pay for what you need.  Percentage based fees make sense in some circumstances, but SMSF administration is not one of them.

If you are looking for an SMSF administration provider (which doesn’t charge on a percentage basis), give us a call on 03 9870 6544.