Gap Magazines 'Australasian Dentist"

FINANCE

What is the sub-prime issue and how does it affect us here in Australia?

By Steve Atkinson
Atkinson Financial Planning

There has been considerable discussion on this topic, the following is a simplified overview.

Sub-prime means sub optimum or one could argue, sub standard loan. In the United States where they were awash with money, a number of states issued loans with a number of flaws including;

Little or No Income verification
Doubtful Valuations with some loans issued well above true valuations e.g. 120%
Lengthy "Honeymoon" periods of up to two years with the ability in some cases to roll over to another provider for a repeat "Honeymoon".
Most loans are structured on a non-recourse basis i.e. borrowers can walk away from the loan and leave the provider or Bank with the property.

To add to these issues in 2003 the Federal reserve dropped Interest Rates to a 45 year low of 1%.

Part of the US lifestyle, expensive cars, plasma TVs etc has been built on debt and in many cases unrealistic debt. The availability of easy credit resulted in the biggest housing boom in US history.

In 2006, 40% of all housing loans in the US required no deposit, while self verification loans amounted to 39% of all loans in that period.

As a result of all these factors housing prices were pushed higher which encouraged more borrowing and more speculation. There were cases of ‘NINJA" loans (i.e. No Income, No Job or Assets).

The reason a lack of prudence and ridiculous loan practices continued, was the unshakable confidence in increasing house prices and the belief that prices would continue to do so. The by product of this was a massive oversupply of houses.

As house prices started to flatten and interest rates started to increase, credit also tightened and a number of borrowers on honeymoon loans were forced onto full rates, and the inability to roll the loan to another provider.

Many borrowers suddenly realised two things;

They had negative equity as values started to drop.
They could not cope with the repayments.

Given that the loans were non-recourse and borrowers could hand the keys back to the Bank, many did so resulting in further substantial housing price reductions as supply started to exceed demand, further exacerbating the negative equity problem for marginal borrowers just hanging in. The worst states effected are Florida, California, Arizona, Nevada and Michigan, which account for 25% of US GDP, clearly having enough impact on the US economy to drag it into recession.

The impact of these events is substantial unemployment within the building trades and follow on industries, and much of this unemployment is yet to filter down into the figures. We could in the next few months see headlines referring to a deterioration in the US economy when indeed it’s not getting worse, but the true reporting of the current position now being reported.

From an Australian perspective all of this affects us in three ways;

The flow on effect of a US recession on the global economy, including Australia, we see this on a daily basis with a 90% plus correlation between our share market and the US Dow Jones.
Up to 75% of these sub-prime loans issued in the US since 2003 have been repackaged into residential mortgaged backed securities. These were then ‘on sold’ into a number of sometimes complex financial products and investment trusts.

Part of the problem with these complex investments is trying to identify exactly what the composition of the underlying Asset is. A further consequence for investors in some cases is "finding out" that they had exposure to sub-prime when they invested as conservative investors, on a primarily fixed interest/mortgage backed "Safe investment".

Clearly the press has been full of stories on corporate losses including Bear Sterns, Merrill Lynch, Citibank and many others.

The re rating of risk – This has resulted in margins increasing above the Reserve Banks official rates resulting in fairly substantial increases in rates for both home buyers and businesses here in Australia.

These increases will help to dampen our economy but are inflationary in their own right.

Clearly as the cost of spreads over the Bank Bill rate increases, profitability and ultimately dividends paid will decline by varying amounts, for our major companies. This is the most transparent flow on effect in Australia.

Moving on …

It’s not all gloom for Australia with many positives. We have a fundamental Housing shortage and have never had a sub-prime loan issue, with prime loans accounting for 92% of all loans issued. We have a strong economy – booming resources and a positive trade relationship with much of Asia. We have a 40 year low in employment and the drought has broken in Queensland at least.

Our continuing risks for the near future are:

The price of oil
The cost of money i.e. interest rates, risk
Stockmarket stability
The serviceability of existing housing Loans for the 20 to 25% of Australians who are already feeling mortgage stress. Clearly a further 0.25% increase will add further pressure on many.

You will be aware that we have already seen a price pressure in a number of outer suburban areas. This will continue to crystallise to what I believe is an already existing two tiered housing market, between the relatively elastic inner city blue chip areas and the rest.

Tips: Be careful, don’t overcommit and when investing buy quality assets – shares or property. Strategy in tough times can still help to make your investments successful.

If Atkinson Financial Planning can be of assistance, send queries and questions to steve@atkinsonfp.com.au or alternatively call the office on (03) 9841-7755.

Sources/Acknowledgements:

James Dunn, Financial Journalist & Commentator – Investors Mutual presentation 28^th February 2008

Stephen Atkinson, Authorised Representative of Securitor Financial Group Ltd.

ABN 48 009 189 495 Australian Financial Services Licensee 240687.

Atkinson Financial Planning
Ph: 03-9841 7755
Fax: 03-9841 7522

This information is of a general nature only and has been provided without taking account of your objectives,financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate in light of your particular needs and circumstances. To assist you in doing this, you should obtain a copy of and consider the Product Disclosure Statement for the products before making any decision

We are not authorised by Securitor to provide advice in relation to taxation. We have however provided estimates and explanations based on our understanding and interpretation of the relevant legislation. Due to its complexity and the speed and frequency with which taxation laws and regulations may change, we recommend you seek more detailed advice from your taxation adviser on any taxation issues.

Provide Feedback and Win a Dozen Bottles of Yarra Park Vineyard Wine

We value your feedback and consequently would like to offer a dozen Yarra Park Vineyard Wines as the prize for the best question on Financial Planning that we receive between this issue and the 30^th June 2008. Judging will be completed by the editor. We welcome your feedback and questions should be addressed to steve@atkinsonfp.com.au

As a matter of interest this will be a great prize as the Yarra Park Vineyard has recently been awarded a Gold and Silver Medal in the 2006 Yarra Valley Wine Show.

Enquiries so far have been strong, keep up the good work

The cut off dates for payment of SG contributions are 28 January, 28 April, 28 July and 28 October each year. However, any voluntary super contributions deducted from your employees' salary or wages must be paid to their super fund within 28 days of the end of the month when the deduction was made.

How does it work?
The amount contributed by employers is equivalent to 9% of an employee's earnings base, generally based on Ordinary Time Earnings. (The earnings base used for these calculations may be stipulated under the Award that is effective in your workplace, but if no Award or Industrial Agreement applies, Ordinary Time Earnings will be used.) Generally, Ordinary Time Earnings are before-tax earnings that are the results of an employee's ordinary hours of work and any overtime is usually excluded.

There is a maximum limit on the amount of super support you are required to provide for employees and this is indexed each year. SG contributions are also generally tax deductible in the year they are made, up to certain limits (more information is available at www.ato.gov.au.)

SG, contractors and employees
Generally, the ATO considers an employee to be "an individual who receives payment in the form or salary or wages in return for their labour or services". However, a person is also considered to be an employee if they have a contract which requires them to provide labour personally and the labour part of the contract is more than 50% of its value.

Even if the person has quoted an ABN, they may still be considered an employee for SG purposes. It's best to clarify the situation with the ATO before making a decision on SG payments.

There are some types of employees you don't have to pay SG for, including:

Employees paid less than $450 in a calendar month
Employees aged 70 years and over
Employees aged under 18 who work 30 hours or less per week
Non resident employees paid for work done outside of Australia
Resident employees paid by non-resident employers for work done outside Australia
Employees covered by Bilateral Superannuation Agreements
Foreign executives who hold certain visas or entry permits
Employees paid to do work of a domestic or private nature for no more than 30 hours a week
Penalties for not paying SG
Financial penalties (including payment of outstanding contributions) are payable to the ATO if SG amounts are not paid to a complying super fund by the 28th day after the end of the relevant quarter.

According to the ATO, if you have not paid contributions for your employees by the due date (remember that your contributions must reach and be banked by your super fund in order to meet the deadline), you will need to lodge a SG statement with the ATO and pay the SG charge.

If you have not paid SG contributions for your employees for some time, you will need to contact the ATO to rectify the situation. Your super fund may accept late contributions, but this does not remove the obligations to pay contributions and penalties to the ATO.

Where to get more information

Visit the ATO web site at www.ato.gov.au/super and look in the Businesses section.
Call the ATO Superannuation Infoline on 13 10 20
Write to Superannuation Business Line, Australian Taxation Office, PO Box 277, WTC Victoria, 8005
Obtain a copy of a fact sheet from A Fax from Tax on 13 28 60

Choice of fund reminder

Choice of fund legislation took effect on 1 July 2005. Employers had until 29 July 2005 to give existing employees who were eligible to choose their own fund a standard choice form (available from www.ato.gov.au/super or www.hesta.com.au), naming your chosen default fund for employees who do not make a choice. Eligible new employees from 1 July 2005 should be given a standard choice form within 28 days of commencing employment, unless they advise you in writing of their choice of fund within that time. You must also give out a standard choice form within 28 days of an employee requesting one in writing (unless your have provided the employee with a form within the previous 12 months).

For information on whether choice applies in your workplace, visit:

HESTA is the national industry fund for health and community services, with $7.4 billion in assets, 500,000 members and 30,000 employers. The Fund has a Platinum Rating from SuperRatings and a AAA Selecting Super Quality Rating.

This information has been supplied by HESTA Super Fund (H.E.S.T. Australia Limited ACN 006 818 695 AFSL No 235249 RSE No L0000109) and is of a general nature. It is not a substitute for professional advice and does not take into account your objectives, financial situation or specific needs so you should look at your own financial position and requirements before making a decision. You may wish to consult an adviser when doing this.

Research warns women about the risks of the latest fad in superannuation

A NEW research report warns many women may be exposed to significant financial risk if they move their superannuation into self managed funds run by family members.

The report, conducted by Australian Research Group for the industry superannuation fund HESTA, examines the implications for women of opting for self managed super funds following the introduction of super choice on 1 July 2005.

Based on interviews with 19 academics, financial counsellors, family law experts, financial professionals, consumer advocates and women's groups, the report warns women who lack detailed financial knowledge are more likely to leave investment decisions to male family members and may be pressured into joining family super funds.

Negative impacts for women who lose control of the fund could range from low retirement income caused by poor investment, through to potential deliberate misuse of funds by the partner on divorce or separation. The risks were seen to be greatest for women on low to middle incomes, if they had limited financial knowledge.

HESTA CEO Anne-Marie Corboy was concerned more people would consider self managed super funds post-choice, without really understanding the risks.

"Self managed super funds are not inherently bad but people need a lot of money, skill and time to run them effectively," Ms Corboy said.

"Women thinking about putting their retirement investment into a self managed super scheme with a family member need to ask whether they are really handing over the reins of their investments.

"If women are not prepared to be active participants in investment decision-making and keep track of investments, or obtain sound professional advice, they are leaving themselves very vulnerable in these self managed schemes."

While the interviewees represented a cross-section of views, many highlighted potential power imbalances where the male partner, for cultural or other reasons, may have the controlling say over financial affairs despite the couple being joint signatories.

Interviewees highlighted a range of risks for women considering self managed super funds including:

concern that some women wanted a self managed super fund because it was "the latest accessory… the new black", even though it might not suit their financial circumstances
47% tax penalties on non-compliant funds, regardless of whether the woman was actively involved in the management of the fund
poor returns on badly managed funds
deliberate misuse of the self-managed fund to benefit one partner on divorce or separation
assets that are hard to track in the event of a separation, making it impossible to seek a share of these unknown assets
partners having ready access to cash in term deposits that may be more readily siphoned off in an adversarial break-up.

According to the Australian Tax Office 2,500 new self managed superannuation funds are being registered each month, with self managed super funds now held by 560,000 people and representing 20 per cent of all superannuation money invested. Approximately 65% of these funds are set up in two names.

"These figures suggest a high proportion of self managed super funds are for couples. HESTA believes everyone needs to be responsible for their own super and this remains true even if in a self managed super fund with your partner," Ms Corboy said.

"Life circumstances can change through divorce, separation or the death of a partner and if women have limited knowledge and control of their investments they may be risking their financial security.

HESTA has more than 500,000 members across the health and community services sector. Approximately 85% of members are women.

For further information or a copy of the research report "The Risks For Women of Self Managed Super Funds" call: Michelle Edmunds 0413 120 342, (03) 9654 4799

Funded Business Succession AgreementsCan you afford not to have one?
By Stephen Atkinson

Stephen Atkinson T/as Atkinson & Associates, Authorised Representative and Insurance Broker Representative of Apogee Financial Planning Limited. Ph: 03 9841 7755

In this article we will examine business succession agreements and explain the potentially dire consequences if the owner's of a dental practice do not have one. In our dealings with dental practitioners, Atkinson and Associates have found this to be an often overlooked part of the business plan and yet it is always vital in the event of anything going wrong.

Establishing a "Will" for Your Business

Funded Business Succession Agreements are used between partners in a practice to formalise the process to be followed in the event of a partner leaving a business either voluntarily, or through illness or death. Often they are called Buy/Sell agreements.

A Buy/Sell agreement can ensure the simple and efficient transfer of a person's share in a business to the remaining owner(s) on the occurrence of certain events.

By using this strategy, you can maintain control over your business if one of your business partners unexpectedly dies or is permanently disabled. If this happens, the following issues will be relevant:

· How is the interest of the outgoing owner to be dealt with?
· Will the dependants of a deceased owner become the surviving owner's new business partners, or will the surviving owner(s) need to negotiate to buy them out?
· Where will the money come from to fund a buy-out?

When this occurs, the expectations and intentions of the surviving owner(s) may be quite different from those of the outgoing owner (or the incoming spouse or beneficiary as new party owner). For example, the surviving owner(s) might want to buy out the interest of the outgoing owner/spouse. However, the outgoing owner (or that person's representatives):

· may not want to sell; or
· may want to sell, but to someone other than the surviving owner(s) (they may even sell their interest in the business to a competitor!); or
· may want to sell, but at a price the surviving owner(s) do not consider reasonable.

All of these scenarios can put extra pressure on a business. To assist in protecting business owners from these threats, a Buy/Sell agreement should be considered. It makes good business sense to plan ahead.

How Does the Strategy Work?

A Buy/Sell agreement defines the process for the orderly transfer of ownership of the business to the surviving owner(s), should one of several trigger events, such as death or serious disability, occur. If such an event was to occur, the remaining owner(s) would need to raise sufficient capital to buy the departing owner's share of the business.

There are a number of ways that business owners may generate the funds to purchase a deceased or disabled business owner's share of the business, however, life insurance is generally recognised as the most cost-effective solution. Other funding methods, such as borrowing, may not be readily available - lending institutions may not be willing to extend credit to a business immediately after the death or disability of a business owner.

A properly funded Buy/Sell agreement can be thought of as estate planning for your business - think of the Buy/Sell agreement as a 'Business Will' and the insurance proceeds as the assets of the Will.

The Benefits

· A funded Buy/Sell agreement can provide immediate funds to enable the purchase of the deceased's share of the business.
· Provides a guaranteed market for the business interest at an agreed price, protecting the value of your share of the business.
· Provides peace of mind for the continuing partners/owners/shareholders.
· Can pacify creditors and stabilise the business.
· Can reduce the chance of disputes between continuing business owners and a deceased owner's estate.

Case Study

Alex and Bill are 50/50 owners in a medium-sized dental practice. The business has been very successful but is thrown into turmoil when Bill suddenly dies.

Without a Buy/Sell Agreement

Alex and Bill had never thought about what they would want to happen to their business in such an event. On Bill's death, he left his share of the business to his wife, Lynn, through his Will.

Lynn was not interested in helping to run the business (and didn't have the foggiest idea about dentistry!), but Alex didn't have any money to buy out her share of the business. Alex found many financial institutions were reluctant to lend him the money to fund the buy-out.

Even though Lynn cannot (and does not want to) help in running the business, she is still entitled to the same management and financial rights and share of profits as Bill. Alex is trapped in the situation where he cannot afford to buy Lynn out, but he is doing 100% of the work yet only receiving 50% of the profits.

Take a moment to think about how would you feel if this happened to you in your practice? What if down the track Lynn passed away leaving Alex in partnership with Bill and Lynn's children? Would the business survive and, if so, who would Alex end up in partnership with? What are the potential implications for you?

With a Funded Buy/Sell Agreement

Alex and Bill had the foresight to enter into a Buy/Sell agreement, funded by insurance. Alex and Bill ensured the value of their insurance was equal to their share of the business (and increased their insurance to also account for anticipated taxes such as capital gains tax). The solicitor advising on the agreement (see Tips and Traps) suggested that each business partner own the insurance policy on their own life.

On Bill's death, the insurance money is paid to Alex. Backed by the Buy/Sell agreement, Alex can use that money to buy out Bill's share of the business from Bill's estate.

Alex can gain full control of the business and Lynn (as sole beneficiary of Bill's estate) can realise and receive the full value of Bill's share of the business.

Tips and Traps

· Take the time to calculate the value of your business and contingency plans if something should happen to one of your business partners.
· As the Buy/Sell agreement is the document which affects your legal rights, it should always be prepared by a solicitor (preferably one that specialises in this area).
· There are a number of different ways to structure the ownership of the insurance policies used to fund a Buy/Sell agreement. As each ownership method will have differing legal, tax and stamp duty issues, the ownership should also be recommended by the advising solicitor after having regard to your personal and business situation.
· It is prudent to make sure all family members are aware of the arrangements made.
· Ensure your insurance cover is updated in line with the (increasing) value of your business. Failing to do this may lead to a funding shortfall. You should consider insurance policies which allow you to increase your level of insurance cover in the future, without medical evidence, when the value of your business increases.

CGT and the Transfer of Assets as a Consequence of the Agreement

For most funded succession agreements, there will be no CGT payable on the proceeds on the insurance policies, but there will be CGT payable on the transfer of equity to the remaining proprietors in the business as a consequence of the insurance funded agreement taking effect.

Specific advice should be obtained at the time.

ATO Attitude to Funded Succession Agreements

Once insurance or other funding has been secured and a valuation method has been put in place, the funded business succession agreement can then be prepared.

The ATO's attitude towards contingent and contingent option agreements appears to have become more favourable in recent years, following the abolition of indexation of capital gains and the preparation and circulation of a discussion paper in 2000.

The ATO has also published views on agreements that are contingent on extreme occurrences such as death. For example, in ID 2002/765, the ATO confirmed that an insured funded business succession arrangement, contingent on the death or serious disability of a principal of the business, does not trigger CGT Event A1 unless and until the death or serious disability occurs.

Types of Funded Succession Agreements

There are 2 main types of funded succession agreements used, ie. mandatory, but contingent, and contingent option.

1. Mandatory, but Contingent - the transfer of business equity is mandatory, but contingent upon a "condition precedent" event, ie. a death or defined health crisis. The transfer is automatically triggered should the funded event occur.

2. Contingent Option - both have the continuing and exiting principals and their associated proprietors have the power to exercise options to transfer equity in the business should defined events occur.

Parties must remember to exercise the option under the agreement. This is generally only a problem if the insurance is cross-owned between business principals, which is increasingly rare due to the bankruptcy, and policy assignment problems.

Once a decision on a buy or sell agreement is made and the amount of cover determined, our process at Atkinson and Associates for choosing the appropriate cover is to use Proplanner software. This gives a near complete overview in terms of pricing and quality (terms conditions) of the insurance market. By way of example:

Client Details:
· Occupation: Dentist
· Sex: Male
· Age: 40
· Smoking Status: Non-Smoker
· Amount of Cover: $1mil Life and Total & Permanent Disablement

Company Score Monthly Premium
Asteron 100/100 $103.44
Aviva 100/100 $106.60
ING 100/100 $105.69
Zurich 100/100 $111.08
AXA/ACL 97/100 $104.16
Suncorp 90/100 $143.16
Tower 90/100 $134.30
CommInsure 87/100 $114.80

Buy/sell agreements can be complex and time consuming and must be undertaken with competent Legal and Financial Advise. As a rule of thumb, if you consider this area a difficult area to manage and discuss with partners, consider how difficult it will be to discuss with a permanently disabled partner, or worse, a former partner's beneficiaries. If you are not completely comfortable that you are covered for all possible scenarios we strongly encourage you to seek professional advice. We have full articles available on request, and would welcome your call on 03 9841 7755 to discuss the above matter.

Sources/Acknowledgements:
· Moores Legal - Box Hill
· DBA Butler - South Melbourne
· Apogee Financial Planning - North Sydney
· Proplanner Software

Information provided in this article is of a general nature and does not take into account the individuals circumstances, needs, specific financial situation, objectives or tolerance to risk. You should therefore consider your own requirements and position prior to making any decision. Therefore no responsibilities are taken for any of the information provided, people who act on this information do so at their own risk. Before acquiring a financial product a person should obtain a Product disclosure statement and consider its contents.

Stephen Atkinson T/as Atkinson & Associates, Authorised Representative and Insurance Broker Representative of Apogee Financial Planning Limited. Ph: 03 9841 7755

Apogee Financial Planning Limited ABN 28 056 426 932 is an Australian Financial Services Licensee and has its registered office at 105-153 Miller Street, North Sydney NSW 2-6-. A member of the National group of companies.