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22 NEWCASTLE HERALD Thursday, November 13, 2014

business PERSONALFINANCE

Investing for the longhaulNOELWHITTAKER

Medibank is a powerful

brand, and there’s no

reason that won’t continue.

SOUND INVESTMENT: Medibank is a good investment because it is an administrator. Picture: Glenn Hunt

No other asset class has the unique benefits of shares,

but you need to decide whether you are a trader or an

investor. Traders look for a quick deal . . . investors take

the slow, steady route.

Noel Whittaker is the author ofMaking Money Made Simpleand numerous other books onpersonal finance. His advice isgeneral in nature and readersshould seek their ownprofessional advice beforemaking any financial decisions.Email: noelwhit@gmail.com.

MEDIBANK is the hottest topic intown right now – and everywhere Igo, people ask if it’s a good buy. Yes,I do think it’s a good buy, but it’sobvious that most Aussies arelooking at it as a bit of a punt. Afterall, we are right in the middle of theracing season and everybody’s aftera sure thing.

Unfortunately, far too manyprospective investors tend to shyaway from shares because they seethem as risky, and suitable only for aquick gamble. Time and time againI hear, ‘‘would never touch sharesagain – bought some years ago andlost my money’’.

No other asset class has theunique benefits of shares, but youneed to decide whether you are atrader or an investor. Traders lookfor a quick deal, and take theirmoney and run if the price goes up –investors take the slow, steady routeand look for something that shouldgive increasing returns over the longhaul.

Medibank is in the long-haulcategory.

The Medibank prospectuscomprehensively describes twoprinciples that have been ignored bymost commentators to date. Theseare the Risk Equalisation Trust andCommunity Rating – twomechanisms that togethereffectively redistribute the risk ofhealth insurance underwritingequally across the whole healthinsurance industry.

When you take these into account,it is clear that Medibank is more ofa health insurance claimsadministrator than an insurer.This makes it a much less risky play.

The success of Medibank will turnon its ability to process claimsefficiently and economically, whilemaintaining its market share, andcontinuing to attract new business.

It is a powerful brand and there isno reason to suggest it will notcontinue to do well.

One of the chief executive’s keyperformance measures for his ownremuneration is to achieve aspecified cost-to-income-ratio target.Expect to see a brutal cost-cuttingprogram soon after listing.

There’s a degree of uncertaintybecause would-be investors do not

know how many shares they will get,or even the price they are going topay.

The float has been wayoversubscribed, so nobody is goingto get what they applied for, butexpect the issue price to be about $2.

Anybody obtaining Medibankshares at this price should expect toreceive a total of 10¢ a share in fullyfranked dividends over the first 12months. This is equivalent to a 5 percent yield, which is way better thanmoney in the bank.

It’s astonishing that the Australian

franking system is one of the best inthe world, yet 90 per cent ofAustralians have no idea how itworks.

To put it simply, you get a creditfor tax paid by the company – thisreduces the tax on the dividend thatis paid to shareholders. You caneven apply for a refund of this creditin cash if you don’t have a taxliability.

For a self-managed super fund inpension mode, a 5 per cent fullyfranked yield is equivalent to anafter-tax return of 7.14 per cent.

For a taxpayer on $100,000 a year,the effective tax on a fully frankeddividend of $5000 would be just $558.

I am disclosing that I have appliedfor shares in Medibank, and will beholding whatever I am allocated forthe long term.

My wish for all who becomeshareholders is that it will turn outto be a good buy, and above allintroduce novice investors to thebenefits of investing in the best assetclass of all.

Check SMSF law before you pick up a hammer this summerBy MONICA RULE

Monica Rule was at theAustralian Taxation Office for28 years and is a specialistSMSF adviser.

MANY self-managedsuperannuation funds invest inresidential property.

With finer weather on the way, alot of people start to think aboutrenovating these properties –especially if a property is notproducing much income.

But the law is quite strict on whatyou can and cannot do withproperties held in SMSFs.

Whether you can renovate aproperty held by your SMSFdepends on whether the propertywas purchased by your SMSFoutright with money accumulatedin the SMSF, or whether it waspurchased using money borrowed.

Borrowings: If the SMSF’s propertywas purchased using borrowedmoney and the borrowing remainsoutstanding, then you are restrictedfrom using the borrowed funds torenovate, and thereby improve, theproperty.

You can only use the borrowedfund to make repairs to theproperty.

The difference between a‘‘repair’’ and an ‘‘improvement’’ isthat a repair includes work torestore the efficiency of function ofthe property without changing itscharacter.

It merely replaces or corrects apart of the property that is alreadythere and has become worn out ordilapidated through ordinary wear

and tear, or is damagedaccidentally or by natural causes.

An improvement, on the otherhand, is work that provides agreater efficiency of function in theproperty and usually involvesbringing the property into a morevaluable or desirable form, state orcondition.

A property would be consideredimproved if the state or function ofthe property is significantly alteredfor the better, through substantialalterations, or the addition offurther substantial features to theproperty.

Now, you can use money alreadyaccumulated in your SMSF toimprove a property purchased byyour SMSF via borrowings, as long

as the improvement does not resultin the property becoming adifferent type of asset.Accumulated funds: If the SMSF’sproperty was purchased usingmoney accumulated in the SMSF,there are no restrictions inrenovating the property.

You could even demolish theproperty and build a new propertyor properties on the land owned byyour SMSF.

However, what you do need to becareful of is that firstly, your SMSF’sinvestment strategy allows for suchactions; and, secondly, you don’t dothe work yourself unless you arelicensed and qualified.

If you are in the building andrenovation business, then it is also

important that any materials usedin the renovation are purchased byyour SMSF directly from thirdparties and not from you directly.

Just remember, if your SMSF hasa loan on the property and is usingborrowed money to fix it, you arelimited to making repairs.

If your SMSF has a loan on theproperty but is using its own moneyfor the renovations, you canrenovate a property to improve it aslong as you don’t change itscharacter.

Q If I am unemployed when Ireach my preservation age, will

I be able to access my super?

A This depends upon your ageand your intention to work. If

you are 55-60, you would need tomake a statement that you don’tintend to be gainfully employed formore than 10 hours within every 30days at any time in the future. If youceased working after 60, you havemet a condition of release – andcan withdraw your entire superbalance tax free.

Q Iwould like tohelpmygrandsonlocateaFirstHomeSavings

accountbuthavehadno luckwith thebanks Ihavecontacted.Wherecould Ifinda listofbanksoffering this?

AUnfortunately they wereabolished in the May 2014

budget due to a lack of interest fromfirst homeowners.