Articles by Janet Xuccoa

GOOD INTENTIONS

 For many of us, each New Year starts off with good intentions.  We make New Year Resolutions and expand great energy in the first couple of weeks achieving our goals.  Around February or March, our motivational levels dwindle and our every day lives take over.  Needless to say, those New Year Resolutions get put on the back burner.

With the above in mind, I decided New Years Eve not to make any Resolutions for 2012.  Yep, I’m having a year off.  Well … sort off.  What I thought I’d do instead is make some subtle changes to my every day life.  And because those changes are slight in nature and easily able to be incorporated into my daily routine, I reckon this year I’ve got a chance of pulling them off.  Just to give me extra focus, I thought I’d share them with you.

stopping the leakage

Isn’t it amazing how our money is spent almost before we earn it?  Pay packets get drained just as soon as they get filled.  Bills spring up from nowhere.  In a bid to stop unnecessary spending, I’m going to concentrate on a monthly and then a weekly budget.  I’m putting in goals with respect to spending and saving.  I’m intending to plan my travel so I save on petrol, take brown paper lunches so I conserve my lunch money and whilst the good weather lasts, have friends over for bbqs to halt the drain via the entertainment fund.  And to help me do my planning and analysing of where my well earned gold coins go, I’m going to use the Gilligan Rowe & Associates Life OnLine programme.  An amazing programme which is easy to use and understand.  It tells you where you are right now with your money and shows you where you will go.  It enables you to set goals and plot your progress toward retirement.  Free to all GRA clients just a one off setup fee.

organising the bankers

I’ve advocated this for a long while and with my budget in place, I’m going to revisit it.  It’s the 3 Banks 3 Bank Account Rule.  The first account is held at say National Bank.  It receives your salary and pays your bills by automatic payment.  The second account is held at another Bank.  Maybe ASB.  It receives by automatic payment a percentage of your salary.  This account has no eftpos on it.  It is a pure savings account.  Never to be touched.  Most importantly, for obvious reasons, this account shouldn’t be held with a Bank that you have any debt facilities operating at.  The third account is held at yet another bank. This account will also receive by automatic payment a percentage of your pay.  Unlike account 2 however, on this account you will have eftpos loaded because this is where you will do your discretionary spending.  Again, you should have this account at a Bank where you do not hold any debt.

The beauty of running Account 2 as above is besides from paying everyone else, you pay yourself each and every time you receive your salary.  This is only right because who on earth works 40 to 100 hours a week, without paying themselves?  Not only that but if you try to save funds after you’ve paid everyone else, you very rarely achieve your savings goals.  Why?  Because we all live to what we are paid – well at least most of us do.

To increase efficiency, rather than using your eftpos card fin Account 3, try taking a set amount of cash out each and every week.  Keep that in your wallet and you will be conscious of your spending when you start to see it dwindling down.

dealing with the insurances

Ever notices how we put lots of energy into getting our insurance policies all set up but then never review them.  I intend to take a real look at the type of insurances I’ve got in March and look at alternative products.  If I can get the same or better benefits at reduced rates, then maybe I will.  This is especially so with medical insurance where there is just so much competition. If my broker is reading this article, expect a call and a directive to do some research for me.

looking at the mortgages – interest rates

Much has happened in the interest rate market.  Right now I’ve got a mortgage on floating and I’m going to have to decide whether to fix or float.  This isn’t an easy decision given the goings on in Asia, America and Europe.  Then again, the Reserve Bank left our OCR at 2.5% this week and the word on the street is it isn’t moving until September 2012 or later.  This of course will depend on where inflation is sitting, how the rebuilding of Christchurch affects the market and where our dollar is sitting.  Maybe I will float a portion of the loan and also fix a bit.  I need to run the numbers and talk to my broker.  If I can save interest costs over the next couple of years, I’m intending to do so.  That would certainly help towards my saving goals. If you are already using Life Online put in different interest rates to reflect the changes, this way you can determine if you can afford the increase in fixing rather than floating.

wills and trusts

We’ve had a bit of a change in our family in the last couple of months. This is going to necessitate a change to my Will.  Not a difficult exercise but one most people put off or at least put to the end of their lists.  But I really want to sort it out because I don’t want to take a chance of the people I love not benefiting should I depart planet terra firma earlier than I expect.  Note to self – call lawyer.

At the time of dealing with my Will, I’m going to look over my Trust and Memorandum of Wishes.  Lots of changes have come into play this year, especially in the gifting regime and I want to ensure I have truly crossed all T’s and dotted all I’s as this is going to be imperative to ensure my assets are protected when the Trust is looked at in the future.

Summary

The above list doesn’t look that onerous.  It involves a little work for me via Gilligan Rowe & Associates products and services.  My insurance broker, loan specialist and lawyer will also have to do their bit but taken over the next two months, they are small jobs which once completed, could make a large difference to where I end up at the end of the year.  That of course is where we come in.  We are all things money.  We are able to help you take control and plan your finances.  We are able to help you get ahead.   If you need any assistance, just call us.  Remember there’s only one name in the money game.  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.

 

© 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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INTEREST IN INTEREST RATES

It seems to me everyone is talking about interest rates at the moment.  I’ve been catching snatches of conversation on trains, planes and restaurants.  The topic has featured heavily on tv and in newspapers.   Dinner with friends at my home on Saturday night was no exception.  It didn’t take long before the theme dominating the table was interest rates and the property market.  Then again, we are in Auckland and there’s nothing like these two subjects to really spark interest amongst Aucklanders. So, as the subject seems so dear to peoples’ hearts and minds, I thought I’d jot down my thoughts on the matter.

 factors that affect interest rates

There are a variety of factors that can affect interest rates.  Broadly speaking we refer to these as internal and external factors.  Internal factors refer to things that occur within the borders of the long white cloud.  Often we have control over these factors.  External factors are those that can affect interest rates that occur outside of New Zealand.  We have very little influence over these.

internal factors

Most of us know that the entity that establishes and implements policies regarding money is the Reserve Bank.  It affects monetary policies by setting the Official Cash Rate (“OCR”).  The main aim of this is to control and influence economic activity and inflation.  Whilst people are familiar with the job the Reserve Bank has, not many people are clear as to how its work actually affects interest rates.

In very loose terms, Banks borrow money which they then lend on to us. Banks borrow money from several sources such as from overseas lenders, term deposit holders and of course, the Reserve Bank. 

When a Bank borrows funds from the Reserve Bank, it usually does so at a rate around the OCR.  When a Bank then lends funds on to us, it does so by putting a bit of a margin on those funds.  So if a Bank borrows funds from the Reserve Bank at say 5% and if it adds a mark up of say 2%, we can expect that Bank to lend those funds to us at 7% or thereabouts.

 Accordingly, when the OCR moves, it affects the wholesale rates Banks borrow funds at which in turn, affects the interest rates the Banks are prepared to lend money to us at.

 When setting the OCR, the Reserve Bank looks about 2 years out.  In other words, the Reserve Bank doesn’t just deal with what is going on right now in our economy when it sets the OCR.  Rather, it looks about 24 months ahead and sets the OCR on what it expects is going to happen in the future.  This is something that people often don’t know and as such, frequently can’t fathom why the Reserve Bank changes the OCR when it does.

housing market

The Reserve Bank will look at the state and pace of the economy when setting the OCR.  With respect to the housing market, the Reserve Bank won’t be too concerned despite the fact that there is a good upturn in the Auckland and Canterbury areas.  These were the forerunner cities when prices started to turn but it seems the rest of New Zealand is now on the rise.  Albeit  this, the market was coming from a very weak initial place so the fact that sales and prices are climbing in most main cities, won’t worry the Reserve Bank much at this point in time and won’t therefore lead it to tamper with existing monetary policy right now.

economic activity

Reviewing data, we can see that confidence in the economy is on the rise.  There has also been reported a lift in retail sales and spending.  Export growth has occurred as well in the oil, dairy, wool and electrical equipment categories.  That said, some areas of the economy aren’t doing so well.  Unemployment is still up and job growth has slowed.  Maybe this is a reason Kiwis aren’t that keen to truly increase their spending and borrowing.  Overall, because the economy isn’t in a state where the Reserve Bank thinks it needs influencing, the general consensus is it will leave monetary policy untouched at this stage.

external factors

Another issue that affects interest rates in New Zealand is what is occurring overseas. 

For example, if our Banks borrow funds from overseas sources and if at the time of borrowing, money is in short supply, the Banks will tend to pay a premium for the money borrowed.  Of course, the cost of that increased borrowing is then passed onto New Zealand borrowers when the New Zealand Banks on lend the money to Kiwis.  Accordingly, the events occurring world wide and in particular in Europe, is of great interest as they have the potential of affecting interest rates. 

One matter that needs to be balanced against the above is the demand for money.  As I’ve previously said, borrowers’ appetite for taking on more debt seems somewhat curbed.   New Zealanders aren’t much different from Americans and Australians – they are more focused on getting their debt levels down rather than borrowing further.  This means demand for money is still subdued.  When demand is short and doesn’t exhaust supply, the fact that our Banks borrow from overseas and then pass funds on to us ultimately mean interest costs aren’t that much of a worry.

crystal ball gazing

Given the above, it appears to me economic growth in New Zealand isn’t going to dramatically increase this year.  Nor will inflation.  If we were looking at these issues only, I think I could confidently say I don’t think interest rates will rise on the back of a change in monetary policy by the Reserve Bank.  However, and it’s a big ‘however’, the circumstances in Europe are worrying.  Money supply could become short which is likely to push the price of borrowing up, assuming Kiwi demand for money is present.  That is on the cards given the rebuilding of Christchurch and the state of play many New Zealand businesses will have to confront in the next 12 months.  So overall my money is on interest rates rising.  The next big question to answer is when is that increase going to occur? 

Some economists are predicting an increase in rates at the end of the year or maybe even early next year.  Others are of the opinion rates will increase earlier.  My pick however is around August.  I’m basing this on the fact that the current low interest rates will start to stimulate our economy more so (especially with housing), demand for funds will become heightened and costs of borrowing funds off-shore will increase. 

summary

Right now you might be trying to decide whether to fix your loans.  In order to do this, you need to get some good information before you implement your decision.  Do the numbers.  Work out the figures.  Check to see which alternative will be to your financial advantage.  Get help from someone independent.  By the way, your Bank is not independent.  If you need help doing this financial check, then talk to us.  Over the years we have helped thousands of clients with their affairs. Of course a large part of our role is working out what is advantageous to clients from a financial perspective.  Remember when it comes to money, there’s only one name in the money game.  That’s GRA.  So if you need help, call us on (09) 522 7955 for a free chat.

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.

 

© 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 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

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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.

 

.

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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As the Trustee Services Partner at Gilligan Rowe & Associates, I’m often asked by Trustees what we think is going to happen in the economy, the property market and with interest rates. We answer questions like this all the time as helping people make and protect their money is our business.

Matthew Gilligan is particular strong on these topics and there are many clients out there who thanks to his advice, did pretty well on the last lot of interest rates ups and downs.

The one million dollar question on the table at present is does a Trust fix its interest rates on its existing loans right now or not?

The last thing Trustees want to do is fix a Trust loan at a rate of say 7.25% pa and then rates move downwards the following month. Likewise, a Trustee will not be happy when they choose not to lock in their loans and find rates move upwards and against them and the Trust.

A couple of months back the answer to this one million dollar question would have been fairly clear. Now however, it really is a game of snakes and lizards and everyone is wondering which way they should roll the dice. Below are some tips that might just help you decide what to do with Trust loans.

The Reserve Bank and the OCR

In simplistic terms, the Reserve Bank’s main job is to establish and implement monetary policy. It does this by setting the Official Cash Rate (“OCR”) with an aim of controlling economic activity and inflation. How does this affect Trustees and Trust loans?

Well, again in very loose terms, Banks borrow money which they then lend on to us. Banks borrow money from several sources such as from overseas lenders, term deposit holders and of course, the Reserve Bank.

When a Bank borrows funds from the Reserve Bank, it usually does so at a rate around the OCR. When a Bank then lends funds on to us, it does so by putting a bit of a margin on those funds. So if a Bank borrows funds from the Reserve Bank at say 5% and if it adds a mark up of say 2%, we can expect that Bank to lend those funds to us at 7% or thereabouts.

Accordingly, when the OCR moves, it affects the wholesale rates Banks borrow funds at which in turn, affects the interest rates the Banks are prepared to lend money to us at.

When setting the OCR, the Reserve Bank looks about 2 years out. In other words, the Reserve Bank doesn’t just deal with what is going on right now in our economy when it sets the OCR. Rather, it looks about 24 months ahead and sets the OCR on what it expects is going to happen in the future.

In the last OCR review, which happened on 29 July 2010, the Reserve Bank set the OCR to 3%. The Reserve Bank said the economy might not grow as quickly as previously thought and inflation might not reach the heights it was previously expected to reach in 2012. What does this mean for interest rates?

If all was going according to the Reserve Banks prior expectations, the OCR would have risen to around the 6% mark by the end of 2012. That meant we could expected interest rates to be around the 9% mark by the end of 2012. But now that the Reserve Bank has brought back its expectations, it thinks the OCR will only reach 5% by the end of 2012. This of course means interest rates could come back a bit, to around the 8% mark.

So given the above information, does a Trustee fix or continue to float the Trust’s existing loans?

Floating Rates

If a Trust’s existing loans are on floating rates right now, you might as a Trustee, choose to continue along this path if you think New Zealand’s economy will be long and slow in growing. Of course if you hold this view, you’re be expecting interest rates to stay low and the OCR not to rise as quickly or as high as was previously envisaged. You will recall the Reserve Bank has recently indicated this.

As a Trustee you might also continue to float if you think the global situation (especially in Europe) will deteriorate. Why would you do this? Well a deteriorating global situation could lead to a decrease in the rates our Banks pay to pick money up off shore. If Banks have to pay less to get the moolah that they on-lend to us, then perhaps they won’t charge us so much for the pleasure of borrowing it off of them eg: fixed rates will come down.

If a Trust is in funds, perhaps it receives rental income for example, you may as a Trustee be intending to pay off some of the money the Trust owes the Bank on its existing loans. If this is the case as a Trustee you would probably also choose to float because if you fix the Trust’s loans, penalties may be incurred for making early repayments.

Fixed Rates

If you are thinking you might fix the Trust’s interest rates on its existing loans, you are probably of the mind that the International Monetary Fund growth forecasts will come true. Likewise, I expect you will believe the New Zealand economy is going to experience fairly rapid growth and inflation in the near future. You might be basing your Trustee opinion on the fact that the vehicle sales, dairy, forestry, education, exports and manufacturing sectors in our economy have grown and will continue to grow at a relatively quick pace.

Of course if you hold these beliefs, you will be expecting fixed interest rates to increase. As a Trustee wanting to do the best for the Trust’s Beneficiaries, you will be hoping to get in early so the Trust doesn’t have to suffer the rate increase later on. Hence, you are likely to fix the Trust’s interest rates now.

The Trust might also be in a financial position of being able to pay the additional monthly increase in payments it is going to experience if the rate is fixed now. I say this because if the loan is currently on a floating rate, the Trust is probably paying around the 6% pa mark. But if as a Trustee you choose to lock in the interest rates right now, you are most likely going to do so around the 7.0% to 7.3% pa mark. Consequently, the loan repayments will increase in size.

Of course the extra the Trust pays in loan repayments on a fixed rate might well be worth the peace of mind that is gained. Which is another reason why a Trustee might choose to fix their interest rates.

Look Left & Right Before You Jump

This heading says it all. Whatever you decide to do, get some information before you implement your decision. Do the numbers. Work out the figures. Check to see which alternative will be to the Trust’s financial advantage. Get help from someone independent. By the way, your Bank is not independent.

If you need help doing this financial check, then talk to us. Over the years we have helped thousands of clients with their Trust affairs. Of course a large part of our role is working out what is advantageous to clients from a financial perspective. This includes Trust clients and businesses and individuals.

So give us a call on (09) 522 7955 for a free chat. We’re here to help you.

 

 

Professional Trustee Services
Gilligan Rowe + Associates Ltd
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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In the last couple of weeks I’ve been honoured to be able to speak at a couple of events, attended exclusively by women. These events focused on issues relevant to women such as maintaining a “work-life balance”. 

I of course spoke about the issue of women keeping their eyes on the ball and looking after the moo-lah.  No one in their right mind would ever ask me to discuss a subject such as “work-life balance”. 

On occasions I’ve even had to look up the words to check their spelling so you can imagine I’ve got no conception of what the phase actually means.

Although in saying that, I did get a bit of balance in last night when I indulged in some Christmas cheer with a few of my own girlfriends.  We got around to discussing what had occurred at the women events I’d presented at and they suggested that I write a blog setting out my own thoughts about a couple of issues that had come out of these presentations.  This seemed an excellent idea after two glasses of red and by the time morning came around, the idea had stuck.  So here I am putting pen to paper.

Before we start, I want to be sure I’m shot by the Policitially Correct Squad so I’ll make this declaration up front:  the points I am raising in this blog can equally apply to both sexes and the views I am expressing are my own, based upon my own observations gathered from about 2 decades of practice.

So ... on the subject of money, here’s some things I’ve noticed over the years that are pertinent to women:

1.         Relationship With Money

Women often have a strained relationship with money in my view.  I’m not saying they don’t understand money.  What I’m saying is they seem to fall into two distinct camps.  They either really take the trouble to get to grips with the subject of money, where it’s coming from, where it’s going, money goal setting, investing, etc or they simply refuse to get their heads around the subject. In other words, there seems to me to be two mindsets – those that are truly interested in money and think of it as an essential economic good that they need to know about or those that adamantly refuse to deal with the subject at all.

Men on the other hand don’t appear to me to fall into two such distinct groups.  They might or might not be interested in the subject. They might or might not be good at managing money. They seem however not to have such strong feelings about the subject of money as I see women having.  In other words, they are much more laidback and ambivalent about the topic.  Summing it up, money for men doesn’t appear to be an emotional topic for them at all.

Of course the type of relationship women have with money affects how they actually deal with the commodity.

2.         Discussions About Money

This is a really biggie.  It affects not only how women deal with their own money but all sorts of other subjects, such as asking for a raise at work or asking their spouses what is going on in the money affairs department.  Women frequently seem to be backward in raising the subject of money. For some reason they seem shy and uncomfortable about discussing the topic. 

By way of an example, a women I spoke with last week was about to permit her boyfriend of 6 months to move into her home.  He had two ex-wives and 4 children.  She had no idea of what he earned, what assets he owned, what his commitments were to his wives and children and what money he would be contributing to what would become their joint household expenses.  When I asked her if she would be discussing these points with him, she said she ‘didn’t like to’. 

Now I just don’t get this.  She was about to permit someone to get really closely involved in her life and she didn’t have a clue as to what he was about financially.  That is just plain scary in my books.  How can you start to build a lifetime commitment with someone that you can’t discuss the subject of money about? 

Men I’ve noticed don’t seem to have much trouble talking about the green stuff with either their prospective partners or their employers.  As a result, they frequently get to grips with the views that their spouses and employers have on the subject and they then make decisions about their own behaviour accordingly. 

Of course not being able to raise and engage in a discussion about money leads women to either taking or advocating control of the coin which can have some really startling consequences.

3.        Working With Money

I guess it goes without saying that if a person isn’t interested in the subject of money and doesn’t feel comfortable discussing money then they aren’t likely to really work with money.  What I mean by this is that they will not feel comfortable asking questions and challenging another person’s viewpoint about what should be occurring with the moo-la.  Unfortunately, women often fall into this category. 

To illustrate my point I want to discuss the case that recently came across my desk, involving Jillian.  Her husband was running a bookshop which actually did pretty well financially. They always managed to pay their mortgages and they enjoyed a reasonable standard of living.  Jillian had always left the running of the business and their money to her husband saying he had everything under control.

Her husband wanted to get ahead as he put it and so he wanted to buy another bookshop.  Trouble was it would involve them getting a very big loan.  But Jillian didn’t want to appear unsupportive so she didn’t question him about things and just signed the loan papers that were put before her. 

She did feel a little uncomfortable about them borrowing such a large sum of money to buy the 2nd bookshop and she wasn’t that happy at the time at having to put their home up as security but she nevertheless went along with things.  She even gave a personal guarantee for the borrowings herself. 

They went ahead and purchased the 2nd bookshop but despite her husband’s best efforts, the business still wasn’t making money after 7 months of trading.   As luck would have it however, a distant relative died around this time and left Jillian $80,000.  Her husband suggested that Jillian put in the inheritance she had just received to help the business along and Jillian, again not wanting to appear unsupportive, agreed. 

Things just got worse.  Month by month the business lost more money.  The loans were unable to be repaid.  Jillian’s husband took action and did sell the 2nd bookshop but the sale proceeds they got were not enough to pay back the loans.  So he then sold the 1st bookshop they owned.  But still there was a debt left owing to the Bank.  So they then sold their home.  Of course being in a downward market, the house didn’t realise as much as they hoped and there was a debt left over that had to be paid back to the Bank. 

As you can imagine all these events put enormous pressure on their marriage and Jillian and her husband separated.

As if this wasn’t bad enough, letters from the Bank started to arrive demanding repayment of the money that was still owing.  Jillian went to the Bank and explained the situation. The Bank whilst being sympathetic told her that she would have to pay them and that if she didn’t, they would sue her under the personal guarantee that she had given.

Of course Jillian had no money and no assets and so that is exactly what happened.  The Bank sued and then bankrupted her. 

Jillian through not wanting to deal with the issue of money had lost her home, her ½ share in the 1st profitable bookshop and her inheritance.

4.         Responses To Money Troubles

In my previous lifetime I use to head up a team at a Bank.  One of the functions of that team was to deal with customers who were defaulting on their loans.  And this is where it gets really interesting.  When the loan was in a joint name, it was usually the women who picked up the telephone and called to find out what was happening and how the problem could be worked through. 

From the couple of years work that I did in this capacity I had to draw the conclusion that when money troubles were on the horizon, women were more inclined to take the bull by the horns and move into ‘clean up mode’ as I though of it. 

I never really did come to understand why it was the fairer of the sexes that tried to sort things out when they’d gone bad especially given the fact that these very same women weren’t at all involved in the decision of where the money went in the first place.  Perhaps this is just one of the mysteries of life I’m going to have to live with. 

The point that I’m making however is women are good at cleaning up money issues but frequently woeful at dealing with the set up of the monetary situation.  If they were more involved and better at the inception of the money decisions, the money troubles may never come home to roost.

5.         Solution

Millions of books have been written about it and loads of money has been made from the subject over the years.  It’s called “Communication”.  That’s the only solution to dealing with money.  Quite simply, you have to sit down with yourself and explore how and why you feel a particular way about the subject.  Then, assuming your financial future is tied up with a nearest and dearest, you have to get down to the nitty gritty, take a deep breath and talk to your spouse about the subject.  You can do it in a non-threatening way. You don’t have to argue about the subject.  You can even agree to disagree.  But you do have to talk.

Once you’ve explored your reaction to the subject and your spouses reaction, you have in my opinion, a really good base from which to grow.  You see a little acorn of knowledge can lead to the growth of a whole tree.  And whilst you’re busy planting, you will start getting comfortable about the subject.  Which in turn will lead you to asking questions and finding out more about the fruits of the tree, including how to look after what the tree is producing.  Which leads me to my last point.

For all those women either in business themselves, or those who have their financial future tied up with their spouse who is involved in business, ensure you get good advice.  You don’t have to put all your assets at risk.  Nor do you have to lose all your assets, including your inheritances, if the business goes bust.

An ounce of prevention is worth a pound of cure.  Get advice.  Get protection.  Get the right structure.  Look at what amount of money is being borrowed and by what entity.  Think about and decide who should be directors and shareholders.  Review who is going to give personal guarantees.  Seriously consider putting in place general security agreements in favour of yourself.  In all circumstances, understand what is going on and feel comfortable about what you are legally agreeing to.

Your goal in life is to minimize your exposure and to protect what you have built up.  Don’t let your own feelings of being uncomfortable about the subject of money be your downfall.  Get advisors around you who help you feel relaxed about the subject.  And if someone is trying to make you feel inferior or unsupportive or just plain incompetent about the subject of moo-la, then take a step back – that’s their issue not yours.

The only dumb question in life is the question you don’t ask.  So as always, get the right people on the bus, sitting in the right seats to help you. And of course it goes without saying, I’m one of those people who are happy to help you.  I

I’d much sooner be pro-active and help you plan your financial future than be the ambulance at the bottom of the cliff, cleaning up the damage.  So if in doubt, please request an interview or contact me.

Professional Trustee Services
Gilligan Rowe + Associates Ltd
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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