By now you may have heard about super choice. It’s coming on 1 July 2005. This is the chance, for those so inclined, to set up their own super fund. Financial Keys can help you transition to a DIY super solution easily and cost effectively.

DIY super really only makes sense for those with more than $150,000 of superannuation benefits. It’s hard to justify the cost for lesser fund balances. With a DIY fund you need to pay for establishment costs as well as ongoing accounting and audit fees. You will be responsible as trustee of your own fund and you need to be aware that the laws governing what you can and can’t do are quite prescriptive. However, with good advice you can proceed confidently.

There are a number of benefits that DIY super provides.

• As trustee you can have a direct say in the underlying investments
  of the fund.
• You can join resources with other family members to build a larger portfolio.
• You can acquire an investment property jointly with your fund’s assets.
• Flexible retirement solutions particularly for those with excess benefits.
• Estate planning benefits.
• For self employed members the fund can acquire the business premises.

Sole Purpose Test
A key overriding principle is that the fund must be maintained for the “Sole Purpose” of providing benefits to members on or after their retirement, or where they cease work due to ill health. In the event of the members death the test also covers the provision of benefits to the member’s beneficiaries.

Investment Strategy
The trustees must devise an investment strategy. This is a plan for the investments of the fund and sets out where the fund will invest its assets. The strategy must be consistent with the “Sole Purpose” test. The portfolio must be reasonably well diversified and the investments cannot benefit the member before retirement. For example the fund cannot buy a holiday home for the member’s use, even if it is let for most of the year.

The fund cannot buy assets from the members (or their associates) with the exception of business real property or listed shares. The fund cannot lend money to a member and cannot invest through a trust associated with a member. The fund cannot borrow except in very limited circumstances.

Using Fund Assets to Acquire Property Investments
People in small business are sometimes attracted to DIY super as they can use the fund assets to buy their business property which can be leased back to the business. The fund can invest in residential property but the members cannot use that property for their own benefit.

The fund can acquire an investment property outright or together with a member as tenants in common. This means each has a separate right to a portion of the property. Importantly the property cannot be used as security for a loan. Some members use their residence as security to acquire a loan to fund the partial purchase of an investment property. The super fund acquires the remaining portion. In this way the super fund participates in the property acquisition but the underlying asset is not encumbered. The member can claim interest on the loan against their share of any rental income earned.

Shares
With the advent or WRAP accounts shares are now available to members without the need to establish a DIY fund. Nevertheless some prefer the DIY option enabling them to directly access the sharemarket. Members can sell or contribute listed shares into their super fund. This will save on brokerage costs if transacted off market. If they are self employed they can claim a partial tax deduction for the shares contributed. Importantly the transfer of shares to the fund is considered to be a disposal for Capital Gains Tax purposes.

Where to from here?
Financial Keys provides a complete DIY fund solution from start up to administration and ongoing advice on the fund’s investment strategy. We advise on portfolio construction including share portfolios, managed funds and property investments.

We can help you decide if a DIY fund makes sense for you and smooth the complex process of establishment and ongoing administration.

Andrew Condell

Back to Top

Getting on top of personal finances seems to be a goal that eludes many.

Wouldn’t it feel good to start this year with that part of your life under control? That way you can focus on other more important things.

Financial Keys is offering to help with a “Financial Check Up” to put your house in order. Even if you are organised, your finances need regular maintenance and review.

• Are your loans structured in the best way?
  Tax effective, cost efficient, flexible?
• Will your super investments be enough when you need them?
  If not, why not?
• Do you have an investment plan?
• Is your money sitting in the bank?
• Have you got too many credit cards and are they the right ones?
• Bank fees too high?
• Do you have a plan for your bonuses or spare cashflow?
• What about margin loans, a line of credit, negative gearing?
• Are you insured against a serious accident or illness?

Loans Review
You should separate loans for investment and personal purposes. Interest only loans are suitable for income generating investments. Principal and interest loans are suitable for your residence. Be sure to direct your repayments first to the least tax effective loan. You may wish to start a line of credit for investment purposes. You can even use this to refinance credit card debt.

What about interest rate movements? Do you have any protection in place? You may wish to split between fixed and variable. This allows you to accelerate your repayments but gives you some comfort in times of
rising rates.

Credit Cards and Other Debts
Is your credit card feeling a little stuffed after Christmas? A line of credit is a good substitute for ongoing credit card debt. If your credit card(s) are continually reaching their limit, examine where you’re spending your income and then set a realistic budget.

If you have several sources of debt then consider consolidating them into one loan to simplify your debts, make them easier to manage and reduce interest costs.

Insurance – Protection for You and Your Family
Accidents and illness can strike at any time, and people can find themselves insufficiently protected. Consider how the family would cope with mortgage repayments and other living costs on just one income, or no regular income.
If you’re single, you still need to insure your income.

Also, make sure your home and contents are fully insured. Be certain that you are insured for the full cost of replacing your home and household contents otherwise you may only receive a fraction of what you need in the event of a claim.

Superannuation and Savings for Retirement
Next to purchasing a house super is the biggest asset most Australians deal with in their lives. Super is like a home mortgage in reverse. It starts small and ends up big. Even a small change in the longer term performance of the fund has dramatic consequences to the balance down the track.

Check your latest superannuation statement(s). Look at the investments.
Find out what your options are. If you have more than one super account, avoid duplication of cost by consolidating them into one account and don’t lose track of them - there is currently over $7billion on the ATO’s lost member register.

Compulsory super is usually not enough to fund your required retirement savings so consider making additional contributions to your super fund.
Super is a good long-term, tax beneficial savings vehicle which can form the core of your retirement savings plan.

Excess Cash
Do you have enough cash in a savings account that can be used for emergencies? Do you have excess income that dwindles away because it is
in your bank account, easily accessible and easily spent?

Consider a structured savings plan that will invest your excess savings before you get a chance to spend them on discretionary expenses. It’s important to ensure that you pay yourself first so that you can meet necessary expenses, but with a disciplined savings plan you can take advantage of the power of compounding with just a small deposit and regular amounts added each month.

Your will
Many Australians don’t have an up-to-date will and consequently their assets may not be distributed according to their wishes. Making a will can be simple and not expensive. Getting divorced, forming a new relationship, changing old relationships or established new interests, can be grounds for challenging a will so it is very important that your will be up-to-date.

Start Today
Call us now and we’ll walk you through a “Financial Check Up”. You’ll feel much better and you’ll be able to get on with the more important things in life.

Brendan Gallagher


Back to Top

The Australian sharemarket had a bumper year in 2004 with the
All Ordinaries climbing to record levels, and the international sharemarket continued to rise from the doldrums.

Low interest rates were a prime motivator for a stronger growing global economy, with the US in particular growing strongly and the US Federal Reserve ensuring this growth is controlled slightly raising interest rates.
The US economic growth measured by Gross Domestic Product (GDP) is expected to continue to grow in excess of 4%.

The US has also experienced strong job growth with unemployment falling to 5.4%. Inflation in the US is steadily rising however the US Federal Reserve is keen to use interest rates to ensure inflation is controlled.

Japan was stronger through November and December following some slow months. There is a general note of caution with many economists of the view that the Japanese economy has entered a slow patch. An indicator of this is the Bank of Japan’s index of business conditions which posted its first decline in 18 months.

In Australia, the All Ordinaries broke through the 4000 barrier during the quarter and kept going. 2004 was a great year for the Australian sharemarket with the All Ordinaries returning investors 27% for the year. This was underpinned by continued low inflation, strong economic growth, low unemployment (5.2% - 27 year low) and strong regional growth, particularly China.

On the flip side, the housing market continued to cool and there is growing concern with the Current Account deficit with Australians appetite for imports showing no signs of abating and the stronger Australian dollar hurting the competitiveness of our exports.

Listed property trusts continued to power along during the quarter, with takeovers, mergers and acquisitions continuing to the key drivers for growth in this sector.

Brendan Gallagher

Back to Top

Investors in emerging markets seek high growth and are prepared for volatility. But while the rewards can be high, investment into emerging markets is not for the faint hearted.

Emerging markets are those countries or regions that are often forgotten by investors. They include South America, Eastern Europe, Asia (ex Japan), Israel and South Africa.

The risks can be mitigated by careful country and stock selection. For example avoiding countries where there is no stable stock market or regulatory regime or where the dissemination of information is poor and corruption is high. Most countries in Africa fall into this category. Choosing the right companies in which to invest can also be very tricky.

Stocks are usually included in a portfolio after
careful evaluation of published accounts and reports. In emerging markets these reports are less reliable and therefore hands-on stock selection is essential. This means company visits and the collection of information from numerous sources. Company claims need to be corroborated by matching information known about competitors, suppliers and consumers. In this way risks can be minimised. Therefore it is important to have analysts on the ground with knowledge of the region and the market sector they are researching.

There are a number of funds which specialise in emerging markets investment including ING and Aberdeen. Both have strong experienced investment teams spread throughout the emerging markets regions and both have strong global ownership connections. The following extract from the Aberdeen Emerging markets fund report for January gives an overview of developments in this sector.

“Emerging markets surged in the second half of the year, chalking up gains of more than 25% to bring the full-year increase to about 19%. The rise in share prices continued to be underpinned by robust economic growth and solid corporate profits.

• In EMEA (Europe, Middle East and Africa), Egypt, Czech Republic and Turkey outstripped other markets as gains in the six months to December more than doubled the first half of 2004. Turkish equities rallied on positive news that its EU membership negotiations will start in October 2005, in addition to a 2% interest rate cut by the central bank.

• Latin American markets closed 2004 on a positive note, rising almost 40% in the second half, bringing the full-year increase to about 35%. Among the leaders were Colombia and Brazil, as they piled on gains of more than 50% each in the six months to December.
  

  Columbian equities chalked up a 126% gain for the year due largely to political stability stemming from the ongoing peace negotiations, as well as a surprise cut in interest rates. Market sentiment in Brazil was boosted by upbeat economic data, including record exports, production and consumption growth, which pointed to the country’s gradual recovery.

• In Poland, third quarter GDP growth slowed to 4.8% year-on-year from 6.2% in the second quarter. Fixed asset investment stayed moderate but unemployment was stubbornly high. The central bank signalled that it may shift its policy stance to neutral from its current tightening bias.

• A positive year for Asian stocks closed on a tragic note after a devastating tsunami claimed the lives of more than 300,000 people in Indonesia, Thailand, Sri Lanka and India. Market reaction was muted, largely because the key areas of economic activity, as well as infrastructure, were unaffected.
  
  Asia’s dark horses such as Indonesia and the Philippines were the region’s best performing markets in 2004. In contrast, Thailand, the star performer in 2003, suffered a year-long correction from the fallout from higher oil prices and continued ethnic violence in the south.

Despite a possible slowdown in global growth in 2005 and uncertainty caused by the weakening US dollar, we remain sanguine about the prospects for emerging economies, where domestic growth should help mitigate any external deceleration. Reasonable earnings growth is expected to continue and valuations still appear attractive relative to developed markets.”

Emerging market investments are for the more growth focussed investors. They can add spice to a portfolio and can significantly enhance returns.
The higher volatility can be mitigated through the value added by a quality management team and through their inclusion as part of a wider portfolio of less volatile investments.

Andrew Condell

Back to Top

	Privacy Policy| Disclaimer | Resources | Contact Us
	ABN: 71 089 066 955  |  AFSL: 222 132