Economic Update

By Jason Fittler 

Economist Dr Chris Caton is coming to Townsville to provide an economic update for our clients and friends.

This presentation will be held on Tuesday the 7th of February 2012 from 3:00 pm to 4:00 pm.

As Chief Economist of BT Financial Group, Dr Chris Caton advises clients on the financial implications of economic trends, policy pronouncements and major political developments.

A former head of the Economic Division of the Department of the Prime Minister and Cabinet, Chris is a leading analyst of the current and future state of both the Australian and international economies and their potential impact on individual industries.

Drawing on his international experience and with an impressive breadth of knowledge, Chris provides succinct and tailored advice to his clients in a wide range of industries, including many that are dominated by small businesses.

A brilliant communicator, Chris has a rare ability to make economics come alive for his audience and has received innumerable accolades for his highly accessible, meaningful, and entertaining presentations.

If you would like to attend and hear what Chris thinks of 2012 please register with our office before the 31/01/2012 to allow us to book you a place.

If you would like to hear what Chris’s view was for 2011 click the below link.

http://www.bt.com.au/bt-market-insights/bt-latest-updates/2010/12-december/20101210-chris-caton-webcast.asp

Small Business Clearing House

By Jason Fittler

If you are a small business and have fewer than 20 employees then read on.

Running a small business is all about time efficiencies. As a small business owner you are required to make super contributions on behalf of your employees. You are also required to offer all of your employees a choice of super. This means in effect you might have to make 20 super payments to 20 different super funds each month or quarter.

This is a very time consuming job. To make life simple and save you money, register on the Small Business Superannuation Clearing House. This is a Government service run through Medicare, which provides small business access to a clearing house free of charge.

It allows you the ability to log on to one web site and pay all of your employee’s super contributions at the same time. The best part is that it is quick and simply to use. The process is as follows:

1. Go to the below web site and register. They will email you out a log in and password. http://www.medicareaustralia.gov.au/super/
2. Log in and put in your employee’s details, most of it is basic information such as name, address and date of birth. You also need to enter the employees Super Indemnification Number and the employees super account number.
3. Once all employees are entered go to pay super contributions, put in the period for the contributions and a list of employees will appear. Put in details of how much is to be paid to each employee and then submit, check and submit again.

The system will then provide you with Bpay details and EFT details. Chose your method of payment and pay.

Once set up it will take you no longer then 10 minutes to pay all of your super contributions. The best part is the date you submit the payments through Small Business Superannuation Clearing House is the date it is taken as paid, not the date that the super fund receives the funds. No more worry about making the payment by the 28th day after the end of the quarter.

This is truly a great service and I would encourage all small business owners to take a look and use this service.

Take Control of Your Superannuation

By Jason Fittler

Below is an ABC news story from last week. Please have a read of this before reading further. 

Key fund's woes puts super at risk for thousands

Economics correspondent Stephen Long, On Wednesday 14 December 2011, 9:52 EST

A key scheme of one of Australia's biggest superannuation funds is short of money, leaving more than 100,000 people facing the prospect of having their super slashed.

At universities across Australia just about everyone from the boffins to the backroom staff is in a super scheme called UniSuper.

The fund has more than 450,000 members and about $30 billion in assets under management.

Its members thought they were in a scheme that was secure but that is no longer the case.

Continue reading... 

Could the failure of Uni Super really happen? Yes and it already has happened to other super funds!

Who pays for the failure of a Super Fund? You!

Following the collapse of Trio Capital, the Federal Government announced in April 2011 that it would provide a grant of approximately $55 million in financial assistance to benefit the members of four super funds that were formerly under the trusteeship of Trio Capital.

This grant of financial assistance has now been recovered by way of a levy on all regulated superannuation funds under the Superannuation (Financial Assistance Funding) Levy Act 1993. The levy is based on the total assets of each fund at 30 June 2010 multiplied by a rate of 0.0001347, with a maximum of $750,000 per superannuation trust. 

Commencing 21 November 2011, this levy will be passed onto members.  This will result in all members with an open super or pension account being charged a proportionate fee based on their account balance at 30 June 2011. The deduction will appear in members' accounts with the description 'Financial Assistance Levy'. 

When you receive your next statement from your Super Fund take a look, I bet you have a Financial Assistance Levy being charged to your account. As such you will pay for the failure of another person’s super fund. 

Anyone with a Self Managed Super Fund does not pay the Financial Assistance Levy.

With a new year approaching every house hold should sit down a quickly do the math on what they are worth and where they need to be in retirement.  Just jot down the following figures;

1. Value of your house less what you owe to the bank.
2. Value of your combined super.
3. Value of any other investments or investment properties less what you owe to the banks.
4. Value of any other assets being cars, home contents etc.

It has been my experience that your Superannuation is you largest asset, if not your second largest asset if you have paid off your house. 

My concern is that very few people give their Superannuation the respect it deserves. Most people are very house proud but find Superannuation annoying and frustrating. 

This New Year do yourself a favour; 

1. Pay a professional to explain your superannuation to you. We can help.
2. Take control of you Superannuation. 

From reading the above article by the ABC it has become more obvious that you need to be in control of your Superannuation.

You have a number of options in doing this, a Self Managed Super Fund or a product like the new Asgard Infinity which is cheaper then Industry Funds and you are in control. 

Let us know if we can help. 

For more information please call us on 4771 4577. 

Standard Deduction for Work Related Expenses

By Jason Fittler

The Government has announced that it will also defer the introduction of a standard tax deduction for work-related expenses and the cost of managing tax affairs by 12 months until 1 July 2013. 

The measure, which was also first announced in the 2010 Federal Budget originally proposed to give people a standard deduction for work and tax management related expenses of $500 in 2012—13 and then $1,000 from 2013—14 onwards. 

Dependent Spouse Tax Offset Phase Out 

The Government has announced it will phase-out the dependent spouse tax offset for taxpayers with a dependent spouse born on or after 1 July 1952, from 1 July 2012. 

This measure extends on the 2011—12 Federal Budget announcement to phase-out the dependent spouse tax offset for taxpayers with a dependent spouse born on or after 1 July 1971. 

The Government has also announced that taxpayers who are eligible for the zone, overseas forces and overseas civilian tax offsets or whose spouse is an invalid, permanently disabled or a carer will not be affected by this change. 

Reform of Living Away From Home Allowances and Benefits 

The Government has announced it will amend the tax exemptions that apply to living-away-from-home allowances and benefits by: 

1. requiring individuals to substantiate their actual expenditure on accommodation, and food beyond a statutory amount; and 

2. Limiting access to the tax concession for temporary residents to those who maintain a home for their own use in Australia that they are living away from for work. 

This change will ensure that a level playing field exists between temporary residents and permanent residents. 

The Government has confirmed that these reforms will have no impact on permanent residents unless they are receiving living-away-from-home allowance in excess of their actual expenses. Employees who receive allowances for having to travel from their usual place of work for short periods will also not be affected by these changes. 

The reforms are proposed to apply from 1 July 2012 for both new and existing arrangements.

Mid Year Budget Review - Superannuation Changes

By Jason Fittler

The Government is focused on having a budget surplus next financial year.

To do this they have taken some measures to cut costs and increase tax revenue.

Below are a couple of issues you should be aware of in regards to your superannuation.

1. Concessional Contributions Caps - starting 01/07/2012 the maximum concessional contribution you can make regardless of your age is $25,000. Previously, if you were over age 50 you could make up to $50,000. It is important to review your salary sacrifice if you have one to make sure you do not exceed the cap. If you do exceed the cap you will have to pay penalty tax. 
2. The Co-Contribution has been halved from $1,000 to $500 starting 01/07/2012. Again you should be aware of this prior to making any co-contributions to your super. 
3. Your annual Pension Payments have remained at 75% of the required minimum. This allows you to continue to take less out of your super fund for the 2012 year.”

There are also a number of changes in regards to your taxation and deduction claims allowable, which I will touch on next week. 

Limited Recourse Borrowing Arrangements (LRBA) for SMSF

By Jason Fittler

The ruling addresses two key issues:

• what is a single acquirable asset
• repairing versus improving an asset

The guidance is essential to ensure that trustees understand the limited recourse borrowing arrangement requirements. If an arrangement does not meet these requirements, it contravenes the borrowing prohibition and places at risk the SMSF's status as a complying super fund.

The key concepts are:

• what is an 'acquirable asset' and a 'single acquirable asset'
• distinguishing 'maintaining' or 'repairing' the acquirable asset from 'improving' it
• when a single acquirable asset is changed to such an extent that it is a different (replacement) asset

An SMSF can borrow money to acquire a single acquirable asset that is held on separate trust under a limited recourse borrowing arrangement. Multiple assets cannot be held under the arrangement. It is necessary to consider both proprietary rights and the object of those proprietary rights to determine if the asset is distinctly identifiable as a single object, even if it has two or more separate proprietary rights. For example, a factory built across two titles would be a single acquirable asset.

As the money borrowed can also be used to repair or maintain, but not improve, the single acquirable asset:

• an improvement substantially increases the value or functional efficiency of the asset
• a repair corrects something that is already there and that is damaged, has become worn out or dilapidated, or has deteriorated
• maintenance is preventative.

Borrowed money cannot be used to effect improvements. However, money from other sources can be used so long as the changes or improvements to the asset do not result in a different (replacement) asset. If a house is destroyed and another house is constructed from the insurance proceeds (so restoring the acquirable asset to land and a house) this would not result in a replacement asset. Thus the limited recourse borrowing arrangement can continue to operate.

Each draw-down (for example, for repairs) under a limited recourse borrowing arrangement is a separate borrowing but satisfies the limited recourse borrowing arrangement provisions as long as the arrangement as a whole satisfies the provisions. However, borrowings solely to fund repairs to an asset that the SMSF already owns would not satisfy the limited recourse borrowing arrangement provisions.

For more information please call us on 4771 4577. 

Education Tax Refund

By Jason Fittler

Overview

The Education Tax Refund (ETR) aims to help families, with children undertaking primary or secondary school studies to meet the costs of school education through assistance with certain education expenses.

• Under the Government’s ETR, eligible families will be able to claim:

−− a 50 per cent refundable tax offset every year for up to $750 of eligible expenses for each child

undertaking primary school, (that is, a refund of up to $375 per child, per year); and

−− a 50 per cent refundable tax offset every year for up to $1,500 of eligible expenses for each child

undertaking secondary school (that is, a refund of up to $750 per child, per year).

Eligibility

• Those entitled to Family Tax Benefit (FTB) Part A in respect of children undertaking primary or secondary school studies for the relevant financial year are eligible for the ETR.

• Generally, eligibility is also extended to parents with school children undertaking primary or secondary school studies who would be an eligible child for FTB Part A purposes, but for the fact that they, on the child’s behalf, or the child receives certain payments or allowances, for example:

−− Youth Allowance;

−− Disability Support Pension;

−− ABSTUDY Living Allowance;

−− payments under the Veterans’ Children Education Scheme; and

−− payments under the Military Rehabilitation and Compensation Act 2004.

• School children undertaking secondary school studies and who are independent of their parents may also be eligible.

• For families who share the care of a child, the ETR entitlement for the child will be shared similarly to the way FTB Part A is shared.

• The families of students who enter or leave school in any school year will be eligible to claim the ETR for the half of the financial year that the student attended school.

• For students who transition from primary to secondary school in a single financial year the full ETR, based on the secondary-school rate, can be claimed.

• Families with home-schooled students can also claim the ETR. To be eligible, students must be registered with the relevant State/Territory Government.

Eligible expenses

For the purposes of the ETR, eligible educational expenses are:

−− laptops, home computers and associated costs (including repair and running costs of computer

equipment, lease costs, printers and paper),

−− home internet connection;

−− education software;

−− school textbooks and material (including prescribed textbooks, associated learning materials, study

guides and stationery); and

−− prescribed trade tools.

• Eligible expenses that have been incurred by a parent or guardian with more than one child with an ETR entitlement can be pooled and claimed against the children’s combined ETR entitlement, provided that the children all have access to the purchased items.

• Education expenses in excess of what can be claimed in a financial year (that is, expenses over $1,500 per annum for a secondary school student or $750 for a primary school student) are able to be carried over in the following financial year. Eligible expenses that are not utilised for the purpose of claiming the ETR in the financial year that they occurred or the subsequent financial year will automatically lapse.

• The ETR cannot be claimed for educational expenses if a tax deduction is allowed or a Commonwealth Government payment/subsidy is payable in respect of that expense.

Commencement of the ETR

• The refundable tax offset applies to eligible expenses incurred from 1 July 2008. Parents cannot claim the offset in their 2007-08 income tax returns, but they should start keeping records after 1 July 2008 to enable their ETR claim to be made in their 2008-09 income tax return.

Claiming the ETR

• Parents can simply claim the refund against eligible education expenses incurred from 1 July 2008, when they complete their 2008-09 income tax returns.

• Parents and eligible independent students who do not ordinarily lodge an income tax return can also claim the refund through the Australian Taxation Office.

– For those who are not required to complete an income tax return, a separate form will be available

from 1 July 2009 to allow the refund to be claimed for the 2008-09 financial year.

Evidence to support an ETR claim

• Claimants are expected to retain receipts for the purchases of items for which they intend to claim the ETR.

Property Forecast to Fall

By Jason Fittler

Below is an article regards property in Australia written by David Collyer.

Given the current economic conditions I feel he is on the money with this view. 

Imminent Recession Forecast By Kavanagh-Putland Index

Posted on Wednesday, October 26th, 2011   

Author: David Collyer   

Melbourne:- The Kavanagh-Putland Index, which examines the ratio of property sales to GDP, has fallen to a 12-year low. A fall in market turnover precedes a fall in land values by one to two quarters, which then foreshadows recession.

“The ratio of property sales to GDP has suffered its biggest year-on-year fall since the recession we ‘had to have’,” Dr Gavin Putland of the Land Values Research Group said yesterday. According to the precedents, “there will be recession in 2011-12.”

“The recession will be quite severe due to our very high debt burden and the fact the housing market was more overvalued in 2010 than at any other time in the last 41 years.

In 2010-11, the index fell by the third biggest percentage on record. The biggest fall was in 1974, which preceded the 1975 recession. The second biggest was in 1989-90, and was followed by recession in 1990-91. The fourth biggest was in 1981-82, which was a recession year, and was followed by a worse recession in 1982-3.

On the basis of sales figures for the second half of 2008, the fall in the index for 2008-9 was initially expected to be very large – perhaps worse than in 1989-90. However, the First Home Owners’ Boost persuaded many potential buyers to purchase, so the actual fall in the index was smaller than in 1981-2. A standstill in borrowing that would have led to recession — as happened in so many other countries — was averted for the time being.

It is twenty years since Bryan Kavanagh started calculating the total annual value of property sales in Australia, using records dating back to 1972.

It is ten years since he first published this measure that shows when a downturn in property prices would cause a recession. The index now comprises forty years of data.

Dr Putland said that governments can, but won’t, act to avoid recession. “They need to cut taxes on current income or expenditure, so that people can more easily service their current debts, and replace the revenue by increasing taxation of capital gains, so that people have less incentive to borrow and speculate in future.”

“Governments just don’t do that sort of thing,” Dr Putland concluded.

Insurance – How to Make the Premiums Deductible

By Jason Fittler

Insurance is something we all have but most will never use.

When it comes to Life, Trauma, Temporary and Permit Disability (TPD) and Income Protection insurance it makes sense to obtain the maximum insurance at the cheapest price.

By having your Life, Trauma, TPD and Income Protection insurance within your super fund there are two benefits.

First, the premiums are deductable to the super fund, if you have a Self Managed Super Fund then this will help reduce the cost of the insurance to you. If you are in a retail super fund this allows the super fund to provide you with the cover at a cheaper price as they can pass the benefits of the deductibility of the premiums on to you.

Second, the super fund is able to obtain group rates from insurance companies again allowing you to obtain the cover at the best possible price.  We all need to have Life, Trauma, TPD and Income Protection cover, but if you speak to your Financial Planner they can structure it so you have the maximum cover for the minimum price. With the extra benefit of having your superannuation pay for the cover instead of having to pay for it out of your take home pay.

Who said you have to wait to retire before you can access you superannuation, with the right advice your superannuation can benefit you right now. 

For more information please call us on 4771 4577. 

Carbon Tax

By Jason Fittler

This week was a big week for industry in Australia.

The Carbon Tax passed in the lower house and will be considered in the Senate in November. It looks all but certain to come into law on the 01/04/2012.

Tony Abbott has advised that he will repeal the tax if he wins office at the next election. So what does big business do now?

Queensland Nickel has announced that they expect job losses; Xstrata has already flagged that they will close down refining in Townsville in the next 5 years. The rumours are out that Sun Metals is also considering a shut down. Who knows if these businesses are serious or not, what we do know is that uncertainty for business brings uncertainty for employees and our city.

I wrote about the Carbon Tax back when the legislation was first released. My information comes directly from the government documents. This debate has become one more of idealism than facts.

I for one am all for reducing pollution but this legislation does not do that. So it is simply a tax to fund the over spending of the Labor government.

I encourage everyone to make up their own mind. Below is a link to my initial comments on the tax, please read but then make sure you read as much as you can from as many different sources you can. (Carbon Tax What is it Good For?)

I would also recommend Dr Robert Carters book “Climate: The Counter Consensus” which can be purchased on Amazon.com.

Tax Cuts

By Jason Fittler

What does it really mean when the government increases the tax free threshold from $6,000 to 18,000? Are we better off? 

Tax Free threshold

The annual tax-free threshold for most Australians is $6,000. This means that, unless your circumstances are different from the majority, your first $6,000 of income is not taxed. Therefore, by claiming the threshold, you reduce the amount of tax that is withheld from your pay during the year.

When your taxable income exceeds your tax-free threshold you pay tax on the excess.

Low income offset

As well as there being no tax on the first $6,000 (the tax-free threshold) there is also, to provide a helping hand to taxpayers who earn under a certain amount each year, a low income tax offset.

Effectively, a low income resident taxpayer's tax-free threshold is $16,000. The offset reduces by four cents in every dollar that income exceeds $30,000, and cuts out at $67,500.

The recently announced tax cuts from the government will mean as at the 01/07/2012 the tax free threshold will increase to $18,000 and the low income rebate will be cancelled.

If you earn less than $16,000 you will be in the same position, if you earn between $30,000 to $67,500 you will lose the benefit of the low income rebate, but you will be better off.

If  earn $37,000 you will save around $600 in tax and if  you earn $67,000 around $1800 in tax. 

It also means that people below $16,000 income will not need to lodge tax returns unless they have paid tax and want the refund. 

For more information please call us on 4771 4577.

Focus On Income Not Growth

By Jason Fittler

In a Bear Market, like we are in now, what you need to forget about is capital growth.

Do not focus on the price of your share. You need to change your focus. You need focus on the income that your investment produces.

Look at it this way, you do not live off your capital, you live on the income it produces. So if the income it produces stays the same, what does the value of the investment matter.

Let look at Westpac Bank, it has a forecast dividend of $1.58 cents per share plus franking credits of $0.68. Making a total payment of $2.26 for the year.  If you hold 1,000 shares you will make $2,260.00 for the year.

Right now the share price is $20.34, so to buy the 1,000 shares it would cost you $20,340.00. Your return or yield would be 11.11% per annum.

Our intrinsic value for the share is $31.27. So once the share reaches this price, the 1,000 shares will be worth $31,270.00. But they will still produce $2,260.00 a year in income or a yield of 7.2% per annum.

What if the price falls 20% from here to $16.27? The shares are now worth $16,270.00 and still producing $2,260.00 a year in income or a yield of 13.8% per annum.

My point. As long as you still believe that the share is worth it’s intrinsic value it really does not matter what the price is, as the income stays the same, and it is the income you use to fund your life style. 

For more information please call us on 4771 4577.

Commonwealth Seniors Health Card

By Jason Fittler

Are you over age 60?

An Australian resident living in Australia?

Are you over pension age but do not qualify for an age pension?

Is your income below $50,000 if you are single or $80,000 if you are a couple?

Then you may qualify for a Senior Health Card which will provide you discounts for all of your medical needs. If you are not sure then contact Centre link and find out.

Please note, if you are receiving an Account based pension from your super fund it does not form part of your taxable income so you may still qualify.

For more information please call us on 4771 4577.

The Web We Weave

By Jason Fittler

"A good adviser will save you far more then you will ever pay them."

There is no doubt that technology has changed the way we live, but it has also changed the way we receive and interpret information.

We are now bombarded with news every minute of every day, advertising campaigns which look a lot like documentaries. So what is true and what is not? How do we know and how can we find out?

The problem is not the information we receive, the problem is how we sort out the rubbish from the facts. It is quite often said that you cannot fool all of the people all of the time, the fact is you do not need to. Simply fool most of the people all of the time and they will silence the rest.

Today I would like to look at a couple of examples of where the general public is being fooled in the area of Financial Advice and economics. This is not a comprehensive list of items but simply examples which have come to my attention due to the work I do.

1. The new Financial Planners Association (FPA) television ad. They clearly state that if you are looking for a Financial Adviser then you should make sure that they are a FPA member, as that way you can be assured for receiving the best professional advices at the highest standards.

Storm Financial services was a member of the FPA. Storm's collective loss to clients is around $3 Billion. The founders are well off and continue to live in Brisbane. The FPA took no compliance reviews of Storm while they were a member and only acted after the collapse of the business. The full extent of their action was to fine Storm $20,000. The fine was never paid. 

A professional body not only holds their members to a higher level, they also audit their members. So is the Ad true, will you be safe using a FPA adviser?

2. Unemployment – most of us take the headline figure as the easy way to determine if unemployment is up or down. Certainly the media does not make the effort to look at further.

A quick visit to the Australian Bureau of Statistics will give you a completely different story. For August 2011 the unemployment rate is 5.3% up 0.1% from the previous month. Not too bad and below the historic levels. But on closer inspection we reveal that in August 2011 12,600 people lost full time employment of which 2,900 moved to part time employment. In July 2011, 22,100 people moved from full time to part time employment.

This trend is a clear indicator that unemployment is on the rise. More people are working less hours and therefore making less money. It is getting tough out there and a lot tougher than you are being told.

We also need to understand what the government defines to be employed, below is an extract straight from the Australian Bureau of Statistics;

2.34 Employed are defined as people aged 15 and over who, during the reference week:
•    worked for one hour or more for pay, profit, commission or payment in kind, in a job or business or on a farm (comprising employees, employers and own account workers); or
•    worked for one hour or more without pay in a family business or on a farm (i.e. contributing family workers)

Show me someone who makes enough money in one hour to cover their weekly living expenses.

3. Financial Planner fees – new laws are coming in called  “opt in”. This is where the adviser must write to their client each 2 years and have the client confirm that they are still happy to pay their fee. Sounds completely sensible.

Again let’s take a look at the fee structure. In a managed fund platform the average fee is 2%, of which the adviser received 0.5% or about a quarter of the total fee.  If you have $100,000 invested the yearly fee is $2000 and $500 goes to the adviser. At an hourly rate of $170 per hour this covers around 3 hours of advice per year. This barely covers the compliance costs to an adviser. However if you opt out, the adviser no long is paid any fee and you no longer receive advice. You are still however paying the fund manager $1500 per year or 1.5% and no one is watching your investments for you. You tell me who the big loser will be?

4. Industry Super Funds – from little things big things grow. This is true. Unfortunately it is not your investment which grows it is the Industry Super fund.

Industry Super fund are cheaper then retail funds. Normally the fees on an Industry Super Fund are around 1-1.5%. On a retail fund you are paying around 2%. The difference is around 1%. So if you have a balance of $500,000 in Super your fees in an industry fund will be $5000. In a retail fund it will be $10,000 so about double.

But what do you get for the extra? First you have access to an advisor who should on their own justify the extra funds. You need to look at an adviser like an Accountant or Solicitor, do you do your own tax or conveyance work. Do you understand the super rules.

A good adviser will save you far more then you will ever pay them.

In an industry super fund for your $5,000 you receive nothing. No advice on superannuation. No advice on investments. No advice on the level of  insurance you should have. You have no idea when you can retire or if the investments you hold suits you.

The message of the Industry Super Funds is simple, advice is worth nothing, every super fund provides the same return and it is only the fees which make the difference.

This could not be further from the truth, good advice makes money. This is why the rich value their advisors.

These are just a few examples of how we the public are deceived. With all that is going on in the world the average person has little or no chance to be on top of the truth. 

The only way to be well informed is to have a reliable adviser whose goals are aligned with yours.

In the Financial Investment space we aim to be this advisor.

Let us know how we can assist you.

If You Could Only Invest Once, What Would You Invest In?

By Jason Fittler

Rich people employ their capital to work as hard as possible for them. They take the time to look at all of the investment opportunities and make sure that they choose the right strategy.

Note I said strategy, not investment.

With all investing it is the strategy you choose which will determine the outcome.

Most people spend way too much time focused on the investment its return and how it has performed against other investments. They spend far too little time focused on their wealth creation strategy; in fact most people put more time in deciding on how they are going to spend their money than they do in how they are going to make it. The strategy is all-important and need to be the main focus.

All wealth is created from the transfer of money from one individual to another.  There are many strategies of how to transfer this wealth, some people look to buy something cheap and sell it at a higher price. This is called trading. You can trade everything from shares, property, gold and collectibles. This has a high level of risk and loss. Arbitrage is another strategy, this involves looking for miss prices items, buy them in one market and sell straight away in another to make a profit. As technologies improve arbitrage becomes harder.

Building sustainable wealth in my view is the best strategy. It may sound simple, but in reality is hard for most to stay focused.

To build sustainable wealth you need to be able to take a long-term view and focus on the income the investment generates and not it value. This is where it becomes hard; as the value of an investment fluctuates most investors start to compare the result with other investments and then look to switch strategies.

This game of catch up never works and in most cases merely compounds the loss.

Income is the key to buying a long-term sustainable business along with the return on the assets employed by the business.  A business needs to make real cash returns and dividends paid from cash are the best sort of returns. A business with a sound business model and product, continues to pay dividends through the good and bad times. Over time the price will increase.

The second variable is the return on assets; you need to invest in a business, which can make a better return on your assets, than you can. Do not confuse return on assets with dividends.

Return on assets is the amount of money the business makes as profit; the dividend is the amount of profits that the business pays out to the shareholders. They are usually not the same; the dividend is the surplus cash the company has which it cannot re-invest.

When looking at the return on assets think of it this way, if you have $1,000 you could invest in a term deposit and make 6% or $60. If a business has a return on assets of 10%, then by leaving this money in the business you will make $100.

Our strategy is to invest in such businesses.

For more information please call me on (07) 4771 4577.

Are You Wealthy?

By Jason Fittler

The GFC has taught us all a lesson on what real wealth is as opposed to perceived wealth. Everyone wants to be rich but very few understand what it means or what the word rich means.

There is, of course the super rich, these are the people who can spend what they like, live how they please and still have plenty of money.  Less than 1% of the population fall into this category, it may seem more as they are frequently in the news. Although most of us would like to part of this 1%, reality is that we never will.

Rich is normally defined based on overall worth. It is a normal assumption that if someone has a lot of money then they earn a lot of money. To some degree this is correct, to be rich you need to have large capital base. How rich you are depends on how you employ this capital base.

You have head of the saying “Work smart not hard” this is true for your assets as well. To truly be rich you must make sure that your capital is working hard for you. It is the income which this capital produces which determines your wealth.

My definition of wealth is being able to live the lifestyle you choose without having to work. To achieve this I need to make sure that my capital (money) is working harder than me.

So again, are you wealthy?

The test is simple, can you stop work today and continue to maintain your current lifestyle. If not then you need to continue to focus on saving, paying down debt and building your nest egg.

Growing and maintaining wealth is not a simple issue. You will need help along the way; all great people have someone providing the right advice and support along the way. Make sure you are getting the right advice; make sure you are focused on the long term.

Below is a table giving you an idea of how much capital you need to produce the income you currently live on.

Now you have a goal, let us help you achieve it.

Income pa	Capital Needed
$    50,000.00	$                833,333
$    60,000.00	$             1,000,000
$    70,000.00	$             1,166,667
$    80,000.00	$             1,333,333
$    90,000.00	$             1,500,000
$  100,000.00	$             1,666,667
$  120,000.00	$             2,000,000
$  150,000.00	$             2,500,000
$  200,000.00	$             3,333,333

Recession – What Does it Mean.

By Jason Fittler

Recession is the new media hype; our office has been calling it since 2009.

"Australia from my perspective is in a recession, for long-term investors this means you need to focus on making sure you are holding blue chip stocks paying a high dividend yield. At the same time keep an eye on the growth stocks and maintain some exposure as once the recession’s starts to break these stocks will be very profitable."

There are many definitions of a recession depending on who you are talking to, a common agreement is two negative periods of GDP is considered a recession.

In economics, a recession is a business cycle contraction, a general slowdown in economic activity. During recessions, many macroeconomic indicators vary in a similar way. Production, as measured by gross domestic product (GDP), employment, investment spending, capacity utilization, household incomes, business profits, and inflation all fall, while bankruptcies and the unemployment rate rise.

Recessions generally occur when there is a widespread drop in spending, often following an adverse supply shock or the bursting of an economic bubble. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation.

Some recessions have been anticipated by stock market declines. Ten recessions were preceded by a stock market decline, by a lead time of 0 to 13 months (average 5.7 months), while ten stock market declines of greater than 10% in the Dow Jones Industrial Average were not followed by a recession.

The real-estate market also usually weakens before a recession.  However real-estate declines can last much longer than recessions. During an economic decline, high yield stocks such as fast moving consumer goods, pharmaceuticals, and tobacco tend to hold up better.

However when the economy starts to recover and the bottom of the market has passed, growth stocks tend to recover faster.

There is significant disagreement about how health care and utilities tend to recover.

Diversifying one's portfolio into international stocks may provide some safety; however, economies that are closely correlated with that of the U.S. may also be affected by a recession in the U.S.

There is a view termed the halfway rule according to which investors start discounting an economic recovery about halfway through a recession. In the 16 U.S. recessions since 1919, the average length has been 13 months, although the recent recessions have been shorter. Thus if the 2008 recession followed the average, the downturn in the stock market would have bottomed around November 2008. The actual US stock market bottom of the 2008 recession was in March 2009.

Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending to spark economic growth.

 Supply-side economists may suggest tax cuts to promote business capital investment. When interest rates reach the boundary of an interest rate of zero percent conventional monetary policy can no longer be used and government must use other measures to stimulate recovery. Keynesians argue that fiscal policy, tax cuts or increased government spending, will work when monetary policy fails. Spending is more effective because of its larger multiplier but tax cuts take effect faster.

Australia from my perspective is in a recession, for long-term investors this means you need to focus on making sure you are holding blue chip stocks paying a high dividend yield.

At the same time keep an eye on the growth stocks and maintain some exposure as once the recession’s starts to break these stocks will be very profitable.

Real Estate prices will fall as it becomes harder to obtain credit, as business owner’s focus on reducing business debt as opposed to lifestyle changes and households start to feel the pinch of increases expenses.  

Regardless of how much the Government tries to talk up the economy the tough times are still to come for us individuals.

For investors now is the time to buy those investments, which will provide you with the wealth in the long term being 3-5 years.

Change Is Coming To Australia

Below is an extract from article from FN arena, it gives our technical analysis Daniel Goulding a great wrap up.

Rudi's View: Change Is Coming To Australia

FNArena News - August 03 2011

By Rudi Filapek-Vandyck, Editor FNArena

A Special Reward goes out to Daniel Goulding, publisher of The Sextant Market Letter, a weekly newsletter focused on the Australian share market. Goulding, who's an avid technical analyst with keen interest in history, philosophy and Elliott Waves, has been on the opposite side of most market experts and commentators' views for a while now, telling his readers the Australian share market remains in a bear market and all those predictions about the index targeting 5500 and beyond are best to be ignored.

Goulding has an end-of-the-year target of 4500 for the ASX200, which against current market developments, seems highly plausible. This is not why he deserves a special mentioning. Ever since the share market peaked in April last year, Goulding has been predicting a sideways pattern at best, and certainly nil, zero, zilch chances of breaking above 5000 on a sustainable basis.

Gosh, I sometimes receive complaints about showing a lack of enthusiasm for the upside potential in Australian equities, so I can only imagine what kind of emails on occasion must land in Goulding's inbox. Picture this: while about everyone with a voice in Australia was predicting an up-year for Australian equities at the start of the year, and most forecasts were for robust earnings growth and expanding PE multiples, so 20%+ investment gains, Goulding stoically set his target at 4500. Apart from Tim Rocks at BA Merrill Lynch, who happens to have a similar target, Goulding has been in a lonesome spot all this time, until recently. The team at JP Morgan has now joined both with an equally sobering outlook and most other experts have been scaling back their projections recently, even though it has to be said: not everyone has as yet given up on the share market surging well above 5000 this year. (No, really).

I don't know where the share market will be at year's end and throughout the years I have steadfastily ignored all invitations from either media or subscribers to "give it a go". I think it's a mug's game and the observation that many experts were off by a solid 1000 points in 2010, and many are looking like they will be off a solid 1000 points this year, only proves my point. Back in 2008, when I was in a similar position as Goulding, warning everyone crude oil was not going to rise towards US$200/bbl, as widely predicted, and that investors jumping on board the bandwagon were going to lose a lot of money, I did not predict crude oil prices were going to revert back to US$32/bbl on dayone - all I knew, and I carried this with conviction, was that US$200/bbl was just silly.

Just as silly as the Deutsche Bank strategist (now at Citi) who predicted the ASX200 would be at 6000 by December 2010. This market is not going to rise anywhere near 6000 for a long time. Similar to Goulding and Rocks, I have remained skeptical as to whether the ASX200 could rise above 5000, and stay there. My rationale was as simple as can be: is earnings growth in Australia strong enough to sustain such a level? My analysis said "unlikely". Turns out my analysis was correct.

You can subscribe here to the paid report, The Sextant Market Letter.

Borrowing to Invest – Why You Should Be Reducing Your Debts Now

By Jason Fittler

I was surprised to learn how much gearing or borrowing was in the market prior to the GFC, in a Bull market you expect that investors will fall to the allure of quick money to be made through gearing. What is more surprising is the number of investors still actively undertaking a gearing strategy.

We are now in a period of flat growth in the share market and in the property market.

As such borrowing will simply reduce the return on your investment.

Paying down debt should be number one priority for any serious investor in this market. Let take a look at some of the issues;

1. Negative Gearing – this is where you make a loss from the investment and then use this to reduce your tax bill. It is called negative for a reason; it simply does not make sense. You lose money to save tax, paying tax means you’re making money. DO not be afraid of paying tax. In the current economy with high interest rates this loss will be larger but there is no capital gain to offset it. If paying less tax is a prime motivation of choosing an investment then the only person making money is your realtor.

2. Gearing should only be used in periods of high capital growth (Bull markets), in Bear or Flat markets which we are in now gearing compounds the losses you will make year to year. Bear markets can last 10 years; as such you should look to reduce your gearing at the start of the Bear market.

3. Fees – your adviser will make fees on the value of your investments and on your loan. As such selling part of your investments to pay down the gearing level will also reduce the fees you pay.

4. Interest Rates – for margin lending the current interest rate is 9.5%, the average income for a diversified portfolio is around 6.5% per annum. As such you would get a better return on your money by paying down your loan. Remember we are not expecting any capital growth.

At present I expect that we will see little growth in the Australian Share market for at least the next 3-5 years and the housing market for the next 8-10 years.

As such to improve your overall return look to pay down your loans.

For more information please call me on (07) 4771 4577.

Carbon Tax – What is it Good For?

By Jason Fittler

There is going to be a lot of political debate around the Carbon Tax unfortunately most of it will be fueled by ill informed people who have an agenda to push as opposed to a sensible debate on the facts and effect.

I fear that people have gotten so lost in the fiction of selling the spin that they can no longer step back and separate fact from fiction any more.

This article is about looking at the facts as set out by the government to take a look at the policy and see how this new tax is going to affect the world climate, Australian climate, Australian business and most importantly Australians.

When looking at the policy of Carbon Tax you need to separate your opinion on Global Warming (Climate Change) from the Carbon Tax. Too many people approach this issue on emotional bases. When reading the Governments policy documents it is clear that it is the Government’s position that the science is settled on this issue. Taking this view point we now need to see if we are getting value for money through this package. Will the dollars that each Australian spends achieve the goals of stopping climate change?

Below are the facts from the government’s policy documents.  Every Australian citizen should read these for themselves, hopefully this article will inspire you to do just that. The facts are;

1.  In 2010 year Australia produced 578 million tons of Carbon, this amount will continue to increase under a carbon tax. The forecast for 2020 is 621 million tons of carbon. The governments plan is to slow the rate of increase, without the carbon tax the 2020 forecast was expected to be 679 tons. Therefore the carbon tax will save 58 million tons of carbon being produced by Australian companies. The target to reduce carbon by 159 million tons will be met by buying 101 million of carbon credits from overseas not from the physical reduction of carbon by companies in Australia.

2.  Per capita Australians are the biggest producer of Carbon at around 27 tons per person; however, Australia only produces 1.5% of the Worlds carbon as such when you look on the world stage we are a very small producer of carbon. One has to ask, will we make a difference to carbon production worldwide given our size and given that the amount of carbon we produce?  Australia’s carbon tax will reduce worldwide carbon by 0.1% per annum.

3.  Carbon Tax will only affect fuel for domestic aviation, domestic shipping, and rail transport, off road and non-transport use of liquid and gaseous fuels. It will not affect fuels used by households, so although they talk about the carbon reductions being like taking 45 million cars off the road in fact they will take no cars off the road. To change carbon emissions we the Australian citizens need to change our habits.  Is this tax doing this?

4.  CPI will increase 0.7% under the Carbon Tax; keep in mind that this is on top of the average increase of 3.5%. As such moving forward the average CPI rate is 4.2%. The government is looking to offset this for the average worker by reducing taxes. The average income is $66,594pa; the tax saving in 2012 to 2014 will be $338.32pa base on the average income. A saving of 0.51%pa, in 2015 onwards the savings will be 0.63%pa. Now keeping in mind that CPI will increase by 0.7% this would mean that the average income earner will be about in the same position. It does however leave no margin for error as such we have to trust that the Treasury has got this 100% correct. I am doubtful that they can calculate the cost increases that closely, time will tell. For higher income earners (people on over $80,000pa) there will be no tax reductions, you will have to pay the full 0.7% increase in CPI yourself. On an $80,000 income this is an extra $560pa; on an income of $180,000 income is it $1260. I doubt that these increases in cost will drive any change in high income earners behavior.

5.  Small business has received no tax cuts; the only offer is the extension of the small instant asset write off. For those non-accountants, this is an accelerated depreciation.  Simply put this has no effect or benefit to small business over the long term. There are two main reasons;            

a.  The small business first needs to make a capital expenditure before they receive any benefit.

b.  The benefit is the same except they receive the benefit over a shorter period of time.

6.  Self Funded retirees, will receive a lump sum payment if they hold a seniors health card in May 2012, some will benefit from the above tax cuts. But those receiving an account based pension will receive no assistance and will wear the full impact of the 0.7% increase in the CPI. Again for the high wealth individuals this will have little effect for the marginal wealth individuals this will most likely mean that they will at some point need government assistance.

7.  Job losses.  The paper provides that more jobs will be created then lost; the catch is that these jobs will be in different industries. I am sure that those who can be re-skilled will be, but those who cannot will lose their job. The figures may stack up but the real world is very different to forecasts and projections, some people will simply lose their job while others will get jobs they did not have prior to the Carbon Tax. The personal affect of someone losing their job and not being able to return to the work force cannot be measured. I guess for these people this is one of those greater good situations.

8.  The 500 big polluters will pay the tax, it is expected that they will pass on what expenses they can. But you must remember in the real world it is never as easy as the models indicate. There will be contracts in place which will need to be reworked in the years to come. Short term some of these will suffer losses to their bottom line. The other issue is that these big polluters will not be named, and as such you will never know how much they have been compensated by the government. No doubt anyone who has superannuation will most likely have money invested in these companies as such given the share markets reaction to the Carbon Tax your investment will or has already suffered.

9.  Off shore investment is another issue which can never be measured. Opportunity costs are hard to calculate and we will never really know how many large companies will change their plans on investing in Australia or what affect this will have on the growth of the nation.

The question now for every citizen of Australia is; are you getting value for your money? Is this tax reducing carbon production and resolving the climate change issue or is this simply another tax? Will the funds raised from this tax truly be put towards better technology for a cleaner Australia? If so can the government provide details of how the funds will be spent?  The government has promised a tax surplus in 2013, will they achieve this through the Carbon Tax?

We are being told it is very complicated, in fact it is not. The above questions should have been asked and answered by the government before the tax was brought in as such they should have the answers available.

As more details come to hand I will make sure that you are up dated, but below is one last thought I will leave you with;