22 NEWCASTLE HERALD Thursday, September 3, 2015

business PERSONALFINANCE

Hang inandadd toportfolioNOELWHITTAKER

The market is very scary at

the moment, but it’s not all

bad news – by a long shot.

The catalyst for the big falls this week was Chinese investors puntingon the sharemarket using margin loans.

Noel Whittaker is the author of Making Money Made Simple, and numerousother books on personal finance. His advice is general in nature and readersshould seek their own professional advice before making any financialdecisions. Email: noelwhit@gmail.com.

WHAT a week it’s been. The DowJones had its eighth-biggest declinein history, markets all over the worldtumbled, and of course theAustralian market crashed as well.

For the nervous it was a time towonder if this is the start of anotherglobal financial crisis, for theexperienced investor the bigdecision was whether to sit tight orjump in and buy.

This is definitely not the start ofanother global financial crisis. Thatwas a credit event caused by billionsof bad debts that resulted fromirresponsible lending.

The catalyst for the big falls thisweek was Chinese investors puntingon the stock market using marginloans.

As the market fell, shares wereforcibly dumped to cover margincalls.

Naturally, the turbulence of theweek has resulted in a string ofemails asking whether to get out ofthe market, and if superannuation isstill worthwhile.

For starters, it would be extremelyrisky to exit the market after thehuge falls we have just experienced.All you would be doing is convertinga paper loss into a real one.

In any event, unless you have adirect shareholding, it is notpossible to make a fast exit.Redeeming all or part of yourportfolio requires forms to becompleted and processing time tooccur. Allow a week at the least.

And don’t confusesuperannuation with assets likeproperty or shares. Superannuationis simply a vehicle that allows you tohold assets in a low tax environment.

Anybody whose superannuation isinvested in shares would havesuffered a loss of value this week,but so would anybody who heldshares in their own name.

Let’s look at the situationobjectively. The only realisticinvestment options are cash,property and shares.

In my view, the Australianeconomy is flat, with jobs continuingto be cut, and action by Greengroups stopping infrastructuredevelopment.

The current fall in the share-markets tends to make people feelpoorer and less confident ofspending, which will makeeconomic conditions even worse.

If this is true, the only direction forinterest rates is down.

It is really up to each individual todecide where they want to invest,but do you really think savvyinvestors will choose to move theirmoney to term deposits paying2 per cent when they can getbetter than 6 per cent frankedfrom shares like the banks andTelstra?

If stocks like this are held in asuperannuation fund in pensionmode the franking credits will takethe effective yield to close to 10 percent.

That’s five times what you can getin term deposits.

The Aussie dollar got hammeredtoo, but this has an upside as wellas a downside.

It will be great for exporters andthe tourism industry, and also it

will cushion any falls in shares heldby international managed funds.

Think about it: if the internationalshare values fall 4 per cent andthe Aussie dollar falls 4 per cent,you will not have lost any value atall.

I think falling rates will push ourdollar down further, which shouldmake international equity trustsgreat performers for the rest of theyear.

So don’t be concerned about thecurrent turbulence; hang in thereand think about adding to yourportfolio if you can.

Don’t forget there is now morethan a trillion dollars insuperannuation, and employers arecontributing 9.5 per cent of payrollall the time.

Much of this money will find itsway into the sharemarket and thiswill provide tremendous buyingpressure year in year out.

Over the long term, share-basedinvestments will still give greatreturns.

Q I am a 46-year-old, self-employedwoman and I own a small home.

My income is variable but generallylow, hovering around $35,000 perannum. Other than owning my home,I have $27,000 in term deposits. Wouldyou recommend that I put this moneyinto my superannuation? I currentlyhave about $16,000 in super.

A Earnings in your super fund aretaxed at 15 per cent from the first

dollar earned. However, if yourincome is generally less than $37,000a year there is little benefit in movinga big chunk of your assets to super,and losing access, because yourcurrent investment earnings arebeing taxed at 19 per cent now.Furthermore, if you made deductiblecontributions to super they wouldalso lose 15 per cent in entry tax.However, it is certainly worth makinga non-concessional contribution of

$500 to super to receive thegovernment co-contribution. Thiscould be done through your existingfund.

Q If I sell my investment propertyand repurchase another one, can I

pay my principal residence home loandown and mortgage the new invest-ment property without incurring capitalgains tax on the sale? Or does thecapital gain have to be applied directlyto the new investment property?

A Once you sell the investmentproperty, CGT – if appropriate – will

be triggered. You could certainly paythe net proceeds off your non-deductible home loan and then takeout a home equity loan to fund theentire purchase price of the propertyyou intend to buy. The interest on thisloan would be wholly tax-deductibleas it is for investment.

They will talk about you when you’re gone – nicely

Hand in hand, SMSFs and familytrusts work for now and the long-term family future.

By MICHAEL HUTTON

Michael Hutton is head of wealthmanagement at accountants andbusiness and financial advisersHLB Mann Judd Sydney.

FAMILY trusts and self-managedsuperannuation funds (SMSF) areboth popular options for investorswho want to control and direct theirfamily wealth. All too often,however, they are considered aneither-or investment choice.

But if used together, they can oftenmaximise wealth creation andwealth preservation.

Most people are well aware of thetax advantages of super foraccumulating investment wealth.SMSFs have the added advantage ofmaximising the benefits you obtainfrom super due to the flexibility andcontrol they give you. But there aredownsides to super. Your money isessentially locked away untilretirement, you are limited on howmuch you can contribute, and yoursuperannuation account must bepaid out upon death.

Conversely, family trusts are notsubject to preservation, so yourfamily money is not locked away.

They are relatively simple toestablish and operate and have nolimits on how much you can put in.

While beneficiaries ofdistributions from a trust must paytax on that income, distributionsdon’t have to be made equally to allfamily member beneficiaries.

This can be extremely tax-effective when distributions arepassed on to family members onlower marginal tax rates.

Family trusts have the advantageof being able to hold personal-useassets – a holiday home, businesses.

Finally, family trusts can continuepast your death, making them anexcellent vehicle for inter-generational wealth transfer.

The downside of family trusts isthat they may not be as tax-effectiveas super.

What many wealthy familiesunderstand is that if you have both afamily trust and a SMSF, you canmould your financial affairs tobenefit from the combination ofinvestment structures.

Both structures assist inprotecting a family’s wealth, aspersonal creditors may be hindered.With improved financial reportingand investment options, and

cheaper systemised compliance,family trusts and SMSFs are nolonger the domain only of thewealthy.

Family trusts are particularlyuseful early in the family’s wealth-building process. At this stage,people are hesitant to put extra intosuperannuation because of thepreservation requirements, andfamily trusts provide a tax-advantaged structure for wealthcreation.

As retirement nears, wealth canbe moved from the family trust to theSMSF, discretionary contributions,building up a concessionally taxedretirement nest egg.

But this is not the end of theusefulness of the family truststructure.

Post-retirement, any extra wealththat can’t be recontributed tosuperannuation can be placed in thefamily trust.

As money is drawn down fromsuper as a pension, the family trustinvestment portfolio may beincreased. Upon death, the familytrust can continue on. Investmentscan remain and control passed tothe next generation. This differsfrom superannuation, which isdesigned to be run down throughretirement, then sold up and paidout upon death.

For many families, a family trustused in conjunction with an SMSFcan be a very beneficial approach,offering intergenerational transferof wealth benefits, assisting inwealth creation and management,and creating the most tax-advantaged outcomes.