Archive for April, 2012

The Negative of Gearing

Sunday, April 29th, 2012

Negative gearing is great – just ask anyone who knows anything about money, or anyone who thinks they know. Negative gearing is also not properly understood by the general public.

Basically it’s a situation with investing where you borrow money to purchase an asset (like a house) and have to pay more to the bank in interest than the money you are receiving in income (like rent from your tenants). Australian tax laws allow you to effectively claim a tax deduction for the difference, and as every Aussie knows, tax deduction = good. But what’s good for an individual might not be good for society.

Leaving aside the fact that negative gearing can totally ruin you financially if you don’t have the right income to support it, negative gearing has been blamed for helping to push up the cost of housing and creating a larger gap between rich and poor. One reason for this is because there is no limit to the amount an individual can negatively gear. Why not?

I reckon if the federal government had the balls, they would take a look at the negative gearing sacred cow and change it, gradually, over a number of years to make the system fairer. Currently there is no limit to the number of properties you can have negatively geared and claiming tax deductions on in your annual tax return. I reckon there should be a maximum introduced of, say, 18 properties (yeah, a few individuals have an enormous number of properties under their belt). The next year the number should drop by one and keep falling by one per year over 15 years so the maximum number of properties that can be negatively geared by anyone is three.

I’m not saying you should not be allowed to own more than three investment properties, just that you can’t claim tax deductions on the interest of the loans of more than three. Introducing a change over a long time period would not adversely affect the property market or the average Joe. The super rich would hate it, especially if the system was widened to take into account negative gearing on shares and managed funds as well.

If the average Aussie property is deemed to be worth $475,000, that’s a good place to start for the equivalent amount of shares or managed funds that can be negatively geared (multiplied by 18 for the first year, 17 for the second, etc.). Lowering the amount that really wealthy high income earners can claim on their tax makes the whole tax system fairer for all of us.

Another way of bringing house prices down to more sustainable levels is to increase supply by encouraging new houses to be built. Allowing negative gearing only on new houses, or properties which have been vacant for 12 months or more, would see more properties available for renters without pushing up the prices of existing dwellings. But introducing a sudden shock like that into the tax system would spell the end of the political party that did it.

It’s The Fashion

Sunday, April 22nd, 2012

With three more Australian fashion designers hitting the headlines this week paying their workers half the minimum wage for making designer clothing, my mind has been turned to fashion, and in particular how bloody expensive it can be. It’s not gonna shock you to know that the label on many products costs more than the article itself, but it might shock you how much more it costs, particularly if you’re like me and don’t generally go anywhere near brand names.

My $15 Target sunnies snapped the other day. Up until the point where they went wonky on my head they actually looked pretty good and, more importantly, they protected my eyes from UV rays and harsh sunlight. When you think about it, that’s all your sunglasses need to do – stop you from squinting, cut out the UV and not make you look like a knob. Australian standards mean that you get UV protection and the mirror on the sunnies stand is there to protect you against looking like an idiot. In theory.

Because it had been about 2 decades since I’d entered a Sunglass Hut shop, I had a look at their collection yesterday and noticed that their entire range was behind glass, you know, like all the gold stuff at a jewelers. At first I thought this was the case so that you had to ask a staff member to give you the ones you wanted to try on, then they had to stand next to you and lie about how good they look on your face. Similar to that fibbing experience when I try on clothing and there is no mirror in the change rooms – “Oh that shirt looks great on you!” is what I hear from the female shop attendant when I’m thinking “Yeah, this shirt, designed for the clubbing teenager, really matches my bald spot.”

But as I got closer to the locked display cabinets I realized that the number 430 on the tag stuck to the arm of the sunnies was not the first three numbers of the barcode. It was at that point I remembered our superglue and left the store to apply some to my 15 buck specials.

When I got home I needed to sit down in the smallest room in the house, and picked up my wife’s baby magazine (normally I read the money section of the newspaper at such times, but I’d finished it at a previous visit). In it there was a picture of Victoria Beckham carrying her baby daughter, both of them dressed for the Logies. Surrounding the photo were a bunch of lookalike products you could buy so that you too could look just like Posh and her kid (minus the ski jump nose – I reckon that’d be extra). The price for the dress and boots came to $205. For the toddler.

Lucky I was sitting where I was, ‘cause I was somewhat shocked. It’s pretty sad that that this particular magazine is targeting new mums who are probably not looking the same as they did pre-kids. Add to that the fact that having kids tightens the purse strings and you have the perfect storm for insecurity.

Something the fashion industry thrives on I guess.

Finally, Good Advice*

Sunday, April 8th, 2012

For many years financial planning has been seen as an industry with professional and ethical standards right up there with used car salespeople and Today Tonight journalists. Many surveys and shadow shopping exercises done on financial planners over the years have reinforced this negative image and the industry itself has been unable to clean up its act.

Lawmakers have also struggled to pass legislation to enable consumers to be given advice that puts their interests ahead of the interests of the planner, or the wealth management team who get their hands on the consumers’ money. There have been many changes over many years aimed at cleaning up the industry and thus far all have fallen short.

The federal government is just about to introduce laws that will see the biggest changes to financial planning to date. Yet, even as the financial planning world screams murder over the changes that they reckon are doomed to have such a negative impact that the sky will fall in, the new laws again fall short.

Firstly, the good news: The laws mean that the planner will have a duty to put the clients’ interests ahead of their own. They will no longer be able to charge commissions on the money of new clients in managed funds or superannuation.

Now, the bad news: Existing clients who pay commissions from their funds will continue to pay them. The new legislation, which was to take effect from 1 July 2012 will only start from July 2013. Planners will still be able to charge clients asset based fees, which are similar to commissions. Commissions will still be allowed on life insurance products (commissions make up to 30% of the premium on some insurance products, meaning a ban on them would’ve seen life insurance significantly more affordable).

The most recent ASIC survey of financial plans found only 3% of them were good. The rest were adequate (58%) or poor (39%). It’s a trend on par with every similar survey I’ve seen done on planners over the past 10+ years. The worrying thing is that when the clients of those planners were asked to rate the advice, 86% of them reckoned they’d received good advice and 81% said they trusted it “a lot”. Clearly what people think is good and what the regulator thinks is good are very different. What it boils down to is people being ripped off, and not realising it. And when the rip off concerns your life savings, it’s serious stuff.

That leaves only one line of defence – legislation. These new laws are an improvement on the old ones but they leave a gaping hole between crap laws and good ones. In the end, the federal government has shown great courage to go against the wishes of an industry to introduce this legislation which will be better for consumers, but there is the very real possibility that the new laws will be in effect for the months between July 2013 and next year’s federal election. Because if the opposition gets the thumbs up from the electorate, they have promised to throw the new laws out the window.

Then consumers are back to square one.

*From July 2013. For new clients only. Not when you pay asset based fees. Possibly for a limited time only.

Super Suggestions

Sunday, April 1st, 2012

Warning: don’t read the following blog before bedtime. Don’t even read it out loud, especially if you are sitting in the passenger seat of a car and the driver doesn’t have ready access to Red Bull. The following blog contains some mild and conscience-changing language which is likely to send children into a boredom related stupor. Keep reading if you reckon you can handle some superannuation suggestions.

The super co-contribution is one of those rare things where you get something for nothing. If your income is below $31,920 and you make a $1,000 contribution to your super, the government will match it. That $1,000 isn’t part of the money your employer puts in or any you salary sacrifice. Once your income goes above $31,920 the amount the government chips in decreases until it cuts out entirely at $61,920. In theory it’s a good scheme, but in practice I don’t know many low income earners who have a lazy grand sitting around. From 1 July this year you will only be eligible for a maximum of $500 from the government for your own $1,000 contribution.

That’s the bad news. The good news is that if your income is below $37,000, from 1 July you will no longer have tax taken out of your employer contributions. Currently everyone’s employer contributions are taxed 15% as they go into your super account, but for low income earners that tax is being abolished. And the amount your employer has to put into your super will start to go up. Currently your boss has to put 9% of whatever you earn into super, but from mid this year it will go up to 9.25%, rising every year until it reaches 12% in 2019.

If you have a spouse earning less than $13,800 and you make a contribution to their super fund of $3,000 you can claim a rebate of $540, which is not much, but better than a poke in the eye with a rough stick. These contributions are not the ones that are eligible for super splitting. Most people are able to split the money paid into their super to their spouse’s fund (unless it’s a contribution they’re claiming a tax deduction or rebate from, like a spouse contribution. Yes, it all starts to get a bit complicated doesn’t it?)

Don’t forget that all money that goes into super these days stays there ‘til you hit retirement age. So don’t go whacking the money you had set aside for the when next credit card is due into your super, ‘cause you’ll need that bill paid before you are old and grey. The only time the tax office will let you get your hands on your super early is when you are about to die or you are completely financially stuffed. And I do mean completely stuffed. Super money is designed for retirement and the tax office makes it very hard to spend before you get there.

If you are self-employed, please please please don’t forget to pay yourself superannuation. You might see it as an unnecessary extra expense now but I can assure you that you won’t think of it that way in the years to come.

I hope you are still awake.