The sharemarket game is back!

Yep, the House of Wealth Share Trading Game is back. Yay! It will be commencing on Thursday the 11th of March, just after the long weekend. So come on guys, take the challenge and play against us and other clients, there is a prize for the winner!

If you’re interested in participating please email me here and I’ll give you the Rules and Registration handout to get you started. It’s great fun and helps build your share trading skills. Last time, our very own Dave won with a total networth of $25,243, a great effort after starting the game with $20,000, over 25% return in just ten weeks.

The average score for all players was about $22,000 – making an annualised return of 64% across the board. Think you can do better than that? Or you're really not sure, but think it could be fun to try? Come and play - you know you want to!

Property analysis #8 - NRAS

Alright, a few of you may have already heard about the NRAS, but for those who haven’t... I’ll quickly fill you in on the brief details. NRAS, or National Rental Affordability Scheme, is a government incentive for property investors to rent out their properties at 20% below market value, qualifying them for an annual subsidy of $8,672. This only applies to NRAS-approved properties, but has amazing potential for investors. Essentially, the government is aiming to increase the supply of affordable rental properties, reduce rental costs and encourage large-scale development projects.

To show you exactly what the possibilities are, I’d like you to take a quick look at this modern 4 bedroom house in Caboolture, QLD. As we can see, it is NRAS-approved, and appears to be in a nice growth area.

The property is selling for $396,587 and I’ve gotten agent estimates of something around $440 ordinary rental income per week. This puts the gross yield at 5.77%. Decent. Now if we then take agent’s fees, rates, insurance, just a little bit for maintenance, it looks like our hypothetical investor gets about 4.69%. At this point, the property would actually be negatively geared, costing the investor just over $100 a week.

Now, to apply those beautiful NRAS benefits. First, the rental income will be reduced to $352 a week. Quite a steep fall, but remember, we’re getting a hefty rebate to compensate. The subsidy is paid as a Commonwealth government incentive of $6,504 per dwelling, and a state government incentive of $2,168 per dwelling, totalling $8,672.

If we then work this into the equation, the property actually becomes positively geared, despite the reduced rental income. Nice!

Averaged out, our investor will be earning about $10 a week in positive cashflow for that first year. While the tax benefits go a long way towards bringing this property into positive territory, it’s important to note that only the federal incentive can be accessed in your PAYGW Variation and the state bonus will need to wait until you lodge your tax return.

Well, it’s definitely something worth looking into. If you happen to come across a property that you think might be NRAS-approved, work the numbers, talk to the agent / developer, and see if that’s a viable option for you. As you can see here, it can be profitable but of course, is not without it's own risks. And don’t forget we’re always here if you need help with analysing any property. Bye for now!

Finding value in the share market

Most investors are always looking to find value in the share market, and though every investor has their own way of picking “hot stocks”, I’m going to have a quick look into a couple of simple and popular ways of looking for value in companies.

These are the Earnings Per Share (EPS) figure and the Price to Earnings Ratio (PER or P/E ratio). As the P/E ratio of a share is dependent on the EPS I will start by explaining the EPS.

In theory this is how much share of a company’s profits you have. It is calculated by taking the after tax profit for a company and dividing it by the number of shares on issue.  Another good measure of how a company is performing is to analyse the EPS growth from year to year.

The P/E ratio often then used to determine how “cheap” a share is. This is calculated by dividing the share price by the EPS. This, in theory, gives the earning power of a share relative to its share price. Shares with extraordinarily low P/E ratios are often considered to be undervalued (or in trouble!) and shares with extraordinary high P/E ratios are often considered to be overpriced. Usually, you would compare the P/E ratio for a company to other similarly-sized companies in the same industry.

Note these figures are theoretical measures only and they do not necessarily determine how a share will perform. This is a site that can be quite useful for company analysis if you are looking for one, but there are many more out there.

Federal Court allows interest deductions against Hybrid Trust

It's been a long time coming, but the tax office finally got around to testing a hybrid discretionary trust in the courts to establish a precedent for claiming interest.

The verdict was, on face value, good news; despite the discretionary powers of the trustee, there was sufficient nexus between the expected income and the actual expense to give the unit holder a deduction for their interest payments. This is also despite the trust not actually distributing any income for the period in question.

The tax office then wanted the courts to consider apportioning the interest, as the trust required only ordinary income (and not capital gains) to be distributed to the unit holder. However, the court dismissed that request as it was not included in the original tribunal hearing. So in looking at whether the interest was deductible in full, or not at all, the court ruled that it was entirely deductible.

We now expect that the tax office will try again with another case, with a focus on apportionment. The good news, though, is that the courts have determined that a trust can operate as both a fixed (ie, unit) and discretionary trust. And as such, unit holders may still have sufficient cause to claim interest on moneys borrowed to purchase units provided their trust deeds have been structured correctly.So, watch this space. It should be just a matter of time before the tax office have another go at this...

Property analysis #7 - renovation project

We all know there’s never just one way to make money in the property market, and it’s probably about time we looked at a method that excites many, and can involve massive profits; renovating!

Browsing, there’s endless listings described as “renovators dream!” and so forth. However, it takes detailed research and investigation to ensure the property is suitable for doing up.

While we’re certainly looking for properties with opportunity for some DIY improvements, there can sometimes be a lot of risk involved when it comes to the structural quality of the building. So, it’d usually be a wise investment to have an in-depth building inspection performed by professionals before even considering a renovation project.

Alright, to illustrate my hypothetical renovation scenario, I’ve found a property at 349 Barnard Street in Bendigo, Victoria. At current, it’s selling for between $200,000 and $220,000, and receiving $210 rental income. So, even before adding any value by renovations, and going on a middle-ground purchase price of $210,000, it’s getting a gross yield of 5.2%. This isn’t quite as impressive as some of my previous analyses, but remember; we’re aiming for capital growth and increased rental income as a result of the improvements that we're about to make.

Let’s take a fair guess and say our hypothetical investor (we've gone back to our original investor now, by the way, although a low-income earner could expect similar results but with fewer tax advantages) might spend $20,000 on improving the property. This is also going to affect interest payments as the investor will be using equity in their existing portfolio to foot the bill for all renovation costs instead of using cash.

Now, to get some idea of what the results of these renovations might be, I’ve found these two closely comparable properties, located in the same area. This seems to show that we can work at a rough post-improvement value of $275,000 (increased value of $65,000). I’ve also spoken to the agents selling both, and they’ve estimated around $270pw for this one at 133 Marong Road, and $290-$300 for the other at 196 Mackenzie Street. For the sake of this analysis, let’s work with $285pw as a reasonable median.

This amount leaves our investor neutrally geared, but it’s important to keep in mind that if we’ve got tenants during the renovation process, we’re more than likely going to have to lower the rent for that period as a sort of compensation - or more likely, the property will be vacant. Hopefully we’ll make up for this when rent increases as well as realising some nice capital gains somewhere down the track. Let’s also remember that the main benefit to renovations is often the increased valuation at the other end of the deal - this gives our investor more equity to play with by getting another valuation or by selling the property.

Let’s be honest though, renovation isn’t for all of us. Doing so in a regional area and managing the project from a distance also carries its own obvious risks. Though it is certainly something to look in to, as we know there are endless amounts of ways to profit from the real estate market. It all depends on the property, and the investor, so get exploring!

Options and futures trading in SMSF

A common strategy that we're seeing with a few SMSFs lately is to hold options over long-term share portfolios as part of a hedging strategy. Some investors take this a step further and trade with some sort of regularity; to the point where as an individual, trust or company, we would expect their activities to be considered business-like and taxed as ordinary revenue instead of capital gains.

However, as we know, a SMSF is not allowed to run a business. The tax office also have provisions that exclude these activities from the usual trading vs investing rules, and declare all such things to be on capital account instead.

The tax office have released a few rulings to show their line of thinking, which you can read here, here, and here.

The key point, though, is featured in all three rulings and looks something like this:

The provisions relating to the taxation of complying superannuation funds (including SMSFs) are contained in Division 295 of the Income Tax Assessment Act 1997 (ITAA 1997).

Section 295-85 of the ITAA 1997 makes the CGT rules the primary code for determining the tax treatment of the gains or losses generated on the disposal of an asset by a complying superannuation fund.

Paragraph 295-85(2)(a) of the ITAA 1997 modifies the normal CGT rules so that a CGT event happening to a CGT asset of the Fund is not affected by the following provisions:

  • section 6-5 of the ITAA 1997 (ordinary income),
  • section 8-1 of the ITAA 1997 (amounts you can deduct), and
  • sections 15-15 and 25-40 of the ITAA 1997 (profit-making undertakings or plans)

Remember though, that anything that a SMSF chooses to invest funds into must comply with the current investment strategy. So, trading complex financial instruments will need to be clearly defined and shown to meet the sole purpose of  providing for the Members' retirement benefits, without undue risk; otherwise, the SMSF could still be caught out and penalised severely. As always, talk to your accountant and financial advisor before taking too many steps in that direction.

e-Record is finally going!

The Tax Office’s record-keeping product, e-Record, has been reviewed... and trashed. So it will no longer be available from the 2010-11 income year. The tax office decided that it no longer was well-suited with the current commercial record-keeping systems (no surprise) and would also have needed to be redeveloped so it can keep up with technology and new business directions. The cost was too much to bear, so the tax office will remove it for download as of 30th June.

In other news. We've recently teamed up with the group at the Educated Investor book store, which we believe is the best of its kind in Australia. You might have already seen the little link on the sidebar to your right there. Joining their mailing list also gives you regular discounts on their products, so it might be worth looking at, too. Soon, we're hoping to have this site branded similar to our own and to be able to offer you exclusive promotional codes - so check it out and stay tuned.

Performance and analysis spreadsheet

This spreadsheet is a little more complicated than the other spreadsheets I’ve created, though it is fairly simple to use.

While it can be used for simple data entry, it is aimed at providing information about past performance and analysing your trading strategies, if you have been trading at an overall loss to date. This spreadsheet extracts and works with two main pieces of information: Your accuracy percentage (Profitable trades/total trades) and Current profit/loss ratio (using absolute figures: Average profit on profitable trades/Average loss on negative trades).

Remember that it isn’t necessary to have 100% of your trades profitable; you just need your wins to outscore your losses.

So if you are not satisfied with your past performance you can use these figures to help with making a decision. This spreadsheet will tell you the minimum accuracy percentage you need to break even; so if you wish to change investment strategies you can test the strategies and if they aren’t delivering you your desired percentage then you know to change strategies. If you are happy with your strategy, then this spreadsheet will also tell you the minimum profit/loss ratio required to break even, which then provides you with minimum profit and loss targets. In other words you can use these figures as a guide for when to sell a share and what profit / loss you are comfortable to accept.

Feel free to check it out and give it a try; and if you have any queries or questions don’t hesitate to ask.

Travel expenses for investment properties

The tax office have just updated their guide on claiming travel expenses for investment properties, and we thought that this might be a timely reminder for everyone about the five main traps that we've had to warn clients about in the past.

Trap #1: Incidental travel. Driving past your investment properties whilst on your way to another destination doesn't qualify as a deduction, unfortunately. The purpose of the trip needs to be about the investment, otherwise it is deemed to be private and no deduction allowed.

Trap #2: Hunting for property. If you are investing in your own name, then driving around to look for potential investments won't count as a deduction, either. If you've not yet made the purchase, then the expense does not relate to existing income.

Trap #3:Flying interstate or overseas. Many of our clients own property interstate. It's a great way to get exposure to multiple markets, and it often helps to keep land tax lower. Getting a tax deduction for a holiday to inspect your property sounds great, too, but if the main purpose of the trip is personal then the tax office will deny the entire cost of flights. You can also only claim accommodation for the portion of the trip directly related to your investments and a travel diary must be kept if you are away for six or more nights.

Trap #4: Too many kms. The 'cents-per-km' method that most of you use for travel deductions, allows for a maximum of 5,000km per car, per person. That's the total; across all work related, business and investment travel. The only exception, incidentally, is additional travel for your accounting related expenses. So if your work or business travel already hits the 5,000km threshold, then you cannot claim additional kms for your investment properties.

Trap #5: Partners without ownership. If the investment property is solely in your own name, then your partner cannot claim travel expenses on your behalf (unless they receive an income from you for their efforts). Likewise, you cannot claim for your partner's travel expenses against your own income, either. This is also important in relation to Trap #4, above.

Of course, there are still plenty of opportunities to make the most of your travel deductions and using a little creativity can often help get you past many of these traps. You know where to find us if you'd like to chat about that soon.