scary statistics

Discussion in 'Money Management & Banking' started by Nigel Ward, 6th Jul, 2006.

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  1. seaview

    seaview Well-Known Member

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    Hi Nigel,
    I thought someone might pick up that pre-tax statement but 'twas too late to take it back. Yes, I meant to say he is paying himself first, and because of gearing is using money which he would otherwise have had to pay in tax.

    I think the RAAF actually may salary sacrifice somehow (my hubby is in RAAF but not here right now to ask) but I really am not sure.

    Defence Credit Union is very good with interest rates (often 1% below other lenders). But even if one had to pay 9% as long as one had income to service the debt, plus the ability to manage the margin loan, LVR etc, then the strategy is still viable.

    Several funds as stated have been growing at 20-50% over the past year: as mentioned LPTs (Australian Unity Property Securities - growth units, Deutsche RREEF Global Property, Colliers Global Property, Macquarie and CFS small company funds, and with more volatility: geared shares (CFS/ Perpetual) and china/asia funds (Macquarie Premium China, Fidelity China, Challenger China). I did qualify that statement by saying one could not expect this to continue indefinitely. Though I tend to think that with research, one should generally be able to find something with high growth to balance out a more conservative portfolio.

    Of course any comments made here are not intended to be financial advice and folk need to do otheir own due diligence.
     
  2. k23man

    k23man New Member

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    I'm not sure this would be as lucrative as you are suggesting. Lets say he gets a personal loan of $5K @ 12% and a margin loan of $10K @ 8.5%.

    Interest/year = $1450
    This is tax deductable so the net cost comes down to $1015

    Assuming a rate of return at 14% per year. Long term I would think this is pretty realistic.

    Gain on investment = $2100
    Tax @ 30% = $630
    Interest = 1015
    Net gain on investment = $455 in the first year.

    So after borrowing $15000, your nephew would have achieved a return of $455, which is equivalent to about 3%......not even keeping pace with inflation. Then there is exposure to risk to consider. A few bad years of negative returns or even returns of 4 or 5% would see your nephew going backwards and having to contribute to the portfolio out of his wages, to meet the interest payments and any margin calls.

    I'm no whiz at this sort of thing, never having taken out a loan for investment myself, but does anyone else agree that this idea might not be as lucrative as it would seem?
     
  3. Bantam Roosta

    Bantam Roosta Well-Known Member

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    The point is that $455 has been made with no money down. You have used $0 of your own money and made $455. That's a return of infinite. The problem is that if your investments don't perform like they are supposed to you will have to come up with the cash, which for larger investments could potentially pose a problem.

    BR
     
  4. Bob__

    Bob__ Well-Known Member

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    The RAAF and all Defence employees (in uniform and civilians) can salary sacrifice via Smart Salary not into their superannuation funds MSBS/DFRDB (for uniform members) or PSS/CSS/PSAA (for civilian members) but into an external fund (ie AGEST)....

    Bob
     
  5. jaypee

    jaypee Member

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    From seaview's post.
    I think margin loan interest was capitalized.
    So only the Personal loan interest is payable - 12% on 5k = 600
    Tax deductable goes down to: 420

    Gain 2100.
    No tax as it isn't distributed, just capital gain
    2100 - 420 = 1680 (with no money down)

    I think that is pretty good, but of course you cant guarante >20% returns.
    And you need to take into account fees and so on.
     
  6. Simon Hampel

    Simon Hampel Founder Staff Member

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    You still pay tax on a distribution - even if you have it automatically reinvested.
     
  7. jaypee

    jaypee Member

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    I thought from sea view's example it was just capital gain. If there was, i though it would be minimal - thus there isn't much tax (well until units are sold - then capital gains tax comes into it).

    OR did I just misunderstand everything?
     
  8. Simon Hampel

    Simon Hampel Founder Staff Member

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    Almost every fund will have some form of distribution - but for some types of funds, most of the distribution may well be realised capital gains that are passed on to the unitholders (possibly with discounts). But yes, if there really was no distribution, there would be no immediate tax payable.

    I don't know of any funds that don't distribute - given the legal requirements of unit trusts, I would think you would need to have some other form of investment structure (or perhaps some hybrid structure), if you intended to have all income reinvested for growth and not distributed.
     
  9. jaypee

    jaypee Member

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    ahhh!! :)

    Thanks for clearing it up for me.

    I'm a newbie at this (as you can tell)..
     
  10. seaview

    seaview Well-Known Member

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    There are quite a few funds which have very low distributions eg. Perpetuals Geared Share Fund, Fidelity China, (lots of others but I cannot recall them now). I think such funds cater for those of us who do not want to realise our gain, (and pay horrid tax), but would rather leverage the growth by using a margin loan to buy more investments. (It is just like neg.gearing an IP really.)

    But the bit I like best is the amazing compounding effect. If you manage to get 30% growth a year, and leave some of it there to offset margin loan interest, you can still margin up the extra 10-20% to buy more funds. If you do this while funds are growing at 30,40,50% there is phenominal compounding happening, especially if you do it every quarter. Yes, of course super high growth will not go on forever (as the current correction displays), but with research hopefully one could find something that is growing fairly quickly in most markets.

    This strategy is fairly aggressive and is probably best used in the initial stage of building an asset base, and only when you have an income source to act as a buffer. It is interesting that Peter Spann says the first thing he does for new investors is to set them up with growth assets... Because your future wealth really depends on your asset base: the more you can acquire, the faster you can leverage it and grow it, especially if what you acquire is growing quickly.

    In the case of our nephew, he will have income from his salary to cover downturns in the market, and once his asset base becomes established, we would suggest he moderate his risk by diversifying more. He can also leverage a deposit for an IP with a cash advance secured against the growth in his funds, and all without having to pay much tax, because of low distributions, plus all the deductions for the interest (including the capitalized interest).

    His credit union loan would be way below 12%, probably nearer 9-10%.

    Anyway, this strategy is not everyones cup of tea. I just mentioned it as a possible way to jump start an investment portfolio. A lot of growth could be missed out on while waiting for savings to accumulate. Not that it is not worth saving - that is a very admirable way to build assets too. This way is just faster.

    A hybrid of both options is to utilize a margin loan savings plan where you contribute say $125 a week and the margin lender matches that amount so you get to buy $1k worth of growth funds each month, which also has a great compounding effect.

    Cheers
    Seaview
     
  11. AsxBroker

    AsxBroker Well-Known Member

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    TtR

    Hi Giddo,

    If you really want to pay 0% tax on income and 0% on growth when you or your wife reach age 55 and start a TtR (also called TRAPs or TRIS).

    If you do this right you'll pay zip in tax and also move up to $1.2m into a tax free environment (WOW $1.2m in a tax free environment!)

    If you want more information message me.

    Cheers,

    Dan

    PS The above statement is not an inducement to buy or invest in any investments. Naturally, speak to your financial adviser or accountant before you make an investment decision.


     
  12. bundy1964

    bundy1964 Well-Known Member

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    For me a retail experiance gets me semi-offline for a while which stops me from becoming a full VR person, any desperate need to check forums/indexes and ASX top 50 can be done via Blackberry :eek:

    I guess I fail at money-saving ideas.......
     
  13. Nigel Ward

    Nigel Ward Well-Known Member

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    Yes

    I said "say you pay $100k tax"... In your example substitute $40k and adjust as required.

    Cheers
    N
     
  14. Glebe

    Glebe Well-Known Member

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    Hi ASX Broker,

    What are these? Any links? What do they stand for? Google isn't helping me... Cheers.
     
  15. Nigel Ward

    Nigel Ward Well-Known Member

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    TtR = Transition to Retirement

    TRIS = " " Income Stream

    TRAP = " " Allocated Pension

    ...I assume ;)
     
  16. AsxBroker

    AsxBroker Well-Known Member

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    Hi Glebe,

    Check out the Transition to retirement website to find out more.

    Ttr = Transition to Retirement
    TtRAP = Transition to Retirement Allocated Pension
    TRIS = Transition to Retirement Income Stream

    Cheers,

    Dan

    This is not investment advice and only factual government information available in the public domain.
     
  17. Glebe

    Glebe Well-Known Member

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    Thanks guys, some research for me for tomorrow..
     
  18. quoll

    quoll Member

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    No don't do that.

    You need the conversation, you need to get out and talk to people, the local video store is a great place.

    You get to meet the locals, most of our customers that come in during the day are unemployed or on a pension of some kind. A few are shift workers, but the stay and chat are getting their daily dose of human interaction. We provide a very valuable service to the community.

    Oh if you didn't pick up we own a video store.

    cheers
    quoll
     
  19. johnnyb

    johnnyb Well-Known Member

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    I also use an online video service (webflicks). I'm interested in what you see as the long term viability of the local video store. I think the real crunch will come when our broadband services are faster and cheaper so the majority of the population will be able to download movies rather than get them in the mail.

    John.
     
  20. TechMan

    TechMan Well-Known Member

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    There is actually an article in this weeks BRW that talks about video ezy stores. Apparently they are still experiencing double digit growth in revenues, and were looking at buying blockbuster. They mentioned that they were expanding their revenue base by selling video games and soon music as well to compliment existing sales of dvds.