one good share

About 10 minutes before I started to write this blog I looked up an update on the number of shares that I monitor regularly and it reminded me about a client that I advised to invest in one of the shares on the list because at the time he had some spare cash. The date was 20.06.11 (13 months ago) when this particular share was valued at $49.52 and his $260,000 at the time would have purchased him 5,250 shares.

Yesterday’s share price was $55.90, which would have made his investment valued at $293,475 a growth of $33,475 and this does not take into account the fact that the client along the 13 months would have picked up couple of dividends valued approx. $18,000. The overall result would have been 19.8%.

What an excellent result that would have been for him. But of course like most people investing $260,000 in the sharemarket is not an easy decision and I can understand why he would be reluctant because the sharemarket can be a cruel friend.

What is interesting to me about case me is that I can use it as a learning tool for future to educate clients to understand and follow some simple rules of investing:

1. Investing is not a SECRET. It is a by-product of knowledge and experience.

2. Buy low and sell high.

3. Don’t get caught up with people telling you the good result stories. This is why people get “sucked in” with investments because they follow good news. Just imagine if this story is told by a work mate in the lunch room. I have no doubt someone listening to it would simply find out which share and buy into it, without thinking.

4. Investors need to be patient with investments. There is no such thing as quick money.

If you have specific tax and/or investment questions, feel free to contact me.

rich taxpayers

Every “tax time” brings the same old questions and arguments about how much tax we all pay and how the tax system favours the “rich” who should be made to pay more – because the perception is “the rich people don’t pay as much tax”. This brings me to my favourite story that may explain why the rich or richer taxpayers should be left alone:

“Once a month 10 men go out to dinner together and the bill for all 10 comes to $300.00. If they paid the bill the way we pay our taxes - it would be paid as follows:

• the first 4 men (the poorest) would pay nothing
• the 5^th would pay $3 
• the 6^th would pay $9
• the 7^th would pay $21
• the 8^th would pay $36 
• the 9^th would pay $54 and
• the 10^th (being the richest) would pay $177

The 10 men ate dinner in the restaurant every month and seemed quite happy with the payment arrangement until one day the restaurant owner gave them an unexpected benefit. He said to them "Since you are all such good customers I am going to reduce the combined cost of your meal by $60.

So now the dinner for the 10 men only cost $240.00 and the group still wanted to pay the bill the way we pay our taxes. So the first 4 men continued to eat free - but what about the other six?

The six remaining men realised that the $60.00 discount divided by six was $10 but if they subtracted that from everyone's share then the 5^th and 6^th men would end up being paid to eat their meal.  The restaurant owner suggested that it would be fair to reduce each man's bill by roughly the same amount and the result was:

• the 5^th man now paid nothing
• the 6^th man now paid $6
• the 7^th man now paid $15
• the 8^th man now paid $27
• the 9^th man now paid $36 and
• the 10^th man now pays $156 instead of $177.

Each of the six men that contributed to the bill were better off BUT once outside the restaurant however they began to compare the savings:

 "I only got $3 out of the $60" declared the 6^th man pointing to the 10^th man who he got $21.”

“That's right," said the 5^th man” I only got $3 too. It’s unfair that he got seven times more than us."

“That's true said the 7^th man "Why should he get back $21 when I only got back $6?" The wealthy get all the benefits" - he declared.

"Wait a minute," yelled the first four men "we didn't get anything at all. The system exploits the poor".

So the nine men surrounded the 10^th man and beat him up. 

No surprise to find that he did show up at the next month's dinner. So the nine men sat down for dinner and ate without him. When it came time to pay the bill, they discovered too late what was very important - they were $156 short of paying the bill.

So here is the moral of the story: We all hate those rich people BUT the fact is they do contribute the most to the Tax System. And this is what worries me about the new “carbon tax” – it is designed to make the richer pay more but the end result will be higher prices leaving the poorer to pay more. Funny how the tax system works, eh!!!

If you have specific tax questions, feel free to contact me.

tax - july 12

This is it – TAX TIME…. Have you started thinking about getting all your things ready for the tax return? The chances are you are not - because from experience not too many people are that well organized. My advice is – if you are expecting a tax refund then I suggest you get your tax return done as soon as possible – money in your bank account is better than sitting with the tax office.

 Due dates for tax returns:

If you are lodging your own tax return direct with the tax office – you have until 31^st August. If you are using a tax agent to lodge it on your behalf then we (tax agents) have an automatic extension until end of October and possibly even longer, depending what our own lodgement programs is. But you must be added on the tax agents’ client data base.

Personally, I believe that all individual tax returns should be done as soon as possible. There is no need to delay the inevitable. Once you have done it – you will know it’s done and over for the next 12 months. Some people think of the tax return like going to a dental appointment – not true – the dentist charges more.

What information do you need:

The most important item is the income for the year. This includes all group certificates (including Centrelink payments), bank interest, dividends, rental income etc. The tax office now has the ability to track down most of the incomes earned by taxpayers such as bank interest, dividends, sale of property etc so make sure you include it. If you don’t; then you may be charged with both hefty penalties and interest charges.

What do you need to know about deductions:

When it comes to claiming expenses then there are three things you need to be aware before it can be allowed as a deduction:

1. actually incurred – unless you have spent the money then you can not claim a tax deduction. So you can not ask your tax agent “what can I claim?” You need to ask “which one of these items that I have spent can I claim?”

2. meets the deductibility test – you must be able to show that the expense was incurred in the course of gaining or producing assessable income.

3. satisfies the substantiation rules – you must have a written evidence to prove their deduction.

The three most commonly misunderstood expenses by clients are: motor vehicle, mobile telephone and home office.

Final note: this year new and lower tax rates will apply.

If you have specific tax questions, feel free to contact me.

happy new (financial)year

Happy New (financial) Year to you all.

Unless you work on Saturdays, today is the last working day for financial year 2011 – 2012. I don’t know about you but for some reason I seem to have only two dates in my calendar: Tax Time and Christmas – what happens between these two date is a blur to me. Have you heard the old saying “as you get older, the years go faster”. Boy, do I get it now!

So what have we learnt in the last 12 months? – I am thinking: PROBABLY NOTHING. We still don’t understand:

-          why the Greeks and the Spaniards can cause so much havoc to the world economies

-          why our super funds have not done as well

-          why our property values have gone down

-           why we have more wrinkles on our faces

I could go on for ever but I am sure you don’t have the time because you probably have already received 10 more emails or updates while reading my blog and you haven’t even got to the end.

My advice is to forget about the last 12 months and start planning for the next 12 months. You can not change the past but may be you can make changes that will make it easier for you in the future by not making the same mistakes. Let’s see if I can help you with some basic “common sense” advice.

1. We live in volatile and unpredictable times - so go with the flow. Don’t react to the markets, whether it’s shares, superannuation or property. The markets will always sort out over the longer period of time.
2. Most common mistakes? It’s the old “fear and greed”. The “greedy” simply invest for the wrong reason – either tax or quick returns. When the markets are going up they jump in because they don’t want to miss out even if they can’ afford it and when the markets are down and they read that the world will collapse, they quickly get out and lose…..
3. If you are going to invest – only invest within your own capabilities and cash flow and always invest for the longer term. DON’T OVER COMMIT.
4. Shares or Property? Best advice is learn what their advantages and disadvantages are before you decide – don’t just take advice form the real estate agent or the stockbroker.
5. Buying property in US? Are you crazy??
6. Rent or Buy? Given what the property prices are, for young people most of the time it is better to rent and save the difference. Only when you have saved a deposit of at least 20% will buying start to make sense.
7. Should you be cashed up? Yes, always have funds in a bank account for “rainy days”.
8. Should repaying the mortgage be a priority? Absolutely.
9. Learn to BUDGET
10. Learn to SAVE regularly

Feel free to ask for advice - my business is giving “financial advice”.

negative gearing

Whenever I discuss with friends or clients about "negative gearing" a rental property I am reminded how little people understand the term "negative gearing". So I've decided to re-visit it and give you an explanation of exactly what it is and how it works.

 "Negative gearing" is the technical term for "losing money".   If this surprises you then you better read on. To "negative gear" an investment means that the expenses are greater then the income which means there is a loss.

The best way to explain "negative gearing" is to use the following profit and loss statement with an assumption that the taxpayer is in the 30% tax bracket, as most Australians currently fall into:

Rental Income	$20,000
Less Deductions
Running expenses	-$5,000
Bank interest	-$25,000
Net Loss	-$5,000

So the first step in understanding the “negative gearing” strategy is the rental property must lose money – and in this example it has lost $5,000. At the end of the year this loss is included or claimed in the tax return and this is where most people get it wrong believing that they will get the full $5,000 refunded by the tax man. Not true!

The amount of the tax benefit a person will get depends on what tax bracket they are in. So if we assume that the tax bracket is 30% then the tax refund applicable to that loss will be $1,500 (i.e. 30% of $5,000). And as you can see this leaves the investor with a net loss of $3,500.

So basically, what has happened is that the investor has lost $5,000 to gain a tax refund of $1,500. At this point you may ask: so why do people get into “negative gearing”? There are tow reasons for this:

The first one, I believe, is most people just don’t understand it and they do it because they heard it from their friends and/or relatives.

The second reason why people get into “negative gearing” strategy is they are hoping that over period of time the value of the property will go up and once they sell it they will make their profit. That's in theory - however, what happens in the real world is another thing. And when you take into account the Capital Gains Tax that will apply when you sell the property - you can only question how good an investment a "negative gearing" is.

And the moral of the story?  DON'T get involved with “negative gearing” because you think or someone told you that "negative gearing" is a good tax deduction. Make sure you understand what it means......

If you have questions specific to your situation, feel free to call me or email me.

tax questions

Every year I get asked many “what can I claim” tax questions by clients but for some reason they are all the same questions every year. Here are my explanations for the top 5 most commonly asked questions:

1. UNIFORM AND LAUNDRY expenses - for a person to be able to claim uniforms it must be a UNIFORM - a uniform is a specific occupation uniform such as a nurse or bank office where the there may be a "logo" and it is a specific colour or shape. Wearing a suit is NOT a uniform. Wearing a nice white shirt or dress at work because the boss asked you to wear is NOT a uniform.  

 2. TRAVEL TO AND FROM WORK - the tax man is very clear that "travelling between home and work is NOT allowed". If you are required to use your own car to go to, say, the bank to do the banking or visit other sites YES you can claim that but you must keep a logbook or make a reasonable calculation of how many kms you have travelled.

 3. TRAVEL OR MEAL ALLOWANCES - if your employer pays you travel allowance then keep records of what kms you did to earn that allowance. Remember! most allowances are paid to you tax-free but come end of the year they need to be included in your taxable income so unless you have deductions to offset them you will pay extra tax.  Same applies to meal allowances.  

4. MOBILE PHONES - how much you can claim depends very much on how much YOU think you use it for work. There is no formula set by the tax man it is up to you to calculate it. I hate having to advise on this because there is no specific answer and my gut feeling is NONE of it is really a business claim. Mobile phone expenses need to be apportioned with regards to itemised account, detailing work and non-work related calls against total costs (even if the fees are capped). My personal test is this – if work requires you to use your mobile phone business then ask the employer to pay for it – end of subject.

 5. HOME COMPUTER – this is also an interesting one and not an easy one to explain when you consider that almost all of us have a computer in our homes. The tax requirement is that YOU must justify the business use of a computer. My gut feeling is that not many people can justify the use of their home computers for business. Same as the mobile phone – if work requires you to use a computer at home then simply ask the employer to provide you with a company computer.

If you have questions specific to your situation, feel free to call me or email me.

greek economy

The troubles with the Greek economy continues to plague the world markets, even as late as this week there was more concerns about the Greeks and the effect it has on the share market, which in turn affects yours and mine superannuation.

Have you stopped to ask why the Greeks are in such difficult times? Has anyone tried to explain to you how could this happened? Last November I gave an explanation so it may be worth that I re-publish it and let’s see if it will help you understand it in “layman” terms:

It is a slow day in a little Greek Village. The rain is beating down and the streets are deserted. Times are tough, everybody is in debt and everybody lives on credit.

On this particular day a rich tourist is driving through the village, stops at the local hotel and lays a $100 note on the desk, telling the hotel owner he wants to inspect the rooms upstairs in order to pick one to spend the night.

The owner gives him some keys and, as soon as the visitor has walked upstairs, the hotelier grabs the $100 note and runs next door to pay his debt to the butcher.

The butcher takes the $100 note and runs down the street to repay his debt to the pig farmer. The pig farmer takes the $100 note and heads off to pay his bill at the supplier of feed and fuel.

The guy at the Farmers' Co-op takes the $100 note and runs to pay his drinks bill at the taverna.

The tavern owner slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him "services" on credit.

The hooker then rushes to the hotel and pays off her room bill to the hotel owner with the $100 note.

The hotel proprietor then places the $100 note back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the $100 note, states that the rooms are not satisfactory, pockets the money, and leaves town.

And that, Ladies and Gentlemen, is how the Greeks got themselves in trouble:

No one produces anything.

No one earns anything.

And the whole village thinks they are out of debt…….