A "sound financial system" is a big reason Australia had one of its "mildest" recessions in the post-War period while the US and several European countries had one of their "most serious", Reserve Bank of Australia governor Glenn Stevens said in April.
One is a cooling housing market. After rising for 16 consecutive months, capital city house prices were virtually unchanged in April, according to the RP Data-Rismark Hedonic Home Value Index. Weak demand for home loans – the number approved in April was the lowest since March 2001 – suggests other capital cities might soon follow Brisbane, Perth and Darwin, where prices are already falling.
If this happens, bank profits are sure to follow. Why? Because the share of home loans in banks' total lending stands at 58 per cent, according the RBA. Falling house prices spell fewer buyers, borrowing less and paying banks less interest.
If they fall enough, house prices can drag down an entire economy. This is what happened in the US in 2006 when falling prices led to a jump in the number of Americans unable to pay their mortgages and, a year later, a sharp rise in unemployment. The newly jobless swelled the ranks of defaulters until the losses tipped thousands of US banks and mortgage firms into bankruptcy and the global financial system into crisis.niversity of Western Sydney economist Steve Keen can see something similar happening in Australia. He says households are so indebted – the ratio of mortgage debt to gross domestic product has quintupled to 85.7 per cent over the past two decades – they can borrow no more."Our current level of economic performance is dependent on an increasing level of debt to GDP," Keen says. "As soon as you have a stabilising, which we are seeing now, then you are in trouble."
The head of the RBA's financial stability department, Dr Luci Ellis, counters that the recent US experience is historically anomalous. "Financial crises are normally sparked by other sources," she told a conference in May. "These [sources] include commercial property, property development, leverage buyouts, sovereign debt and so on."Which is why the developing sovereign debt crisis in Europe provides a second reason to worry about local banks. While the big banks have little exposure to European governments in difficulty, the RBA's Stevens concedes the most important effects in Australia will come through "the impact on world and Asian growth, on resource prices and on the cost and availability of global capital"."A collapse in China – or even a global slowdown – will have an impact on the economy, Australian income growth, and that would certainly feed into house prices," Australian School of Business researcher Glenn Otto says. "The impact of unemployment is also crucially important for house prices; an economic shock pushing up unemployment would have even more consequences for house prices."While few economists are as pessimistic, most agree the big banks are now too big for any government to let fail. "They are all too systematically important to fail," real estate funds manager Rismark's managing director, Christopher Joye, says. "That is one reason why taxpayers offered the major banks deposit and liability guarantees during the GFC."
Fortunately, they did not have to draw on those guarantees. But what if they do in the future? Is the government's balance sheet big enough to cover the big banks' deposits and liabilities?"The Armageddon outcome would be the complete implosion of the banking system if taxpayers were not there to backstop institutions in the case of a crisis, which could cause extreme credit rationing and precipitous price falls," Joye says.According to a former chief economist of the International Monetary Fund, Simon Johnson, Australia's big banks pose a bigger risk to the economy than the biggest US banks do. Johnson thinks no single bank should own assets (mainly housing, small business and corporate loans but also derivatives and other investments) worth more than 4 per cent of a country's economic output.
Yet NAB owns assets equal to 54 per cent of Australia's GDP, followed closely by CBA 51 per cent) and Westpac (49 per cent).Even the bank with the fewest assets, ANZ (42 per cent) is almost three times the size, in relative terms, of the biggest US bank, Bank of America (which owns assets worth 15.6 per cent of US GDP)."One of the lessons of the global financial upheaval was that sometimes simple is best – and mutuals are very sound, with straightforward balance sheets, conservative funding, high-quality assets and high capital," she says. "Global collapses and bail-outs were about very big, very complex, aggressive and 'creative' institutions."For this reason, Rismark's Joye is more concerned about the overseas expansion of ANZ and NAB than he is about a collapse in house prices."The major banks' peers in the UK and Europe had far greater direct exposures to the US sub-prime crisis through their overseas expansion strategies," he says."My single greatest concern with the major banks right now is their offshore expansion plans, which directly undermine their greatest source of strength during the GFC."Like Joye, Keen is also cool on a size cap, believing banks would successfully lobby it away during stretches of economic and political stability. He favours a cap on the size of home loans instead – equal to 10 times the rental income from a property – and other measures to reduce demand for credit in the first place.Of course, the failure of a big bank is still an unlikely, if no longer a preposterous, idea. According to John Laker, chairman of the Australian Prudential Regulation Authority (APRA), the main bank regulator, the big banks would survive a Chinese and global economic downturn severe enough to raise unemployment to 11 per cent and lower house prices by 25 per cent.However, as Laker admits, a future downturn will "not play out as specified" in APRA's so-called "stress-test". "It is just one of a myriad of future possible outcomes," he said in early June.Among clear lesson of the global financial crisis is that the unlikeliest outcomes become possible in a crisis. After all, the best computer models said US house prices would fall by 20 per cent only once every 10,000 years.
Wednesday, June 23, 2010
Friday, May 28, 2010
OECD says rate rise for Australians
A global economic research body has warned Australians that interest rates will rise by up to 1.2 percent in the coming year.In its global economic outlook, the Organisation for Economic Cooperation and Development (OECD) said that while there are risks to the Australian economy from the current crisis gripping European markets, the Reserve Bank will push interest rates up.The OECD says official interest rates wil rise from their current 4.5 percent to 5.7 percent by June 2011.That would likely push real mortgage interest rates towards 9 percent.However, Australian economists are calling for the RBA to pause after its raising rates six times since October last year.The OECD has warned that there are negative risks to Australia's rosy economic outlook from the uneven pace of the global recovery and volatility in financial markets.It says there are substantive risks related to sovereign debt markets which, while originating in some euro-area economies, has spread to other euro members and other parts of the world."Overheating in emerging market economies also poses a risk," it says."A boom-bust scenario cannot be ruled out, requiring a much stronger tightening of monetary policy in some non-OECD countries, including China and India."For Australia, it also says rising confidence and more favourable international trade conditions may lead to more buoyant demand that needs a more rapid rise in interest rates.These risks aside, the OECD expects the Reserve Bank of Australia (RBA) will in any case have to add to its six rate rises so far."After weathering the crisis well in 2009, the Australian economy is projected to experience strong growth in 2010 and 2011, above its trend rate," the OECD says.It is forecasting economic growth of 3.2 per cent in 2010, accelerating to 3.6 per cent in 2011, after 1.4 per cent growth in 2009.This growth will be driven by booming exports and domestic demand.It expects the unemployment rate - currently at 5.4 per cent - to fall below five per cent by the end of 2011, while inflation will be moderate.This, it says, will keep confidence among households at high levels, although the pace of decline in the jobless rate will slow as working hours expand.It expects the consumer price index to hit the top of the RBA's two to three per cent target band in 2010, before easing to 2.7 per cent in 2011.The Paris-based institution says for Australia, managing the exit strategy from the global crisis is "less problematic" than in most OECD countries, and the tightening of both monetary and fiscal policy is welcome given the rebound in activity.It says rising private demand, fuelled by investments and stockbuilding by companies, is expected to replace public demand as the main force driving the recovery in 2010 and 2011."Companies in the mining sector should benefit in particular from the dynamism force of Asian markets and the significant pick-up in the terms of trade," it says."These developments, coupled with the rise in real estate investments, are likely to improve the employment situation."Responding to the report, Treasurer Wayne Swan said it highlighted how Australia's economic growth and employment outlook were among the best in the OECD."The OECD report is a reminder of the strong economic management that has seen Australia fight off global recession and which is returning the budget to surplus three years early and halving peak debt," he said in a statement.Mr Swan also welcomed the OECD's observation that mining companies would benefit from Asian demand and an improvement in Australia's terms of trade.But he pointed out the underlying weakness in Europe was a threat to global recovery.
Monday, April 19, 2010
Land prices
The price of the average residential block of land has risen to a record high in the December quarter, a new survey says. The Housing Industry Association (HIA)-RP Data land residential report for the December quarter found the weighted median price of a vacant housing block increased by 2.2 per cent in the December quarter to $185,222.Over the year to December 2009, the weighted median land price rose by 14 per cent, the fastest annual rate since mid-2004, the report said. HIA chief economist Harley Dale said land values rose substantially quicker than building costs and the rate of inflation during the previous upturn in the housing cycle. Dr Dale said new house prices (excluding land) rose by an annual rate of 2.8 per cent in December 2009, building materials increased by one per cent, yet median land prices increased by 14 per cent."Only six months into a new home building recovery this situation is happening all over again," Dr Dale said."If this situation continues then the recovery will stall, the housing shortage will worsen, and there will be upward pressure on rents and on existing home values that could have been avoided."Sydney had the dearest median price of residential land in Australia, $275,000. This report has obviously not taken into consideration the ACT where land prices are well over $350,000.The cheapest market in Australia was the northern region of South Australia ($59,165), followed by Mallee in Victoria ($75,000).RPData.com national research director Tim Lawless said policy makers had to act to arrest the recent drop in the number of land sales."With Australia's population growing at a rapid rate and housing undersupply worsening we should be seeing land releases and consequent sales volumes rising not falling," Mr Lawless said."... without further construction of homes we are likely to see affordability worsen and more prospective buyers looking towards an already very tight rental market for their accommodation requirements."We believe that policy markers must act to provide additional residential land which affordable as well as being close to necessary amenities."
Goldman Sachs accused of fraud
17/04/2010 2:12:21 PM
The US government has accused Wall Street's most powerful firm Goldman Sachs & Co of fraud. They sold mortgage investments without telling the buyers that the securities were crafted with input from a client who was betting on them to fail, which they did to the tune of $US1 billion ($A1.07 billion).A hedge fund, capitalised on the housing bust. The civil charges filed by the Securities and Exchange Commission are the government's most significant legal action related to the mortgage meltdown that ignited the financial crisis and helped plunge the country into recession.The news sent Goldman Sachs shares and the stock market reeling as the SEC said other financial deals related to the meltdown continue to be investigated. It was a blow to the reputation of a financial giant that had emerged relatively unscathed from the economic crisis but who continued to play the same games that brought down the US economy in the first place
The SEC alleges that Goldman misled investors by failing to disclose that Paulson & Co. also played a role in selecting the mortgage pools and stood to profit from their decline in value. Two European banks that bought the securities lost nearly $1 billion, the SEC said. The global game continues."Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party," SEC Enforcement Director Robert Khuzami said in a statement.
Thursday, April 15, 2010
economy and property
The Australian economy has returned to debt-driven growth, with the household sector carrying the full burden for the private sector. Will this period of debt-driven growth last as long as in previous bubbles when our private debt to GDP ratio was half what it is today?
Banks & mortgage lenders have been biggest beneficiaries as mortgage debt has risen from under 20% of GDP in 1990 to over 85% at end of 2009.
So how does Australia keep house prices high? By encouraging households to get into yet more debt.The rise against GDP is far more dramatic than against household disposable income because other government policies—the stimulus package itself and the RBA’s 4% cut in interest rates—boosted disposable income dramatically in 2009 (but even so, mortgage debt is now a higher proportion of household disposable income than before the GFC). The Boost-inspired house price bubble was financed by households adding another 6% of GDP to their already unprecedented debt burden, when prior to The Boost they were on track to reduce mortgage debt by about 3% of GDP in 2009.We’ve avoided hitting the ground of deleveraging by climbing to a higher cliff but stepping off the cliff will eventuate unless there is a totally new solution to the dilema. Saying all this we have Grace on our side because we are still an expanding relatively new country with a growing population that does need a place to live.
Australia’s still unburst bubble drove the real price of housing to 140 percent above the level of June 1986–that is, real house prices are now 2.4 times what they were in mid-1986
Australia's Debt Bubble has kept going while other countrie's have already popped is the same old reason-debt. This is the biggest debt bubble in our history. The previous two record highs were in 1882 at 104% of GDP, and 1931 at 77% of GDP. Record debt is 158% as of March 2008.
large reason why Australia has had such a mild GFC so far is because Australian households were enticed back into debt by the First Home Vendors Boost, and by the impact of the Government stimulus package upon household disposable incomes.Households were reducing their mortgage exposure prior to the introduction of The Boost: mortgage debt had peaked at 81.3% of GDP in June 2008, and was trending down prior to the Boost. It then hit a bottom of 80.3% in December 2008 before rising to an all-time high of 86.8 in January 2010.The change has been less extreme when mortgage debt is measured against Household Disposable Income (HDI), since the Australian government’s stimulus package and the interest rate cuts by the RBA boosted household incomes by almost ten percent last year. As a result, mortgage debt fell only slightly as a percentage of HDI, from 133.6% to 130.3%, and it took longer to fall. But ultimately, even though incomes had been boosted so substantially, the increase in mortgage debt last year finally exceeded the increase in incomes: by January 2010, the mortgage debt to HDI ratio had hit a new peak of 134.2% The overwhelmingly important reason why this happened is the policy that the Government called the First Home Owners Boost.
Banks & mortgage lenders have been biggest beneficiaries as mortgage debt has risen from under 20% of GDP in 1990 to over 85% at end of 2009.
So how does Australia keep house prices high? By encouraging households to get into yet more debt.The rise against GDP is far more dramatic than against household disposable income because other government policies—the stimulus package itself and the RBA’s 4% cut in interest rates—boosted disposable income dramatically in 2009 (but even so, mortgage debt is now a higher proportion of household disposable income than before the GFC). The Boost-inspired house price bubble was financed by households adding another 6% of GDP to their already unprecedented debt burden, when prior to The Boost they were on track to reduce mortgage debt by about 3% of GDP in 2009.We’ve avoided hitting the ground of deleveraging by climbing to a higher cliff but stepping off the cliff will eventuate unless there is a totally new solution to the dilema. Saying all this we have Grace on our side because we are still an expanding relatively new country with a growing population that does need a place to live.
Australia’s still unburst bubble drove the real price of housing to 140 percent above the level of June 1986–that is, real house prices are now 2.4 times what they were in mid-1986
Australia's Debt Bubble has kept going while other countrie's have already popped is the same old reason-debt. This is the biggest debt bubble in our history. The previous two record highs were in 1882 at 104% of GDP, and 1931 at 77% of GDP. Record debt is 158% as of March 2008.
large reason why Australia has had such a mild GFC so far is because Australian households were enticed back into debt by the First Home Vendors Boost, and by the impact of the Government stimulus package upon household disposable incomes.Households were reducing their mortgage exposure prior to the introduction of The Boost: mortgage debt had peaked at 81.3% of GDP in June 2008, and was trending down prior to the Boost. It then hit a bottom of 80.3% in December 2008 before rising to an all-time high of 86.8 in January 2010.The change has been less extreme when mortgage debt is measured against Household Disposable Income (HDI), since the Australian government’s stimulus package and the interest rate cuts by the RBA boosted household incomes by almost ten percent last year. As a result, mortgage debt fell only slightly as a percentage of HDI, from 133.6% to 130.3%, and it took longer to fall. But ultimately, even though incomes had been boosted so substantially, the increase in mortgage debt last year finally exceeded the increase in incomes: by January 2010, the mortgage debt to HDI ratio had hit a new peak of 134.2% The overwhelmingly important reason why this happened is the policy that the Government called the First Home Owners Boost.
Wednesday, April 14, 2010
Gearing and Super
ONE way to get around the non-concessional contribution caps for superannuation is to use gearing. Under super tax rules, to avoid paying excess contributions tax of 46.5 per cent, you are allowed to contribute only $150,000 a year in non-concessional contributions. However, you can utilise a three-year cap by making a one-off contribution of up to $450,000 if you are under 65 and then not contributing any more than that for another two years.So if you have a commercial property worth more than $450,000 that you want to transfer into your self-managed super fund through an in-specie contribution, you could run into difficulties.By using gearing, however, you can borrow the value of the property either from a financial institution or from yourself or your business at a commercial rate.This is because whatever you borrow is not included as a contribution provided the borrowing arrangement complies with the conditions set out in the law.In fact, you can borrow as much as the fund can service. It's worth noting, however, that most commercial lenders apply an interest cover ratio where the fund's investment income must be a set multiple of the interest cost of the loan. Failure to meet this ratio may give the lender the ability to call on the loan.You can use this strategy to bolster your superannuation balance, regardless of what you make in non-concessional contributions.Of course, gearing into superannuation is not for everybody. Whether it's to invest in shares, property or works of art, it's a complex process that requires sound financial advice and a cost-benefit analysis to make sure it's the optimum route for your circumstances.And it is not cheap either, with estimates running into the thousands of dollars just to establish the loan. Additional costs may include legal advice to establish proper trust and other arrangements, transaction and stamp duty costs and asset administration fees. The importance of establishing the loan and trust arrangements properly cannot be understated as there may be unnecessary capital gains tax and-or stamp duty costs if you don't.Before 2007, superannuation funds were not allowed to borrow to purchase assets. However, uncertainty about whether instalment warrants and instalment receipts involved borrowing meant there was a need to change the legislation.The new rules not only allowed SMSFs to invest in more traditional instalment warrants and instalment receipts generally involving shares, but also in non-traditional instalment warrant arrangements over such assets as property. However, it's important to be aware that the normal investment rules that apply to SMSFs also apply to investments that are purchased using an instalment warrant borrowing arrangement. For example, you cannot make an in specie contribution of a residential property into the fund although you are at liberty to buy residential premises on the open market as long as it is not purchased from yourself or a related party.However, a number of grey areas in the treatment of instalment warrants within super have proved a deterrent to gearing in SMSFs.Last month, the government moved to clarify how instalment warrants will work, particularly in relation to capital gains tax.When an SMSF buys a property or shares through an instalment warrant, it has to set up a separate trust. This separate entity is known by a variety of names: a bare trust, a security trust, a warrant trust or a debt instalment trust. They are basically all the same thing.
If your fund were buying a property under an instalment warrant arrangement, it must be held in the trust until the debt is paid in full, at which point it is transferred into the SMSF. The grey area was always whether that transfer triggered capital gains tax.But last month, Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced an amendment to the tax law so that a superannuation trustee entering into a limited recourse borrowing arrangement to purchase an asset would be treated as the owner of the asset for income tax purposes."The changes will ensure that trustees to superannuation funds who have entered into permitted limited recourse borrowing arrangements will not face CGT obligations at the time the last instalments are paid," Bowen says.Another grey area was whether the super fund trustee or the instalment warrant trustee should be the one to declare any income earned on an asset.The latest announcement confirms it is the super fund trustee who should declare the income. And equally, the fund can claim a tax deduction from earning that income."If structured properly, it will look as though the investment trust does not exist," says Philip la Greca, technical services director at Multiport. "Income flows through to the fund; dividends and depreciation flow through to the fund. It looks as though the fund owns the asset directly."La Greca goes on to say the issue of CGT has been a big concern given that an asset held for five or 10 years could have a reasonable capital gain.Another issue is stamp duty, which, rather than being a federal tax like GST and CGT, is administered by the states and territories. Generally speaking, however, the transfer of a property from a bare trust to an SMSF should be exempt.The recent announcement also brought gearing property into SMSFs into the framework of financial products.As a result, providers have to be licensed. In the past, real estate agents and property developers had been promoting the strategy and this has caused some concern. The move to licensing underlines the importance of having sound financial advice to ensure the strategy is right for your SMSF's circumstances.A downside of having property in your SMSF is that not only is it an illiquid asset but it can also be a large chunk of your fund's investments.What would happen, for instance, if one of the members of your SMSF were to die early and the fund had to make a payout?Deb Wixted, head of technical services at Colonial First State, says in such circumstances it could take time to unwind the arrangement and could be expensive.She also comments that although the latest government announcements have cleared up a number of issues, there is still a lot of scope for interpretation."The Australian Tax Office is still sifting through the issues, so what you do now could still be called into question in the future," Wixted says.But there are other positives in gearing, not least that if the fund still holds the property when it enters the pension phase there will be no capital gains tax payable on the sale of the property. But the wisdom seems to be that the gearing should be well and truly completed by then, otherwise you may have problems with cashflow at the time you may be needing to draw an income out of your super on which to live.Another plus is that once you are in the pension phase, the rental income will no longer be tax assessable, although that also means the interest costs won't be deductible.Of course, gearing into super is not all about property. Indeed, most reports are that while there are plenty of inquiries about borrowing to buy property within super, very few actually end up going down that road.Far more popular is the use of instalment warrants for direct share purchases or to invest in managed funds, although with the latter it may be simpler to invest in a geared managed fund rather than have your SMSF undertake the gearing.Graeme Colley, national technical manager at ING Australia, says borrowing to buy shares in your SMSF means the fund can enjoy the benefits of franking credits. With fully franked dividends taxed at 30 per cent already and your SMSF only paying 15 per cent tax on its earnings, the fund can use the 15 per cent difference to offset other income in the fund.And if you are gearing into these shares, then, assuming the market remains positive, you benefit from the extra exposure. Of course, if shares tumble then you will take a bigger hit.On the shares front, Macquarie, for example, has Equity Lever, which allows you to get leverage in an SMSF.Peter van der Westhuyzen, head of sales and marketing at Macquarie Margin Lending, says Equity Lever has been on the market for some 18 months and has enjoyed strong support."Equity Lever gives you increased investment size in a tax effective environment along with diversification," van der Westhuyzen says. Just as the banks want a low loan-to-value ratio when customers are borrowing for property, the LVR for Equity Lever is below 50 per cent.The initial investment can be as low as $20,000 but the interest rate on the product is 9.55 per cent. borrowing to invest, whether inside or outside super, can be fraught.But if the fund makes the right investment and can service the loan, you could be bolstering your super benefits.And given that superannuation payments are tax-free to those aged over 60 and there is no capital gain on assets sold when in the pension phase, it makes for a reasonably solid argument.If the limited recourse loans start to offer competitive rates of interest and the grey areas of gearing are cleared up, it may well prove an effective strategy for your SMSF.
Gillian Bullock From: The Australian April 14, 2010
If your fund were buying a property under an instalment warrant arrangement, it must be held in the trust until the debt is paid in full, at which point it is transferred into the SMSF. The grey area was always whether that transfer triggered capital gains tax.But last month, Financial Services, Superannuation and Corporate Law Minister Chris Bowen announced an amendment to the tax law so that a superannuation trustee entering into a limited recourse borrowing arrangement to purchase an asset would be treated as the owner of the asset for income tax purposes."The changes will ensure that trustees to superannuation funds who have entered into permitted limited recourse borrowing arrangements will not face CGT obligations at the time the last instalments are paid," Bowen says.Another grey area was whether the super fund trustee or the instalment warrant trustee should be the one to declare any income earned on an asset.The latest announcement confirms it is the super fund trustee who should declare the income. And equally, the fund can claim a tax deduction from earning that income."If structured properly, it will look as though the investment trust does not exist," says Philip la Greca, technical services director at Multiport. "Income flows through to the fund; dividends and depreciation flow through to the fund. It looks as though the fund owns the asset directly."La Greca goes on to say the issue of CGT has been a big concern given that an asset held for five or 10 years could have a reasonable capital gain.Another issue is stamp duty, which, rather than being a federal tax like GST and CGT, is administered by the states and territories. Generally speaking, however, the transfer of a property from a bare trust to an SMSF should be exempt.The recent announcement also brought gearing property into SMSFs into the framework of financial products.As a result, providers have to be licensed. In the past, real estate agents and property developers had been promoting the strategy and this has caused some concern. The move to licensing underlines the importance of having sound financial advice to ensure the strategy is right for your SMSF's circumstances.A downside of having property in your SMSF is that not only is it an illiquid asset but it can also be a large chunk of your fund's investments.What would happen, for instance, if one of the members of your SMSF were to die early and the fund had to make a payout?Deb Wixted, head of technical services at Colonial First State, says in such circumstances it could take time to unwind the arrangement and could be expensive.She also comments that although the latest government announcements have cleared up a number of issues, there is still a lot of scope for interpretation."The Australian Tax Office is still sifting through the issues, so what you do now could still be called into question in the future," Wixted says.But there are other positives in gearing, not least that if the fund still holds the property when it enters the pension phase there will be no capital gains tax payable on the sale of the property. But the wisdom seems to be that the gearing should be well and truly completed by then, otherwise you may have problems with cashflow at the time you may be needing to draw an income out of your super on which to live.Another plus is that once you are in the pension phase, the rental income will no longer be tax assessable, although that also means the interest costs won't be deductible.Of course, gearing into super is not all about property. Indeed, most reports are that while there are plenty of inquiries about borrowing to buy property within super, very few actually end up going down that road.Far more popular is the use of instalment warrants for direct share purchases or to invest in managed funds, although with the latter it may be simpler to invest in a geared managed fund rather than have your SMSF undertake the gearing.Graeme Colley, national technical manager at ING Australia, says borrowing to buy shares in your SMSF means the fund can enjoy the benefits of franking credits. With fully franked dividends taxed at 30 per cent already and your SMSF only paying 15 per cent tax on its earnings, the fund can use the 15 per cent difference to offset other income in the fund.And if you are gearing into these shares, then, assuming the market remains positive, you benefit from the extra exposure. Of course, if shares tumble then you will take a bigger hit.On the shares front, Macquarie, for example, has Equity Lever, which allows you to get leverage in an SMSF.Peter van der Westhuyzen, head of sales and marketing at Macquarie Margin Lending, says Equity Lever has been on the market for some 18 months and has enjoyed strong support."Equity Lever gives you increased investment size in a tax effective environment along with diversification," van der Westhuyzen says. Just as the banks want a low loan-to-value ratio when customers are borrowing for property, the LVR for Equity Lever is below 50 per cent.The initial investment can be as low as $20,000 but the interest rate on the product is 9.55 per cent. borrowing to invest, whether inside or outside super, can be fraught.But if the fund makes the right investment and can service the loan, you could be bolstering your super benefits.And given that superannuation payments are tax-free to those aged over 60 and there is no capital gain on assets sold when in the pension phase, it makes for a reasonably solid argument.If the limited recourse loans start to offer competitive rates of interest and the grey areas of gearing are cleared up, it may well prove an effective strategy for your SMSF.
Gillian Bullock From: The Australian April 14, 2010
Wednesday, March 31, 2010
GFC
While GDP certainly decreased during the GFC, Australia avoided sliding into an official recession. And while the unemployment rate rose (reaching a high of 5.8% in June 2009), those that retained employment actually experienced an overall increase in disposable income.Many Australians are actually in a better position now than before the downturn – what with significantly lower interest rates (currently at 4%, compared to 7.25% at the start of September 2007) and greater national disposable income (estimated by IBISWorld to reach $194,500 in the March 2010 quarter compared to about $181,000 million in late 2007).Add to this lower fuel-prices (now at US$80 per barrel compared to US$145 per barrel in mid-2008) and it's not surprising that household spending has been relatively strong over 2009-10.
Where to from here?
Average Australian households remain better off now than before the GFC and the first home owner boost encouraged many Aussies to enter the mortgage market – meaning we are just as indebted now as pre-GFC. Interest rates, fuel and electricity prices have all risen and many Australian families will again feel the pinch this year and onwards.Nonetheless, conditions are forecast to continue to improve, with IBISWorld projecting that slow economic growth in the March 2010 quarter will be replaced by solid growth for the remainder of the year, as households continue to spend and businesses join the fray.IBISWorld also expects the unemployment rate to continue to trend downwards and, barring any reversal of the improving trend internationally, the Australian economy will remain strong for the foreseeable future.
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