Articles by Janet Xuccoa

The Low Down on New Gifting Rules

Christmas Grinch versus Santa Claws

When it comes to giving, they say it’s the thought that counts.  Unfortunately, not many people apply this truism when it comes to gifting to the Family Trust.  I expect lots of New Zealanders will, in the next little while, rush in where angels fear to tread and make gifts to their Trusts.  They will forgive all debt owing to them and will feel happy that the new law permits them to bring their protracted gifting programmes to an end.  Very little thought will be spared on what the implications of this move are or the enormous loss of wealth it could cause.  In a bid to help you, I thought I’d share what I’ve been thinking lately …

a new landscape for trusts

On 1 October 2011 the Government introduced law which abolished Gift Duty.  This legislative move was made after a review had been conducted which showed adequate mechanisms existed to protect creditor rights.  The review also brought to light that little Gift Duty was ever collected thus the tax was ineffective and furthermore, the actual completing and filing of gifting documentation placed significant costs on the Government and the persons making gifts.

The result of the new legislation is that the Gift Duty regime as we have known it is now an historic beast. The practice of selling your assets, at market value to a Trust and getting a Deed of Acknowledgment of Debt (IOU) back from your Trustees and annually forgiving $27,000 of that IOU debt is now a thing of the past.  Individuals are free to make one or more gifts (including debt forgiveness) of any value, without incurring and paying Gift Duty, from 1 October 2011.  Wonderful I hear people say.  Finally, I can wrap up my affairs and conclude this long drawn out affair I’ve had with gifting.  But before you do just that, read on. 

Implications

 1.         potential creditor claims

Many people, especially those in business, borrow funds from an arms length party such as a Bank.  At the time of borrowing they sign loan documents which state they must remain solvent at all times.  Often once an individual has the funds from the Bank, they on lend them to a Trust they have created.  In turn, the Trustees of the Trust give them a Deed of Acknowledgment of Debt evidencing they owe them the money they have just received.  In effect this means the individual remains solvent as the IOU balance noted in the Deed constitutes a personal asset to them.  Accordingly the person’s asset and liability position is balanced.

Forgiving the debt owed by the Trustees of the Trust however may mean the individual becomes technically insolvent.  This is because all assets will be owned by the Trust and the individual will merely owe a liability back to the Bank without having any corresponding asset owed to them. 

Being technically insolvent could amount to a breach of the covenants in the Bank loan documents and that could give rise to the Bank demanding repayment of the debt the individual owes them.

For this reason, an individual should always consider what their personal asset and liability position will be in relation to any covenants they have given to a lender before they complete gifting.  This matter is particularly important if an individual is intending to complete any lump sum gifting.

2.         relationship property issues

When individuals in marriage or de-facto relationships transfer their joint assets to a Trust, they are in effect transferring relationship property.  When they obtain Deeds of Acknowledgment of Debt back from the Trustees of the Trust for the relationship property they have transferred, the debts noted in those Deeds are also relationship property.  The actual assets that have been transferred however become Trust assets.  In other words, the transferred assets change their legal classification.   Ordinarily this is not an issue if the relationship between the individuals continues and if both individuals are Appointors, Trustees and Beneficiaries of the Trust.

Problems can however arise if lump sum gifting has occurred, the relationship breaks and one of the individuals does not hold the positions of Appointor and Trustee.  This happens because if assets have been fully gifted to a Trust there is no debt owed back to the parties.  Therefore there is no relationship property which can be shared.  Additionally if only one party in the demised relationship holds the powerful positions of Appointor and Trustee, the individual not in these power seats may find they have to apply for a Court Order in order to gain access to the Trust’s assets on the basis that the Trust has deprived them of their relationship property rights.  This can be an expensive and stressful experience.

Clearly full consideration of this issue needs to be given and canvassed with Professional Advisors before debt is forgiven in its entirety.

3.         ability to call for funds from the trust

When a person transfers assets to a Trust and obtains a Deed of Acknowledgment of Debt from the Trustees of the Trust, this gives them the ability to demand from the Trustees partial or full repayment of the IOU balance stated in that Deed.  If however the IOU balance has been forgiven in full, it means an individual loses this right of repayment. 

An important consequence of this is that when an individual no longer has an ability to call up repayment of their outstanding loan balance, they become reliant on the Trustees.  One would hope the Trustees would exercise their discretion and provide funds back to the individual.

To avoid the above scenario and retain some control over Trustees, it may be wise to leave a portion of debt owing back by Trustees to an individual.  This point should be given some thought before all debt is forgiven.

4.         inadequate trust attention – sham trusts

The law is quite clear when it comes to Trusts - in return for asset protection that Trusts bestow, Trustees must satisfy their duties and run the Trust properly.  Failure to do this can result in a myriad of unwanted consequences including Sham Trust allegations.

Completing of annual gifting has in the past given Trustees an ability to come together and review how the Trust has been run.  Frequently annual Trustee Reviews and Financial Statement Reviews were completed at the time annual gifting was undertaken. Outstanding Trust administration was consequently identified and caught up on.

Because may people will choose to forgive debt balances owing to them in one lump sum, the opportunity that annual gifting historically afforded to review the affairs of the Trust and catch up with Trust administration work will no longer exist.  Thus there is a real fear that regular and proper Trust administration will no longer occur and opportunities to bring allegations of Sham will arise.

Additionally, now that Gift Duty has been abolished, it’s thought the transferring of assets to Trusts will become even more popular.  Correspondingly so will the scrutiny from creditors and other potential claims such as the Ministry of Social Development.    

What one should take from the above is that at all times the need for regular and correct Trust administration is present.  In point of fact, this need is likely to increase over time.  Simply adopting a ‘gift and forget’ attitude about the Trust will put the Trust and its assets in jeopardy.  Therefore, if debts in their entirety are to be forgiven, Trustees must be mindful to still take the time to annually (at least) satisfy their legal duties and responsibilities.

5.         loss of wealth

Many people will be under the misapprehension that because legislation has repealed Gift Duty, they should immediately transfer all assets into a Trust and complete the forgiveness of all debts owing to them, thereby immediately qualifying for eligibility for the Residential Care subsidy.  This view is however incorrect.

It is the Inland Revenue Department which was charged with the collection of Gift Duty.  So the new legislation abolishing Gift Duty has an effect on this particular Government Department.  It does not however affect the Regulations and policies the Ministry of Social Development applies and which WINZ implement, when an individual applies for a rest home care subsidy.

Before I tell you about the current rules the Ministry has, I should advise you that these Regulations and policies will undoubtedly change in the years to come.

At the time of writing however the process is that once an application for a Residential Care subsidy is received, WINZ conducts an asset assessment on the applicant. 

As at July 2011, an individual is permitted to have $210,000 in personal wealth plus their personal effects plus a $10,000 pre paid funeral expense account in order to be eligible for a rest home subsidy.  This applies where the applicant is single or where the applicant has a spouse/partner that is living in residential full time care.

Alternatively, where an applicant has a partner but that partner/spouse is not in residential care, the applicant is allowed to have the same $210,000 in personal wealth plus their personal effects plus a $10,000 pre paid funeral expense account.

If the applicant does not wish to apply this test, they are able to use another test.  This is often referred to as the Alternative Test.

The Alternative Test will apply where an applicant has a partner but that partner/spouse is not in residential care.  In such a case, the applicant is allowed to have $115,000 in personal wealth, plus a home plus a car.  In other words, the individual applying for the subsidy is able to have cash of up to $115,000 and their home and car is exempt from the asset assessment, irrespective of the value of that home and motor vehicle.  The home and car must however be owned by them and not held in a Trust.

All gifting that is completed by the applicant within a 5 year period immediately before an application for a rest home subsidy is made, will be taken into account when calculating an applicant’s personal wealth.

Additionally, any gift an applicant’s spouse/partner has made within the 5 year period year immediately before the application is made, will be taken into account when assessing how much an applicant has in personal assets.

The news is not all bad.  Under current Regulations and policy regime, WINZ permits an applicant to claim a ‘rebate’ of $6,000 per annum during the 5 year period, providing excess gifting exists.

WINZ also has the ability to go further back than 5 years and as at October 2011 under current policy, can factor in gifts made by the applicant and their spouse/partner by looking back indefinitely and clawing back the gifting that both the applicant and their spouse/partner have completed.

An allowance for any gifting completed by an applicant and his spouse/partner totalling $27,000 in any one year will be given by WINZ when they complete their calculation.

If you think the above rules sound complicated you are not alone.  Trust and Tax experts have all stretched their grey cells considering a variety of potential positions that could befall an applicant. 

In an attempt to make a difficult subject somewhat clear, I am gong to give you the following example of how WINZ might calculate an applicant’s personal wealth.

         example

In 2003 Mr and Mrs Cavell transferred their family home to a Trust.  The market value of the home at the time was $750,000.  They each received from the Trustees of the Trust a Deed of Acknowledgment of Debt for $375,000. In the following years, they progressively forgave $27,000 each of this debt per annum.  Once their annual gifting was completed in August 2010, the Trust owed each of them $159,000.  In 2011, Mr and Mrs Cavell forgave the remaining loan balances owed to them of $159,000 each.

In 2015 Mr Cavell applied for a Residential Care subsidy.  Mrs Cavell would however remain living in the home owed by the Trust.

Under the prevailing legislation at the time, Mr Cavell was permitted to have $250,000 in personal wealth plus personal effects plus a $10,000 pre paid funeral expense account.

Mr Cavell actually had very few personal assets.  He did however have $20,000 in a savings account.

WINZ conducted an assessment and determined Mr Cavell to have $551,000 of personal wealth.  This amount was ascertained as follows:

• Gifting completed by Mr and Mrs Cavell in the 5 years prior to Mr Cavell’s application being made was automatically reversed. 
• Mr Cavell was granted an annual allowance of $6,000 in respect of the gifts he made in the 5 years prior to his application being submitted, totalling $30,000.
• Gifting completed by Mr and Mrs Cavell in the years prior to the 2010 year was added back.  Remember, WINZ has an ability to claw back indefinitely.  In Mr and Cavell’s case, they annually completed gifting of $54,000 in the 2003 year through to the 2009 year, being 7 years worth of gifting.  However in this example, only gifting of more than $27,000 is included in the asset test so $189,000 is in effect added back.
• The funds Mr Cavell held in his personal savings bank account of $20,000 was also taken into consideration.

Because WINZ assessed Mr Cavell’s personal wealth above the $250,000 permitted legislative threshold, his application for the Residential Care subsidy was declined.

Way Forward

You should take from the above example a few points.  First, despite the law change that has now occurred, you should really think through the issues that I’ve mentioned above. Simply divesting yourself of assets to a Trust will not necessarily make you an eligible recipient for a Residential Care subsidy.  Secondly, the forgiving of debt in one lump sum may not serve your best interests nor for that matter will completing annual gifting of $27,000. Possibly a better way is plodding through a gifting programme at an annual combined rate of forgiveness of the usual $27,000 amount. Finally, WINZ rules are complex and likely to change. Because of these points it is vital you obtain advice from your Professional Advisors before transferring assets to a Trust and gifting, whether it be partial forgiveness of debt or gifting balances in their entirety.

That of course is where we come in.  We are all things money.  We are able to help you evaluate your choices and make your decisions.  With respect to evaluating your gifting choices, we have developed a system helps you decide what’s best for you.   If you need any assistance, just call us.  Remember there’s only one name in the money game.  That’s GRA.

Finally my Christmas wish for you is short spendings and long earnings as the Russian Money Barons say.

 

Ciao.    Janet

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

© Gilligan Rowe & Associates LP

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

 

 

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The art of marketing in business

Marketing can take a day to learn but a lifetime to master.Harry Beckwith

In my last blog I focused on people, relationship and selling.  This time round, I thought I’d give you a couple of nuggets on the science and art of marketing.  More of this will come out of the seminar we are proposing in early December 2011.  Watch our site for details on this.  In the interim, here are some golden nuggets, in no particular order:

Golden Nugget #1

Every business has to have customers and move products and/or services to survive.  That doesn’t however mean you to have to sell all products and all services and try to be everything to everyone.  Chose the products and/or services you really want to sell.  Choose wisely.  Choose those that people want and that make you money. 

Golden Nugget #2

Just because you can sell a product and/or service, doesn’t mean you should.  Be very clear about what your key products / services are.  Become an expert in the products and/or services you are selling. 

Golden Nugget #3

Check how your brand looks.  What does it say about you and your company?  How do people view the brand?  Brands often change over time.  Others stay the same.  Is it time for you to have a brand change?  Does your brand need a re-vamp?  Ask members of the public and your own clients and staff and they will tell you how they perceive you company and its brand image.  Listen and take action if warranted.

Golden Nugget #4

Half the money that people spend on advertising is wasted.  The problem is, they never know which half.  Have you identified what form of advertising works for your company and brand?  Lots of companies think chucking the marketing dollar around will automatically generate business.  Wrong.  You need to be sure what your marketing dollar spend translates into business dollars.  You also should know what advertisements and methods work the best for your business.

Golden Nugget #5

Finally, do you know how to actually write up a marketing advertisement that grabs attention and promotes action by potential clients and customers?  Do you understand that messages should be on your website and through your social media sites?  This is just so powerful you can’t afford not to be acutely aware of these matters.

Summary

Harry Beckwith said ‘To sound like an expert, hire one’.  I’d like to add to that quote.  To sound like an expert hire one or at the very least, imitate one.  On that note, remember to look out for our upcoming seminar where the expert Heather Smith is going to share with you some of her secrets.  She wouldn’t be such a bad person to imitate when it comes to marketing.

Until I talk to you next time, remember spend short and earn long.

Ciao.  Janet

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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The art of making money

in business

Recently someone asked me what were the secrets for running a successful business?  At first I thought the answer was obvious.  Successful businesses make money.  But in order to make money, what are the fundamentals of a money producing business?  This takes a bit of thinking about because each business is different.  What is the same however is the majority of successful money making businesses have common building blocks:  a strong CEO, a solid management team, great staff, ahead of the game research and development, innovative marketing, reasonably advanced technology, sound legal counsel, commercial accounting advice, workable banking relationships, good cash flow, stream line processes and of course, products and services clients want.

 

With the above list in mind, I thought I’d write a couple of blogs, noting my thoughts in relation to each building block.  Starting with the idea that for a business to not only survive, but prosper, I’ve jotted down my ideas in respect of moving products and services to clients.

Golden Nugget #1

Being in business means you should be attempting to build long term relationships.  Business relationships shouldn’t be likened to a speed dating exercise.  Take some time with people.  They will appreciate and value it.  Don’t short change them on the time commodity.  If you do this, you short change yourself and your business.

Golden Nugget #2

So often I see people selling to a client.  I don’t think this works.  When you are trying to demonstrate your goods and services, feel from the heart and work with the mind.  Clients don’t buy goods and services with their heads.  They buy them with their hearts.  You don’t have to sell at a client.  Simply seek to understand your client’s needs. Stand in their shoes.  Attempt to feel what they are feeling.  Only then can you really hear what they are saying.  Only then can you truly understand what they want and what they need. 

Golden Nugget #3

Passion and excitement are catchy.  If you don’t feel interested, committed and enthusiastic about what you are offering to a person, how on earth do you think you’re going to communicate the message that they need your goods or services?  Indifferent, apathetic personalities don’t promote your business in a good light.  So get energized about your day and what your business can offer your clients.

Golden Nugget #4

People like honesty.  This means they like to know the cost as well as the value of what they are getting.  Never be afraid to be upfront about these things.  Explain the benefits of your services and products and be transparent with your fees.  Doing this builds trust which in turn builds a strong business relationship. If you are uncomfortable talking prices, practice. 

Golden Nugget #5

Offer people a variety of price points in respect of your goods and services. Be inventive when it comes down to charging.  Sure offer a complete price for your goods and services but if appropriate, offer a variety of ways of pricing.  Maybe pricing per widget or per job or per process in a job, is appealing to your clients.  Do some client surveys to find out.  Whichever method you choose, ensure your clients are clear on the pricing and what they are getting. Remember you’re trying to build a repeat business relationship so transparency is vital.

Finally, let me leave you with a quote from Jeff Bezos … “If you build a great experience, clients tell each other about that. Word of mouth is very powerful”.  In light of this, I say choose your business footsteps wisely.

Until I talk to you next time, remember spending is short and earning is long as the Russian Money Baron say.

Ciao. Janet

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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Secrets of wise investing

part iII

 

In my last blogs (Part I and II) we covered some points people should consider when investing their gold and we looked at the different types of investments people could make.

 

In this last part of the series of Secrets of Wise Investing, we are going to look at what type of investment delivers the highest returns.  Is it paper or bricks and mortar?

 

residential property or shares

A debate has raged for years as to what type of investment provides the best returns.  The discussion is frequently fuelled by bias, data being skewed and mis-information.

If you asked Donald Trump and Warren Buffett what asset produces better returns, you can bet one of your last dollars Trump would say property and Buffett would cite shares.  But remember, each of these men is an expert in their respective fields. For my part in this debate, I thought I’d show you both sides of the same coin.  To give you a balanced view, I’ve held discussions with Peter Corban.  He’s with First NZ Capital and is an Authorised Financial Adviser.  Should you wish to discuss any aspect of investing be it shares or bonds, you can email him at peter.corban@fnzc.co.nz.  He’s a mine of information.

 

Three arguments

I’ve always held the view that over the long term, well located properties and shares provide about the same returns. Other people however think this isn’t correct. Rather, they will point to graphs which show shares out do property in the long run.  The proponents of this school of belief hold that if property did indeed out perform shares, companies would simply invest in property rather than making their own products because those companies would make more money from bricks and mortar than they would running their businesses.  Interesting point to ponder.

 

Irrespective of what school of thought you subscribe to, comparing the returns does not just involve looking at data and forming an opinion.  You need to consider risk, leverage and human behaviour.

 

RISK

When thinking about risk, I’ve historically believed and still believe good residential property is not as volatile as shares.  As such, I don’t think property is as susceptible to risk as what shares are.   My reasoning for this view is several fold.

 

First, the property market comprises a mixture of individuals being home owners and pure investors.  Consequently, if a downturn in the residential property market occurred, only a portion of individuals (frequently investors) would leave the property market. Ultimately the people who stayed in the residential property market would enjoy a level of safety as to the value of their investment because the market wouldn’t completely collapse.  I don’t believe the same can necessarily be said of the share market. Those in the share market camp however raise opposition to my belief.  They correctly state two of the largest investors in the share market are Superannuation Funds and other companies.  Super Funds won’t leave the share market.  They are generally mandated to have funds in it.  They also have a very long time frame perspective, effectively forever so they tend to hold onto their investments rather than exiting the market.  Accordingly, share market advocates believe the prices of shares wouldn’t plummet because Super Funds and other companies wouldn’t exit the market if there was a down turn.  This is undoubtedly a convincing perspective.

 

There is a second reason why I believe shares tend to be more susceptible to risk than property.  When there is a downturn in the economy, investors often cash in their shares. Investors have no emotional tie to their shares, like people do to homes, so feel little compunction about cashing up.  This selling off can have a negative effect on the price of the share.  In other words, there is little safety netting in share prices and the share market unlike what I believe there is in property.  Others would argue however that even if investors did exit the market, companies would buy other companies shares if the share prices drops too much.  Thus companies would replace private investors on the basis that it is easier, quicker and most importantly cheaper, for a company to buy a rival company rather than starting a new operation or expanding organically.  In other words, there will be a buyer around to buy the shares hence there is somewhat a safety break on the share price falling.  There could be some merit in this argument as well.

 

The third reason I believe property is less volatile than shares is because individual companies (being the issuer of shares) can come and go.  Housing on the other hand is an essential need for humans. As such, there will always be some demand for housing as a necessary economic good whereas share investing is not an essential to sustaining human life.  Conversely however, I know that companies are essential to sustaining human life.  They employ people and produce the goods and services we need. Without companies, who would supply life’s essentials?  Who would pay people’s wages? For example, the three absolute essentials (Maslow Hierarchical Pyramid of Needs) of life are food, clothing and shelter. Where would we buy our food from if Woolworths and Foodstuffs didn’t exist?  Where would we get our milk from if Fonterra wasn’t around? Who would supply our clothing if Hallensteins, Glasson, Kathmandu, The Warehouse, etc weren’t on the planet?  Where would the raw materials to build our houses come from (eg: cement, plasterboard and other building products) if Fletchers didn’t exist?  Who would run our phone services if Telecom and Vodafone didn’t dominate our world space?  And what about internet services?  Can you even imagine a world without Microsoft and Google? Finally, where would our shops live if AMP and Westfield didn’t build shopping malls for us to visit and buy life’s essentials?  Yes I have to concede.  Companies are essential to our living and as such, the share market is also essential because the share market enables capital to be raised by those companies which in turn, enables them to supply us with the daily goods and services we need to live a reasonably hassle free life.  Without the share market and companies we would be living off the land, leading a subsistence life.  Impossible for this girl for sure.  So maybe my argument the property market is absolutely essential for life and the share market isn’t might not be as water tight as initial thought.

 

leverage and human behaviour

So what about leverage and human behaviour?  Do these factors influence whether returns from property are better than those one can gain from investing in shares?

 

Turning our minds to leveraging, it seems that in this country at least, individuals are more comfortable with borrowing to purchase property than they are shares.  Conversely, Banks are more comfortable with lending on property and more reluctant to facilitate borrowings on shares.

 

As I’ve noted in Part I of this series, the magic of leveraging is all about borrowing money to increase the returns on your investment.

 

To demonstrate, let’s assume you purchase a property for $100,000.  You contribute $20,000 of your own money to the purchase price and you borrow the remaining $80,000.  This means your debt to asset ratio is 80%. Within 7 years the property has increased in value by 25% so it is now worth $125,000. This means you have made $25,000 on your initial investment of $20,000.  Another way of looking at it is you’ve just made a 125% return on your initial capital investment. On the basis that you now have an asset now worth $125,000 and a liability (money owing to the bank) of $80,000 your debt to asset ratio has decreased down to 64%. 

 

Taking this to the next level, at this point in time, if you are a property investor, you would approach the bank and request to borrow further funds to purchase another property and you would then start the process over again. However, remember you are in a much better starting position than you were previously.  When you bought your first property, your debt to asset ratio was 80%. Now it’s 64%.  This means you have more equity when you approach the bank to fund your second property purchase.  This increase in equity will mean the bank is more amenable to lending you the funds to complete this second property investment.

 

On the basis that you purchase correctly and structure your borrowing and tax right, you can continually increase your equity and investments via leveraging.

 

To take full advantage of this process, you should only ever put down a minimum amount of cash on a property and the property must be purchased at the right value and in the right location.  You need to ensure you do not buy dubious property as this can destroy your returns and overall decrease the value of your investments.

 

So the secret wise property investors know is that leveraging is best to engage in when the property market is on the rise. They also only leverage on properties situated in areas which they are sure are going to increase in value and they build in their own safety nets.

 

Overall leveraging is about investing very little of your own money, using other peoples money, knowing your market, enjoying price increases, clearing your borrowings and stashing your gold away.

 

To be fair, you need to be aware of the downsides to leveraging.  This practice only works in a rising market.  If the property market falls (as it has done in USA) and you have borrowed heavily your debt to asset ratio will rise.  You may also have difficulty in selling the property which means you can be left with no assets, large debts and migraine headaches.  Lastly, you should remember that you need to have some cash in the bank in case your tenant walks out owing you rent or you lose your job.  Loss of a tenant or your employment doesn’t stop the Bank demanding their monthly mortgage payments.

 

I also need to make a disclosure at this junction.  My above examples and associated ratios, assume the rental income that would be received, would be equivalent to the rates, insurance, maintenance and mortgage interest that would be incurred.  In other words, there is no net cash flow going outwards.  This is not always the case.

 

summary

Standing back and looking at the initial arguments, I don’t think we’ve been able to establish property returns out perform the returns shares can and do deliver.  Nor have we been able to determine shares out run property. 

 

What we have been able to identify however is that people feel more at ease borrowing to purchase property than they do shares.  When we borrow to purchase property, we are no longer comparing apples with apples.  Rather, we are comparing the returns an apple orchard can generate with one single tree.  Clearly that’s not fair because the bases that we are then computing the returns on, aren’t exactly the same.

 

Overall, it’s my personal view that a little of everything is a good thing.  Stash some cash, buy some shares in strong companies and purchase some property, at sharp prices, with the fundamental of real estate in mind.  That way, all bases are covered.

 

Regardless of what vehicle you use to build your wealth, one things for sure – investing takes time and patience.  It involves well thought out goals and strategies and a diligent pursuit of financial objectives.  It starts however with obtaining great advice and carefully constructing a money plan.  This is something we can help you with at Gilligan Rowe & Associates.  We are able to help you evaluate your choices and make your decision.  We are all things money.  If you need any assistance, just call us.  Remember there’s only one name in the money game that you need to recall.  That’s GRA.

 

Until I meet you, I wish you short spendings and long earnings as the Russian Money Barons say.

 

Ciao.

 

Janet

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

 

 

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Secrets of wise investing

Part II

In my last blog (Part 1 of Secrets of Wise Investing) I threw out some nuggets of information that I thought people should consider when investing their gold. In this blog, I’m going to tell you a little about the different types of investment choices you could make.

Investment choices

There are many types of assets a person could invest in - far too many for me to cover in this short space.  In the main however, I have found the majority of people invest in cash, property, bonds and shares.  In an attempt to help you decide what investment is appropriate for you, I have explained below a little about each class of asset.

 

• Cash – Probably the greatest benefit cash bestows is liquidity.  This means it’s on hand and available whenever you need it.  That’s especially handy in emergency situations.  The second biggest plus in putting your cash safely in the Bank is there’s very little risk in losing your money.  Sure a Bank can go bust but that’s a pretty rare occurrence. 
• As we know, there is a relationship between risk and return hence whilst there’s little risk to placing your gold in a Bank, the returns you’ll receive on that deposit investment, tend to be minimal.  In fact, money kept in a bank account usually provides one of the lowest returns of asset investment.  This return can be so poor that over time, inflation can be greater than the return the cash actually produces.  Eventually, the return can be eroded in its entirety.
• If you are putting funds into a bank, you might chose to put them on term deposit. This will mean that you’ll have to wait for a definitive period of time, before you can gain access to your cash.  Thus, term deposits aren’t 100% liquid although in saying that, you can often forgo interest and take a penalty if you chose to cash up your term deposit before its maturity date.
• You’ll always want to aim for your cash earning as much interest at possible. As such, you should keep an eye on the rates borrowers of funds have to pay.  If borrower interest rates are on the rise it‘s likely deposit interest rates will also increase.  If this is occurring in the market place, consider putting your cash on short term deposit or take a spread of terms. That way, if deposit rates rise, your money won’t be stuck on a low interest rate for very long and you’ll have the ability to take advantage of the increased deposit rates being paid by the Bank.

 

• Bonds – companies and Governments frequently issue bonds to assist with running their operations or getting a specific project off the ground.  A bond is akin to an IOU. 
• The Issuer will issue the bond to the Bond Holder (say Mr Smith) for a specific amount (called a par value), at a certain interest rate (called a coupon rate) and for a definite time period (called a maturity date). 
• During the time the Bond Holder possesses the bond, the Issuer will pay him interest, often bi annually. The Bond Holder will receive their initial investment back once the bond matures.  It’s a bit like a time Term Deposit
• The Bond Holder may sell their bond before it matures.  They will do this on what is known as the ‘secondary market’.  When the Bond Holder goes to sell their bond on the secondary market, they will likely end up selling at either a ‘premium’ or ‘discount’ to the purchase price. 
• To demonstrate, let us say Mr Smith purchased a bond for $1000.  Its coupon rate is 7% and it matures on 1 April 2014.
• Prior to 1 April 2014 Mr Smith decides to sell his bond.  At the time, interest rates are only 5%.  This means a prospective purchaser would be willing to pay a premium to Mr Smith for the bond.  Mr Smith is thus able to sell his bond to Mr Brown for $1,050 Mr Brown has paid Mr Smith an extra $50 to acquire the bond. He has done this because the bond will pay interest at 7% whereas if he invested his money in the bank he would only get 5%.  Accordingly, Mr Brown is willing to pay a premium to Mr Smith to achieve a 7% interest rate of return on his money. Once Mr Brown buys the bond, the Issuer will pay the coupon rate (interest) on the $1,000 bond to him at 7%.  When the day of maturity of 1 April 2014 arrives, the Issuer will repay Mr Brown the initial investment of $1,000.
• Conversely, let us assume that prior to 1 April 2014 interest rates have risen to say 9%.  Mr Smith needs funds so he sells his bond.  Because interest rates have risen over and above the coupon rate, the bond is not as attractive as before.  Mr Smith sells his bond for say $950 to Mr Brown. This means Mr Smith has had to sell his bond at a discount.  Mr Brown was wiling to pay only $950 for the bond because he could have put his money elsewhere and achieved a 9% return on it whereas the return he is now going to receive on the bond is only 7%. At the date of maturity, the Issuer will repay to Mr Brown the face value of the bond being $1000.  Prior to maturity, Mr Brown will receive only 7% on his investment but he will pick up the extra $50 on maturity of the bond which equates to an overall return of 9%.
• Clearly because bonds pay out interest on a regular basis, they can be a good source of income.
• But you need to be aware that if interest rates move, the value of your bond can fall. They are also subject to inflation risk.
• The small print on bond applications needs to be carefully scrutinised.  This is because not all bonds are created equal.  For example, an Issuer may have the ability to call for repayment of the bond before it matures.  If this occurs, the Bond Holder may receive only the par value back. This  could perhaps occur when interest rates fall and the Issuer identifies they can buy back the bonds and then issue further bonds at a lower coupon rate thus saving themselves from paying out higher returns.  Alternatively it could occur if there was a right of early repayment when and if a change of control (eg: a takeover) occurred. 
• There might not always exist a prospective purchaser to buy your bond, hence they are not as liquid as cash.
• There are several different classes of bonds as well.  For example ‘junk bonds’.  Never make the mistake that all bonds are therefore created equally.
• Overall if you are thinking of purchasing this type of investment, I recommend you do so through an Authorised Financial Adviser such as your stockbroker as they will be familiar with the bond market.  One such person whom I have spoken to and who has helped me write this blog is Peter Corban.  He is very familiar with these types of investments and he is with First NZ Capital. You can contact Peter via his email address at Peter.Corban@fnzc.co.nz if you need assistance.

 

• Property – just like there are many different types of bonds, there are several sub categories to the property class of investment.
• For example there is the residential market, the industrial market, the comercial market, the leasehold, etc.  Additionally, within each sub category there are different categories.  To illustrate take the residential property market.  Within this market there are apartments, town houses, stand alone houses, joined together units, etc.  To add more confusion to the mix, each of these will have their own particular market.  A town house in Remuera or Park Lane for example will be a different price than one in Royal Oak or Islington.
• The first rule of thumb when investing in this asset is to truly know your objective and your market.  You should understand why you are purchasing and what you are purchasing.
• You might wish to simply buy a home and live in it.  Alternatively, you may wish to purchase a property for rental investment purposes.
• Irrespective of your reasons for purchase, you should be aware of some buying rules.  For instance, try to buy below market price as this instantly gives you capital gain if you achieve this.  Additionally, don’t over capitalise your property when completing alterations and renovations as you won’t get the extra funds you have put into the property back when you come to sell it.  Buying rules are crucial if you wish to make money in property.  For this reason, I recommend completing a property education course which teaches the rules of property investing.
• Regardless of your objective, I believe you should be aware of the demographics of the neighbourhood, the existing and proposed amenities in the neighbourhood, the prices other properties have sold for, the average rent charged in the area, etc.
• You should also understand supply and demand of a neighbourhood.  For instance, if you purchase a property in a well known area where supply is limited and demand is high, you can expect to pay a premium for that property as many other buyers will be wanting to purchase the home.  Conversely, when you want to sell the property, you would expect to have a ready market and not have too much trouble selling the property on.
• They say location is everything when purchasing a home.  What they mean by this is you can make a greater capital gain by purchasing the worse house in the best street in the premium neighbourhood than you can by purchasing the best house in the best street in a less than desirable suburb.  Always aim to buy your personal home in the best suburb you can afford.
• You should also think about what is driving the demand in any given area.  Properties situated in suburbs that are close to the centre of any city and close to good schools have historically been more expensive than those homes in suburbs further away from a city’s core. This occurs because people value their time and educational facilities.  Accordingly, they will pay more to reside in a suburb where travelling distances are short to their work (city centre) and their children’s schools.
• Likewise you need to consider what drives property prices in the area you are intending to purchase in.  Mostly property prices rise over time but some house prices rise quicker than others. This is because there is not a natural cap on prices or the ceiling on the prices is fluid and able to move upwards.  This tends to occur when the people in the area you have a home in, are able to afford those increased prices.  For example, if a person has a job they will have an income. This helps them borrow funds from a bank which in turn, enables them to have enough money to purchase the property. From this you should gather that it is important to purchase property in cities rather than in rural communities if one of your objectives is to grow your financial wealth because it is cities which have employment opportunities.
• Like most investments, timing is an important factor to take into account when purchasing or selling your asset.  You want to aim to purchase at a time when the property market is depressed and prices are low.  Conversely, if you are going to sell the property, you want to sell it when prices are high as this is when you will make the most money. 
• Of all the categories of investment you could make, property is one of the least liquid as it can take more time to sell the asset than say cashing in your term deposit.
• Unlike other forms of investment, many people leverage to purchase property.  This means they use their own money and other people’s money to complete the purchase.  For example, a person may have in cash 20% of the purchase price but they may borrow from a Bank the additional 80% of the funds required to buy the property.  The return the property produces however is not simply on the individual’s 20% deposit.  Rather it is on the whole 100% of the money used to purchase the property. 
• Being able to leverage can be a benefit this class of asset bestows over other assets.  This is because it’s often easier to leverage to purchase property than it is to purchase shares. This is because Banks tend to be more reluctant to lend to an individual who wants to use the funds to purchase shares and more willing to lend to facilitate the purchase of bricks and mortar.
• Overall, people perceive the investment into property less risky than the investment into shares. This occurs because individuals think that as they can see and touch their asset, the asset is a more solid investment than say shares.  One must remember however, property markets can and have dropped.
• To ensure you make the right property purchase, I recommend getting a good real estate agent who truly understands the market you are thinking of buying in.  You will also need a lawyer who is competent in conveyancing.
• If you are intending to purchase a property for rental or trade or development purposes, you will also need an accountant who understands structures and can advise you on the tax issues.  This is absolutely imperative.

 

• Shares – a share is an ownership unit in a company.  It represents part of the overall value of the company.  Usually it entitles a shareholder to a proportionate slice of the company profits.  When profit’s are paid out, they are referred to as a dividend.
• Most shares are extremely liquid, but shares in smaller companies may be less liquid.
• Your risk profile, your desired returns, the time you have available to meet your personal financial objectives and diversification are all important matters you need to consider when purchasing shares.
• Just like the property market, there are markets within markets when considering shares.  For example you can invest in domestic shares or international shares.  You need to understand exactly what you are purchasing and you need knowledge of the company you are purchasing shares in. 
• Share investing is probably one of the more risky types of investments a person can make in terms of day to day volatility.  This is because shares are listed on stock exchanges and trade throughout the day, at whichever prices buyers and sellers are willing to transact at the time.  This volatility can be caused by the actual activities the company undertakes, the positive or negative publicity a company’s management can receive or simply the industry the company operates in.
• In the short term, the returns from shares can vary widely but in the long run, the returns will tend to be higher than those received from other forms of investment.  The ultimate return of course depends upon the success of the companies the shares are purchased in and how long the shares are held.

• Diversification to curtail risk is a very large factor sensible share investors practice.  Accordingly, they will often hold mainly ‘blue chip’ shares, being shares issued by companies that are perceived to be relatively solid, rather than say “start-up” enterprises, which may be more speculative.  By purchasing blue chip shares, the risk of volatility of returns and erosion of capital decreases.  Companies that issue these types of shares often deal in necessary goods such as electricity.

• Some investors buy only in companies they really like.  As Mae West said ‘“too much of a good thing can be wonderful”.  That however is not the way to going about building your wealth in the share market.  Share investing can be complex in terms of the range of companies that are available to invest in.  As such, it is vital to engage a qualified Share Broker / Authorised Financial Advisor to advise you.  You need to build a sensible share portfolio that is tailored to your needs and in order to do this, you need personal, informed, unbiased advice and assistance.  A person I have found knowledgeable and helpful is Peter Corban who is with First NZ Capital. You can contact Peter via his email address at Peter.Corban@fnzc.co.nz if you need assistance.

 

Summary

 

There’s an old saying … “different stokes for different folks”.  That saying is a truism when it comes to choosing what you will invest in.  For my part however, I prefer to practice the lessons I‘ve told you about in Part I of this series of Secrets of Wise Investing.  In particular, I believe in diversification so that my bases are covered.  As such, I have placed my money in cash, shares and property. I have chosen these types of investments because I believe everyone should have some cash at their disposal, I’m comfortable with the ups and downs of the share market and I enjoying being able to swing half a cat around my Parnell bricks and mortar pad.

In our next and final part of this series, we are going to explore what type of investment provides you with the highest returns.  You may well be surprised at this outcome.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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Secrets of wise investing
part i

 

They say if you give a man a fish, you feed him for a day but if you teach a man how to fish, you feed him for a lifetime.  Growing your wealth is no different.  With that in mind, I’ve noted some pertinent things you should consider when trying to grow your own pile of gold. 

 

Money Personalities

It’s essential to know your own money personality.  It can either help you climb up the wealth ladder or take you to the bottom of the deep, dark, blue sea.  If you missed this topic in our previous blog click here and check what money personality you have.

 

Risk Profiles

When it comes to investing, most people understand the market they’ve invested in could go up or down. In other words, there is always a degree of volatility in the market. Volatility  is how your investment  may fluctuate rather than the potential of the complete loss of your invested capital.  Some people are willing to accept this volatility.  For others however, their willingness to accept this risk is low   This is what a risk profile is all about.  It signifies your tolerance to and acceptance of volatility.  Just like it’s vital to know your money profile, understanding your risk profile is also imperative as it will determine what investments (eg: cash, shares, property, etc) are best for you. 

 

Check below as to what your risk profile is.

• Conservative - You won’t want to take on much risk at all.  Because of this you accept the return on your investment will be low.  The effects of inflation won’t concern you much, providing your initial capital investment remains protected.  Ultimately you’re a very low risk taker.
• Moderately Conservative - You’re still a low risk taker but you’ll want to obtain better returns than what a conservative investor would seek.  Whilst wanting better returns, you’ll still want to protect your initial investments so won’t be prepared to enter into more aggressive investment opportunities. 
• Balanced - This person will be prepared to accept some risk in order to achieve the investment returns they require. You’ll be interested in diversification and be willing to look at investments which take medium and long term to come to full fruition.  If you fit into this category, you’re a calculated risk taker with an average risk profile.
• Moderately Aggressive - You are prepared to accept ups and downs on your investment and incur moderate risk in order to obtain your required returns.  You are likely to have the goal of accumulation of assets.  Generally you’re thought of as a high risk taker.
• Aggressive - If you have this risk profile you will be happy to tolerate volatility in order to achieve higher returns.  Accumulating wealth will be more of a goal that capital protection.  Often you will have a long time horizon.  You’ll be thought of as a high risk taker if you fit into this category.

 

Risk and Returns

One of the secrets of wise investing involves understanding the correlation between risk and return.  The higher the risk, the greater the expected return on your investment. So if you have a high tolerance for risk, you’ll expect to ride out the ups and downs of your investment and reap the rewards for sitting out those nail biting moments.  Conversely, if you’re a person with a low risk profile, you’ll prefer to invest in things that give you steady growth and peace of mind.  In return for this serenity, you’ll expect to receive less return than someone who was willing to take on more investment risk. Below is a diagram which captures risk and return.

 

diversification

There’s an old saying – never put all your eggs in one basket.  Diversification is the epitome of this maxim.  Put simply, diversification is about attempting to reduce risk.  It’s a secret all intelligent investors know and practice.

Ever wondered why street vendors sell hot dogs and gelato?  It’s because a person might feel like a hot dog on a cold day and only want to eat an ice-cream on a hot day.  By selling both products, the street vendor caters to all markets and reduces their risk of losing money on any particular day.

When it comes to investment, diversification is about investing your money into different types of assets in the hope that if one investment loses money or the returns aren’t as high as expected, the other investments you have will make up for those losses you’ve sustained or lower returns you’ve experienced. 

Sensible investors not only diversify between different asset classes, but also within an asset class.  For example, an investor may choose to have some cash around.  They may then decide to have cash in a current savings account and in a fixed term deposit account.  By undertaking diversification within the asset class of cash, they are able to have liquid funds immediately at their disposal and achieve a higher rate of interest by having some funds invested for a definitive period of time.

You might think when one market falls, all investment markets will fall.  History however has shown that different markets rarely rise and fall at exactly the same time.  Hence, if one of your investments doesn’t do so well, diversification should help to moderate the effect on your total investment returns because another type investment will still perform.

RISK AND RETURN TRADE OFFS

Clever investors appreciate the relationship between risk and return.  Generally speaking, to achieve higher returns, you need to accept a higher risk of the loss of your capital invested or of returns not being achieved.  This is because the assets that offer those high returns are usually more volatile than those producing low returns.  Of course, you need to be aware of your risk profile to feel comfortable with what risk / return trade off you chose when making your investment choice.

One issue people frequently encounter is that their risk profile is at odds with their money objectives.  For example, a person may have a low risk profile, have only a short time to invest and may want to achieve high returns on the capital they invest.  This causes a conflict because an investment that is often recommended to generate high returns is share investing.  Whilst shares have the potential for high returns, they are also an investment with a high chance of price volatility in the short term.  Thus, the person with the low risk profile is being asked to undertake a higher risk investment.  Consequently, a tension exists between a person’s risk profile and the returns they seek.

 

TIME, RISK AND RETURN

Besides from the matters canvassed above, smart investors understand the secret of time and how this inter-relates to risk and returns. They take the time horizon into account when planning their financial goals.  Investors who are young have time on their side.  They tend to be willing to take on more risk when they invest because there will be time to make up for lost returns should their investments fall.  Ultimately they have the time to ride through economic cycles and the volatility of the markets.  Conversely, those investors who have less time to invest and see returns mature, will be more comfortable with taking a more conservative approach and taking on less risk because there simply isn’t the time to make up for their investments failing to achieve the returns they seek. 

 

Emotions

Finally, the savvy investor is acutely aware of their emotions and the danger of making decisions based on what they are feeling.  Without a doubt, everyone wants to back a ‘winner’ and no one invests their hard earned gold with an objective of losing it or making minimal returns.  Unfortunately, investments can’t have a good day, every day.  Markets move up and down.  This means the value of your investment can differ from day to day.

Those investors who aren’t aware of their emotions base their investment decisions on their feelings. More often than not, they react to how they feel their investment is performing rather than sticking with their chosen investment strategy.  When an investor makes a decision based upon their feelings and mood, it can result in an incorrect decision being made.  By way of illustration, an investment that may have done well historically could fall in value for a period of time.  This may cause an investor to feel despondent.  Consequently they make the decision to sell their investment when in fact they should have just stayed the course and held their investment.

Warren Buffet is acutely aware of the danger of basing investment decisions on emotions.  He is known for saying “we simply attempt to be fearful when others are greedy and greedy when others are fearful”.  What he was pointing out was his consciousness of the emotive cycle investors go through.  That cycle involves 14 distinct stages as the diagram below depicts.


 

Most investors start their emotional journey at the optimistic rail way station.  As the returns on their investment rise, they travel through to the euphoria stage.  At this point in the cycle, they will be thrilled to have made their investment.  That feeling however quickly turns when markets start to fall.  At this point in their journey, an inexperienced investor can move from feeling excited to anxious.  Outright panic and despondency can set in and the investor can react to their feelings and sell their investment.  This selling decision can be much to their peril.  This is because markets do recover and when they regain their strength, the investment will start to increase its returns. Experienced investors will not permit this to occur.  They will not react to their emotions.  Instead, they will stay with their investment strategy. Thus, they will leave their despondency behind and move to feeling optimistic again as and when their investment returns begin to pick up.

 

Summary

 

Above are some considerations Investors should think about when it comes to investing.  In my next blog, I will touch on the different investment choices an Investor can make and some things they should consider about those investments prior to them spending their gold.

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

 

© Gilligan Rowe & Associates LP

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should  act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

 

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Should I rent or Buy?

 

One of our client recently asked me if they should be renting or striving to buy a home.  They weren’t too sure if buying a house was such a smart way of increasing their wealth given the recent state of the property market and the way property had decreased in areas such as Christchurch.  They also wanted to know what other options of investing they had if they weren’t going down the property route.  Very clever questions I thought and definitely topics that made me use my little grey cells. 

 

Before I tackle this question you need to know I’m not a financial advisor and the following are simply my own comments and feelings on the subject of buying verse renting a home.

 

 

it’s the kiwi dream

 

Owning a home is something that everyone strives for – right?  Not necessarily true.  It all rests on your values and dreams and the assumptions you make about a whole host of things so numerous I’d have to write a book just them off.  In general terms however, the answer to this question depends upon personality, psychology and numerical factors.  So in an effort to light the way, here is a list of pros and cons about climbing on board the property ladder.

pros for owing a home

 

• Rent can and usually does, increase over time.  Mortgage payments on the other hand, tend to stay stable as most people have fixed term mortgages for 2 to 5 years.  This means some degree of money certainty is able to be achieved if you own a home rather than renting one and being at the mercy of the landlord.

 

• Making mortgage repayments is in a way, an enforced savings plan.  This is because over time, the amount of money you owe the bank for your mortgage, decreases.  Conversely, your equity in the home increases.

 

• If the property market moves upwards, you get to increase your equity in the home over and above the mortgage repayments you have made.

 

•  Mortgagerepayments eventually come to an end once the loan is repaid back to the bank.  Rental payments are like Ever Ready Bunnies – they just keep going on and on so long as you are renting the property.

 

• One you have some equity in your home, you can use it as leverage and buy other assets which lead to increasing your wealth such as businesses or houses.

 

• Already having a stake in the property market means you are unlikely to be priced out of the market. 

 

• If certainty is important to you, then owning your home will be a more comfortable concept than renting and being at the mercy of a landlord who may wish to increase rental prices or sell the property and subsequently ask you to leave the property.

 

• Owning a home means you get to play King and Queen of the Castle.  You can do what you like with it, within reason.  If you want to paint the kitchen red and lay green carpet throughout the place, then you’re free to do so without asking anyone else’s permission.

 

• Being able to make improvements to home tends to add capital value to a property, meaning your equity increases.

 

• Owning a home means you have something to leave the children when you depart planet terra firma.

 

• Lastly, when you buy a home, your interests and priorities ands values often change. These you pass onto your children.  You start to buy into society norms such as peace and good model citizen behaviour.  Children tend to copy their parents so if you want to build strong citizenry and consequently, strong communities, homeownership is the way to go.

 

 

cons for owing a home

 

• As our reader pointed out, if the property market falls then your home has decreased in value.  This means your wealth overall has taken a bit of a dive.  But note your wealth on paper may have decreased but that decrease in equity won’t be realised if you don’t sell the property. 

 

• If the property market doesn’t increase, your money won’t see capital gains.  Accordingly, it might be better invested in other things such as shares.

 

• High mortgage repayments may mean you don’t have a lot of surplus income to play with.  Overall, this could mean a lesser lifestyle than what you might have otherwise been able to enjoy if you were paying less rent than what your mortgage repayments are.

 

• It’s hard to argue that annual insurance and rate payments lead to an increase in overall wealth.  Despite this, if you own the home these payments have to be made.

 

 

pros for renting a home

 

• Rental prices can be less than the initial mortgage repayments you make.  This means there’s more money to spend on life’s luxuries such as good vino and holidays.

 

• Money can be saved as you won’t have to worry or pay for rates, insurances and annual maintenance.

 

• Not having a stake in the property market means your balance sheet won’t be subject to any decrease in prices this market experiences.

 

• If you take the money you would have spent on every single mortgage repayment and put that money into something else such as shares or a business, your wealth might increase just as much (maybe even more) as it would have done if invested in real estate.

 

• If you haven’t already purchased a home and you have saved and the property market has dropped, you may be able to afford more house than if you’d purchased earlier on when prices were high.

 

• If you don’t like the new neighbours, you can often move location quicker than if you had a home to sell.

 

 

cons for renting a home

 

• You are always at the landlord’s mercy with respect to rental increases they may want to make.

 

• There is a large degree of uncertainty involved as the landlord may sell and you may be asked to vacate.

 

• Talking of renovations, generally speaking landlords don’t allow you to rip out the kitchen and paint the house any colour you want.

 

• If house prices do increase, you can be priced out of the market because salaries don’t keep up with those property price increases experienced.

 

• Unfortunately most people don’t put aside every single month what they would have paid in mortgage repayments.  Accordingly, their wealth does not increase.

 

• No house means no asset to leverage off of.  This translates to you being inhibited to a large degree in building your wealth as you have no asset to pledge as security to buy a business or some other form of investment.

 

• No home means no property to pass onto your children.

 

 

wheres the property market now

 

I’ve given a full answer to this question in my blog at www.gra.co.nz so I won’t go into too much detail here.  Suffice it to say that we have a shortage of houses which will ultimately push prices up. But there’s a caveat.  House prices can only increase so much.  In order for them to move up, the population have to have money in their pockets to pay for those increased prices.  To put a person in this position they generally have to have a job.  So only buy a home in an area where there is an undersupply of housing and employment.  Cities clearly fall into this category.  This is why houses in certain parts of Auckland have increased their prices over and above that which they would have fetched in 2007, which was the height of the property market, whilst other houses in New Zealand are still suffering below 2007 prices.

 

what eles is on offer

 

On the basis that you don’t put your moo la into property, how exactly do you grow your wealth?  Good question and if you go to my blog you will see a full answer.  In general however you could try shares, bonds, managed funds or commodities such as coffee, gold, silver  to name but a few of the main categories of investments.  Actually even if you do get into property, I still think you should look at putting your gold coins into these categories because diversification is one very important factor of wealth creation.  Be careful in this area though as there are lots of sharks out there.

 

 

summary

 

No one has all the answers.  We can only make a judgement call and often we either under call or over call our hands.  To assist, we can look at historical data and carry out some forecasting.

 

If I was trying to decide whether to buy or rent, I’d probably buy.  I’d do some solid research on the suburb I was looking at and really get to grips with the market in that suburb, including prices.  But I wouldn’t just buy because of the numbers.  I’d buy because I like certainty and enjoy homeownership.  I like being able to swing half a cat around my Parnell chicken hutch. 

 

I’d also keep in mind they aren't making any more land darlin’ so in the long run (10 years or more), I’d expect to make a capital gain on my home.  But my wealth plan wouldn’t stop there.  Additionally, I’d put some money into Kiwisaver and shares and cash so I’d have most bases covered.  Buying Lotto tickets would also be a regular investment feature as well !

 

The dominate feature I’d put into practice is getting a money plan.  Checking where I am now and where I want to go.  We’re pretty good at that here at Gilligan Rowe & Associates.  Money is our business after all.  If you need help with this, please just let me know.  Happy to help.  Also come along to our fabulous Womens Seminar where I’m going to explain all of the above in much more detail.  Details are on our site. 

In the interim, spend short and invest long as the Russian Money Barons say.

 

Ciao.   

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

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P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

 

 

© Gilligan Rowe & Associates LP

Disclaimer: This article is intended to provide only a summary of the issues associated with the topics covered. It does not purport to be comprehensive nor to provide specific advice. No person should  act in reliance on any statement contained within this article without first obtaining specific professional advice. If you require any further information or advice on any matter covered within this article, please contact the author.

 

 

 

 

 

 

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Whats Happening with the new zealand economy 

 

 

 

Money – a necessary good (economically and metaphorically speaking) and in some circles, a necessary evil.  The stuff that makes the world go around.  Some people understand this.  Some people can even predict or at least give us a forecast, on how it’s going to behave.  Some people listen.  Some people ignore to their bank balances peril. For what it’s worth, here are my musings on the subject.  They haven’t been checked over by an Economist.  They are simply a collection of thoughts, in no particular order, often wandering off of a point. In many places as I try to piece together what I am thinking and why. 

 

wheres employment going

We all know it’s been high. Last year around 6.8% of our population were unemployed.  This year things have trimmed back somewhat, but the figure still hovers around the 6.6%.  Next year and in the preceding few years however, unemployment is expected to pull back. Yep, our magic crystal ball says there’s going to be a shortage of good people around to employ.  Forecasts show the unemployment rate will hover between 5% and 5.5% for 2012.  What does this mean for those unemployed and those looking for employees? 

 

Well those in particular industries, especially the construction game, shouldn’t find it as difficult as they have found in the past 3 or so years, to get work.  Conversely, employers need to start thinking now about stocking their labour pool before it gets really hard to find good people.  Employers might also start to think about raising labour costs they might incur.  After all, when demand for a good (staff in this case) outweighs supply (available human beings to undertake a role), wages go in one direction.   When this happens, I wonder what will happen to prices of goods and services?

 

 

wheres property going

No dinner party would be complete without a conversation about the property market, or at least that’s the case in Auckland.  Read on and you’ll find out why.

 

Prior to the recession, lots of building was going on.  That said we still had a shortage of supply of houses in relation to those people coming into New Zealand and looking for property.  

 

During the recession, building stopped.  This occurred for a variety of reasons, including the downfall and demise of finance companies, tightening of bank terms and the general unavailability of cash for our developer boys from other secondary sources such as finance companies. These factors served only to worsen the housing shortage as building all but stopped.

 

Coming out of the recession, we’ve seen positive migration from overseas as our wonderful country has attracted migrants.  Additionally, Kiwis in overseas contracts have been made redundant and returned to NZ.  There has also been a shift of population in New Zealand as a relocation of our citizens, attributable to different factors, including the Christchurch earthquakes, has occurred. Relocation in this respect has definitely lead many to the City of Sails.

 

All those living in the Land of the Long White Cloud, need a roof over their head and 4 walls to shelter them from the rain.

 

Remember we didn’t have enough houses before the recession, house weren’t built during the recession and data tells us that building consents whilst on the up aren’t anywhere near where they need to be to cope with the shortage of housing.  It’s been forecasted we need around 25,000 houses to be built a year.  Right now we’re only managing to erect 14,500 of them.  See the problem?

 

That said, building consents are definitely expected to increase from the end of this year and early next year because Christchurch will need to be rebuilt and that will mean in part, building new houses.

 

Which is why I tend to think building costs, such as wages, are going to increase.  Christchurch will clearly need labour to rebuild.  At the same time, Auckland in an effort to cope with the housing shortage it is experiencing will need houses to be built.  That is going to mean building labour will be required in Auckland as well as Christchurch – at the same time.  All in all, there is only so much labour available, which of course means, in economic terms, demand outweighing supply.  This has a consequential effect on pushing labour prices up.  In this respect I’m not talking just about labour costs.  What will happen to the prices of building products and materials?  Will retail get her engines going as a knock on effect occurs because furnishing are snapped up for all the houses that are going to be built?  Interesting thoughts which of course lead me to the existing residential property market.

 

What’s going to happen to prices of existing houses?  Are they going to fall some more, remain static or climb?  Before we look at these questions, let’s think about where we’ve come from.

 

Prior to the recession, credit was plentiful, tax benefits for owning residential investment property was in effect and New Zealanders loved the idea of being property owners and investors.  These factors led to houses being snapped up either by those who wanted to live in a house rather than under the Auckland Grafton Bridge or by those who wanted to be property investors.  This, amongst other factors, lead house prices going through the roof.  A vendors market prevailed.

 

During the recession, things got tight.  Migrants stopped coming to our shores.  People were made redundant.  Banks called in loans and tightened their credit terms.  New Zealanders’ appetite for debt started to decrease.  With all these factors came a fall in house prices.  Yes, prices started to reduce and housing became more affordable.  The market definitely turned and it went from being a vendors market to being a buyers arena as houses were put up for sale.

 

But note it was for a short time only.  An impasse it seemed between vendors and buyers occurred.  Those vendors who didn’t have to take decreased prices hung on and rejected buyers’ offers.  Buyers conversely weren’t prepared, even if they could get it, to take on hefty loans and so refused to meet the prices vendors were demanding. The property market took on a somewhat static effect – but only for a time.

 

Coming out of the recession we saw a new Government take control, a Government who had new objectives.  One particular goal they seemed intent on was to achieve what I call a re-direction of money capital into investments.  There were other things to buy than housing according to those in the power seats.  To achieve this aim, tax advantages such as the claiming of depreciation and the disbanding of the favoured loss attributing qualifying vehicle and the subsequent introduction of the look through company with its limitation of loss rules, have been introduced. This of course has, to a degree, had some effect on the residential property market.  Many people have now sold their residential investment properties.  Don’t be fooled however by thinking residential property investment is dead.  Remember there are always money investment opportunities around.  You just need to know where to look, what to look for and how to assess what you are looking at.

 

All things change of course and this truism applies equally to the property market as it does to other concepts.  The changes that are being felt aren’t the same however the whole of New Zealand over. 

 

In some places, there seems to be property to buy and prices have not increased that much at all as we’ve climbed out of the recession.  There isn’t a flood of property on the market and prices are remaining firm but static. 

 

In other parts of the country however, such as Auckland, a different story is being told.  Listings are short, the number of days it takes to sell has decreased, rental prices have increased and sale prices are on the rise.  Turnover of the property that is available is definitely improving.  Banking and legal markets corresponding have improved as more property transactions means more work in these sectors.

 

The sensible question to ask now has to be why is Auckland leading the challenge in the property market stakes against other parts of New Zealand?  Read on.

 

If you are looking for a job, you go to a city where there is employment.  That means people coming into Auckland.  Once you have a job, you have money.  This means you can afford to buy a home or rent a home.  Add to these factors an existing shortage of housing in Auckland and you see increased property prices and increased rental prices occurring.  Of course people who have money in their pockets can afford to pay these prices.  So a marriage of money, supply and demand forms.  Supply is short, demand is high and a population with money and the ability to buy credit exists to meet increased pricing. Capital residential property prices and rental prices are able to increase because all the planets are lining up.

 

In other parts of New Zealand, employment opportunities may not abound.  Accordingly, even if there is a shortage of property, prices simply cannot increase, or at least not increase as much as they otherwise would.  Why?  The population in these areas don’t have the moo la in their pockets to pay for the capital increases in property prices and rental prices which means a constraint on these prices occurs.

 

Looking forward, where are property prices going to go?  With the credit reins loosening, money becoming available, building of property and infrastructure occurring, employment on the rise and pressure for demand for property to own or rent increasing, the answer is clear. Up.  But a caveat comes with this statement.  People have to have the money to pay for those increased property and rental prices, which means they need to be employed and receiving a wage.  So in my view, a city where employment is available is going to be where we see property prices climbing.  Likewise, places where infrastructure is going in will have a subsequent effect on property prices increasing.

 

 

whats happening with Interest rates

Interest rates - another subject the majority of kiwis what to know something about because we borrow money to purchase our homes and subsequently have interest to repay.  If we haven’t borrowed money to purchase the roof over our head, we’ve often borrow money to fund our businesses or indeed our pleasures, such as credit card spending and the buying of nice cars.

 

So where are interest rates heading?

 

Prior to the recession, New Zealanders had a keen hunger to consumer and much consumption was permitted through the incurring of debt.  We had a great enthusiasm for taking out bank loans and accepting credit card companies offers of finance.

 

And spend this money we did.  We bought bigger homes, more investment properties, baches, boats, cars, large tv screens and home theatre systems that you had to have a degree in technology to be able to work.  No wonder I never purchased one of those – I’m hopeless with technology.

 

But with the recession came a redefining of priorities.  Spending was no longer cool.  We worked out we didn’t need all the bells, whistles and gadgets that could perform a thousand functions at the touch of a button.  Redundancies began.  The banking and legal professions in London all but shut down overnight and there was a considerable reduction in work in these industries here in New Zealand.  A reduction in our appetite for spending and debt incurring began. If we didn’t voluntarily decrease existing debt levels or our need to take on more debt, the need to curb our appetite was severely inhibited as bankers tightened their credit terms.

 

All up, we started to understand there was a difference between good and bad debt.  We began the obvious realisation that whilst it was all well and good having capital appreciating assets on our balance sheets, at the end of the day, we had to have cash flow to make those monthly loan payments. 

 

For some souls, this comprehension came too late. They would be severely hurt financially.  For others, especially those who had lived through the latter part of the 1980’s, they’d seen it all before.  The only difference was the product in question.  In the 80’s it was shares. I recall documenting large numbers of script deals in legal offices.  In the 90 and forward roll, the product had changed.  Now people borrowed heavily to invest in property on the basis that it would always go up.

 

For a large number of New Zealanders, a new understanding about money began.  For another group of citizens, the financial knowledge they had gained a couple of decades earlier, simply rose to the forefront of their minds. Overall, we began our journey of off loading assets, repaying debt and decreasing our eagerness to borrow. 

 

At the same time of this increased awareness, some interesting money events were occurring around the world.  I won’t go into them here because this scribble will become a novel if I did but suffice it to say, interest rates start to fall the world over.

 

Thankfully our new founded wisdom and sensibility over money seems to have stuck now that we have come through and out the other side of the recession.

 

Going back to our original question though, where are we heading with interest rates?  To answer this, I think we need to digress just a little further and gain an understanding of where our money comes from in order to assess where interest rates might go.

 

In general terms, our Banks have to get money from two sources (a) us internally and (b) others externally.  Lenders have to utilize both sources because we simply don’t have enough cash available in New Zealanders to satisfy all Borrowers including the Governments, requirements.

 

About 40% of the money that Banks lend to us, comes from people who place their funds on term deposit. The balance of funds, being roughly 60%, is what our Banks borrow from overseas.

 

Banks tend to lend money to borrowers on either floating or fixed terms.

 

The official cash rate is what the Reserve Governor sets.  When Banks lend money to us on floating rates, they take into account the OCR.  But Banks don’t lend at the OCR rate.  Rather, they tend to lend out money at the 90 day bank bill rate, which in part, is influenced by the OCR.

 

The above is in stark contrast to what occurs when Banks lend money to us on fixed rates.  When this occurs, Banks have to source their funds from overseas.  They pay their Lender a particular percentage of interest and then add onto that percentage, a margin.  This combined percentage is the percentage rate that Banks charge us, give`or take,  when we borrow funds on fixed term.

 

So to answer the question where do we think interest rates are going to go in the next year or so, we need to establish if we are discussing floating or fixed rates.

 

With respect to floating rates, it seems unlikely the OCR is going to be raised in the short term by the Reserve Bank.  Hence, floating rates may well remain constant.

 

If you’re looking at fixed rate however, you need to take into account what is happening internally as well as offshore.  If for example, there is a large increase in job growth, a sharp decrease in unemployment, a jump in wages growth and non wage costs, heightened demand for housing and a continuing climbing dollar, this could all lead to a spike in inflation. The RB may then react and tighten monetary policy.  This will force interest rates up of course. 

 

Additionally if our Banks have to pay more for the money they are picking up offshore, they will pass that increased cost onto us.  This of course will mean fixed interest rates will climb.  Why would an overseas Lender put up their interest rates?  Well if that overseas Lender was finding it hard to source cash, it might have to pay more for the money it picks up.  Of course it would then pass that increased cost onto our New Zealand Banks and when our Bankers lend money to us, they in turn would charge us more for the privilege of borrowing those funds from them. Additionally, if it appears our country’s overseas credit rating is heading southward, New Zealand will seem a bit more risky to lend funds to.  Accordingly, the Lenders will charge our New Zealand Banks a higher percentage of interest.  Again, our Banks will pass this cost onto us when we borrow from them.

 

Given the above, where do we think fixed rates are going to?  Only one way. Upwards.  It was forecasted that this would not occur until towards the end of this year but with the earthquake that has just occurred in Christchurch, it may mean economic growth is delayed.  Accordingly, rates may not move until early next year.

 

Things can however turn quickly in the money world.  Hence I’d study the economic climate internally and I’d keep my ears open to mummers such as those coming out about Greece and my eyes on possible future overseas events.

 

 

whats happening with Deposit rates

For those souls who have funds on term deposit, I guess you wouldn’t want to be trapped into holding funds in a bank account at a rate that is lower than what you could otherwise get.  In other words, I’m thinking that if interest rates increase, deposit rates might go the same way. 

 

If deposit rates do rise, you would want some flexibility so perhaps you might consider keeping your funds on term deposit on a short day rate of say 90 to 120 days.  If you do this and the rate moves upwards, you won’t loose too much in earned interest foregone and will be able to move to the higher rate quicker than if you’d locked your hard earned readies up for say 6 months or more.

 

Using a crystal ball and trying to join up the dots, if fixed interest rates increase toward the end of this year or the beginning of next year, you might expect deposit rates to pick up as well so I’d be keeping flexibility around the end of 2011 and 2012 years.

 

 

 

whats happening with Migration

Everyone is interested in this factor because it can have such an effect on our economy. 

 

Prior to recessionary times migration was soaring.  The rate of our dollar was relatively low.  This made us an attractive place to live.  Migrants coming into NZ could buy more for their dollar.  Additionally let’s face it, really is a beautiful country.  You can get good food here, reasonable accommodation and for the most part, NZ is not a country full of violence.  Who wouldn’t want to live here! But I digress – back to economics 101.  When migrants come to NZ we need to remember they have to either buy or rent a house, buy goods to put in those houses, buy or lease vehicles and generally spend cash in our society.  A good thing of course because as people come through the New Zealand door, our population grows which in turn increases demand for goods and services.  Businesses need to produce more to keep up.  This means their demands for labour and other inputs, goes up.  Accordingly businesses start to buy more inputs and hire more people.  Unemployment goes down.  More people in society have more cash to spend (those unemployed are now being paid a wage) and spend they do.  So in effect, the economy starts humming along at a nice pace. 

 

Conversely this supply and demand has a knock on effect.  Prices increase.  New Zealand starts to look like a good place to invest in. Outside interest picks up as people offshore buy up our currency.  All well and good you say but here is the down side.  Our dollar increases and inflation of course occurs.  To gain some degree of control, the Reserve Bank takes action.  They increase the rate   .  Suddenly people don’t want our currency anymore because they have to pay too much for it.  Migrants don’t want to come here because they don’t get so much for the dollars they are bringing in.  Things start to cool down.  And so the whole cycle starts again.

 

The above was what occurred, give or take, during the recession.  Our dollar dropped. Migration dwindled and then ceased.  There was even a period of time when we had more people leaving the country than coming in to reside on our lands.

 

Now that the recession is over, where are we?  Well après recession a new story has begun.  We have been experiencing a mild increase in net migration, excluding March 2011 and forecasts are that this will continue.  Hopefully this will lead once again to an increased demand for our goods and services as our poor retailers really need this shot in the arm.

 

what happening with Manufacturing and RETAILING

As I’ve said previously in these mussing, pre-recession we had a huge appetite for spending.  New Zealanders didn’t just keep up with the Jones.  They set the benchmark and the line to which the Jones had to step up to. We loved spending and retailers clearly enjoyed it as well as they moved their goods literally in the truck loads.

 

On a business front, we consumed as well.  We borrowed to buy capital items and inputs and often a business’ inventories grew fat along with our staffing levels. 

 

Like most things experienced in life however, there is a cycle and our cycle of feeding on debt ceased once the recession hit.

 

Private citizens reined in their belts.  They stopped spending or at least didn’t spend nearly as much as they had done.  Spending also changed.  Discretionary items weren’t purchased so much and if spending did occur, it was usually on those goods that we call economic necessities such as washing machines.

 

Businesses during this time took stock.  Frequently they were running mother ships and as a friend once told me, it can take several months to bring a mother ship to its right course.  Meanwhile little income is coming in and costs are soaring.  In an effort to turn their ships to the right course, businesses began to empty out their inventories and stopped placing orders for widgets.  This of course affected manufacturing and retailing.  As a knock on effect, manufacturing shut down the world over.

 

Coming out of the recession, the first country to fire its engines was China.  Why that country you say?  Because it was the largest manufacturing country in the world and that is where inventories are made.  Other countries kicked in after that.  Manufacturing to a large degree has picked up and is forecasted to improve as our world economies rise.

 

Retailing on the other hand hasn’t been treated as kindly.  We’ve now had it drummed into us that debt reduction is a good thing and consequently, we haven’t picked up our bad old habits of spend, spend, spend.  Naturally this has affected our retailers.

 

Is retailing going to dramatically increase?  My personal view is no.  Sure the ability to borrow funds might be a bit easier but I think New Zealanders have been listening and they just won’t spend as much or as freely as they previously did. 

 

Accordingly, if I was a retailer, I’d definitely be keeping my eye on controlling the stock I was carrying and trying to create competitive advantages.  Think Harvey Norman. I view this as a smart retailer who from the television ads, appears to read the markets and their expected effects, very, very well.  Actually I wouldn’t mind meeting their marketing guru and having a chat.  I’ve got a feeling that person might also have some economic nouse.  Similarly for individuals, I expect they will continue to shop around for good deals and drive hard bargains.

 

 

The budget

Prior to the budget what was the state of play?  Well one things for sure – we weren’t in a great place.  But let’s take comfort in the fact the whole world wasn’t in such a great shape in the middle of the recession.  Back home however we had high taxes, high unemployment, high migration off-shore and high investment in property to deal with.   Key in an attempt to turn things around introduced some changes via the Budget he saw into play in 2009.  His main objectives under this 2009 Budget was to get Kiwis saving and investing and to keep the engines ticking.

 

One smart move of Keys was to reduce marginal tax rates. The individuals highest tax rate under his hand was reduced down.  Not only was this meant to put more money in peoples pockets but it was meant to make New Zealand more attractive as a place to live and work.  It was hoped this move would stem the persistent drain of our citizens to bbq land - Australia. 

 

To help companies out, Key reduced company tax rates to 28%.  This was undoubtedly a smart move because it was aimed at freeing up money made by companies so they had funds to buy more inputs and capital items and most importantly, hire more labour. If that worked, greater productivity and a drop in the unemployment rate was to be had.   As a bonus, it meant our companies were paying less tax than those in Australia.  Ultimately, helping companies out in this way was meant to induce them to say onshore rather than moving offshore as so many had done before them.

 

Did the changes that Keys introduced in his 2009  help achieve his objectives? A little but not absolutely would be my answer.  When the economy did finally kick start and the world began is slow climb out of recession, New Zealand didn’t get the upturn in economic growth that was expected.  We were left in a place where the economic engine room had fired but not a lot of hiss and roar or output was happening.  We just weren’t experiencing any real growth and we had a deficit that was intent for shooting for the moon.

 

Key of course reacted in an attempt to help matters along.  His thinking was more money was needed for companies for investment purposes and so to free up more capital he decided a change in tax laws was necessary.  Which leads us to around 2010 and 2011.

 

The thinking went that if companies had more accessibility to capital, they would use it in investment in their businesses.  They would buy more capital inputs, they would hire more people, staff would have money in their pockets to spend in the economy – the same argument I’ve already written about. 

 

So a tinkering with the tax system began. A strong effort, backed by legislation, was made to move Kiwis away from their love of property into other areas of investment.  This was brought about in a large part by the removal of the ability to claim depreciation and of course the limiting of losses through the removal of the LAQC vehicle.  Exit LAQC and enter LTC. 

 

Did these changes have their desired effect?  Maybe a bit early to tell but my personal view is they won’t deter Kiwis from investing in real estate.  The property market therefore will not fall in.  Think about it and in particular why we are applying our little grey cells, think about history.  Right now Kiwis have a choice of where to put their money.  New Zealanders have lived through the share-script days of the 80’s, they’ve done the currency-commodity times of the 90’s and they’ve had their fill of the finance companies in the recent decade. So my guess is New Zealanders are pretty smart now they’ve got a bit of history under their belt.  They aren’t going to put their hard earned cash into shares, commodities or for that matter hand, it over to other companies to manage.  Rather they will want to buy something they can touch and see and to a large degree, control. 

 

Where can the average New Zealander then put their cash?  Property of course.  That is and will continue I believe to be the preferred investment vehicle for most Kiwis.  Sure, you may not get so many people chasing the cash flow off of properties and people may well buy (mainly) for capital gains now and there may not be so many people wanting to own a second or third property.  In other words, the investor as a type may have changed but that is where the change stops.  It doesn’t mean more kiwis are going to start up businesses or hand over cash to existing businesses in an investment bid.  At the most, I think all that will occur is those with spare cash who chose not to put it into property, will take the safe route and put it into term deposits.  Ok I guess but not a long term smart money move.  We all know over the long haul cash erodes in value.  So, in summing up, we are left with one choice of investment being property and that is why I do not think Keys latest move in changing the tax laws will make that much of a difference. 

 

Besides from trying to divert the flow of capital, Keys had of course to deal with the deficit heading for the moon.  And deal with it he did, in his recent budget.  They called it a “zero budget” and I think it was aptly named.

 

But before I examine what happened in the Budget, let’s just pause for a moment and think about what a Budget is.

 

Just like you and I have to balance our household private budget and cheque book at the end of the month, so does the Government.  If we spend too much personally, we either have to dip into our savings to fund the spending we’ve just done or we have to borrow to cover it.  The Government isn’t much different.  It just has to undertake its balancing of the books on a much grander scale.  To do this of course, just like us private individuals, it either has to live within its means or borrow to fund the deficit that is showing up.

 

Going into this Budget the Government was grappling with a major problem.  The national deficit sat around $16.7 billion and the Government was borrowing around (on average) $300 million a week to fund this eye watering deficit.  This didn’t look so hot for us with respect to overseas Lenders.  Remember what I’ve previously said about borrowing money from overseas.  It was recognised overseas that NZ was one of the most indebted country in the world.  I saw a graph and it even put us in with the PIIGS – frightening. There was some concern that our country’s credit rating would fall. If this occurred, it was thought that the organisations that lent money to New Zealand to enable our deficit to be funded could get nervous.  An effect of these jitters could mean those overseas lenders would increase the interest rate at which they lent money to our Government.  Clearly if that occurred, our Government would end up paying more for the money it borrowed to fund the deficit.  Subsequently, our deficit would grow.  Something had to give.  Enter the recent Budget.

 

Under the Budget just gone, the Governments main objective was to get our deficit down and live within our means. To achieve these objectives, the Government made changes to Student Loan Schemes, Work for Families welfare packages and Kiwisaver.  Additionally, it advised it wanted to privatise some state owned assets and intended that Government departments cut their spending.

 

Spending was off the Budget menu.  This is the reason they called it a ‘Zero Budget’ meaning zero additional spending was intended to occur in new areas and the spending that was going to happen, was going to have to come about by the Government making some cuts in the existing areas it was spending money in such as Kiwisaver.  This of course brings me to make some points about Kiwisaver. 

 

I’m probably not going to be the most popular girl in town for saying this but “has anyone seen the elephant in the middle of the room?”  It just amazes me how many people want to ignore this question.  I speak to thousands of people a year and when I bring this subject up, people get uncomfortable.  You can see the horror on their faces. They don’t want to acknowledge the elephant which is this … WE ARE AN AGING POPULTION, THE GOVERNMENT WON’T BE ABLE TO PAY IN FULL FOR THE KIND OF RETIREMENT WE WANT, IT DOESN’T HAVE THE MONEY, YOU CANT GET BLOOD OUT OF A STONE. 

 

The elephant has been standing in the room for the last few years for sure, which is why Kiwisaver was introduced in the first place.

 

It’s all very well saying I’ve paid my taxes and I’m entitled to my superannuation but if the coffers are dry, where exactly is the money going to come from?  Far better in my view to get real.  Let’s try and do something for ourselves.  Kiwisaver might not be the total answer.  Actually personally I don’t think it is, but it’s a damn good start.

 

Kiwisaver in its basic form is a type of compulsory behaviour – a behaviour we should cultivate – savings on a regular basis.

 

Most New Zealanders do not save each and every week a percentage of their pay packet.  Actually I don’t really understand this behaviour.  Even if it’s $1.00 a week I’d be saving it.  I absolutely refuse to work all week and not pay me first so I’d be first in line to get my $1.00 in payment. 

 

Through regular savings, balances add up.  That’s what Kiwisaver is about – enforced regular savings.  Enforced savings from you of 3% and from your employer of 3% will be introduced.

 

Additionally, it comes with a great bonus.  The Government puts in $1000 as an initial kick start payment and then there are some tax credits you can collect along the way as well.  I know the tax credits aren’t as much as were originally given out but there isn’t any point in our government borrowing money overseas to simply put it into our Kiwisaver accounts.

 

Looking at these incentives, can anyone tell me where you can get someone else (your employer and the government) to put money into your bank account each and every week? 

 

Now at this point I can hear two particular chants.  First people tell me “the Government has already changed the rules of the Kiwisaver game since I started in the fund, they will change those rules again”. To this I say of course the rules have been changed and you should expect them to change in the future.  That is what running a country and a Budget is all about.  It’s a moving target.  This is why the rules have to change.  A change in the rules however doesn’t mean a change occurs in the objective of the game.  The objective of the game is at the end of a long successful life, you have some money available to fund your retirement.  Secondly, people say ‘my money is tied up.  It’s my money and I want to be able to get it when I want it”.  To this I say you can get your money out if you want to buy your first home or you suffer financial hardship.  But if you could just take it out whenever you felt like it, then it wouldn’t be a enforced savings plan would it?  The whole point of Kiwisaver is to keep the fund there until your retirement.  Dipping into it whenever you want would defeat the objective of the scheme.

 

Judging from the above you should get the idea I like Kiwisaver.  But that is only part of the answer.  I think we still need to take action and invest our money in other vehicles.  Property for me of course is my preferred vehicle but it differs from person to person.  I think cash, Kiwisaver and property will see me live at least a reasonable comfort level in my retirement.

 

Back to the Budget.  As I’ve said, we are running at a huge deficit and the recent Budget was in part aimed at controlling and then slashing that deficit.  Additionally the Government knew that in the next coming years it was going to have to deal with two drains on cash – rebuilding Christchurch and coping with population that was ageing that was going to cost heaps.  Keys had these two issues in mind when he designed this Budget.

 

So with his objectives in mind, Keys looked about and decided he would get his savings from three particular sources.  Decreases in the Government contribution to Kiwisaver ($2.6 billion), lower abatement thresholds and higher abatement rates in the Working for Families Scheme ($448 million) and a savings in running Government departments ($980 million) is where the Government intends to get its money.  Changes are intended to be implemented after the 26 November 2011 election

 

Spending of course under the Budget was at ground zero.  There is no new spending going on in this Budget.  Rather, the Government is going to use the cash it would have spent in Kiwisaver, Working for Families and running it’s Departments towards other things, such as repaying the borrowings we have made overseas to fund our deficit and dealing with rebuilding Christchurch. If all goes to plan, it is forecasted we should be in the black around the 2014.

 

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SUMMARY

Take these comments for what they are worth – merely my musings. As I said, I had nothing to do one Sunday afternoon and wanted to write so thought I’d simply gather my thoughts together and scribble.

 

My musings come with a caveat…if all the forecasts that people have made were true, there would be a lot more millionaires out there.  People when they make forecasts are merely taking the data at their disposal, having conversations with other people, putting things  together and delivering their personal opinions as to future happenings. That’s all I’ve done.

 

That aside, I’ve always found information useful as it helps one play the money game.  You can’t play the game if you don’t know the rules and you’re chances of winning the game are considerable curtailed if you don’t have the necessary information at your finger tips.

 

If you think you want to get your money game back on track, give me a call.  I’m a Partner at Gilligan Rowe & Associates and money is our business.  We know how to help our clients make it and keep it.  We appreciate how the cycle of debt works.  We understand how tax interacts with your personal and business affairs.  Overall, we have the knowledge to get you from where you are now to where you would like to go when it comes down to your money journey.  I guess you could say we know how to play the money game.

 

You can get me by emailing me on jx@gra.co.nz or picking up the phone and calling me on (09) 522 7955.

 

Until next time, spend short and invest long as the Russians Money Barons say. 

 
 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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Trustee minutes and trustee resolutions

whats the big deal ?

 

As a Professional Trustee, I’m often asked two questions.  First, what’s the difference between Trustee Minutes and Trustee Resolutions and secondly, why are they so important.

 

To answer the first question first, Trustee Minutes are really notes made of a meeting of trustees and the decisions those trustees make at their meeting.  Trustee Resolutions on the other hand, are a record of what the trustees have decided to do but they are made when a physical meeting of trustees has not occurred.  For example, where trustees have discussed matters and made decisions by telephone rather than having a physical meeting.

 

Why are Trustee Minutes and Resolutions so important?  To answer this question, you have to go back to old English law.

 

As I’ve stated in my book Family Trusts 101 Parliament has decreed that assets held in a Trust are held for the Beneficiaries of the particular Trust in question and, all things being equal, are generally protected.  To obtain that protection however, Trustees have to satisfy a few duties. 

 

One duty Trustees have is to document the decisions they make in an appropriate manner.  So what does this entail? 

 

In my book, I’ve explained that I believe it means Trustees have to show they have taken into account all relevant, factual matters before they have actually made their decisions. 

 

duty in action

 

An example of this in action is where a property is going to be acquired by a discretionary Trust. 

 

The Trustees should at the very minimum ask themselves what the assets and the liabilities of the Trust are before the purchase and what they will be after the house purchase has been completed.  Ratios should be compiled.  Trustees will also want to understand how any loans that are going to be picked up will be satisfied. Which of course leads Trustees to reading and considering the loan contracts that are being placed before them.  Finally, a question which I think most important is to ask how is the house purchase going to benefit the Beneficiaries.  After all, the Trust is created for the Beneficiaries so it’s vital their interests are being served by the transaction.

 

Once all the above has been asked and answered, its imperative to demonstrate the Trustees have met their duty and so Trustee Minutes or Trustee Resolutions have to be prepared and signed.  Of coupe, these Minutes and Resolutions should be backed up with appropriate evidence that Trustees have considered all the relevant factual matters that we’ve just discussed.

 

Not all Trusts have the benefit of a Professional Trustee so not all Trustees understand how vital the above is as the Trustees in a fairly recent case found out.  The consequences in that case were dire.  Trustees were found to be in breech of their duties and their decisions were set aside.

 

summary

Moral of the story for all Trustees is satisfy the 3D Rule I discuss in my book Family Trusts 101.  Gather relevant information together before you make your decisions, distribute that information and discuss its contents and implications amongst yourselves as Trustees and then document your decisions in appropriate Trustee Minutes or Trustee Resolutions.  Only this way can you demonstrate that you have met your duties and thus keep the Trust’s assets protected.

 

If you need any assistance with this, please just let this Professional Trustee know.  I’m always happy to help our clients and a quick discussion (free of charge) over the telephone, can frequently save much heartache, time and money down the track.  You can contact me by emailing jx@gra.co.nz or telephoning (09) 522 7955.

 

 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

 

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MONEY MATTERS

Wallis Simpson, Mistress of the King of England, was frequently quoted as saying “must have, can get”.  Of course her way of getting was to ensure others, such as her Husband and the King, got for her. For most of us however, ‘must have, can get’ means we have to get for ourselves.  For many people, their getting involves the use of the plastic fantastic.  In other words, they get using their credit cards.  All well and good you say.  Everyone uses a credit card.  But for many people, that usage can spiral out of control.

 

The use of a credit card is not of itself a bad thing. Many people use their cards sensibly.  They pay their monthly bills such as electricity and telephone with their credit cards.  These individuals however know what they are spending and can tell you what the balance of their credit card will be before the statement lands on their door mat.  When the statement arrives, this group of credit card users have cash in their bank accounts to pay the debt and clear their monthly credit card balances completely.

 

For other world citizens, the credit card can be a dangerous weapon. Dangerous to its owner that is.  Danger usually strikes because the card user simply cannot control their spending.  That said however, you shouldn’t get the idea that all credit card debt is brought about thought a person’s sheer shopping indulgences.  Sometimes people use their credit cards to draw cash and pay necessary bills.  They do this because they simply don’t have the cash to pay their accounts as they fall due.

 

Irrespective of how the debt has arisen, it has to be paid back.  Whilst credit card companies are in the business of making money on the moo la they lend you, they ultimately want the debt and its associated interest, repaid. So how exactly do you go about doing that when the dreaded debt balance has become a bit more than you can chew?

 

 

balance transfer

 

There are many different methods of reducing debt.  Different strokes work for different folk.  One of my favourite methods however is what I call a “Balance Transfer”.  I like this method because it has an immediate effect. It gives a person instant confidence and motivation to keep up the debt repayment plan.

 

Under your existing credit card, you are likely to pay interest at an average rate of say, 19%. Your mission should you chose to accept it, is to get the debt repaid so the less interest you are being the charged, the better off you’ll be.

 

Apply to a new credit card company for an additional credit card.  Transfer the balance of your existing credit card debt to this new card.

 

Before you do this, check the new credit card company will charge you a lower rate of interest.  Many credit card companies charge only a 3% interest rate on balances that are transferred from other credit cards.

 

Once you have done this, you will be paying interest on the credit card debt balance at a much lower rate eg: 3% verses 19%.   That’s a worthwhile saving in my book.

 

Next put yourself on ice.  Fill up a plastic bag with water.  Put your credit cards in that bag and then put the bag in your freezer.  By doing this, you will have to defrost the bag of water to get access to your cards, meaning you won’t be able to indulge in instant shopping gratification.  Clearly a continuation of spending isn’t going to help you in your cause of getting rid of all credit card debt.

 

Finally, undertake a budget exercise.  Determine how much you can pay off the credit card debt each and every month.  Complete the monthly payments. Stick to the debt repayment plan.  Make a determined effort to clear that debt once and for all. 

 

 

summary

 

Regardless of what debt repayment route you take, the fact of the matter is repaying the debt is only part of the solution.

 

The golden key to dealing with credit card debt is being in control of your money rather than money controlling you.  If you continue to think about money and use money as you have previously done, it will be only a matter of time before you find yourself right back in the credit card debt situation you have just clambered out of. 

 

To ensure you get out of debt trap and stay in the black you need to understand where you are now money wise and where you want to go.  You need a money road map – something we can help you with at GRA.  Money is indeed our business and it’s our job to help clients find solutions.  So if you need help, contact me by emailing jx@gra.co.nz or telephoning me on (09) 522 7955.

 

Until next time everyone, spend wisely and save well.  Remember spending is short, and earning is long.

 

Professional Trustee Services
Gilligan Rowe + Associates LP
Chartered Accountants

Learn more about Janet
Email: jx@gra.co.nz
Ph: +64 9 522 7955

P.S. Did you like this article? Go ahead and sign up to our free newsletter and receive tips, updates and useful information to help you protect your assets and grow your net worth.  GRA are accountants who provide expert accountant advice both in NZ and offshore.

P.P.S.  Check out our sister website, www.familytrusts.co.nz for more family trust information.

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