The ABC of V,W,U,L - Jamie Nemtsas

The world of finance should be about numbers! However recently letters seem to dominate all the talk in the financial press, media and analysts' views.

Take for instance the debate of the R word versus the D word. Everyone seems to be too scared to say it aloud, especially the D word. That debate seems to be over and the R word has turned into a global Recession, however other letters have joined in on the act.

Our interest has turned to another alphabet soup of: Us, Vs Ws and Ls. Markets have continued to trend up from early March. The S&P/ASX 200 index rose nearly 28%, an astonishing performance between March 6 and June 3 before the recent levelling off.

This has left most of us assuming that the worst is maybe behind us and the recovery is near. However the question that we all have, and probably why the market has paused recently, is in what shape will the recovery be? This is where the Us Vs Ws and Ls come into it.

All of these letters depict a particular shape of a recovery:

• V for a relatively rapid recovery;
• U for a more subdued return to growth;
• W for a false hope before starting the long way forward; and
• L for a prolonged period of stagnation - think something along the lines of Japan's lost decade.

The four cover most of the likely scenarios, however you will hear others: the hockey stick, the inverse square root, lightning bolt, but we will stick to the letters for this article.

The V - Recovery

This is the shape that most investors hope the recovery will look like. A sharp turnaround with the economy repairing itself quickly and bouncing back. There are plenty of reasons to think this might happen.

The quick and easy list is:

1. The level of synchronised stimulation by all the major governments of the world;
2. The dramatic fall in interest rates around the world;
3. The non existence of inflation;
4. The growth of China and India.

Markets are probably starting to price in a V shaped recovery. A rise in equity valuations of nearly 30% over a three month period, highlights that most investors believe the recovery will be something like this.

However, even though Investing Times has its fingers crossed for a V shaped recovery, a V shaped recovery might not be what the doctor ordered over the longer term.

This downturn was created by a financial crisis, credit fuelled consumers, greedy investment banks, and speculators in a market they didn't understand.

A quick recovery will not be beneficial to many people over the longer term as the world needs to deleverage - it needs time to repair itself. We also need to learn from this. A V shaped recovery might not allow any of this to actually happen and set us up for a bigger problem down the track.

The U - Recovery

The case for a U-shaped recovery starts from the proposition that the current recession differs enough from its predecessors. The majority of global post-war recessions have been the result of actions by central banks to tame inflation. The current downturn has its origins in a major financial crisis. In addition, it is a synchronised global downturn.

The combination of these two factors argues both for a deeper recession and a more subdued recovery than the historical average. This seems the most likely outcome and yes, China and India will underpin growth. The US has been working on its problems and will have some success over the next 24 months, however expect less optimism from the individual consumers in the US who had accounted for over 70% of economic growth in the US.

Europe remains a basket case and enormous change is needed within Europe that will take time, and more importantly, a concerted effort. The problem is there is still a vast amount of deleveraging and restructuring that needs to be done and that process could take years to complete.

The US economy has now been in a recession for 17th months - the longest since the Great Depression. We're arguably in the midst of a U-shaped recovery, not unlike the protracted slump from 1970 to 1974. The U shape is a bit more subjective - a judgment call, but it's defined by the time it takes to get growth back on track, and is at this point more indicative of where we stand. Essentially a U shaped recovery means no boom in sight even when the worst is over.

The W - Recovery

The last time we had a W shaped recovery was back in the Great Depression. Back then it took World War II to get the economy back on track after a series of partial recoveries and market plunges of 20% or more throughout the 1930s.

It is possible to get a similar double dip, W-shaped recession with the wings of a tentative recovery of growth in 2010 at the risk of being clipped toward the end of that year or in 2011 by a perfect storm of rising oil prices, rising taxes and rising nominal and real interest rates.

Right now, it is certainly hard to imagine a new round of banking collapses given the current level of government support. It is also difficult to see deflation taking hold when central banks are being so hyperactive. But while all that government support - and liquidity - might be enough to stave off collapse, it does not guarantee that the rebound will prove truly dynamic.

Europe's corporate landscape, for example, is currently littered with heavily-indebted companies in dire need of restructuring, but they are somehow still staggering on because their creditors are unwilling to pull the plug. Ineos, the chemical giant, is just one case in point.

In America, consumers remain laden with debt which they have barely begun to pay down. On both sides of the Atlantic, numerous banks remain neither dead nor fully alive, propped up by government support.

Most pernicious of all, the government bond world is threatening to dampen any cheer. Until now, Western governments have found it relatively easy to sell debt, even as projected issuance has surged. But this week's activity in the treasuries market suggests that investors are getting jittery.

An argument can be built that the economy is looking like the first half of a W, but will then flattening out into a straight-ish, horizontal line and while these predictions may be over-blown, this sense of unease will make it hard to create any aura of financial stability anytime soon.

The L - Recovery

The easiest way to explain an L shaped recovery in one word is 'Japan'.

Japan had been expecting a recovery for 20 years now. An L shaped recovery is really not a recovery at all, it just stays flat. The last time the world really saw something like an L shape was 1945-46, when a post-war economy had trouble spurring increases in productivity, spending and expansion as civilian goods replaced tanks, munitions and warplanes. The chances of an L shaped recovery is minimised by the majority of issues we have highlighted above - essentially a massive global stimulation.

Conclusion

So where does that leave all those "V", "W" "L" or "U" arguments?

If you add the different elements of the picture together, Investing Times' best bet is that the coming months will look like the first half of a "U", meaning that after an initial, small rebound, there is likely to be a long, bumpy period, as the forces for reflation and deflation pull in opposite ways. However the ingredients are there for a sustained recovery however not just yet!

The truth of the matter is that the shape of the recovery is unknown. However we have recently seen how fast fear can spread and optimism is also exponential.

Sharemarkets are likely to have periods of volatility and even further corrections. Capital raisings are the main game at the moment. Further unemployment and even bank losses, plus the ups and downs of commodities will also add to a volatile market in the short term.

Jamie Nemtsas -  Director - Lachlan Partners

Publishers of "Investing Times" newsletter. Visit the Investing Times online - www.investingtimes.com.au 
This article is an extract from the June 2009 issue of Investing Times newsletter.

* Zone 5 is defined as a Zone where the value of the All Ordinaries Index is at least 17.23% below  the long term trend line of the All Ordinaries Index. The value of the All Ords at 19/6/09 was 3894 (Zone 5) – 29.275 below the long term trend line. You can learn more about the Zone system by subscribing to the Investing Times Newsletter. To order a complimentary copy of the newsletter email susan@investingtimes.com.au or phone 1300 131 526.

When buying and selling property, you need to factor in the costs associated with each transaction. Vanessa De Groot

IF YOU'RE planning on buying a property it's easy to just focus on the price of the home when deciding what you can afford. But once you've signed on the dotted line you'll end up out of pocket for more than just the purchase price.

There are extra costs associated with buying a property that you need to budget for.

It's no different from the seller's point of view - you need to make sure you maximise the price you get for your property so you can cover all the costs incurred along the way and still make a profit.

While many of the same major charges apply to property transactions in each state and territory of Australia, the actual cost can vary widely.

It's also important to keep in mind that each state may have its own unique small costs in addition to the major costs.

Before deciding to sell or buy a property, director of Independent Real Estate Consulting (IREC) Rob Williams says it's a good idea to work out what costs will be involved ahead of time.

"Selling and buying a property is one of the biggest financial transactions most people make in their lifetime. It's wise to know exactly what the costings will be before any commitment is made.

"A wise move would be to overestimate all costs and in doing so there will be no nasty shortfalls once all the bills come in."

Williams recounts an instance where a seller failed to factor an important cost - mortgage exit fees - into the equation.

"When settlement was due the financial institution wouldn't allow the transaction to complete until arrangements were made to pay the outstanding amount," he says. "The sale of the property was put in jeopardy."

Similarly, president of the Real Estate Institute of Australia (REIA) David Airey says it's important to be aware of any extra costs that might arise when transacting property.

"It's very important to ask the agent to list all the estimated costs of selling and for the buyer to know what costs will be involved so that they avoid a cash crisis at settlement and have budgeted properly to be able to meet all the expected costs of buying and moving in."

The major cost for the buyer of a residential property will be stamp duty, while the biggest cost for a seller is agent's fees. Stamp duty is a government charge and isn't negotiable, but agents' fees are negotiable in most states and territories.

Airey says there isn't really anyway to minimise the costs associated with buying and selling property, because most are government or regulated charges.

"Selling costs and commission are negotiable but in a tough selling market you need a motivated agent, not a discounted deal," he says.

SHARED COSTS

While there are many costs that are unique to buyers and sellers, there are also some costs they'll have in common. For instance, both will be up for legal costs because they'll need to employ the services of a qualified solicitor to carry out any legal work involved in the transaction, like conveyancing.

Conveyancing is the legal transfer of ownership of a property from one person to another.

While it can be done using a do-it-yourself (DIY) kit for between $70 and $150, it's advisable to use a solicitor or conveyancer to do it for you, which is likely to cost between $600 and $800.

Independent legal advice should be sought before signing a contract to transact property and solicitors can carry out necessary searches, such as title searches verifying ownership of the property and surveys to check the position of the house and its boundaries and whether it has been built in accordance with council requirements.

Solicitors' fees are generally negotiable and will vary, but you can probably count on paying somewhere between $1500 and $5000 all up in legal costs.

While a solicitor can be used in Western Australia, Brian Greig of the Real Estate Institute of Western Australia (REIWA) says a settlement agent is usually employed to play the role of solicitor.

Required as part of the transaction, he says it will generally cost between $600 and $1000 depending on the complexity of the sale.

Another possible cost for both buyers and sellers is a valuation report. While sometimes the seller will obtain one at their own cost to provide to potential buyers, an independent valuation can be valuable to a buyer to determine a property's true worth.

According to WBP Property, a property valuation including a full internal and external inspection is carried out by an Australian Property Institute certified practising valuer.

The cost of a full valuation ranges between $300 and $500 depending on the amount of work involved in compiling the report, which is determined by various factors including location, access, property type and purpose of the valuation. It may cost more for a valuation on a property worth millions of dollars.

Inspections - for instance a pest and building inspection - are also another associated cost that buyers and sellers may potentially incur.

Pest and building inspections are likely to be priced somewhere between $500 and $2000.

Whether GST will need to be paid on the property transaction is also something both parties should take into consideration.

MAJOR COST FOR BUYERS: STAMP DUTY

Stamp duty is a state government tax paid by the buyer and is calculated as a percentage on the purchase price of the property.

The cost of stamp duty on a residential property purchase varies in each state and territory of Australia and according to a BankWest study released at the end of last year, it can add between one and four per cent to the cost of a home.

The main finding of the study was that stamp duty on the typical Australian home has soared 59 per cent over the past five years, almost double the rise in household income over the same period. The research found Queensland had the lowest stamp duty bills for housing in the country with a median stamp duty bill of about $5000. Meanwhile, the Australian Capital Territory was the most expensive for stamp duty, with a median stamp duty bill of $17,888.

In terms of capital cities, as a percentage of household income, median stamp duty was highest in Sydney and Melbourne, at 24 per cent, and lowest in Brisbane, at nine per cent.

The lowest stamp duty burden was found to be in Queensland, Tasmania and the Northern Territory, where there are no local government areas (LGAs) with a median stamp duty bill of more than 20 per cent of household income.

According to Mortgage Choice, because stamp duty is a duty for transferring the title to a property, it will be imposed irrespective of whether the property is financed with a mortgage.

A land titles office won't register a property transfer or mortgage unless it's stamped and the duty paid. Some states charge higher stamp duty for investment properties and there are stamp duty discounts and exemptions for some home buyers.

OTHER BUYING COSTS

In addition to stamp duty, buyers will be up for a range of other costs.

In South Australia, buyers will have to fork out for mortgage stamp duty, calculated on the amount of the mortgage. However, this will no longer be payable after July 1, when stamp duty on mortgages in SA is abolished.

Registration fees charged by government agencies must also be paid by all residential property buyers, the cost of which of course varies in each state and territory.

The two major registration fees are the property transfer fee and the mortgage registration fee, but there may also be others.

The property transfer fee, which is a charge to register the transfer of title of the property from one person to another, might cost between $300 and $500.

A mortgage registration fee will also be charged for registering the lending institution's mortgage on the title record for the property and is likely to cost between $150 and $300.

If buyers are borrowing money from a financial institution to finance a purchase, they'll need to budget for a loan establishment fee, as well as ongoing fees and mortgage repayments during the life of the loan.

The majority of lenders charge a one-off establishment fee on new home loans, which can cost up to $1000 and in most cases will include the cost of the first valuation.

Some lenders will waive the fees to get your business.

On top of the application fee, if you're borrowing more than 80 per cent of the value of the property you're purchasing, you'll most likely have to pay lenders mortgage insurance.

This insurance covers the lender in the instance that a buyer can't make repayments on the mortgage.

It doesn't protect the borrower in any way, for example by covering loan repayments in the case of illness or unemployment.

The fee for mortgage insurance is usually a one-off premium and will vary depending on factors including the deposit amount and the lender but can cost up to $8000. It's calculated on a sliding scale, so the more money you borrow, the higher the mortgage insurance premium payable.

Most lenders will require that buyers take out building insurance on the property they're purchasing, to the full insurable value of the home.

It protects both the borrower and the lender in case the property is damaged by a disaster like a fire. Buyers pay the building insurance premium, the cost of which can vary widely.

Building insurance isn't available for strata-titled properties, but the lender will want to see evidence that the body corporate has a policy for the block.

If you're buying an investment property it's wise to get a tax depreciation schedule, which will probably set you back between $500 and $700 for a standard one and in some cases it will be more.

The depreciation schedule is a table showing depreciable assets and the percentage by which they'll depreciate each year.

Essentially it reduces your tax liability on assessable income, allowing you to claim back money that would otherwise be paid in tax.

"A WISE MOVE WOULD BE TO OVERESTIMATE ALL COSTS AND IN DOING SO THERE WILL BE NO NASTY SHORTFALLS ONCE ALL THE BILLS COME IN."

MAJOR SELLING COST: COMMISSION

If you use the services of a real estate agent to sell your property, you'll have to pay them a commission fee.

The agent's sales commission, which is based on the final sale price, will more than likely be the biggest cost you'll encounter when selling a property. Agent's fees and charges will vary from agent to agent and state to state, so it's important to find out from the start what the costs associated with it will be.

As well as finding out the costs upfront, it's a good idea to shop around before deciding on a real estate agent to sell your property.

Queensland is the only state in Australia in which commission rates for the sale of a residential property are regulated by the government and they're currently set at a maximum of five per cent of the first $18,000 of the sale price and 2.5 per cent of the balance of the sale price, plus 10 per cent GST.

While the Real Estate Institute of Tasmania recommends a fee schedule for agents, members are not bound by it so essentially in every other state and territory of Australia it's a deregulated market in terms of agent commissions.

Consequently, the client and agent are free to negotiate on fees - which can be a flat fee, a percentage of the sale price or a combination of both - and the level of service provided.

According to anecdotal research by IREC, in those states where commission is negotiable it can range from anywhere between 1.6 per cent and four per cent but can also be higher or lower.

Greig says the commission rate will usually include GST and can sometimes include the advertising costs associated with selling the property, but that's open to negotiation between the agent and the client.

"For more expensive properties - typically those $1 million plus - the commission is usually a lesser percentage because the dollar amount is greater," he says.

In addition to the selling fees, Airey notes another main cost to be taken into consideration is the agreed advertising and marketing costs, which can also be negotiated. In most cases the agent must itemise these costs before the seller agrees to use their services and both parties must sign a document pertaining to that.

Advertising and marketing of the home can involve the use of signboards, newspapers, websites or magazines and is likely to cost between $2500 and $4000, according to PRD nationwide national franchise director Jim Midgley.

While in the majority of instances the agent's fee will only be paid if the property is sold, marketing fees are payable because the agent has already paid for them on your behalf.

If you prefer not to use a real estate agent, there are other options available to sell your property and some of those may save you money. There are companies that charge a flat fee or a lower set amount of commission with the intention that there will be potential savings for sellers when compared to using a real estate agent. Generally the services of those sorts of websites could cost between $1000 and $6000.

OTHER SELLING COSTS

If you're selling your property and it's financed through a mortgage it's likely you'll have to pay some fees to your financial institution.

Williams notes in some cases exit fees for a mortgage may surpass an agent's commission.

Apart from exit fees, it's likely your bank or financial institution will charge you for their attendance at settlement to receive and discharge the mortgage, the cost of which will vary between institutions.

Other potential costs a seller should consider are those associated with preparing the property for sale, which can include things like garden and painting services, cleaning and fixing any obvious faults like loose doorknobs and leaky taps.

While you'll need to factor in other costs like document preparation and government fees, if you're selling an investment property you may also have to pay capital gains tax (CGT).

CGT is the tax you pay on any capital gain you make; it isn't treated separately in its own right but forms part of the income tax system. (See API October 2006 for more on this.)

AUCTIONS

Williams notes the buying process is no different regardless of whether the property you're intending to buy is marketed via private treaty or auction. He says in all circumstances a buyer should obtain the relevant inspections prior to the contract becoming unconditional.

"One may be up for increased costs if you complete all inspections and valuations on an auction property and then are unsuccessful at the auction and have to then find another property to buy."

Airey says there will be no cost difference to the buyer whether they acquire the property at an auction or through a private treaty sale. "The seller may face higher up-front advertising costs but usually get a quicker sale," he says.

A good, well-coordinated advertising and marketing campaign is especially necessary if you're selling your property via auction, because the more people that know about it, the more likely it is you'll get a big turnout and consequently sell your property at the best price.

According to Enzo Raimondo of the Real Estate Institute of Victoria, an important difference between private sales and auctions is that the former usually take longer to complete so the marketing costs are spread out, while auctions see marketing concentrated in a short term, usually four weeks, to focus buyers' attention.

As well as marketing and advertising costs, homeowners looking to sell their property at auction will need to pay for an auctioneer.

Depending on who you use, this service can set you back about $350 plus GST, with Jock McLaughlin of the Real Estate Institute of the Northern Territory estimating auctioneer fees could reach $1000 plus.

Vanessa De Groot

© Australian Property Investor magazine - www.apimagazine.com.au. Reproduced with permission.

This information is of a general nature only and does not constitute professional advice. You must seek professional advice in relation to your particular circumstances before acting. Please read our warning and disclaimer.

Warning: China's stockmarket has risen 90% this year - overheating? - Julia Lee

You may not know this but things in China are going crazy. Things are just not looking normal. GDP growth is at 7.9% but that is on the back of a massive decline in exports.

The big questions about what is powering China's growth are:

• What is behind the growth?
• What does it mean for traders?
• What is the effect likely to be?

The answer is the huge government stimulus from the Chinese government. The growth in China is not being powered by demand from the rest of the world but from government demand and a huge amount of money being lent out.

Fixed asset investment is up 33.5% in the first half of 2009. If you look at some of the numbers, they are simply astounding. There has been an explosion in bank lending. New loans in June were up 360% from a year earlier. All that money has to go somewhere and at the moment it seems to be finding a home in real estate or the stockmarket.

The problem with pumping that much money into the economy is that the quality of loans is sub-standard. You only have to look to the sub-prime crisis with its sub-prime loans to see what effect that can potentially have on an economy.

Asset Bubbles?

In July, China's sharemarket surpassed Japan's to become the 2nd largest in the world. Here's a graph of the Shanghai Composite index. Since the low reached in November 2008, the sharemarket has risen by more than 100%. In 2009 so far, it's up by 90%, making it the best performing sharemarket in the world.

IPO's in China remind me of the good old days of the tech boom when companies on the first day of trading doubled or tripled in value. This week, Sichuan Expressway tripled on its first day of trading. It managed a gain of 204% on its first day of trading.

Real estate is rising at such a high rate that even regulators have warned of a bubble forming. China property prices are up 6.3% from a year ago even though banks need a 40% deposit on loans. In China's capital, average house prices have jumped 27% from January to June, according to government data.

In the June quarter, China's aluminium import volumes rose by nearly 400%. Coal import volumes rose by almost 300%. Copper imports were up by a 140%. At a time when other major economies around the world are struggling - US, Europe and Japan, China is showing some astronomical growth.

The China story is not over and in the long term, China will grow at strong rates and will one day be the largest economy in the world. What else can you expect with a population of 1.3 billion.

In the short term, the signs of overheating are present and we know from history that the longer the bubble, the bigger the mess afterwards will be. You never know when a bubble will burst, but burst they always do, so act with caution.

If you trade stocks related to commodities or China, trade them with one eye cautiously on the bubble forming in the sharemarket in China.

Happy trading!

Julia Lee - Equities Analyst - Bell Direct

To buy or sell shares from as little as $15 per trade, go to www.belldirect.com.au  

Bell Direct does not provide investment advice. This information is general information only. You should consider your own financial situation, particular needs and investment objectives before acting.

Return of the Inverse Relationship between Gold and the USD - Peter McGuire

The first half of 2009 saw sharp rebounds in equity markets and across the broader commodity complex fuelled by 'worst-is-over' optimism, expectations of an imminent economic recovery and an improved appetite for risk. Among the commodities complex, many base and industrial metals saw astonishing price rises in 1H 2009 with lead (76%), nickel (69%) and copper (71%) scoring the biggest percentage rebounds over the six months to the end of June.

While these gains appear impressive, the steep declines of 2H 2008 meant that these commodities were rebounding from a low base. By comparison, gold prices have been rangebound and choppy in 1H 2009, with different forces at play in the market for the yellow metal.

Demand for gold as a safe-haven meant it was one of the few assets to benefit from the turmoil of the financial market crisis, heightened uncertainty and associated increase in risk-aversion. Diminished investor confidence in risky assets drove gold prices to near-record highs as priced in a number of currencies including the US dollar, British pound and Australian dollar.

The normally inverse relationship between the US dollar and the gold price was not present when gold rallied in late 2008 and early 2009; in fact the pair exhibited a positive correlation during this period (see chart below). Both the USD and gold were boosted by strong investment demand from risk-averse investors seeking to preserve capital.

COMEX Gold versus US Dollar Index (weekly)

In recent months the safe-haven appeal of gold has waned amid an improvement in risk-appetite. The typical inverse relationship with the USD has by-and-large been re-established. After a sharp rise in the USD in the first two months of the year (as equity markets scored their bear market lows), the greenback thereafter trended lower over the remainder of 1H 2009.

To a degree, the negative influence on gold of waning safe-haven demand has been offset by the positive influence of a declining USD, explaining why gold has been rangebound between $800/oz and $1000/oz over 1H 2009. In the physical market, the elevated gold price of 2009 has dampened consumer demand for gold while simultaneously boosting scrap sales.

The medium term outlook to gold prices appears mildly biased to the downside. The US appears likely to formally emerge from recession in early 2010, by which time attention will be squarely on the Federal Reserve's plan to reverse its zero interest rate policy.

The biggest unknown is exactly when the Fed will move to begin its tightening cycle. The knowledge that the Fed will have to raise rate should limit the downside for the USD which would be negative for gold prices. The upside risk for gold is that the Fed may be reluctant to begin tightening while unemployment is still rising. In the wake of unprecedented monetary and fiscal stimulus, the spectre of inflation will grow larger the longer the Fed waits to raise rates.

Peter McGuire - Managing Director - Commodity Warrants Australia    www.cwa.net.au
Peter is a regular commodities commentator on Bloomberg Television and CNBC and appears widely in the Australian financial press.

Complementing your Self Managed Super Fund (SMSF) - Laura Menschik

With the reduction to the concessional contribution caps for super funds and SMSFs to a maximum of $25,000 for under 50's and $50,000 for over 50's (until 30/06/12), investors may be looking at other options available to help fund their retirement. For individuals with a personal Marginal Tax Rate (MTR) over $80,000 per annum, they may want to save in a tax efficient investment alongside their super arrangements.

An alternative investment option could be Bonds. There are a number of Bonds, mostly known as investment bonds, friendly society bonds, insurance bonds and imputation bonds, which are currently available.

The Bonds are designed by overlaying a tax-paid investment product structure across professionally managed funds and unit trusts and pay tax at the maximum company rate of 30% (sometimes this is less due to imputation credits).

Under Australia's well established tax-paid Investment Bond system most Bonds capitalise on attractive personal taxation benefits. These include:

• any income earned does not appear in personal tax returns each year;
• there are personal tax deferral benefits on the Bond's investment growth component;
• personal tax rate "arbitrage" advantages; and
• financial planning advantages allowing investors to switch between different Investment Portfolios without personal tax or capital gains consequences.

Combining tax-paid investments (Super with Bonds)

• Superannuation is a form of tax-paid investment with a nominal 15% tax-paid rate, and relatively complex rules, including restricting access to your investment until you reach your preservation age of 55 or 60 years.
• Bonds are another form of tax-paid investment, but with a higher nominal (though frequently lower) 30% Portfolio Tax rate. However, Bonds entail much less complexity and do not impose age restrictions on access to your investment.
• Tax rate "arbitrage" is used to highlight a difference between an investor's higher ongoing MTR (if between 31.5% and 46.5%), and the effective tax-paid rates applying to an Imputation Bond's various Investment Portfolios.

Personal Tax Position

If you withdraw from an Investment Bond within the first 8 years you are assessed for tax on 100% of the growth of your investment, after 8 years you are assessed only for two thirds of the growth, after 9 years one third and after 10 years zero. You can then apply the full 30% Tax Offset (even if the portfolio has only paid tax at say, 23%) against these earnings and if you have a surplus of offset apply the balance against other income.

Hence it makes good sense to time withdrawals from your Bonds for a time when your MTR is 30% or less or wait until after 10 years if your MTR remains higher.

Bonds do not distribute Income or Capital Gains; hence no tax is paid by the investor during the life of the Bond, nor is any tax reporting required (unless a withdrawal is made within the first 10 years).

125% Rule

Bonds have a valuable taxation status that will not be jeopardised by making additional investment contributions, provided these do not exceed 125% of the level of contributions made in the previous Bond year. This feature is called the "125% Rule", and is governed by taxation laws applicable to investment bonds.

The attraction of using the 125% Rule is that when making Add-On Lump Sum Investments,(or contributing under a Savings Plan) ever increasing levels of additional contributions can be made closer and closer to the Bond's optimal post-10 year period, after which all investment growth is totally exempt from personal tax.

Importantly, you can continue the benefits of the 125% Rule by making additional investments beyond the 10 year mark.

Whilst the 125% Rule can increase a Bond's tax-effectiveness when making ongoing contributions, it needs to be understood that if it is breached your Bond's 10 year period will restart from the commencement of the Bond year in which you make the "excess" contributions.

Reminders

Please remember that investment risks are carried by you. Simply stated, this means that you carry the risks of your Bond's overall value rising or falling in line with the value of Units in the investment options that you select from time to time, though this is in line with other investment strategies.

As with all investments, you will need to research what is available, including fees and charges. You should to seek professional advice to ensure that this investment is applicable to your circumstances and the bond you invest in is suitable to your needs.

Laura Menschik
Director and Authorised Representative
WLM Financial Services Pty Ltd.
CERTIFIED FINANCIAL PLANNER TM - SMSF SPECIALIST ADVISER TM
WLM provides wealth and lifestyle management services in a professional and personalised manner, by qualified advisers, on a fee-for-service basis. WLM is independently owned by its Directors. Visit WLM Financial Services online wlm.com.au

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