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Tuesday, 21 June 2011 15:31

Financial markets are anticipatory animals

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How often have you seen a company make a record profit announcement, only to see their share price decline that day.  This happens as the markets had factored in a better result than was released, and that higher forecast was already built into the price.

Conversely investors often see share prices rise when companies announce bad news as the news was not as bad as had been built into the share price.

While this may seem counter intuitive to many, the fact is that financial markets are anticipatory by nature.  In other words, what is built into share prices takes into account information that is known as well factoring in forecasts of events expected to happen.

With this point in mind we look to the current pricing of share markets and ask why are they so cheap, when company earnings are rising?

The chart below tracks the average Price to Earnings Multiple (PE multiple) over many years to demonstrate whether the share market is cheap or expensive compared to history.  A PE multiple is simply how many times company earnings, investors are prepared to pay for a company.  Generally the higher the multiple, the higher the price of the company or market.

For example a company earns $1-00 per share, and its share price is $12, therefore the Price Earnings multiple of 12, but if the share price rose to $15 while earnings remained the same, the Price Earnings multiple would be 15.

 

 

What this chart shows is that the share market appears to have already anticipated the uncertainties in the world economy listed above by discounting the price earnings multiple it is willing to pay for companies (and in doing so reducing share prices)

Price earnings multiples are now trading at well below long term averages.

The key point is that markets seem to be already priced for many uncertainties in the global economy.  Investors need to ask whether the market is pricing in too much bad news as they were in early 2009.  If it turns out that markets are factoring in worse news than actually happens, investors could see share prices rise as a result of the market increasing PE multiples.

In the long term company earnings drive returns for investors in share markets, but in the shorter term numerous other factors impact share prices.

 

Friday, 17 June 2011 08:34

Value in Commercial Property – Office Market Summary

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In the lead up to the Global Financial Crisis, we did not invest in Listed Property Trusts or Unlisted Property Trusts.

With the significant realignment in these property markets we now are seeing value of investing in Commercial Property markets.

This article focuses on the Office market within the Commercial Property sector.

2010 saw the following occur in the Office market:
• CBD Office vacancy rates peaked at 8.3% and are now trending down
• Capital values increased by around 5%
• There was tangible evidence of increased demand for space
• Prime Gross Effective Rents increased by 1.4%

Below is a chart supplied to us by Charter Hall Property group which outlines forecasts for CBD Office property in each of the major markets in the coming years. These forecasts are based on demand assumptions for space, compared to known additional supply of property that is in the pipeline.

This chart is showing that it is anticipated that over and above the income received by investors, capital values are forecast to rise on average by around 20% from 2011 – 2014 in the CDB Office sector.

When considering a commercial property investment we normally would recommend investors seek the following in a property investment trust vehicle:

- Vehicle should have High Quality Tenants of well known companies with strong brand names in a strong financial position. The property vehicle should not overly focus on one tenant.
- Consider the Average Lease Expiry (referred to as ALE) – this is the average term that tenants have to run before their lease is up for renegotiation. A longer ALE should result in a higher income certainty for the investment vehicle
- Level of Gearing – we would normally start to become uncomfortable with a property investment with more than 50% gearing
- Investment vehicle should contain a number of properties in different locations, rather than relying on either one area, or worse still one property.

IMPORTANT INFORMATION: Any advice contained in this article is general advice only and does not take into consideration the reader’s personal circumstances. Any reference to the reader’s actual circumstances is coincidental. To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances. When considering a financial product please consider the Product Disclosure Statement

Sunday, 05 June 2011 11:14

Greek Debt Crisis

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Sunday, 05 June 2011 11:07

Personal Deductible Super Contributions

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For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

 

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow BeforeStrategy AfterStrategy
Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

 

Blog Website:  www.investmentadviceadelaide.com

Tuesday, 31 May 2011 15:57

Value in Commercial Property – Office Market Summary

Written by

In the lead up to the Global Financial Crisis, we did not invest in Listed Property Trusts or Unlisted Property Trusts.

With the significant realignment in these property markets we now are seeing value of investing in Commercial Property markets.

This article focuses on the Office market within the Commercial Property sector.

2010 saw the following occur in the Office market:

  • CBD Office vacancy rates peaked at 8.3% and are now trending down
  • Capital values increased by around 5%
  • There was tangible evidence of increased demand for space
  • Prime Gross Effective Rents increased by 1.4%

Below is a chart supplied to us by Charter Hall Property group which outlines forecasts for CBD Office property in each of the major markets in the coming years.  These forecasts are based on demand assumptions for space, compared to known additional supply of property that is in the pipeline.

This chart is showing that it is anticipated that over and above the income received by investors, capital values are forecast to rise on average by around 20% from 2011 – 2014 in the CDB Office sector.

When considering a commercial property investment we normally would recommend investors seek the following in a property investment trust vehicle:

  • Vehicle should have High Quality Tenants of well known companies with strong brand names in a strong financial position.  The property vehicle should not overly focus on one tenant.
  • Consider the Average Lease Expiry (referred to as ALE) – this is the average term that tenants have to run before their lease is up for renegotiation.  A longer ALE should result in a higher income certainty for the investment vehicle
  • Level of Gearing – we would normally start to become uncomfortable with a property investment with more than 50% gearing
  • Investment vehicle should contain a number of properties in different locations, rather than relying on either one area, or worse still one property.

IMPORTANT INFORMATION:  Any advice contained in this article is general advice only and does not take into consideration the reader’s personal circumstances.  Any reference to the reader’s actual circumstances is coincidental.  To avoid making a decision not appropriate to you, the content should not be relied upon or act as a substitute for receiving financial advice suitable to your circumstances.  When considering a financial product please consider the Product Disclosure Statement

Monday, 30 May 2011 11:56

Australian Property Bubble?

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(Aust Financial Review 26th May 2011)

According to the Organisation for Economic Co-operation and Development, the ratio of house prices to incomes is 34% above its long term average and the ratio of house prices to rents is 50% above its long term average, both being at the top end of OECD countries.

Also, the 2011 Demographia International Housing Affordability Survey shows that in Australia the median multiple of house prices to annual household income is double that of the US.

AMP economist Shane Oliver points out that in Los Angeles the median house price is $345,600 in Sydney it is $US$634,300.  In Austin, in oil rich Texas, the median price is $189,100, in Perth it is $480,000.

 

 

 

Thursday, 26 May 2011 10:40

Uncertain Housing Market

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(Aust Financial Review 25th May 2011)

Australia’s housing market looks very expensive with prices running at around 25% higher than the long-term average.  Further gains will be limited by the high debt levels borrowers have taken on to buy property.

It means they are vulnerable if anything goes wrong.  With this in mind the veiled threats by the Reserve Bank of Australia to raise interest rates must send a shudder through some investors.

A recent run of soft consumer data shows that confidence levels are already low in most households, so any move by the RBA will hit hard.  According to AMP Capital Investors, so far this year prices are down 2%.

Wednesday, 25 May 2011 12:21

Personal Deductible Super Contributions

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For people who are self employed or persons with substantial taxable income personal deductible contributions are a way of tax deductible contributions to superannuation reducing your taxable income leaving more after tax money for investment.

 

What is the strategy?

Making personal deductible contributions reduces a person’s taxable income because the contribution is claimed as a tax deduction.

The contribution is taxed at just 15% which may be less than the tax paid if taken as taxable income. This means more after-tax money is available for investment, which increases a person’s overall retirement benefits.

 

Who is suited to this strategy and why?

This strategy is suitable for individuals who are:

  • primarily self-employed as a sole trader
  • under age 65 and who have not been employed in the income year the contribution is made, or
  • employed, but the income earned from employment is less than 10% of their total income.

The benefits of making personal deductible contributions are:

  • personal income tax is reduced
  • retirement savings are increased, and
  • small business owners can diversify their wealth outside of their business.

 

 

How the strategy works?

Individuals who are eligible to make personal deductible contributions into superannuation can claim a tax deduction equal to the amount of contribution.

The tax deduction reduces the person’s taxable income thereby reducing income tax.

Personal deductible contributions are taxed at 15% upon entry into super. This means the individual making the contribution will ultimately pay tax at 15% on the contributed amount instead of at their marginal rate.

 

Notice of Deductibility

To be eligible to claim a deduction for contributions to super, an individual must lodge a Notice of Deductibility form with their superannuation fund by the earlier of:

  • the date the individual lodges their tax return for that financial year, or
  • the end of the following financial year.

The form must be lodged prior to commencing a pension, rolling the contribution over to another fund or withdrawing the contribution.

 

Example

Kate is age 40. She runs her own mining engineering consultancy business as a sole trader, earning $185,000 per annum.

Kate’s financial adviser has recommended she contribute $20,000 into her superannuation fund as a personal deductible contribution.

Kate is aware that she won’t be able to access the contribution until she meets a condition of release, but she is interested in building up her retirement savings in a tax-effective manner.

The following table shows that Kate has created a tax saving of $5,100 as a result of implementing the strategy. Her cash flow has reduced by $11,900 but she has saved $17,000 for retirement.

 

Cash Flow Before

Strategy

After

Strategy

Gross salary $185,000 $185,000
Less personal deductible contributions $0 $20,000
Taxable income $185,000 $165,000
Tax on taxable income* $59,575 $51,475
After-tax income $125,425 $113,525
Superannuation    
Personal deductible contributions $0 $20,000
Less contributions tax $0 $3,000
Increase to super $0 $17,000
Net Package $125,425 $130,525

* 2010/11 financial year. Includes relevant tax offsets and the 1.5% Medicare levy.

 

Risks and implications

  • Making personal deductible contributions to superannuation reduces a person’s cash flow.
  • Contributions to superannuation are preserved until a ‘condition of release’ is met.
  • Personal deductible contributions count towards a person’s concessional contribution cap, as do SG contributions and salary sacrificed contributions. Contributions in excess of the concessional contribution cap are taxed at 46.5% and count towards the non-concessional contribution cap.
  • Reducing taxable income too low can result in more tax being paid as the 15% contributions tax paid on deductible contributions may be higher than the individual’s marginal tax rate.
  • Individuals who have worked through the year must be certain that they satisfy the 10% rule prior to making the deductible contribution.
  • Changes in legislation may reduce the flexibility or benefits that superannuation currently enjoys.

 

Note: Advice contained in this flyer is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2011.

Further information on Deductible Super Contributions can be found on our YouTube site which can be accessed via the website below:

Website:  www.gemcapital.com.au

 

or to arrange a no-cost, no-obligation first consultation, please contact the office on 08 8273 3222.

Blog Website:  www.investmentadviceadelaide.com

Sunday, 22 May 2011 15:14

Life Insurance Advice

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