Now you can use these tools to ascertain your complete Cash Flow position (whether or not after all costs , income, assets and liabilities you have a positive or negative cash flow). Knowing this information is vital to better management of your money.

Being able to develop and manage a Budget on an ongoing basis has always been an important aspect of gaining better control of our financial affairs. Unfortunately, completing this task on a regular basis has always been difficult, time consuming and at best ad-hoc. There have never been any readily available tools to help with this process.

So we take great pleasure in advising that you can now access and use new Budgeting, Superannuation and Tax tools right here on our website.

To start using them simply click on the 'Calculators' or 'Financial Tools' button in the menu bar.

The real beauty of these tools is that you can begin using them to develop your budget or test some Super strategies, leave the site, and when you return to the site the information you entered previously is there waiting for you. Of course, you need to Register so the system knows which information is yours, just like Internet Banking.

While these tools are great for all existing clients and staff, they are also useful for family members to utilise. It is never too early for children and young adults to gain a better understanding of their financial position or to improve their financial literacy.

 

The 2011/2012 Federal Budget was a ‘nip and tuck’ Budget. Along with the summary below is a more detailed consideration of the budget points in the MGR Accountants' Budget report.

Many of the changes were either because of or justified by the need to improve the workforce participation rate to counter the declining unemployment rate from the current level of 5% to 4.5% by June 2013.  Others were simply to fulfil the promise of bringing the budget into surplus.

Some changes were more than cosmetic with a temporary flood and cyclone reconstruction levy set to apply in the 2011/2012 income year to those who earn over $50,000 (adding $1.725bn to Government revenues over 5 years).  FBT changes will add an additional $970m over 5 years.  And, a few tucks will be made to the tax system with the phasing out of the dependent spouse tax offset and removing the ability for minors to access the low income tax offset on unearned income in order to restrict income splitting.

Some areas of interest to business remained unchanged: the company tax rate reductions announced in the previous Budget remain intact as do some of the small business initiatives.  Some extra revenue has been gained by delaying the start of some broader (mostly green) reforms and infrastructure projects, and holding indexation at current levels for family payments.

In the superannuation area, reforms to the excess contributions tax regime may provide some relief (but not this year).

Some of the detail, such as the $5,000 write-off for small business to purchase a car (replacing the entrepreneurs tax offset), and the FBT changes were announced/leaked ahead of the budget.  So, there were few surprises in this budget.

The elephant in the room was the carbon emissions trading scheme, or the lack of it.  There is no detail beyond funding for an advertising campaign.  This means that when the final shape of the emissions trading scheme is known, the Government will need to release an updated set of figures.

Key Budget points include:

• FBT – statutory formula for valuing car fringe benefits to change to a single statutory rate of 20%
• Flood and cyclone reconstruction levy introduced in 2011/2012 income year on income above $50,000
• Income splitting targeted – low income tax offset removed for minors on unearned income
• Reforms to excess contributions tax from 1 July 2011
• Reduction in GDP adjustment factor for PAYG instalment taxpayers
• Some companies will be required to report annually on payments made to contractors in the building and construction industry from 1 July 2012.  The cleaning industry has also been flagged as a possible compulsory reporting industry.
• As planned, company tax rate will reduce to 29% for small business in 2012/2013

Yesterday the Federal Government announced it would impose a flood levy to help cover the cost of repairs to damage caused by Queensland's recent floods. People earning a $50,000 taxable income will incur a 0.5% levy on anything above $50,000, increasing to 1.0% for taxable income above $100,000. The Government has promised the levy will not increase, nor will it last any longer than the 2011 2012 tax year. Additional repair funds will come from spending cuts.

Anyone who received the Australian Government Disaster Recovery Payment will not be required to pay the levy which otherwise will be deducted via the normal PAYG installment system. More details on this will be available once the levy is enacted in legislation.

A scan of today's press shows opinion on the need for a levy is divided.

Pitcher Partners have developed a 4–5 page snapshot of issues surrounding flood relief for businesses and individuals. The paper covers some of the items already posted about on mgr.com.au but also covers tax deductions for donations and consideration of employer assistance to employees.

This is useful, but relatively high-level information and we would recommend you consult with your accountant on any areas where you require assistance.

More information on flood grants. This time from Rural Finance who have fact sheets on Victorian Flood Grants.

By now you'll have seen there are a number of grant options available to you. MGR Accountants is able to assist you work out which grant/s are most applicable and how to apply for them.

As a gesture of assistance to those impaced by recent natural disasters, ESS BIZTOOLS have prepared additional papers on the government grants that will become available to affected businesses. These can be download at www.essbiztools.com.au. If not already a subscriber you will need to create a free account to login and access the downloads.

The Victorian list covers:

• 140–310 — Clean Up & Restoration — VIC – Primary Producers – Grant
• 140–311 — Clean Up & Restoration — VIC – Primary Producers – Loan
• 140–312 — Clean Up & Restoration — VIC – Small Business – Grant
• 140–313 — Clean Up & Restoration — VIC – Small Business – Loan

The Age has just reported that flood clean-up grants will rise from $15,000 to $25,000 and apply retrospectively to the September and December 2010 floods. Read the full article on The Age.

The CPA Disaster Recovery Toolkit for Business will help you and your accountant identify and prioritise actions to take if your business has been impacted by recent flooding. It includes information on assessment, record rebuilding, future protection and winding up a business should that sadly prove necessary for you.

Multiple Goverment agencies are offering assistance to those affected by flooding and other natural disasters. FirstTech have a summary of Government Assistance for the 2010/2011 floods which covers Centrelink, the Australian Tax Office and several state-based agencies such as the Victorian Department of Human Resources.

This is summary information and we would advise that you involve your accountant to work out which are most applicable to your situation and to complete any necessary paperwork.

The FirstTech team have also put together a paper on Flood, financial difficulty and access to super. Again, seek proper assistance from someone such as MGR Financial Services as early access to superannuation may also have tax consequences that you need to be aware of.

If you are a business or individual affected by the flooding on our East coast you can relieve some of the hardship by speaking with MGR Accountants about access to the Australian Tax Office (ATO) support services. It is to your advantage to receive advice accurate to your situation so that you gain maximum value from the government assistance on offer.

beyondblue: the national depression initiative recognises that people may be at risk of developing depression and anxiety after experiencing a traumatic event like a bushfire, flood or earthquake. It’s important to know when to seek help.

Reactions to the Flood Crisis can be categorised into normal reactions (though obviously stressing and uncomfortable) and severe reactions. The beyondblue website provide guidelines on when you should seek professional help to cope should you be experiencing the listed symptoms.

For more information visit Floods - Where to get help on the beyondblue website

The income tax laws on the provision of fringe benefits to employees, their associates and clients are very complex, especially at Christmas time. In addition to the Christmas party, businesses normally provide various types of gifts to their staff and clients.

If you are a small business with an aggregated turnover of less than $2 million and want to claim the 50% investment allowance deduction in this current 2010/11 tax year you have until 31 December 2010 to first use or install the asset ready for use in your business.

This same deadline applies to other businesses (i.e., those with an aggregated turnover of $2 million or more) that want to claim the 10% investment allowance deduction this tax year.

If you have questions about the investment allowance and the 31 December deadline, please contact MGR Accountants on (03) 5443 8888.

This month's tax update covers GST Changes, amending income tax returns, resident minor's tax-free thresholds and more.

The Paid Parental Leave Act 2010 (the Act) provides for the first national, government-funded paid parental leave scheme in Australia. The Act takes effect on 1 October 2010, however payment under the scheme will not be available to employees until 1 January 2011. Eligible employees who become parents after that date will be able to claim up to 18 weeks parental leave pay at the national minimum wage (currently $569.90 per week).

On 1 June 2009, the ATO introduced two initiatives to help small businesses that are struggling to manage their activity statement payment obligations. These measures have been extended for a further 12 months until 30 June 2011.

The ATO is extending the 12 month general interest charge free concession for mutually acceptable and sustainable payment arrangements entered into for activity statement (i.e. BAS) debts negotiated from 1 July 2010 to 30 June 2011.This concession may also apply to payment arrangements negotiated prior to 30 June 2010 that are subsequently renegotiated.

Small businesses experiencing cash flow problems can also request an interest free payment deferral on their next activity statement. Businesses that pay quarterly and annually may be granted a deferral of up to two months, with those that pay monthly eligible for up to one month.

Where an employee, company director, or office holder receives a reasonable allowance for travel costs within Australia or overseas and the person makes a claim for expenses up to these reasonable amounts, then the person is not required to keep written evidence (i.e. receipts) of the expenses. These reasonable deduction limits are based on the salary of the person and the destination of the trip.

Our monthly updates have changed to two PDFs that contain far more information than we'd supplied in the past.  We've made this enhancement due in part to give more detail on the markets and the economy but also to provide you with more help in understanding these tough times.

• Click here for a Market Report  - 31st May 2010
• Click here for an Economic Report - June 2010

In the lead up to 30 June 2010, individuals should consider topping up their superannuation by making either tax deductible (concessional contributions) and/or after-tax contributions (non-concessional contributions).

Concessional contributions

The concessional superannuation caps for the 2009/10 year are as follows:

Person aged below 50 years of age at 30 June 2010:	$25,000
Person aged 50 and over at 30 June 2010:	$50,000

Note that employer super guarantee contributions are included in these thresholds. Where a concessional contribution is made which exceeds these amounts, the excess is taxed to the fund member’s account at an effective rate of 46.5%.

The above contribution caps apply equally to self-employed taxpayers who can claim a 100% deduction where they satisfy the 10% test.

There is an age and work test that needs to be satisfied before a concessional contribution can be made. Where the individual is under the age of 65 at the time the contribution is made, this work test does not apply.

If the individual is aged 65 to 74 the work test needs to be satisfied every year before the contribution can be made. This requires that the individual be gainfully employed on at least a part time basis during the financial year and must work for at least 40 hours during a consecutive 30 day period in that financial year (before the contributions is made). To be gainfully employed, the person must receive some form of remuneration for personal services.

Note that employer and self-employed superannuation contributions need to be made before the person reaches the age of 75.

In order to obtain a deduction in the 2010 financial year, the contribution must to be received by the superannuation fund by 30 June 2010.

Non-concessional contributions

Individuals who are under the age of 75 are entitled to contribute up to $150,000 per annum in non-concessional or after-tax contributions for the 2009/10 year.

There is also a 3 year averaging rule which allows individuals under the age of 65 at any time during the financial year to make an undeducted contribution of up to $450,000 by 30 June. In other words, they can utilise the $150,000 cap for the current year and the next two financial years.

In these circumstances, the individual cannot make any further non-concessional contributions in the 2010/11 and 2011/12 financial years.

Where the individual is age 65 to 74, the above work test also applies before a non-concessional contribution can be made.

Super co-contributions

Individuals, including self employed business owners, who make an undeducted contribution of up to $1,000 are eligible to receive a co-contribution payment from the Government of up to $1,000 for the 2009/10 year.

However all of the following conditions need to be satisfied in order to be eligible for the co-contribution this financial year:

• the contribution is made by 30 June 2010 to a complying superannuation fund or retirement savings account;
• a tax deduction is not claimed for the contribution;
• The person’s total income is below the income threshold for the 2009/10 year of $61,920. Total income is worked out by adding assessable income, plus reportable fringe benefits and reportable employer super contributions minus “business” deductions. This means that self-employed taxpayers with high turnovers/low margins may still receive a co-contribution payment;
• 10% or more of the person’s total income is from running a business, eligible employment or a combination of both. Note that business deductions are not included in the 10% test;
• the person must lodge a tax return for the income year; and
• the person is less than 71 years old at the end of the income year.

To receive the maximum co-contribution of $1,000 for the 2009/10 year, the taxpayer’s assessable income (including reportable fringe benefits and reportable employer super contributions), must be less than $31,920 and a contribution of $1,000 needs to be made. The co-contribution of $1000 reduces by five cents for every $1 of assessable income over $31,920 and cuts out at $61,920.

In-specie contributions

An in-specie contribution is where an asset, rather than cash, is contributed to a self managed super fund (SMSF). The contribution can be made by an individual or the individual’s employer.

It is important to note that a SMSF is generally prohibited from acquiring assets from related parties such as members and relatives. However the following exceptions apply when the asset is contributed at market value and the asset is either:

• Listed Securities; or
• Widely held unit trust investments; or
• Business real property, or
• An in-house asset which would not result in the level of in-house assets exceeding 5% of the fund’s total asset value.

The transfer of an asset in-specie changes the legal ownership of the asset from the contributor to the SMSF. Therefore there may be stamp duty and capital gains tax implications.

In-specie contributions are included in the concessional and non-concessional caps.

Tax offset for spouse contributions

A resident individual can make a contribution on behalf of their resident spouse (legal or de facto, or same-sex and the spouse is not living permanently apart) and claim a tax offset of up to $540 where:

• the spouse is aged under 65, or
• the spouse is over the age of 65 and under the age of 70 and was gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in that income year (before the contribution is made).
• the sum of the spouse's assessable income, (which includes reportable fringe benefits and reportable employer super contributions) for the financial year was less than $13,800.

The contributions are treated as Personal Contributions (and therefore not subject to 15% contribution tax) and are preserved to the spouse’s preservation age.

An 18% tax offset is claimable when amounts up to $3,000 are contributed, reducing for every dollar that your spouse earns over $10,800. Therefore to receive the maximum tax offset of $540 (18% of $3,000), the spouse’s assessable income needs to be under $10,800.

If spouse assessable income exceeds $10,800 then the maximum $540 tax offset will reduce by 18 cents in the dollar until spouse income exceeds $13,800 at which point the tax offset no longer applies.

Business owners should by now be looking at strategies to legitimately reduce their tax bill for the 2009/10 tax year.

Some tax planning strategies techniques differ depending on whether the business is a "small business entity". The mostcommon strategies that should be considered prior to 30 June 2010 include:

Small business entity (SBE) tax concessions

The "small business entity" (SBE) tax rules provide access to a range of concessions that businesses can apply without the need to make a formal election in the tax return. A business can choose which one or all of the concessions to apply.

In order to be an SBE, the turnover of the business, including connected entities and affiliates, has to be less than $2 million GST exclusive.

The major tax planning concessions that are available under the SBE rules are:

• The choice to adopt the simplified depreciation rules whereby an immediate deduction can be claimed for assets costing less than $1,000 GST exclusive. Depreciable assets costing $1,000 or more GST exclusive are included in an asset pool. A full depreciation deduction of 15% (30% thereafter) can be claimed for 2010 where the asset has an effective life of less than 25 years regardless of when the asset was acquired during the income year;
• Claiming an immediate deduction for certain prepaid business expenses where the payment covers a period of 12 months or less that ends in the next income year. Subject to cash flow requirements, the most common expenses that an SBE taxpayer should consider prepaying by 30 June 2010 include lease payments, interest, rent, business travel, insurances, business subscriptions, etc;
• The ability to apply the small business capital gains tax concessions without the need to satisfy the $6M net asset value test.

Prepayment of expenses

Certain prepayments are not subject to the above 12 month rule and therefore both SBE and non-SBE taxpayers may be able to claim deductions for expenditure that is: 

• less than $1,000 GST exclusive; or
• incurred under a law of the Commonwealth, State, or Territory. Common examples are motor vehicle registration and compulsory third party insurance and Workcover premiums and statutory licences; or  
• paid under a contract of service (e.g. prepayments of salary and wages, bonuses and commissions).

Deferring income & capital gains

• Businesses that return income on a cash basis are assessed on income as it is received. A simple end of year tax planning strategy is to delay "receipt" of the income until after 30 June 2010.
• Businesses that return income on a non-cash basis are generally assessed on income as it is derived or invoiced. Income may be deferred in some circumstances by delaying the "issuing of invoices" until after 30 June 2010.
• Realising a capital gain after 30 June 2010 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months. The date of the contract is the realisation date for capital gains tax purposes.

Valuing trading stock

Both SBE and non-SBE taxpayers have the option of valuing trading stock on 30 June 2010 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock.

For example, where the market selling price of stock items at year-end is below the actual cost price, the taxpayer can generate a tax deduction by simply valuing the stock at market selling value for tax purposes. 

In situations where stock has become obsolete at year-end (e.g. fashion clothing), the taxpayer may elect to adopt a lower value than actual cost, replacement cost, or market selling value.

Maximising depreciation claims for non-SBE taxpayers

• An immediate deduction can be claimed for assets costing less than $100 GST inclusive (e.g. minor tools).
• A tax deduction can be claimed for depreciable assets that are scrapped or sold for less than their written down value.
• Assets costing less than $1,000 GST exclusive can be allocated to a "low value pool" and depreciation claimed of 18.75% for 2008 (37.5% thereafter) regardless of when the assets were acquired during the income year.

Claiming deductions for expenses not paid at year end

Both SBE and non-SBE taxpayers are entitled to an immediate deduction for certain expenses that have been "incurred" but not been paid by 30 June 2010 including:

Salary and Wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2010, but have not been paid until the new financial year.   

Directors Fees. A company can claim a tax deduction for directors fees it is "definitely committed" to at 30 June 2010 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2010 year when the amount is actually received.

Staff Bonuses and Commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2010 where it is "definitely committed" to the expense.

Repairs and Maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2010 but not paid until the next income year.

Writing off bad debts

Where a taxpayer accounts for income on a non-cash basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2009/10 so long as the debt is declared bad by 30 June 2010.

The business will need to show that it has made a genuine attempt to recover the debt by year- end to prove that the debt is bad. It’s preferable that this decision is made in writing (e.g. a board minute).

Businesses can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.

Concessional superannuation caps

The concessional superannuation caps for the 2009/10 year are as follows:

Person aged below 50 years of age at 30 June 2010:		$25,000
Person aged 50 and over at 30 June 2010:		$50,000

 

Note that employer super guarantee contributions are included in these thresholds. Where a concessional contribution is made which exceeds these amounts, the excess is taxed to the fund member’s account at an effective rate of 46.5%.

The above contribution caps apply equally to self-employed taxpayers who can claim a 100% deduction where they satisfy the 10% test.  

Employer and self-employed superannuation contributions need to be made before the 28th day of the month following the month in which the person turns age 75.

In order to obtain a deduction in the 2010 financial year, the contribution must to be received by the superannuation fund by 30 June 2010.

Private company loans to shareholders

Business owners who have borrowed funds from their company must ensure that the appropriate principal and interest repayments are made by 30 June 2010.

Where the loans don’t comply with the strict ATO rules (including having a loan agreement) , the entire amounts may be deemed to be an unfranked dividend paid to the relevant shareholders under Division 7A of the Tax Act and taxed at marginal rates.

Following changes announced in the 2009 Budget, private use of certain company assets (e.g. boats, cars and investment properties) from 1 July 2009 is now also potentially caught by Division 7A and deemed to be an unfranked dividend unless a market rental fee is paid.

PAYG instalments

PAYG instalment obligations should be reviewed and consideration given to varying the instalment for the June 2010 quarter where the estimate of business income tax payable for the year is less than the instalments raised by the ATO.

Our monthly updates have changed to two PDFs that contain far more information than we'd supplied in the past.  We've made this enhancement due in part to give more detail on the markets and the economy but also to provide you with more help in understanding these tough times.

• Click here for a Market Report  - 30th April 2010
• Click here for an Economic Report - May 2010

Please click on the following links for more detail on the Budget delivered last night:

• Click here for a 'Budget at a Glance'
• Click here for an Overview of the Budget

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
7th May 2010

This is one of the questions that the National Centre for Social and Economic Modelling (NATSEM) at the University of Canberra set out to answer in its recently released report Saving Tomorrow.

Some of its answers are likely to surprise you. And the answers should provide many wakeup calls – including for those winding down their careers in the final years before retirement.

As a broad comment, NATSEM notes that Australians on average – as with the experience in the United States, for instance – no longer spend more than they earn. (The modelling is based on statistics to December 2009.)

The propensity of Australians to save has somewhat improved the sting of the GFC. But as NATSEM comments: “Whether it is a permanent change or just a fad remains to be seen.”

We have hardly become champion savers. The median amount saved by those 15 and over is less than $300 a year.

And sadly, even the savings figure of under $300 a year can give a misleading impression given the wide disparity in saving patterns.

“One-quarter of Australians saved more than $12,360 a year over a four-year period and another quarter of Australians reduced their savings, or probably went further into debt, by $9,810 a year,” the researchers found.

Consider these particular findings by NATSEM:

• In geographic terms, Australia’s best savers live in the Northern Territory – saving $4,970 a year or 16 times the national median amount. 
• Young people and those in retirement typically spend $100 per year more than they earn. 
• By age, Australia’s best savers are 45-54, saving more than $2,260 a year. “A somewhat surprising observation,” says NATSEM, “is that those approaching retirement (age 55-64) are saving less than those age 45-54.” Yet generally, their children would have left home and their finances should be in the best shape of their lives. 
• Predictably, men are much better savers than women, having twice the median savings. Women, of course, have lower average incomes, often interrupt their careers to raise children and do more part-time work because of family responsibilities.

Finally, one of the report’s shock findings is that a quarter of Australians classified by researchers as high-income earners – with mean after-tax incomes of $86,800 a year – were Australia’s worst savers by far in dollar terms.

The lower quartile of the high-income group overspent their annual incomes by a breathtaking $25,710 a year.

Another savings wakeup call has been loudly sounded.

By Robin Bowerman
Smart Investing
Principal & Head of Retail, Vanguard Investments Australia
21st April 2010

Retirement savings plans often make for interesting dinner party conversations.

Recovering markets have, thankfully, improved the tenor of discussions around superannuation accounts as both portfolio balances and confidence have been repaired.

But it is sometimes surprising to hear how individuals are thinking about their retirement savings – or rather the lack of it.

Consider the case of a single, professional woman successfully running her own consulting business which means she often works overseas for extended periods.

She cheerfully explained that her super account balance was “pitifully” low. Her success in the business world has not – as yet anyway – translated into a successful approach to retirement savings. Sadly she is typical of an endemic problem within our superannuation system – women have dramatically lower account balances than men.

Research by ASFA in 2007 put the median super balance at $31,250 for men and only $18,500 for women. There is nothing to suggest that that imbalance has shifted significantly in the past three years.

There are a variety of reasons to explain it – interrupted working lives and lower average salaries being two of the main ones.

But there is also the issue of engagement and understanding of superannuation. Our case study had not entirely ignored her need to finance her lifestyle after work. She had bought an investment property – to her way of thinking that was her super back up plan.

Residential property has performed strongly in recent years and there are tax advantages courtesy of the negative gearing deductions – although it will be interesting to see if Ken Henry’s review of our tax system recommends any changes to that.

But the rental income from one property is probably not going to be enough to fund a comfortable retirement lifestyle. Property proponents may say that is an argument for a portfolio of houses but the challenge with that is paying down the debt at the time of retirement.

It also raises other issues – a critical one being that the new caps on contributions make it difficult, if not impossible, to get large amounts of money into super to take advantages of its tax concessional status in the run up to retirement. So the idea of selling an investment property and then contributing the proceeds into super just prior to retirement is problematic.

A more fundamental problem with property assets when drawing down retirement income is the illiquid and lumpy nature of property. Rental income is great but if that is insufficient and you want to draw down a lump sum for a new car for example you cannot just sell off a bathroom or bedroom to raise the money.

That is where the liquidity of a super fund provides a much more flexible retirement income solution.

The key issue here is not about super versus direct property as the best way to save for retirement. Increasingly – given the contribution caps - it is about having money both inside and outside super. All of which argues the case for a holistic financial plan that sets the strategy to achieve a comfortable retirement.

When it comes to women and their low super balances that is a public policy issue in need of more debate. The Super System Review that is being chaired by Jeremy Cooper is due to hand down its findings in June this year and that may well provide the catalyst and framework to begin to correct the imbalance.

Our monthly updates have changed to two PDFs that contain far more information than we'd supplied in the past.  We've made this enhancement due in part to give more detail on the markets and the economy but also to provide you with more help in understanding these tough times.

• Click here for the Market Report  - 31st March 2010
• Click here for an Economic Report – April 2010

By Robin Bowerman
Smart Investing
19th April 2010
Principal & Head of Retail, Vanguard Investments Australia

The level of controversy and debate swirling around super continues to mount in the final-quarter countdown to the end of the financial year.

The Cooper superannuation review and the Henry tax review along with the growing realisation of the impact of excess contributions are key ingredients in this potent brew. And this is against the background of a rapidly ageing population and inadequate retirement savings.

The Cooper review’s final report will be delivered to the Government by June 30 and the Henry Review is being released two weeks before the federal budget with its own media lockup.

The intense debate in the media and among superannuation professionals about the future of super provides individual fund members with a perhaps unprecedented prompt to take a long hard look at their own super position.

No matter what recommendations are made by the Cooper and Henry reviews, many fund members are likely to more closely examine a range of factors concerning their super. These may include the amount of fees being paid through their funds, their asset allocations, the role of financial planning advice, the adequacy of their retirement savings and the most suitable type of super fund for their circumstances.

A particularly urgent matter that demands many members’ attention is the possibility of paying excess super contributions – particularly given that the annual caps on concessional contributions have been halved from 2009-10.

Smart Investing discussed excess contributions earlier this month – see Super shocking – and warnings about the consequences of excess contributions are being covered increasingly in the personal finance articles and specialist tax publications.

Surely, many more members are now focusing on their super savings.

By Investopedia.com | 31.03.2010
CompareShares.com.au  / www.thebull.com.au

The world has been watching and waiting for signs that the economic crisis is coming to an end. Unfortunately it's taking longer in some of the globe's richest and most socioeconomically generous nations. In these places unemployment continues to rise, with no clear signs of leveling off.

Recent data from the Organisation for Economic Co-operation and Development (OECD), a wealthy-country think tank, have shown that among the world's 30 richest nations, including the United States, Japan and Germany, it is European countries that have seen unemployment increase the most in the last year.

European officials may be tied up with the debt problems of Greece, but the more widespread and keenly felt problem across certain parts of Europe is that of everyday people having difficulty finding a job. Ireland's unemployment rate worsened the most dramatically over the last year. It stood at 13.8% in January, but that was a whopping 4.4-percentage-point increase from this time last year. Back in 2008 the jobless rate was at just 6.3%.

Second-worst is the Slovak Republic, where the rate of unemployment rose by 4 points to 13.7%. Spain still has the highest unemployment rate out of the advanced world--an eye-wateringly high 18.8% in January--and that's also marked a 3-point increase from January 2009.

Outside Europe

Though most of the countries in the OECD are European, the other nations in the club have fared better when it comes to keeping their jobless rates under control. America's unemployment rate is still at a relatively high 9.7%, but that was a shift up of a fair 3 percentage points from the year before. In Japan the unemployment rate has risen by just 0.7 points to 4.9%, according to OECD data.

This is just a continuation of a trend that started with the credit crisis in 2008. Between that year and 2009, the biggest jumps in unemployment by region took place in the European Union and developed economies, where the overall jobless rate increased by 2.3 percentage points, according to the International Labor Organization.

While things leveled off in America and Japan, the outlook remains grim for Europe. Economic sentiment in the region has been improving in the last 10 months, according to the European Commission, but that rebound has already lost some of its momentum. "The E.U. economy is still facing headwinds, and the outlook for the labor market remains unfavorable for 2010," the commission said in its latest monthly report on the region's employment situation.

This shouldn't be surprising considering that the American economy contracted by 2.7% in 2009, while the European Union's contracted by more than 4.1% last year, according to the International Monetary Fund. The sharpest declines took place in the emerging-market nations of Lithuania, Latvia and Estonia, none of which are members of the OECD.

Real Estate Bust

In developed Europe, the countries hardest hit are those that went through the boom and bust of a rapidly growing construction sector and soaring property prices. Ireland, once hailed as the Celtic Tiger, now has one of the highest unemployment rates in Europe after thousands of construction workers--many of whom were on temporary contracts--lost their jobs and struggled to find work in other sectors.

Ireland's GDP plunged by 7.5% in 2009 and is expected to fall by another 1% this year, according to the country's Investment and Development Agency. The national economy is also heavily dependent on trade--with exports representing 90% of GDP--so the slow recovery in world trade is exacerbating the country's problems.

In contrast Germany has managed to keep unemployment in check because its companies, many of them involved in engineering or high-tech manufacturing, employ highly skilled individuals who are difficult to replace. Instead of firing workers, German companies try to shorten their hours; the government has a short-term plan of subsidizing wages where hours have been reduced. Thanks to government spending, Germany has had one of the lowest increases in unemployment in the last year: Its 0.3-point increase is on par with Norway and Australia.

Denmark, Turkey, Iceland and Spain are a few other rich countries that have seen big jumps in unemployment in the last year. While Spain and Iceland have suffered from construction and financial bubbles, the labor market troubles of Denmark are curious: The Danes have a relatively low unemployment rate of 7.3% and rank enviably high in terms of their standard of living.

Yet Denmark was the first country in Europe to dip into recession, thanks to a domestic property bust. And Nevlia Konika, an economist with IHS Global Insight, points out that the Danish labor market is actually weakening as wages in the country grow, making its exports and services less competitive.

This could be a growing problem. While emerging nations like China and Brazil make a speedy recovery from their recessions and traditional powerhouses Switzerland and Japan get back on their feet, some of Europe's largest economies are struggling to get their labor markets on track.

Even Germany may see its hefty government spending result in a bigger deficit that hits the job market down the line. Economists at Deutsche Bank expect the jobless rate in Germany to rise to 9.5% in 2011.

When it comes go jobs, Europe's troubles are far from over.

By www.compareshares.com.au – for more articles like this click here. 
CompareShares.com.au is Australia’s pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.

By Investopedia.com | 22.03.2010
CompareShares.com.au / www.thebull.com.au

Gross Domestic Product (GDP) is a star, as far as economic measurements go. The Consumer Price Index (CPI) (and other members of the acronym club) have their moment in the sun, but the talk inevitably returns to GDP. When it increases, we cheer. When it decreases, we point fingers. It is seen as the weathervane for our economy. This begs the question of how accurate a measure it is, and what it is actually measuring. Upon closer inspection, it appears that there is something truly gross about GDP.

Broad Strokes
The GDP claims to measure the total value of all goods and services produced within a nation. Seeking to paint the economy in such broad strokes is bound to leave out some details. For example, marriage can exert downward pressure on GDP.

Imagine a masseuse and a deli-owner. The masseuse buys all her lunches at the deli, and the deli-owner gets all his massages from the masseuse. In a romantic haze of pastrami and shiatsu, the two decide to marry. The deli-owner now makes lunch for his wife without charging her and she, in turn, gives him free massages. In this case, GDP has dropped because less lunches are being bought and less massages are being paid for. These kinds of "transactions" irk economists, but taken alone, they don't invalidate GDP.

Buying Your Way to Wealth
The main problem with GDP is that it is heavily skewed towards purchasing and the impact of purchasing on the economy. In a very real sense, GDP doesn't count as a good or service until it is bought by the end user. Consider a car. The car that is sold to a consumer represents multiple smaller purchases – rubber for tires, steel for the frame, spark plugs and their components, and so on. All of these purchases and the profits made on them are factored out to avoid counting something twice. The understanding is that all of this activity is summed up in the final sale of the car.

Left out of this equation is the flow of private investment capital. When profits are made at each stage of production – by the steel maker, tire manufacturer, etc. – they are reinvested into the economy in the form of more inventory, factories, employees, or even simply paid out to shareholders who then reinvest elsewhere. This flow of private capital is calculated out of the economic metric to avoid double counting. By removing this capital from the equation, we end up with a GDP that is 60-80% consumption spending, and around 90% with government outlays added in. Factoring the private capital flow back in lowers consumption spending to 20-30% of total economic activity, making private business a far more important part of the economy.

Wasting Your Money
Consumer and government spending affect GDP disproportionately, even though buying isn't an act of production. It is assumed that the purchase accounts for the capital that went into production. With private purchases, this could be the case in a limited sense. With government purchases, this is rarely so. Every time the government over pays for a project, GDP is increased by the artificial amount, before any benefits are realized; often they are not. For example, consider the $600 for toilet seats or the estimated $90 billion wasted on redundant and ineffective programs. Both cases represent overpaying for a product or service, yet the GDP considers these valid transactions that fully benefit the economy.

Broken Scales
Common sense suggests that GDP has serious flaws. It considers spending and overpaying as an indicator of production, while delegating private capital investments to a minor role. Simply put, it doesn't do the job it was designed to do. Trying to measure economic activity with a scale tipped heavily towards consumption spending is like trying to calculate the weight of an object using a ruler. This wouldn't be an issue if GDP wasn't used to set government policy. When the government spends money, GDP increases. The government seems to like spending money, so there hasn't been a lot of political initiative to use a more accurate measure or fix the one they have. The next time someone tells you more stimulus spending is needed to lift the economy, you can inform him that the weight of an average carp is 15 inches.


By www.compareshares.com.au – for more articles like this click here.
CompareShares.com.au is Australia’s pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.

Missing three consecutive credit card payments, paying phone bills three months late or trying to make too many credit applications can make you a bad credit risk.

After three missed payments in a row, you are technically in default and that will be listed on the credit history.

Any of these actions will stay on your official credit history for five years, making it very difficult to secure a loan.

Whenever anyone applies for a credit card or loan, the financal institution will check the applicants’ creditworthiness with a credit organisation.

That will be added to your credit history of any previous inquiries you’ve made for credit cards or loans and any defaults or any judgements.

Consumers should regularly order a copy of their credit file to check its accuracy.

Get in contact with the agencies, then check yourself, particularly if you’re about to go for a home loan.

By Investopedia.com | 08.03.2010 CompareShares.com.au  / www.thebull.com.au

Most investors realize that it's important for a company to have a good management team. The problem is that evaluating management is difficult - so many aspects of the job are intangible. It's clear that investors can't always be sure of a company by only poring over financial statements. Fallouts such as Enron, Worldcom and Imclone have demonstrated the importance of emphasizing the qualitative aspects of a company. There is no magic formula for evaluating management, but there are factors to which you should pay attention. In this article we'll discuss some of these signs. The Job of Management A strong management is the backbone of any successful company. This is not to say that employees are not also important, but it is management that ultimately makes the strategic decisions. You can think of management as the captain of a ship. While not physically driving the boat, he or she directs others to look after all the factors that ensure a safe trip. Theoretically, the management of a publicly traded company is in charge of creating value for shareholders. Management is to have the business smarts to run a company in the interest of the owners. Of course, it is unrealistic to believe that management only thinks about the shareholders. Managers are people too and are, like anybody else, looking for personal gain. Problems arise when the interests of the managers are different from the interests of the shareholders. The theory behind the tendency for this to occur is called agency theory. It says that conflict will occur unless the compensation of management is tied together somehow with the interests of shareholders. Don't be naive by thinking that the board of directors will always come to the shareholders' rescue. Management must have some actual reason to be beneficial to shareholders. Stock Price Isn't Always a Reflection of Good Management Some say that qualitative factors are pointless because the true value of management will be reflected in the bottom line and the stock price. There is some truth to this over the long run, but strong performance in the short run doesn't guarantee good management. The best example is the downfall of dotcoms. For a period of time, everybody was talking about how the new entrepreneurs were going to change the rules of business. The stock price was deemed as a sure indication of success. The market, however, behaves strangely in the short term. Strong stock performance alone doesn't mean you can assume the management is of high quality. Length of Tenure One good indicator is how long the CEO and top management has been serving the company. A great example is General Electric whose former CEO, Jack Welch, was with the company for around 20 years before he retired. Many herald him as being one of the best managers of all time. Warren Buffett has also talked about Berkshire Hathaway's superb record of management retention. One of Buffett's investment criteria is to look for solid stable managements that stick with their companies for the long term. Strategy and Goals Ask yourself, what kind of goals has the management set out for the company? Does the company have a mission statement? How concise is the mission statement? A good mission statement creates goals for management, employees, stockholders and even partners. It's a bad sign when companies lace their mission statement with the latest buzz words and corporate jargon. Insider Buying and Stock Buybacks If insiders are buying shares in their own companies, it's usually because they know something that normal investors do not. Insiders buying stock regularly show investors that managers are willing to put their money where their mouths are. The key here is to pay attention to how long the management holds shares. Flipping shares to make a quick buck is one thing; investing for the long term is another. The same can be said for share buybacks. If you ask management of a company about buybacks, it will likely tell you that a buyback is the logical use of a company's resources. After all, the goal of a firm's management is to maximize return for shareholders. A buyback increases shareholder value if the company is truly undervalued. Compensation High-level executives pull in six or seven figures per year, and rightly so. Good management pays for itself time and time again by increasing shareholder value. But knowing what level of compensation is too high is a difficult thing to determine. One thing to consider is that managements in different industries take in different amounts. For example, CEOs in the banking industry take in more than $20 million per year, whereas a CEO of a retail or food service company may only make $1 million. As a general rule you want to make sure that CEOs in the same industries have similar compensation. You have to be suspicious if a manager makes an obscene amount of money while the company suffers. If a manager really cares about the shareholders in the long term, would this manager be paying him/herself exorbitant amounts of money during tough times? It all comes down to the agency problem. If a CEO is making millions of dollars when the company is going bankrupt, what incentive does he or she have to do a good job? You can't talk about compensation without mentioning stock options. A few years back, many praised options as the solution to ensuring that management increases shareholder value. The theory sounds good, but doesn't work as well in reality. It's true that options tie compensation to performance, but not necessarily for the benefit of long-term investors. Many executives simply did whatever it took to drive up the share price so they could vest their options to make a quick buck. Investors then realized the books had been cooked, so share prices plummeted back down while management made out with millions. Also, stock options aren't free, so the money has to come from somewhere, usually the dilution of existing shareholder's stock. As with stock ownership, look to see whether management is using options as a way to get rich or if it is actually tied to increasing value over the long run. You can sometimes find this in the notes to the financial statements. Conclusion There is no single template for evaluating a company's management, but we hope the issues we've discussed in this article will give you some ideas for analyzing a company. Looking at the financial results each quarter is important, but it doesn't tell the whole story. Spend a little time investigating the people who fill those financial statements with numbers. Supplied by www.compareshares.com.au CompareShares.com.au is Australia’s pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.

By Robin Bowerman Smart Investing Principal & Head of Retail, Vanguard Investments Australia 12th March 2010

As federal politicians debate over paid parental leave, the plight of women's superannuation savings has been highlighted once again this week with the release of a report, Superannuation Savings Gap for Women, authored by superannuation consultants and actuaries Rice Warner. The report, commissioned by the Investment & Financial Services Association (IFSA), presents a sorry picture that cannot be reinforced too many times – particularly given the rapid ageing of Australia's population and the widespread inadequacy of retirement savings. The issue of women withdrawing from the paid workforce for a period to raise children and the inadequacy of their retirement savings are indelibly linked. And that is yet another reason why the current parliamentary debate over parental leave is so interesting. In painstaking detail, Rice Warner sets out how and why women typically will end their working lives with much lower superannuation savings than their male counterparts. The combination of interrupted working lives, typically lower pay than men doing the same work, and the financial impact of caring for children following divorce take a tremendous toll on the ability of many women to save for retirement. Women not only enter retirement with much lower average super balances than men, they really need more super than men to allow for their great longevity. Rice Warner's report presents some fascinating scenarios or case studies, illustrating in stark dollar terms how women's super is really handicapped. Read the report (PDF). There seems little doubt that the state of women's retirement savings will become an increasingly hot issue during 2010.

By Investopedia.com  | 25.02.2010 CompareShares.com.au  / www.thebull.com.au

Investing in rental real estate looks like a great idea on paper. You just buy a place in a nice area, find tenants and let the cash roll in. However, there are some matters you have to consider before buying a property and putting a "for rent" ad in the newspaper. Here we provide a rundown of the pros and cons of owning rental property and give you a few tips on how to turn a profit as a landlord. Advantages of Rental Real Estate The advantages of rental real estate are quite substantial. One that is not listed below is the fact that when you own rental real estate, you own a tangible asset. You can paint it when you're happy with it and throw rocks at it when you're not. Shares of Enron, by contrast, are much harder to hit with a stone. Many people who feel uncomfortable investing in financial instruments have no qualms about investing in real estate. This is a psychological distinction, as a bad stock and a bad rental property are equally capable of losing money, forcing you to sell for a loss. That said, here are the advantages that show up on paper: Current Income - This refers to the rent money that is left over after the mortgage and related expenses have been paid. Current income is basically monthly cash that you did not have to work for - your property produces it for you. Appreciation - This is the increase in value that properties generally experience as time passes. Appreciation is not guaranteed. However, if you own a property in a stable area (cities), the property will likely increase in value over the years. Even properties in sparsely populated and less desirable areas may appreciate due to general inflation. Leverage - Rental properties can be purchased with borrowed funds. This means that you can purchase a rental property by putting down only a percentage of the total value. Essentially, you can control the whole property and the equity it holds while only paying a fraction of its total cost. Also, the property you purchase secures the debt rather than your other assets. You may lose the rental property, but you shouldn't lose your own home. Tax Advantages - Your rental income may be tax free if you do not receive net cash flow after expenses are deducted. This means that your mortgage is being paid down and you own more of the total value of the property (rather than just controlling it), but you do not pay taxes on the money that is doing this for you. In addition to this, you can also pull out tax-free money by refinancing your loan if the property appreciates and the interest rates have fallen. Disadvantages of Rental Real Estate For every upside, there is a downside, and rental real estate is no different. Rental real estate may expose you to the following: Liability - What happens if a stair breaks under your tenant's feet? With the increase in frivolous lawsuits and the unquantifiable nature of "emotional distress", liability can be a scary thing. Providing someone with shelter in return for money puts you and the tenant in a relationship where both parties bear responsibility. You have to be certain that the property you are renting out meets all government codes. Unexpected Expenses - What do you do when you pull up the basement carpet and find a crack that opens onto the abyss? It is impossible to prepare for every expense related to owning rental property, so there are bound to be some unexpected ones. Things such as plumbing and fixtures often need to be replaced and are not prohibitively expensive. However, faulty wiring, bad foundations, compromised roofing and the like can be very expensive to repair. If you can't find a way to pay for repairs, you will be left without a tenant and with the grim prospect of selling the property at a significant discount. Also, as building codes evolve over time, lead paint, asbestos, cedar roofing tiles and other materials that passed inspection in the past may be reevaluated to your disadvantage. Bad Tenants - No one wants to have to use a collection agency to collect overdue rent. Unfortunately, almost every landlord has a story that involves police cars escorting his or her tenant out of the property - erasing all hopes of getting the five months' worth of overdue rent. Bad tenants can also increase your unexpected expenses and even hit you with a lawsuit. Vacancy - No money coming in means that you have to make the payments out of your own pocket. If you have an emergency fund for the rental property, you will be able to survive long vacancies with little trouble. If you don't have one, you may find yourself scrambling to pay the rent to the harshest landlord of all - the bank. Tips Minimizing the disadvantages of owning real estate is actually quite simple. While you won't be able to eliminate the pitfalls completely, following these guidelines will take the teeth out of their bite. Keep Your Expectations Reasonable - Have the goal of positive cash flow, but don't expect to be purchasing a new yacht at year's end. If you keep your expectations in check, you won't be tempted to jack up the rent and push out good tenants. Find a Balance between Earnings and Effort - Are you "hands on", or should you work with a property management firm? Current income doesn't seem so great if you are putting in another full-time shift working on your rental property. There are property management firms that will run your rental property for a percentage of the rental income. Know the Rules - Federal and state laws outline your responsibilities and liabilities, so you can't claim ignorance when something happens. You will have to do some reading; nevertheless, it is better to spend 20 hours in the library than in the courtroom. Have the Property Inspected - One of the best ways to avoid unexpected expenses is to have the property inspected by a professional before you buy it. Make Sure Your Leases Are Legal - If you make a mistake on the lease, you will find it more difficult to litigate if a tenant violates the terms. Take the Time To Call References and Run Credit Checks - Too many landlords rush to fill a vacancy rather than taking the time to make sure the prospective tenant is a better option than an empty property. If you have time, you may want to drive by a prospective tenant's current living space - that is what your property will probably look like when that tenant lives there. Make Friends with a Lawyer, a Tax Professional and a Banker - If you find that you like owning rental properties, a network including these three professionals will be essential if you want to increase your holdings. Make Sure You Have the Right Kind of Insurance - After learning the rules, you will need to buy insurance to cover your liability. You will need the help of an insurance professional to select the proper package for your type of rental property. Create an Emergency Fund - This is essentially money earmarked for unexpected expenses that are not covered by insurance. There is no set amount for an emergency fund, some say 20% of the value of the property, but anything is better than nothing. If you are getting current income from a property, you can pool that money into an emergency fund. Conclusion Investing in a rental property can be an excellent decision if you go into it informed. Consider these words from Donald Trump: "It's tangible. It's solid. It's beautiful. It's artistic … I just love real estate." Supplied by www.compareshares.com.au . CompareShares.com.au is Australia’s pre-eminent news and investing site for investors and traders, covering shares, superannuation, property, financial planning strategies and more.

By Robin Bowerman Smart Investing 16th March 2010 Principal & Head of Retail, Vanguard Investments Australia

What do you expect to leave your children in your estate? Depending upon your age, a more relevant question may be: What do you expect to inherit from your parents when they die? A short paper released this week by Rice Warner Actuaries – headed Surviving Longevity – bravely forecasts that the days of the great Australian inheritance, the family home, left by deceased parents to their children, are reaching an end. This forecast could be greeted by some adult children with shock and horror, considering how inheritance of family homes is so ingrained in the Australian psyche. The reasoning behind the forecast is straightforward. The point will be reached, according to Rice Warner, where Australians facing longer and longer life expectancies and inadequate savings can no longer afford to leave the family home to their children. A 65-year-old retiree can expect to live at least another 20 years – and there’s a 20% chance of living for another 30 years. “Traditionally, many retirees have liked to pass something through to their children,” Rice Warner observes. “However, we expect this attitude will need to change in the future.” “Many children are going to be middle-aged when their parents die – some will be pensioners themselves!” And this part of the paper concludes: “It is more rational to invest in children’s education to improve their earning capacity and then not to plan to leave them an inheritance. This strategy also frees up the family home as an asset for income generation in later years.” Welcome to the future.

Our monthly updates have changed to two PDFs that contain far more information than we'd supplied in the past.  We've made this enhancement due in part to give more detail on the markets and the economy but also to provide you with more help in understanding these tough times.
 
Click here for a Market Report  - 28th February 2010

Click here for an Economic Report – March 2010

 

 
Source:       Zenith Investment Partners