During 2006, the Australian Taxation Office (ATO) began to make noises about whether investment in Agri-bususines (forestry plantations and food crops) was in fact tax deductible (as was the tax position at that time). During 2007, the ATO produced a tax ruling giving the new ATO position that investment was of a capital nature and therefore not tax deductible. This was a total reversal of its previous position.

 

This ruling applied to all future investments only and had no impact on investments already in place, which would be guaranteed to have the previously existing position continue.

 

The government, wishing to continue to foster plantation timber production responded to the new ATO position by legislating to allow the deductibility of Forestry investments, but did not address those invested into non-forestry agricultural endeavours such as growing fruits and other crops.

 

The Agricultural Managed Investment Scheme (MIS) industry, believing the ATO ruling was contrary to law, launched a test case against the ATO.

 

This has now been decided by the full court which has unanimously agreed with the MIS proposition and reinstated the previous position where rent and fees paid were deductible to the investor.  The Commissioner for Taxation has indicated he will not appeal the decision.

 

This is not only a proper and just decision as the ruling by the ATO defied logic, but a win for common sense. Much of the innovation in production methods and improvement in product (including new varieties and improved growth rates) has come from the involvement of the MIS industry which would have been lost to Australia has the ATO decision stood.

 

POSTED: 24-Dec-2008

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POSTED: 19-Dec-2008

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Legislation to make treatment of same-sex couples and their children, the same as heterosexual couples and their children, has received Royal Assent.

 

The new law ensures that same-sex partners are now treated as a couple for the purposes of eligibility for Centrelink benefits, tax offsets and Medicare levy surcharge, amongst other matters.

 

Commonwealth superannuation legislation has also been amended so that same-sex defacto partners (as defined) are able to access a reversionary pension from the defined benefit superannuation fund of a member. Additionally, the children of such a relationship are now treated as dependants for superannuation and taxation purposes.

 

POSTED: 19-Dec-2008

Posted in Legislation | 3 Comments »

The press is currently running stories about a Queensland-based financial planning group whose clients are suffering severe debt stress. It seems this group has been recommending that clients borrow against their homes and invest these funds into the same planning group’s own badged sharemarket products, which was administered by a major financial institution. There is nothing wrong in borrowing for investment.  In fact, it can be a very tax-effective method of investing and can accelerate returns.

 

Reportedly however, this group then used the borrowed funds as collateral to borrow additional funds from a margin lender and added that to the investment. This increases the risk significantly and it would seem from press reports that most investors were unaware of this increased risk.

 

Strategies such as this will work whilst the market is going up. Once however the music stops, as it always does eventually, then problems will set in. Broadly, this is how it works.

 

Let’s say you own a home worth $1 million and you borrow $500,000 against it from the bank to invest in the sharemarket. Assuming you can afford the interest on the loan (which is tax deductible) and you allow enough time for the market to work. The market then drops by 45%, (which it has done over the last year).  Your investment is now worth $275,000.  The bank is not concerned about your loan as you are paying the interest each month and they have your house as security, worth twice the loan value. You - as the investor, whilst not happy at the value of your investment, at least have the time to wait until the market recovery which will inevitably come. 

 

However, let’s say that with the original $500,000 of borrowed funds as security, you obtain another $500,000 from a margin lender. Again let’s assume that you can afford the interest on $1 million. The $1 million you have invested in the sharemarket drops 45%. Your investment now is worth $550,000 and you have $1,000,000 in debt.

 

Your bank lender is still unconcerned, but it’s a different story with your margin lender. The margin lender generally will only lend you a percentage of the funds invested (usually about 75%), the difference being their security margin (like the deposit on a house). So now your loan is 91% of the value of the investment which makes the margin lender very uncomfortable. So that your margin lender doesn’t lose money, they ask you to either put in more security (cash or other investments), or they will initiate a forced sell-down of your investments to repay the loan. To avoid the forced sale, you are looking at finding almost another $140,000.  For those who can’t raise the extra cash, the outlook is grim.

 

It seems that this is what has happened with a very large number of people in this case, and reportedly many people have had to sell their homes to repay their debts.  Some of the luckier ones have sold out of their investment and repaid the margin loan, and now have a debt on their homes that has to be repaid.

 

This financial group has reportedly devastated thousands of Australian’s lives leaving many with nothing - no savings, no superannuation and no home. It could have all been avoided.

 

There are a number of lessons here.  Firstly, don’t ever think the market will keep going up. Downturns happen regularly. Most are not as severe or long lasting as the 2008 one, but there are no guarantees. Secondly, do not over borrow. You need to have some equity in any investment. If you are over-leveraged, a small downturn can be devastating.  It is far better to build wealth slowly than suffer financial devastation from which there is little or no recovery. 

 

Each of us is different in our tolerance to risk. Some will be comfortable taking on additional risk for the possibility of a larger gain, whilst others will not be so inclined. The important thing is to know your risk tolerance level and be sure that your borrowing level matches that. Always consider the downside risk. Negative markets always recover but that is of no comfort if you do not have the financial resources to outlast the down times and reap the benefits of leveraging your investment when the turnaround comes.

 

Every investment has risk attached. Know what that risk is and if you are not comfortable with it, don’t do it.

 

POSTED: 18-Dec-2008

 

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What a year it has been! So many things have happened that most of us have never seen before, such as the Sub –Prime crisis which fuelled a credit squeeze, the failure of some of the largest financial institutions in the world and a sharemarket that has dropped by amounts not seen since the Great Depression. We have banks needing to be government guaranteed, car makers now looking for handouts to survive, mortgage and property funds frozen and industry giants reduced to a shadow of their former selves, struggling to survive.

 

This has been a year of irrationality and huge swings.

 

Who would have thought that oil could reach a high of $147 with some predicting over $200 a barrel by Christmas, only to see it crash to not much over to $40 a barrel now. The same with the Australian dollar, 88 cents to the US$ in January, 98 cents in July with a rapid decline to a low of 61 cents before recovering slightly. 

 

It’s the same with interest rates. There were two rises of 0.25% each in February and March 2008. By September the RBA started cutting viciously with 0.25% in September, 1% in October, a further 0.75% in November and another 1% in December 2008. And it’s not over yet.

 

Our economy has gone from boom time to bust almost overnight. Suddenly, inflation is no longer a problem (even though it is still at 5%), unemployment is rising rapidly and with forecast job retrenchments will go much higher, a huge government surplus looks like turning into a deficit and a recession looms.

 

So what does the future hold?

 

Certainly the economy is going to do it tough next year. But as we are being told, our economy is better placed than most to weather the global downturn. Recession is a real possibility, though likely to be short in duration and probably quite shallow.  The stimulus package of infrastructure spending announced by the government, coupled with the cash payments to targeted groups should start to have an impact in the early part of 2009 and our economy should start to show signs of recovery soon after.

 

The sharemarket will also recover and much sooner than the economy. History tells us that sharemarkets tend to be well ahead of the economy. The consensus of commentators has recovery setting in toward the end of the first quarter of 2009.  Stock markets always overshoot both on the way up and the way down, which generally means that when the recovery starts, there is a quick catch up period where returns are well above average. Those who remain invested will benefit from the upturn.

 

In times like this it is hard to see the big picture when we are immersed in a deluge of (sometimes conflicting) information on a day to day basis. For all we know, this could be the best buying opportunity right now for decades. Only time will tell that.

 

Hopefully though, a brighter future for sharemarkets and all things financial is not too far away.  After the year we have had, that will be very welcome. 

 

POSTED: 18-Dec-2008

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