Finance ViewPoint

Financial considerations when buying a house from a tax consultant and accountants perspective (Part 1)

andy@financeviewpoint.com (Andy) — Wed, 06 Aug 2008 15:30:00 +0000

This edited article has been provided to Finance ViewPoint by Raj Kuckreja CA, of Kuckreja Accounting and Taxation Services Pty Ltd (Phone: 02-9708-6978). The information in this article is general in nature and DOES not represent individual financial or taxation advice. Liability limited by a scheme approved under the Professional Standards Legislation.

Purchasing a house has to be thought of from firstly from a financial perspective. The rest will come from there. Before even deciding on a location or any other issue, you need to consider financing. This will be the driving factor on how much you are willing to pay. Important financing considerations:

NEVER view this as how much the financial institution is willing to lend, rather go online, and work out your monthly repayments for different borrowing amounts. Consider how much you can afford to repay with one salary and an absolute worst case scenario interest rate (for example 4% higher than current rates or a 50% increase in your repayments)
Try and avoid paying mortgage insurance whenever possible. This insurance does nothing for you; rather it is to cover the bank’s risk – which you are charged (paying) for. The best way to avoid this is either:

Ensure you have saved 20% of the purchase price (which is the deposit you want to aim for) plus stamp duty and legal costs; or
Borrow the 20% plus on-costs using security of another property (e.g. parents property if they have surplus or full equity in their home).

The combination of factors described in points one and two will then determine how much you can afford , which will help determine if it is the right time to buy
If the above factors limit your choice too much, consider purchasing the property as a rental investment first and then eventually moving into it. There are taxation implications to consider, for which you should consult a taxation advisor. This strategy can be very effective in helping you afford the property you want. (In the interim period consider living with parents or renting a much cheaper place).
If your choices are limited try NOT to think of buying a house for a short term. Having seen many clients and friends do this, it makes no sense from a financial perspective in most cases. The cost of buying and selling can easily get up to the $40k mark (when you consider stamp duty, legal fees, borrowing costs and agent fees on sale).
In most cases purchasing a house makes no sense for a short term investment. Especially when you consider how cheap it is to rent in comparison to loan repayments. There are studies showing mortgage repayments are often close to double rental payments. When you consider how little principle you actually repay in the first two years of a loan – I am sure a financial consultant will be very wary of this strategy.
With this in mind obtain loan approval before you start and be patient. Also consider reviewing your budget / strategy with an appropriate advisor (e.g. you accountant or financial advisor).

This concludes part one of the article. Look for more taxation, financing and loan related items to consider in Part 2 (to be published shortly)

World's Top 10 places to Be An Expat

andy@financeviewpoint.com (Andy) — Mon, 04 Aug 2008 03:01:00 +0000

If you are thinking of relocating overseas for the expat lifestyle then this article could be just the start of your journey. If you are already overseas, what do you think of the findings? I was surprised with some of the destinations that came up, though overall it is a pretty fair assessment,

Forbes brings us the story of the World's Best Places to be an expat. according to a HSBC Bank International study surveying 2,155 expats around the world. Here is the list:

1. Singapore - The tiny island country is the best place to live if you're an expatriate. If you can withstand the scorching summers and drenching humidity, you can have a life that is far more luxurious than the one you currently enjoy at home, including everything from a nanny for your children to a swanky central accommodation complete with a swimming pool.

2. The United Arab Emirates (UAE)/Dubai is tied for second place. The UAE, with no income tax, perhaps unsurprisingly does very well when it comes to saving and freeing you up to enjoy its swanky hotels and shopping centers--all reasons why it's the best place for luxurious living, according to the survey. See my piece on the pro's and con's of moving to Dubai, the main draw in the UAE for expats.

2. USA (tied) - Expats often get posted to corporate headquarters and command high salaries. Especially for Europeans, who are used to the high cost of living within the euro zone, life can get a lot more luxurious in the U.S.

4. Belgium - Capital city Brussels, home of the European Union headquarters, tends to attract expats for long periods of time, while decent accommodations are available and affordable.

5. Hong Kong. Attracts the biggest earners, with almost half of expats earning more than 200,000 U.S. dollars a year

6. Canada, Germany and Netherlands (tied). Like the US, these countries have a number of multinational headquarters.

9. India. When it comes to saving the pennies, there's no place like India. The low cost of labor, private health care and dining out all compensate for accommodations, which can be extraordinarily pricey, but below the standards found in other top expatriate destinations. "We were surprised by earnings in India. The huge demand for human capital and people with experience in management, financial services and the IT (information technology) sector means that expats have been able to demand increasingly higher salaries," says Aaron Le Cornu, deputy chief executive of HSBC Bank International.

10. China and Australia tied for 10th place.

Overall, it is a good time for those who get the opportunity to be posted abroad. More than half of expatriates are not only able to invest and save more, they can also spend more on shopping and socializing while abroad. The global expat population has continued to boom--according to the World Bank's Global Links Report 2007, the number of people living outside their home country has more than doubled since 1980 to 190 million!

The full article with more information can be found at Forbes.com

Related Post:
- Is Dubai the place to be? A review.

My super is down 15%

andy@financeviewpoint.com (Andy) — Thu, 31 Jul 2008 14:24:00 +0000

I recently received my Colonial first state superannuation half yearly statement and it showed the value of my portfolio is down almost 15% from January 2008 to July 1st 2008. Ouch. What was more annoying was the $500 or so in fees charged! Unfortunately there is little I can do about it, other than change fund managers. However given how bad markets have been this year I don't think switching now would make much of a difference. Here is what they had to say for justifying the poor results. Provides a good recap of events to date, but doesn't sound like a very optimistic or convincing outlook going forward. I will definitely be taking the time to review my superannuation investment strategy and allocation going forward. Have you?
__________________________________________________
Your June statement and your investment performance

Since January of this year share markets have fallen dramatically. You may be disappointed by the current value of your investment and this is understandable, however it may reassure you that over the long term the general trend of share markets to date has been up and many investors would have received some healthy returns over the last five years. Over the past 20 years to May 2008 the Australian share market has returned 10.99% pa1 and the property market has returned 10.32% pa2. This long time period includes many significant events which severely impacted the market at the time, however those who had the courage to stay invested through the inevitable downturns have been rewarded for their patience.

With markets considerably lower than their previous highs, this may not be the most ideal time to make changes to your investment strategy. Although it may be tempting to switch your investment to something that has delivered better returns over the last 12 months, chasing last year's winner may not be a sensible strategy.

What is happening in the share markets?
From mid-March to mid-May, share markets began to recover, largely due to a series of aggressive interest rate cuts in the US and cash injections into financial markets by central banks around the world. Strong commodity prices, particularly coal and iron ore, and takeover activity also helped the markets to recover. Bidders believed that the takeover premiums included in the current prices offered long-term value. This type of activity was building confidence and suggested that these companies were optimistic about the future.

From mid-May to the end of June share markets took another turn for the worse. Higher oil prices, higher interest rates and concern over slowing economic growth saw investor nervousness return and share markets fall. Although higher interest rates are slowing activity in Australia the economy is still growing and the resources boom is not over. This should be positive news for the Australian share markets over the remainder of 2008 once investor confidence returns.

Have we seen the bottom of the market?
The immediate crisis appears to be behind us, although volatility does remain. However the problems we still face relate to the pace of economic growth in the US and Australia. If higher interest rates in Australia slow the economy more than expected, companies may issue further profit downgrades or profit warnings. Of particular interest will be the profits of banks. Banks make up a large proportion (around 20%) of the share market and therefore have a significant impact on the performance of the Australian share market. Banks have come under short-term stress due to rising interest rates. Banks have had to pay significantly more for the funds they borrow in global capital markets and this will affect the demand for loans by their customers for at least the remainder of 2008. Over the longer term it is unlikely that the banking sector will dominate the market as much as they have done over the previous decade or so.

The share market should recover over time as US sub-prime and other issues are worked through and focus is placed back on the future earnings capacity of companies.

Does the share market still offer good investment opportunities?
Market sentiment can lead to unpredictable and volatile investment returns. What is important is the need to focus on the underlying fundamentals of the Australian share market. Despite the gloom in the markets we would do well to remember that parts of the Australian economy are still booming. The resources sector has seen the prices of coal and iron ore rise significantly. Share prices in the resources sector have recovered most of the ground lost in the early months of 2008 and although we are still in drought the rains over much of Australia should assist rural incomes and rural exports.

While the market will always have ups and downs Australia remains well placed to grow over the next five to ten years. This means that opportunities are likely to be ahead for those who invest in the share market.

What might the future hold for the rest of 2008?
Current market sentiment is that the outlook for the rest of 2008 is relatively positive for a number of reasons, although it is likely we will continue to see some volatility over the short to medium term. In the medium term, positive drivers such as the resources boom and the Reserve Bank of Australia's commitment to keeping inflation on an even keel should help company profits and support the Australian share market.

On the global front, the global economy is expected to slow, at least for the remainder of 2008, from its fast pace of growth over the last three years. Developing economies such as China continue to report strong economic growth that is not as dependent on the US economy growing.

Starbucks to close in Australia

andy@financeviewpoint.com (Andy) — Wed, 30 Jul 2008 20:15:00 +0000

Slower growth and declining profits have forced American coffee giant - Starbucks - to announce that it would close the majority (61 out of 84) of its stores in Australia, and cut a number of international management roles as part of its realignment efforts. I think most true coffee lovers in Australia would not be too worried about this as they prefer their morning brew from the local cafe where the coffee is good and made by a real Barista, as opposed to a 20 yr old university kid. Will this spell the end of Starbucks in Australia? I think so and while it is unfortunate that a number of jobs will be lost because of this; Australia is better of without Starbucks and their overpriced beverages . What say you?

Property still better than shares & 5 tips to consider when investing in property

andy@financeviewpoint.com (Andy) — Tue, 29 Jul 2008 20:44:00 +0000

I am happy to introduce another expert contributor to Finance Viewpoint - Australian Mortgage Options managing director Robert Projeski. In this post he shares his views on why he thinks investing in property is still better than shares and provides 5 tips for investing in property. Feel free to leave a question if you have any property related comments or questions for Robert.

Property still better than shares

Following last year’s strong performance of the property market and the continuing volatility of the share market, many investors are choosing to stay or return to property investing despite the recent interest rate hike, suggests Robert Projeski, managing director of Australian Mortgage Options.

Housing approvals nationally are sitting 18% below the 2003 high and 3.4% below the long term average and investor finance at just $4.8bn for March 2008 making it a drop of 4.6% taking it to 18% below the 5 year average (2003 – 2008). [Westpac May residential report]

Despite the slowdown in demand, house prices are set to continue to increase in our capital cities with exceptions made only by Sydney, Perth, Hobart and Darwin. The decline largely due to mortgage stress and the affordability crisis brought about by increasing finance costs and the US sub-prime market impact.

“With Perth recording a drop of 0.5% on median house prices (average) and a stable level of housing approvals, suggesting further price growth and continuing rental demand, thus making it one of the locations to make your investing count in” suggests Mr Projeski.

With Sydney’s vacancy rates at just 1.6% it further suggests that the ‘Western City’ is a good place to put your money. However, when looking at investing in property it is essential to do your research and homework. Look at statistics, sales history, employment trends and other factors affecting the location you wish to invest in, before you make an offer of purchase.

As timing and the right price are the essential factors in buying well performing investment properties, it is paramount to not simply listen to friends, family or agents, but to do your own research, either through a professional or on your own, stresses Robert.

“We live in a time where one can easily access sales history, statistics and performance reports to decide on the best investment location and with finance options being more flexible than ever – purchasing worthwhile investment property has never been easier”, he added.

5 tips to consider when investing in property, which are worth considering if you looking to play the high rental yields current available in the Australian metro marketplaces.

1) Using property experts. Just because you have bought and sold a couple of houses with profit, does not mean you are an investment expert. Don’t listen to friends and family blindly – usually they have an opinion about investing, often despite that fact they are not doing it themselves. Property investing is too important an expenditure to take chances with – talk to property experts, investment advisors, finance brokers and study property reports before you make a decision.

2) Waiting for the price to come down. Property generally always goes up in value. It may plateau or slip back a few %, but across the board – prices are steadily claiming. So, if you wait until the prices from 10 years ago return, you will wait a long time. You are in most cases better off buying now rather then in 6 months, as often you will pay more down the track – effectively reducing your capital growth. Having said this, the best time to invest is when you are ready to do so. Sooner than later is usually best.

3) Emotional vs commercial decision.When selecting and deciding on an investment property – do yourself the favour of approaching this simply as a commercial decision based on figures, returns, vacancy rates etc, not what colour the walls are, whether you would want to live in it or that it is in easy reach so you can mow the lawns on a weekend. The more emotionally detached you are, the better it is. Investing is done from the head, a home is bought from the heart.

4) Old vs New.Unless you are a tradesman or have loads of time to spare to perform renovations, repairs and maintenance, you probably are better off buying a newer investment property. Apart from the work and expense, your depreciation schedule is more substantial on a new property than an older one. After all, it is all about letting your money do the work – work smarter - not harder.

5) Managing the Property Yourself. Unless you are rather experienced in this area and have access to the industry tools to ensure you do end up with the best tenants possible – don’t do it yourself. Firstly, if you do select a ‘lemon’ for a tenant, this can easily turn into a lengthy process in front of the tenancy tribunal, with loss of rent, loss of access to the property, presentation costs etc. Once again, you want to work smarter not harder. So, get a good property manager to look after your investment. The percentage you pay them should outweigh any losses through your own tenant mismanagement and peace of mind is worth a lot!

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The "Last Lecture" Professor - Randy Pausch - passes away

andy@financeviewpoint.com (Andy) — Sun, 27 Jul 2008 18:52:00 +0000

Randy Pausch, 47, famous for his remarkable taped speech known as the “last lecture” which was a sensation throughout the web last year passed away on Friday. His last lecture at Carnegie Mellon, where he was a professor, was inspirational in it's life lessons, but the most remarkable aspect was that he knew he had terminal pancreatic cancer before he gave the speech. Instead of focusing on the negatives he looked at achieving what he hadn't and what was important in life (family). In the lecture, he spoke of overcoming the obstacles that may seem insurmountable. If you haven't seen the last lecture, I urge you to spend the time (about 75 minutes) to watch it. For those of us who are going through tough times, this provides much needed inspiration.

Jim, from Blueprint for Financial Prosperity and a former Carnegie Mellon alumni published a copy of the official letter from the university on the professor's death and I thought the following line was the most striking:

Perhaps the greatest lesson, however, Randy taught us all was how to live, even in the face of great challenges, and how to follow our passion. While Randy’s greatest passion was clearly his family, he did not shy from sharing his passion for his work as a professor, for his students, and for Carnegie Mellon. We will miss Randy, but we will carry the memory of him and all that he did to make Carnegie Mellon a better university and each of us who knew him a better person.
What are your thoughts?
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The rising price of oil and market outlook vidcast

andy@financeviewpoint.com (Andy) — Sun, 27 Jul 2008 14:40:00 +0000

A few weeks ago I indicated that the rising price of oil was based more on speculation rather than supply and demand. I also pointed to the price of oil peaking this year, with prices likely to fall over the next one to two years to around $70 a barrel. In the last two weeks the US government has introduced plans to reduce the speculation on oil prices, which has subsequently seen the price of oil fall. While it is still too early to confirm whether oil has peaked, the signs are very encouraging. If it does start to move down I don’t believe it will be a swift retreat, rather I expect it will be steady decline over the next 12 months.

So what can we expect in the market?

Last week the All Ordinaries index fell to a low of 4880 on Wednesday 16 July, and has since risen strongly to reach a high of 5209.60 as of Wednesday 23rd July. Whilst the fall was close to my target of 4800, I am not convinced that the fall is over. My current expectation is that the current move up will last between one to four weeks before it finds any resistance, although in my opinion the longer the upward move the better.

For the market to prove it is bullish again, we need to see it hold above 4880 points. While it will fall away to test the recent low, the move down needs to be short lived. Currently the medium term direction of the market is uncertain, as it is still possible it could fall away to trade around 4300 points, which is the next support level on the All Ordinaries Index.

Remember, until the market proves it is bullish, we need to assume that it will continue to be bearish. Given that the market has yet to prove it is bullish, is it is far safer to sit and watch it unfold before making any decisions. Once the market confirms it is bullish there will be many opportunities to profit in top blue chip shares during the remainder of the year. Right now I encourage investors to sit tight.

Dale Gillham Vidcast (Streaming video clip) of Market Outlook

This report is from Dale Gillham , chief analyst of share investment company Wealth Within

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You must read this article if debt is any part of your life....

andy@financeviewpoint.com (Andy) — Tue, 22 Jul 2008 21:20:00 +0000

"The collection agencies call at least 20 times a day. For a little quiet, Diane McLeod stashes her phone in the dishwasher"

I first read about this article in the I will teach you to be rich blog via a link I was sent and adapted it here for my audience. It is from the New York Times and is about the American debt problem shown through a woman named Diane McLeod who got into hundreds of thousands of dollars in debt from a seemingly secure position. It's remarkable series of articles because it includes a rich set of multimedia features that let you understand how many Americans get into so much debt — and also allows you to compare yourself to others. I know it is American focused, but I think it is applicable to any one in the world who got in to debt, is in debt and how to get out. This multimedia article, part of a series, is worth spending the time to read through. It covers:

> An overview article: Given a Shovel, Americans Dig Deeper Into Debt. This is the story of Diane McLeod and how she got into debt.
> A interactive timeline of debt from the 1920s until now. I have shown a screenshot of the 2000's below. You can look at every decade in the feature.
> A haunting video of Diane McLeod. Just watch her attitude and how her debt affects her.
> 1000+ comments at last count. Clearly a lot of people have something to say.
> A tool that lets you compare how much debt you have with others like you. Just use the exchange rate and see how you compare to most Americans ($1 Australian = $0.97US. So if you are earning $100,000 Aussie dollars, it is equivalent to $97,000 US dollars)

I highly recommend you read and see the entire piece (it should take you about 15 to 30 minutes). Whether you are financially secure or not, you will learn something new. Click here to see the NY times article. Also check out the above blog, which has more comments on this article.

What are your thoughts on it? I thought it hit a number of key points and challenges we or some we know faces. Sometimes without realizing it.
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Analysing Market Trends

andy@financeviewpoint.com (Andy) — Mon, 21 Jul 2008 01:20:00 +0000

When analysing the market, it is important to always review the historical patterns to assist in forming a view of what may occur in the future. It is a well known fact that the All Ordinaries has a history of making a major low approximately every 4 years, and with the last 4 year low occurring in March 2003, it is obvious that we are well over due for the current 4 year low.

The longest period in history for the 4 year low to unfold on our market is 64 months between July 1982 and Nov 1987 and currently the market has been unfolding for 61 months since March 2003. Given that the average length of the 4 year low is around 50 months, it is evident that the low could occur at any time. While the opportunities will be plentiful when the low is confirmed, investors will need to exercise caution by only investing in large companies that generally lead market recoveries.

So what can we expect in the market?

This week the market continued to sustain its downward trend falling to a low of 4880 on Wednesday 16 July, which is now the 8th successive week that the market has fallen. While it is rare for the market to fall for such a sustained period I still believe it will rebound over the next one or two weeks.

Given the level at which the market fell to this week, it is also possible that we may see an end to the current fall and the market return to being bullish, however, only time will tell. Given that anything is possible in the current market conditions, it is important that investors protect their capital in preparation for the next bull run, which I do not believe is too far away. I expect the market to find support around 4800 points although if it falls through this level it could fall to the next support level of around 4300 points.

This report is from Dale Gillham , chief analyst of share investment company Wealth Within

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Tips on successfully buying a house

andy@financeviewpoint.com (Andy) — Thu, 17 Jul 2008 21:01:00 +0000

I had recently published a post on a friends first hand experience of buying a house in Sydney. Based on that article, here are his key learning points about the home buying journey. Given I may be looking for a house to buy soon, these are very useful tips:

Know where you want to live and why. Key factors include, family, transport, lifestyle, schools and work. When schooling takes up 5 out of the 7 days a week for 13 years of your children’s life this is a huge factor.
House or unit/town house and why. Houses give you more room and flexibility but it comes at a cost of a lot more maintenance and is generally more expensive with purchase price and rates.
Set a range, probably about $50,000 plus or minus of your budget.
Know the market. The single biggest factor in making sure you don’t get ripped off. Go to auctions, open homes and look at places out side your range. The few hours each week could save you $20,000-$30,000. At high interest rates that is a lot of money to save at the back end.
Be patient. There were a couple of places we liked but had to let them go due to the price being out of our range. I know that if you miss out on a place you had set your heart on there will be another come along. It is amazing. Try to ride out the emotion as much as possible. My wife didn’t do this well after the first place we missed out on. It hurt her for a good few weeks, but then came along another place, and it sparked our interest.
Ask the agent why the vendor is selling. Also if they have a place to go to. In our case they had not purchased a place and were looking at their options. The reason I say this is that if the vendor has no where to go and you are not in a huge rush you can ask for a delayed settlement. We delayed ours by 2 weeks, bringing the settlement out to 8 weeks. It gave us another pay run into our savings accounts, plus it meant we had a bit more time to sell our unit. Every week that you have locked in a price but don’t have to cough up the balance is a huge saving on your mortgage.

Do you have any more to add to the above list?

$55 a day for parking in Sydney!

andy@financeviewpoint.com (Andy) — Wed, 16 Jul 2008 19:25:00 +0000

The economist brings us a comparison of parking costs across the world, as shown in the graphic below. Can you believe Sydney is the second most expensive city in the world (after London) for parking. I remember parking in Sydney a couple of years ago and $55 (or $800 monthly) was way more than I paid. Probably only a few places (Centre Point, Australia Square, Opera house) had parking that expensive and only in peak hours. What do you think?

Darkest hour is just before dawn

andy@financeviewpoint.com (Andy) — Sun, 13 Jul 2008 17:09:00 +0000

There is an old saying that the darkest hour is just before dawn and this is, at times, a very appropriate phrase when referring to the share market. In October 1997 experts were predicting a global meltdown as a result of the Asia crisis, yet our market rose 40% over the next two years. The same situation arose following the tech wreck in 2000, yet our market rose over 18% the following year.

Following the September 11 crisis, experts where once again predicting doom and gloom for the world economies, but our market only fell around 6% over the next 18 months into March 2003. Since then, we have had the biggest bull market in history therefore the pull back in the previous 12 months is a natural process whereby the market is simply adjusting to more realistic levels. Since the Asia crisis our market has risen nearly 130%, despite three major events that were predicted to have enormous impact on our economy. The question that remains then, is it time to buy? Not yet but it is getting pretty dark, so be prepared.

So what can we expect in the market for the week ahead?

Over the past seven weeks the market has been in a sustained down move, with the All Ordinaries falling to a low of 4999 on Thursday 10 July. The last time our market fell for a prolonged period was the eight-week fall into the March 2003 low. Given this it is highly likely that our market will rebound over the next one or two weeks.

While it is possible the rebound will signal an end to the current market fall, I believe it is likely to be short lived as I am expecting the market to fall away one more time to exhaust the current downtrend to eventually find support around 4800 points. While I would urge investors to remain patient, I believe it is time to get ready to take advantage of the next bullish move, which will occur in the not too distant future. As I have indicated previously, I still expect the second half of this year to produce good profits for those who are patient.

This report is from Dale Gillham , chief analyst of share investment company Wealth Within

Did you get a 19% pay rise?

andy@financeviewpoint.com (Andy) — Mon, 07 Jul 2008 19:32:00 +0000

The Sydney Morning Herald reported that "Prime Minister Kevin Rudd's senior management team received an 18.9 per cent pay rise. That is an extra $1400 a week, and takes the three top earners to almost $490,000 a year"

The article goes on to say

"Under the former prime minister, secretaries were on remuneration packages worth between $384,420 and $410,890. He then handed out bonuses of 5 per cent for secretaries assessed as performing satisfactorily, 10 per cent for superior performance, 15 per cent for outstanding and 20 per cent for exemplary performance. After freezing MPs' pay and urging unions to show wage restraint, the Prime Minister has [done an about face] and given a big rise to secretaries of the 19 federal government departments. The packages of the secretaries in departments rise from $384,420 to $490,000 on average "

How fair do you think this is? Given inflationary pressures and a worsening economy for ordinary Australian's, I think this pay rise is ridiculous and over the top. With private sector companies looking to cut jobs over the coming year, perhaps it is best to get a lucrative job with the government. Never thought I would say lucrative and government job in the same sentence.

An overview of Capital Gains Tax

andy@financeviewpoint.com (Andy) — Wed, 02 Jul 2008 19:46:00 +0000

Capital gains are the profits that an investor realizes when he or she sells a capital asset (eg a Stock holding) for a price that is higher than the purchase price plus transaction costs. Capital gains taxes are only triggered when an asset is sold, not while it is held by the investor. Hence smart investing should factor in the capital gains tax implications to legally minimize the taxes you pay and maximise your take home profits. Some major assets like the family home (the primary residence), are exempt from capital gains. The focus of this article though is on capital gains tax in relation to equities.

Capital Gains Tax is NOT a stand-alone tax with a fixed rate. Any taxable capital gain made in a financial year is added to your taxable income. Tax is paid at your marginal tax rates; hence capital gains tax rate varies depending on your other taxable income. Because it is variable and dependent on other income, effective forward planning can minimise your end of your tax liability.

At this time of the year you should be reviewing your investments and determining the following:
1. How much capital gains /capital losses have already been recognised during the year
2. Are there any assets with capital losses or gains that you will be better of recognising this financial year rather than future financial year?

Keep in mind the Contract dates (NOT Settlement dates) are the important dates for determining which financial year a gain is taxed and if an asset has been held for more than twelve months. Here is a walk through on how capital gains and associated taxes are figured:

CGT Example

Assume you purchased BHP Shares in September 2004 for $10,000 and sold them in May 08 for $60,000*. As you have held the shares for at least 12 months and one day – only half of the gain will be taxable under Australian tax law. i.e. (60,000 – 10,000) x 50% = $25,000. The actual tax you pay on the $25,000 will be depended on an individual's marginal tax rate. If you are earning over $150,000 (in 2008 financial year), that will mean 46.5% of half the gain. $25,000 x 46.5% = $11,625.00

*Note : Transaction costs for buying and selling the shares can be added to your cost base as well and will reduce your tax liability, so make sure you keep a track of these.

Assume you also owned Zinifex (ZFX) shares and purchased them in 2006 for $60,000 and today they are worth $40,000. Before financial year you can consider selling these shares. This will recognise a capital loss of $20,000. The sale contract must be before 30 June for the capital loss to be recognised.

A CAPITAL LOSS is not a tax deduction. It can only be used to reduce your capital gains. The $20,000 capital loss will reduce the gain on BHP shares. It is important to understand the net capital gain will be:

$50000 (Gain on BHP Shares) - $20,000 (Loss on Zinifex) = $30,000 x 50% = $15,000

That is the loss reduces the total gain FIRST and the CGT long term holding discount (50%) comes second.

However by recognising the capital loss before financial year you have effectively reduced your taxable income by $10,000. This reduces the tax payable by $4,650 if you are in the top marginal tax rate.

Selling for Tax Purposes and the Wash Rule

Often the question then comes up you want to reduce your tax bill and sell Zinifex shares, but you still think it is a good investment. Can you sell the shares and repurchase, for the sole reason to recognise the capital loss? In the past this was common practice. However the ATO seems to be clamping down on this practice in recent times. They have been actively issuing rulings and alerts warning people that if there is a "Wash Sale" - A scheme of buying and selling shares with the sole purpose to obtain a tax benefit - they will ignore the tax effect of such transactions and charge penalties.

The net result is you need to sell down Zinifex and either (a) not re-purchase OR (b) make the reason for selling and buying back is not about tax. For example you need to obtain and document advice justifying reason for selling Zinifex because it is not longer a good investment, and if you want to re-purchase shares in the future obtain and document advice as to why you have changed your mind. By documenting your financial advice for buying / selling and not holding the shares for an appropriate time – the sole reason for the sale and re-purchase may no longer be taxation – rather financial.

In summary

Capital gains tax planning is only one part of the puzzle and must fit in with overall tax and superannuation planning, but remember to always seek advice when it comes to taxation. More often than not the advice will more than pay for itself.

This is a very high level overview and I did not look into many issues such as methods of utilising capital losses, capital gains for collectables, small businesses capital gains, capital assets purchased before 1999 and adjustments for gains on properties. Leave a comment if you would like me to look into these or any other related tax topics.

Related tax articles and links:

1. Ten useful tax deductions
2. Investment Property and taxes
3. Ten Tips for Using Your Tax Refund
4. 2007/8 Tax Brackets
5. Should you hire an accountant
6. Australian Taxation office website.

My Investment in Apple's 3G iPhone Australian and Global launch

andy@financeviewpoint.com (Andy) — Mon, 30 Jun 2008 19:18:00 +0000

Telstra announced that they will be offering the iPhone 3G in Australia, with the launch scheduled for July 11. Optus and Vodafone will also launch their iPhone offerings at the same time. I have been using the older iPhone model for a few months (officially only sold in the US, though it was cracked and sold worldwide) and really think it is one of the best smart phones out there. The new 3G version with improved features, should be a big hit and really help the bottom line of Apple as it will be distributed internationally across multiple carriers. The new iPhone, includes fast 3G wireless technology, maps with GPS, support for enterprise features like Microsoft Exchange, and the new Apple Store access. Like the original iPhone, it combines three products in one—a revolutionary phone, a wide-screen iPod, and a breakthrough Internet device with rich HTML email and full web browsing. As some pundits are saying the "iPhone 3G. It redefines what a mobile phone can do—again."

With the above in mind and the ongoing growth in sales of Apple's other products (laptops, iPod products and iTunes store sales), I really believe Apple's future is strong. This led me to making a big investment in their stock ($16,000) and I believe that in the long term this should double. You can read more about this investment and reader comments at my US focused investment blog - savingtoinvest.com. I am currently down on my investment (thanks to falling markets last week), but still firmly believe in the long term future for the company. You'll see what I mean if you end up buying or using the iPhone.

A look at investing behaviours

andy@financeviewpoint.com (Andy) — Sun, 29 Jun 2008 15:14:00 +0000

There is a long held view that by taking a contrarian view to investing, investors can profit. In essence this is what the professionals do as they buy shares in good companies when no one wants them and then they sell them when the market has peaked. Historically the amateur investor does the opposite and in so doing reduces the ability of their portfolio to generate good returns.

In the current market conditions, many companies have been oversold as investors sell out through fear of losing, with many companies trading at prices well below their true value. The professional investor knows that this presents great opportunity for long-term gains and in our market these opportunities are likely to come from the energy, resources, healthcare and materials sectors.

Adapting to Changing Markets

It seems that investors are failing to acknowledge that the market has changed and would prefer to cling to how they have done things in the past. But as we all know, the market has changed and so must the investor’s expectations if they want to get reasonable returns in the future. Prior to 2003 most investors were happy if they received a 10 per cent return on their investments. But as a result of the bull market in recent years, investor’s expectations are continuing to remain high.

In my opinion, investors now need to become much more realistic in their expectations and more selective in the stocks they hold. While good returns are still possible, we now have to work smarter to achieve them.

The above is based on reports from Dale Gillham, chief analyst of share investment company Wealth Within.

The fallout in Australian infrastructure funds

andy@financeviewpoint.com (Andy) — Thu, 26 Jun 2008 15:27:00 +0000

During the 90's and in the early part of this decade, infrastructure funds and their management companies were booming. The key beneficiary of this was Macquarie bank (MQG) which managed and spun out a number of infrastructure funds and led to the bank being called the "Millionaires Factory". Babcock and Brown (BNB) joined the party earlier this decade and reaped enormous gains following a similar model. However over the last year, with the credit crisis and tightening of borrowing standards, many of these debt laden funds and their management parents have suffered quite badly. The table below, based on one from Reuters, shows how much value some of the leading infrastructure companies have lost relative to their Net tangible Asset value (which is the book value or value of all the company assets, less debt and intangibles).

* Share Price discount to NTA value is based on data as of June 24.

Unfortunately I hold a number of the above stocks - MAP, MIG, AIO - so have seen a big hit to my portfolio. However I am not selling any of them yet as I believe the companies themselves are fine and that they have been caught up in the fallout from the credit crisis. While not adding to my positions, I do believe the best value stock in this group is Macquarie Airports (MAP) and if you haven't got a position in this stock then it is worth looking into as it is trading at a significant discount to NTA.

As as side note, the share price management companies Macquarie Group and Babcock & Brown have declined by 45% and 80% respectively - much worse then the infrastructure companies they manage.

My Coffee habit I am not giving up on

andy@financeviewpoint.com (Andy) — Fri, 20 Jun 2008 03:31:00 +0000

Many personal-finance sites and authors talk about the need to cut your day-to-day expenses so that you can boost your savings. Good simple advice, but some who propose concepts like the obligatory measure of eliminating your daily cup (or two or three) of coffee and investing what you would have spent on it - are going too far. Yes, if you save $3 a day, for $720 a year, you will have some number like $10,000 in 20 years saved. A lot of money no doubt. However, in life you got to live a bit, for which you need to spend a bit. In my view, life's daily little pleasures like my morning cup of coffee have an intangible value to me which far exceed the $3 or so I spend on it. Maybe it's the caffeine or the simple experience of taking the time out to get the coffee and the 5-10 minutes to catch up with fellow workers, but I have found the returns of that daily cup of coffee to far exceed what I spend on it....

Saving where you can is great, but remember to ensure you don't deprive your life of the simple little pleasures along the way. I rather be happy and well-off, as opposed to a miserable millionaire!

This post is republished with permission from Savingtoinvest.com

What happened with Babcock and Brown (BNB)

andy@financeviewpoint.com (Andy) — Sun, 15 Jun 2008 12:17:00 +0000

The steep share price fall in Babcock and Brown (BNB) last week has really caught me by surprise. I own almost $15,000 worth of stock which I bought at $25, so am down big time. The share price has been falling over the last few months, but as I am a long term holder of the stock, I felt that it would recover and weather the current market turmoil driven by falls in the US markets. However with the stock under $6 now, I am not so sure it will be able to recover. Especially given the perception that it's creditors (banks) will demand early loan repayments. Here is a recap of what has happened with the stock last week as reported in the Australian:

AUSTRALIA's second biggest home-grown investment bank, Babcock & Brown, has been forced into emergency talks with its bankers following a massive share price plunge that put it in breach of loan covenants. Shares in the company collapsed by 28 per cent yesterday, slicing its stock market value to $2.3billion in the kind of selling frenzy that in the past year has crippled companies such as ABC Learning Centres and the Allco Finance Group.

The plunge forced Babcock into talks with the bankers behind a $2.8billion loan. If the company cannot restore its market value to above $2.5billion within four months, the syndicate of 25 banks, led by the Bank of Scotland and including Australia's big four retail banks, have the right to demand early repayment of their loans to the company.

Babcock executives yesterday insisted the company remained "robust" and said its business was sound."We have just got to show by our actions over the next couple of days and weeks that our business model remains completely intact, that we are developing and growing our business," the company's head of capital markets, Trevor Lowensohn, told The Australian.

Debt-laden Babcock, which has about $46 billion in debt across 20 separate listed and unlisted funds, is Macquarie Bank's biggest imitator. Like Macquarie Bank, it buys businesses, such as infrastructure assets, packages them together in one fund and charges a fee for managing them.

Babcock's stock market slump unnerved many shareholders. "They're obviously very nervous as many bought at higher (share price) levels," ABN AMRO Morgans adviser Lisa Jarvis said yesterday. "Certainly people have ridden the stock up from $7 (to $34) and not sold it and it's all the way back there now."

So based on the above and other media reports, should I sell my shares and take some money while I can? My heart tells me yes, but my head still thinks that Babcock and Brown will make it through given the quality of its assets and management. I'll be closely watching what the company executives and analysts say today when the shares resume trading. What are your thoughts?

Should you hire an accountant to do your taxes?

andy@financeviewpoint.com (Andy) — Wed, 11 Jun 2008 02:58:00 +0000

When it comes to doing your taxes, one question that most people have asked themselves at some point is, “Should I do my own taxes or hire an accountant?” When I first started filing tax returns they were very basic and I used to do them myself. However once I started working full time, investing and undertaking further education I started using an accountant to file my taxes. They make life much easier and unlike in most countries (e.g. the USA) your accountant fees are tax deductible. If you are in the higher tax brackets, that’s like getting a 40% discount. However you need to weigh up your own situation to determine the best and most cost-effective way to prepare your taxes.

So how do I know if need an accountant? The more complicated your taxes are, the more likely it is you need a tax professional. The easiest way to determine this is to first try to do your taxes on your own. If you find it’s too difficult, or if you feel like you’re making mistakes, seek out an accountant or a tax preparation company.

Though I did my own taxes for a long time, I gave up once they became complicated and too much work. My brother referred me to his friend (whom I knew as well) who was an excellent CPA, and am pleased to pay him to do my taxes for me. Living overseas, this is an added benefit as he is able to greatly assist with my family’s local taxation affairs and has provided sound advice on a number of occasions.

From my experience — and this may not be true for everyone — having an accountant prepare my taxes has paid for itself. Though I’m a relatively smart guy and follow directions well, there are things I miss when I do them myself. Further, the tax code is updated every year and most of us non-accountants don’t have the time or background to keep up with all the changes and possible deductions. Accountants normally have tax preparation software and tax checklists that enable them to file taxes quicker, with much fewer errors and to try and get back as much as legally possible for you. For example, did you know you can claim the fuel /driving costs to and from training classes/courses you go to using your own car? For multiple days or year long programs that can add up to hundreds of dollars in deductions most of us wouldn't know about if doing taxes on our own.

A good accountant will do more than just file your taxes, they will actually save you taxes and provide sound tax related advice. The other thing is to always choose a qualified accountant you are comfortable with, trust and has good referrals. I’ll write another post shortly with more details on how to find and select a good accountant.

Top 25 Stocks by PE ratio

andy@financeviewpoint.com (Andy) — Sat, 07 Jun 2008 22:25:00 +0000

The table shows that top 25 stocks by P/E ratio. The P/E ratio is defined by Wikipedia as follows "The price-to-earnings ratio of a stock (also called its "earnings multiple", or simply "multiple", "P/E", or "PE") is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. "

A higher P/E ratio means that investors are paying more for each unit of income. A low P/E means the stock is potentially undervalued. However when evaluating the P/E ratio always compare the stocks to others in its industry or sector. Similarly it is misleading to compare P/E ratio's for stocks in different sectors; for example, technology shares normally have much higher P/E ratio's than industrials due to the nature of their business and earnings.

With the sharp fall in share prices a number of stocks in the above table have very low P/E ratios (e.g. CNP, BNB and BOL) and may look like great deals. However companies only report earnings every 3 to 6 months, so until their earnings are reported (which will most likely be much lower), the P/E ratio can give a false impression. Still in a normal market environment they provide a good starting point to narrow down a list of stocks for evaluation. I prefer the PEG ratio, which I wrote about here.

Market Report (from Dale Gillham)

The share market has been quite challenging this year with the All Ordinaries Index down 10.08% to 31 May 2008. The worst performing index is the Mid Cap index which includes shares ranked from 51 to 100 by market capitalisation which has fallen by 15.77% for the year.

In 2007 all of the indices, with the exception of the top 20 rose between 11% and 12% but the poor performance of the market this year has essentially wiped out these gains. The good news is that in the 26 years since 1982 the All Ordinaries index has only ever closed lower than it opened for the year on five occasions and it has never had two consecutive down years. Given this, probability suggests that the worst of the volatile market is behind us.

How to claim your lost superannuation

andy@financeviewpoint.com (Andy) — Tue, 03 Jun 2008 18:33:00 +0000

There's roughly $12 billion in unclaimed superannuation money, some of which could be yours if you have lost track of your super over the years. There are 4.3 million Australians with unclaimed or lost Superannuation. Like most people, you have probably had multiple jobs and unless you were "super" organized (especially before everything was computerised) you may have some unclaimed super sitting around. Recent estimates show that the fund managers of this "lost" super take up to $250 million in fees every year from unclaimed retirement savings. Workers on temporary visas are believed to make up a big proportion of lost super.

What is "lost" superannuation

Australia was home to 5.16 million lost or unclaimed superannuation accounts (one person can have multiple accounts if they had more than one (job) - known as eligible rollover funds (ERF) - at the end of June 2007. Super is transferred into one of these ERF accounts if a contribution has not been made for two years or someone has failed to reply to mail. Another $6 billion in lost super is tied up in mainstream funds that have not transferred the super into an ERF.

How do I find out and claim my lost superannuation

The Australian Taxation Office (ATO) and the superannuation industry have set up a FREE system, called the Lost Members Register, to help people claim lost super. The easiest way to search for your lost super is via SuperSeeker, the ATO's online search tool. Using your Tax File Number (TFN), SuperSeeker will look for your lost superannuation and instantly provide you with possible matches. It will also search Tax Office records, such as the Superannuation Holding Accounts Reserve (SHAR) and any unclaimed superannuation guarantee vouchers in your name.

Remember this system is free to use and is available 24 hours a day, 7 days a week. So if companies try and sell you this service, all you are paying them for is to enter your TFN number into this system on your behalf.

The current system though can be improved and is not as comprehensive as it could be. Superannuation Minister Nick Sherry has indicated the federal government is devising a system with the Australian Taxation Office so consumers will, in 12 to 18 months time, be able to more easily find lost or unclaimed super.