Critique Blog

The consumer price index (CPI) rose by 0.4% in the December quarter, down from 0.7% in the previous three months, with headline inflation for the year to December at 2.7%. Underlying inflation was down slightly to 0.4% in the December quarter, from 0.5% in the September quarter.

In a statement on the February interest rate decision, RBA Governor, Glenn Stevens, said that factors such as the high exchange rate, a decline in wages growth and strong competition in key markets had offset large rises in utilities prices, with the RBA expecting inflation over the year ahead to remain consistent with the 2-3% target.

The Australian dollar fell slightly over the course of January, beginning the year at around 101.91 US cents, but settling slightly below parity at 99.72 US cents by the end of the month.

Australian Bureau of Statistics (ABS) figures for December 2010 showed unemployment decreased 0.2% to 5.0%, due to increases in both part-time and full-time employment, with labour force participation now sitting at 65.8%.

The ABS also released the results of its latest survey of Employee Earnings and Hours, May 2010, which showed that one-quarter of all employees earned less than $528 per week, with another quarter earning more than $1304. This survey also showed that 10% of employees now earn $1,856 or more per week or approximately $96,500 p.a.

Manufacturing remained fairly stagnant for the beginning of 2011, with the January Australian Industry Group – PricewaterhouseCoopers Australian Performance of Manufacturing Index remaining relatively unchanged at 46.7 points, up 0.4 points from December. For the fifth consecutive month, this index remained below the 50-point level, indicating a contraction in activity.

Nine of the twelve subsectors expanded during January, with textiles, clothing and footwear, and food and beverages the strongest performers. Sectors such as basic metals, fabricated metals and paper, printing and publishing showed sharp declines owing to soft demand, a strong Australian dollar and increased competition.

House prices were also fairly flat in the December quarter, rising by a seasonally adjusted 0.4%, according to the RP Data-Rismark Hedonic Home Value Index. Values of capital city dwellings only rose 0.2% (seasonally adjusted) during the quarter.

Over 2009/10 financial year, prices were up an average 4.7%, with Melbourne and Sydney the best performers, growing 8.4% and 6.6% respectively, while Perth (-2.3%) and Brisbane (-1%) suffered falls in house prices.

Economic impact of Queensland floods

Federal Treasurer, Wayne Swan, in a speech to the CEO Institute (Queensland) gave Treasury’s preliminary estimates of the economic impact of the Queensland floods.

Swan said the loss in 2010/11 is likely to be around 0.5% of Gross Domestic Product (GDP), with the main negative impact to be concentrated in the March quarter. A large part of this impact, expected to be in the order of several billion dollars, will come from lost coal production and export volumes, due to the damage to mines and supply chains in the Bowen Basin.

Treasury also estimates the losses in agricultural production to be around $1 billion, including loss of fruit and vegetable crops worth around $225 million and cotton crops of around $150 million.

The corresponding increase in food prices as a result of these losses may lead to an increase in Consumer Price Index (CPI) inflation of about 0.25%, on Treasury estimates.

In order to rebuild flood-affected regions, preliminary estimates are that the Federal Government (Government) will need to invest $5.6 billion – most of which will be spent on essential infrastructure. While $3.8 billion of these funds will be delivered through spending cuts, the remaining $1.8 billion will be generated by a progressive levy on taxpayers earning over $50,000 p.a. The levy will only apply in the 2011/12 financial year, and those directly affected by the floods will not have to pay the levy.

The Government has reported that it does expect the rebuilding efforts in Queensland to impact on its ability to meet its promise to return the budget to surplus in 2012/13.

The Government has also moved to establish a Business Taskforce to advise on the immediate recovery effort. Bringing together 10 Australian business leaders from a range of industries, the taskforce will be chaired by the Federal Treasurer, and will focus on leveraging corporate financial donations, helping drive and coordinate in-kind donations, and providing business expertise to help with the recovery and rebuilding efforts in Queensland.

Cyclone Yasi

Mother Nature has continued to wreak havoc, with Cyclone Yasi battering the Queensland coast. While good planning and preparation spared loss of life, the cyclone will have a major impact on the economy due to it wiping out up 80% of Australia’s banana crops and 75% of its sugar cane crops.

Following the floods, Cyclone Yasi’s damage will also limit mining products and have an adverse affect on tourism with revised predictions of 1% to be shaved off the March quarter GDP. Fruit and vegetable prices will contribute to a short-term spike in inflation.

Source: Kaplan Professional

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Affording insurance for the long term

When you take out insurance, there are three ways you can pay your premiums:

• A level premium based on your age when your cover commences. Your premiums will only vary if a change is made to the actual premium rates.

• A stepped premium that increases as you age.

• A decreasing cover where your premium stays the same each year while your benefit varies each year, depending on your age and the  premium rates at the time.

Level premiums, a cost-effective option

While stepped premiums are usually lower in the early years, level premiums can be a more cost-effective option if you continue the insurance over a longer period.

The earlier you commence your cover on level premiums, the cheaper the total cost of premiums over the long term.

The following graph illustrates the differences between the costs of stepped premiums and level premiums in the long term.

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Caps on super top-ups relaxed

• Geoffrey Newman, Wealth editor
• From: The Australian
• March 01, 2011 12:00AM

CANBERRA will relax the annual caps on super contributions by older Australians but yesterday said it would not index the new thresholds for inflation, prompting accusations it was undermining its own policy.

The government announced last year it would maintain higher caps on concessionally taxed personal super contributions for those aged 50 and over with low super balances. The caps were due to halve in July next year from $50,000 to $25,000 a year, the same for those under 50.

Under the plan, which still needs parliamentary approval, those aged 50 and over would be allowed to continue to contribute $50,000 as long as they had less than $500,000 in super.

Assistant Treasurer Bill Shorten said it was expected to benefit about 275,000 people, particularly those who had periods outside the workforce, especially women. “These changes will provide flexibility for those nearing retirement to make additional catch-up contributions at the stage in their lives when they are most able to,” he said.

The move is generally supported by super funds, but has attracted criticism from some financial advisers for its complexity and the decision not to index the $500,000.

Partners Superannuation Services director Martin Murden said by not adjusting the threshold for inflation, Canberra was clawing back the benefits of its own policy as each year passed, since inflation would make people ineligible even though their wealth had not increased. “You are gradually going to whittle down the real value of this measure,” Mr Murden said.

He said for such a complex proposal, it would benefit relatively few people and the government would be better off scrapping the halving of the caps next year. The consultation paper floats two proposals for monitoring a person’s super balance, the first that they self-assess and the second that the records are maintained by the Australia Tax Office.

Mr Murden said the latter suggested the ATO would have to keep tabs on every Australian’s super balance to be effective.

“We are going to introduce a complex system which is going to have little benefit to superannuation,” Mr Murden said.

Thousands of people have been caught out by the caps, which were imposed to prevent the leakage of too much tax revenue to super. Those caught could face losing almost half their excess contributions in penalty tax.

Australian Institute of Superannuation Trustees chief executive Fiona Reynolds said it was not just the wealthy who were restricted by the caps and would benefit from the new measure. She said people on average earnings who received an inheritance or redundancy payment should be allowed to put more of it into super.

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Market Update & Outlook – February 2011

To read the latest market update and outlook (as at the end of February 2011), please click here.

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Market Update & Outlook – November 2010

To read the full report, please click here.

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Asset protection through family trusts

In the past family trusts had been viewed as offering a good degree of asset protection from creditors or other claimants. However, in recenty years a number of courts had in fact elected to ‘look through’ the trusts and ruled in favor of claimants over that of the beneficiaries.

First we take a look at a family trust and how the structure works.

The Trust Structure

A family trust is generally established by a family member for the benefit of other family members. The process beings with the settlor, who provides the intital assets to the trustee to be held in accordance with the terms and conditions of the trust deed. The trust deed is an essential document; a trust generally cannot exist without one. The initial asset that the settlor provides is usually very small; can be as low as $10.00. It is a symbolic figure which is meerly used to bring the trust to life. Beside this, the settlor has no other role to play. They cannot be a beneficiary or trustee.

The trustee must be appointed to their role. This is done by the appointor. The appointor can be a beneficiary. In effect, the appointor has an ongoing relationship with the trust in that they can ‘hire and fire’ the trustee.

The trustee is bound to act for the benefit of the beneficiaries in accordance with the trust deed. The trustee holds legal title to the investments and determines how income should be distributed. The trustee is also responsible for paying tax.

The above is a very brief summary of the workings of a trust structure; in the real world it can be complicated through the use of pty ltd companies as trustees etc, but the above illustrates several important relationships which are discussed further below.

Asset Protection

The idea of asset protection stems from the fact that the assets are held by a trustee on behalf of a group of family members. No specific beneficiary has a claim over any individual asset or specific value of assets. Therefore, in theory, creditors of any single beneficiary cannot have claim over the assets because that beneficiary has no decision making abilities with respect to what should happen with the underlying assets of the trust.

Problems arise however, when a beneficiary acts as the appointor and therefore has the ‘right to hire and fire’ the trustee. It could be seen that the beneficiary can in fact exert influence on the trustee or can in a round-about way determine what should happen with a trusts assets.

The family court had previously decided to ‘look through’ trusts and determined that some or all of a trusts assets can form part of marriage property in the event of a divorce. In other words, holding large amounts of assets through a family trust may not offer any protection in the event of a divorce.

Furthermore, in 2006 a ruling by Justice French of the Federal Court ( “Australian Securities and Investments Commission Inthe Matter of Richstar Enterprises Pty Ltd (ACN 099 071 968) v Carey (No 6) [2006] FCA 814 (29 June 2006)” http://www.austlii.edu.au/au/cases/cth/FCA/2006/814.html)  said that the property of any person can in fact include property held in trust for that person by a third party. This is particularly the case when the person can exercise control over the trust. Let’s consider the relationship between the appointer, the beneficiary and the trustee. The appointor has the right to appoint and terminate the trustee’s services. The beneficiary of the trust receives income in accordance with the trustees decisions and the trust deed. If the appointor and the beneficiary are the same person, the beneficiary can in fact ultimately determine how the trusts assets should be invested and distributed; they are exercising ultimate control.

Going forward

The above ruling puts the asset protection qualities of trusts into some doubt. It could potentially be construed that to maintain these asset protection qualities, the person whose assets are to be protected should not be a trustee, an officeholder (i.e. director) or shareholder of a trustee company or an appointor of the trust. In other words, the person whose assets are to be protected should meerly be a beneficiary with absolutely no exercisable control over the trust.

Setting up a trust in practice

Trusts are very complicated in nature, and the above examples are meant to serve as a warning. If you are considering setting up a trust we strongly recommend against utilising a web-based DIY trust service which simply gives you an off-the-shelf trust without consideration of your particular circumstances. When setting up a trust it is essential that you take time to sit down with a qualified solicitor to determine the best structure and who should play what role in the trust.

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Market Update and Outlook

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Planning on buying that property? Read this first!

Buying an investment property or first home is an enormous undertaking and it is not something you want to get wrong. Begining with searching and finding the perfect property, through to settlement, the process can be quite complicated. The below article comes courtesy of Caputo Lawyers.

Caputo Lawyers is a legal practice in Sydney specialising in providing clients with top-notch advice regarding all aspects of purchasing or leasing a property. As experienced property lawyers, they can handle complex conveyancing matters when they go beyond a conveyancer’s level of expertise. Director Vanessa Caputo has dedicated her legal career to property and has over 14 years of experience in this field. Her clients have included  Jones Lang La Salle, JB HiFi and Bunnings.

……………………..

Are you looking to buy property in NSW?

We have outlined some of the steps involved before you sign that contract

Searching for property

• Research, Research, Research – You should search the internet for properties for sale, recent sale prices and attend some auctions and open homes in your preferred areas. This will give you a better understanding onthe price of different types of properties in these areas. Common websites to visit are www.domain.com.au and www.realestate.com.au.

Type of sales

• Properties may be offered for sale by private treaty, auction or tender.

Finance approval

• If you are serious about purchasing a property then you should contact your mortgage broker or financier (we will now refer to them as the Bank) to find out how much you can afford to spend on a property.

• Many people do not realise the importance of having a pre-approval from their Bank before they search for property.

• It can take a while to get your paperwork in order, fill out the application forms and receive a response from your Bank.

• You may find a property you really want to buy, only to realise that you are not able to get finance for that amount or another buyer may already have their finance arranged and will enter into a contract for that property before you!!!

Deposit

• Normally, a seller will require a deposit which reflects 10% of the purchase price on exchange.

• A seller may accept a 5% deposit, but it will depend on the individual circumstances and the seller has a right not to agree to this.

• A bank guarantee representing a 10% deposit is frequently being used for off the plan purchases where completion may not be for a few years.

• You should consider the deposit,before you start searching for property.

• Sometimes agents refer to a holding deposit. This is not the deposit we are referring to here. The property is still on the market until you formally exchange contracts regardless of whether or not a holding deposit is given to the agent.

I have found a property I am interested in now what?

• Hopefully you have done your research as mentioned in searching for a property, have pre-approval from your Bank and your deposit ready.

• You may now want to make an offer to the seller through the selling real estate agent or the vendor directly if there is no agent. This is the negotiation process between you and the seller.

• If your offer is accepted by the seller, you should contact your solicitor or conveyancer if you haven’t done so already.

• Again the property is still on the market until you exchange contracts.

• In the case of auctions, in some instances the seller will insist on the property going to auction and no formal offers will be accepted. You need to ask the selling real estate agent.

Before you exchange contracts

Before you exchange contracts or before an auction you should have the following:

• Final approval from your Bank. You must speak to your bank and solicitor or conveyancer about this. Final approval is only provided after the bank conducts a valuation of the property you are securing

• Your deposit money available, which is normally 10% of the purchase price unless otherwise agreed by the seller

• Inspection reports you have ordered on the property

• Advice from a solicitor or conveyancer about the purchasing procedure and contract

If you exchange contracts with a cooling off period, then you have a few more days to ensure that the requirements above are met.

Common Reports

The most common reports ordered before an exchange of contracts or before the auction (or during the cooling off period) are:

• Pest report
• Building report
• Strata report
• Survey report
• Building certificate

Your solicitor or conveyancer should advise you on the types of reports available as it will depend on the individual circumstances and the property as to which reports you should be ordering before exchange, before the auction or during your 5 day cooling off period.

Cooling off period

• In New South Wales after an exchange of contracts for residential property, buyers have a 5 business day cooling off period which commences from the date that contracts are exchanged and ends at 5pm on the 5th business day (other than in circumstances where there is NO cooling off period, see below).

• During the cooling off period, a buyer can get out of the contract (rescind). If you haven’t done so already, you must contact your solicitor or conveyancer as soon as you exchange contracts with a 5 day cooling off period.

• Although you have a right to get out of the contract (rescind) during the cooling off period, if you want to do this you need to serve the seller with written notice of the rescission before the cooling off period expires. If you rescind the contract during the cooling off period, the seller is entitled to 0.25% of the purchase price from you.

• Normally a cooling off period is used when you sign a contract with a real estate agent and they exchange the contract.

• Did you know that the seller does not have a right to rescind the contract during the cooling off period.

Circumstances where there is NO cooling off period

There is NO cooling off period in the following circumstances:

• If the buyer provides the seller with a section 66W certificate waiving their cooling off rights. Only a conveyancer, solicitor or barrister can provide you with a section 66W certificate

• If the property is sold by public auction

• If the contract is exchanged on the same date as the property was offered for sale at public auction but passed in

• If the contract is made in consequence of the exercise of an option to purchase the property

If there is no cooling off period then you are bound by the contract from the date contracts are exchanged.

We wish you the best of luck with your property searching.

Disclaimer: When you purchase or sell property in New South Wales you must obtain legal advice from Caputo Lawyers, a solicitor or conveyancer. In no way is the general guidance given by Caputo Lawyers about the purchase or sale process meant to replace legal advice when you actually go to purchase or sell a property in New South Wales. Each purchase and sale is slightly different and the advice given will depend on the individual circumstances.

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Market Update & Outlook

We’re now well and truly into the second half of the year and much to everyone’s relief, financial markets are now showing signs of improvement. One of the main reasons behind these improved conditions is the growing confidence investors have that governments and central banks in Europe will be able to do enough to keep their sovereign debt issues under control.

This renewed confidence has been strengthened by two major boosts: the large € 750 billion bailout package agreed in May and the positive reception to the European banks’ stress tests results, released 23 July.

These ‘stress tests’ involved looking at a range of adverse economic scenarios and assessing how the banks would fare should these scenarios occur.The European Banks were tested in the extreme scenario of a sovereign debt crisis and a double-dip recession in Europe. With only 7 banks out of 91 failing the test, this has gone a long way to improving investor sentiment.

Over in the US, recent economic data has been mixed. While there appears to be some decline in manufacturing, the private sector continued to generate jobs through to the end of July, the housing market seems to be getting close to the bottom and business investment has been rising.

NAB economists aren’t convinced this data means a double-dip recession is on the cards. It does however, point to the potential for slow growth for the US economy.

In China, recent surveys suggest manufacturing is slowing down, which ironically, is actually viewed as a positive. This is because, as you may recall in earlier updates, there was increasing concern China’s economy was at risk of over heating, with unsustainable levels of growth. These latest manufacturing results indicate policy measures adopted to prevent this over heating appear to be doing the job.

On the home front, the Reserve Bank of Australia (RBA) refrained from increasing the cash rate at its early August meeting, keeping it at 4.5%. This decision was based on the following key factors: inflation remains within the RBA’s target range of 2% to 3% and key indicators, especially housing and retailing, suggest the Australian economy is slowing somewhat.

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