Investing Is Like Reading At First You Have To Learn The Basics

Sun Herald

Sunday August 29, 2004

George Cochrane

Savings accounts are perfect for beginners, George Cochrane writes.

I WOULD like to invest in a managed fund but don't know where to start. I have saved about $1000 and can afford a further $100 a month. I know it's only a small amount but I understand compound interest means it will grow and grow over the long term. Is that correct? C.C.

Compound interest is simply a mathematical term for reinvesting your interest. Reinvesting money is not necessarily a way to become enormously rich.

If you place your money in a sharemarket fund, you are basically hoping the shares that your fund buys will then grow in value, just as you are hoping that your property will grow in value. Asset prices (such as shares and property) can grow, but they can also fall, in which case, reinvesting your income can only reduce the loss in original value.

So whether you reinvest the income or not (by buying shares in a company with a dividend reinvestment plan), be sure to buy wisely in the first place.

I know that you have an investment property but not whether it is mortgaged. If it is, why not pour your spare cash into the mortgage while rates are still low? If it is not, keep your money in ING or a similar savings account (which will allow you to reinvest and thus compound your interest) until you learn a bit more about investing.

I suggest that the best place to start is one of the lessons offered through the Australian Stock Exchange, either free online or face-to-face with a lecturer. See www.asx.com.au.

Be nice to the boss

I AM paid a base salary of $100,000 a year and my employer pays the compulsory super guarantee charge of 9 per cent ($9000 a year) into my super fund. Within the next 12 months, I will have paid off my mortgage and at this point plan to channel as much as $50,000 a year directly into my super fund, reducing my taxable salary to $50,000. Will my employer still be required to contribute 9 per cent of my total salary, i.e. $9000, or will their liability reduce to 9 per cent of my taxable salary i.e. $4500? C.A.

In a strict legal definition, the employer is only required to pay the 9 per cent super guarantee contribution on the employee's earnings base but defining this has proven to be a bit of a problem.

The earnings base can be determined by your super fund's trust deed, by an industrial award, by an employee agreement, or it can be "ordinary times" earnings. It can be argued that the latter excludes voluntary super payments made through a salary sacrifice agreement.

So while most employers pay their 9 per cent on a pre-agreed salary amount, before salary sacrifice, they don't have to.

In an attempt to clarify the matter, the Federal Government proposed in its 2004 budget that a single definition of an earnings base be introduced from July 1, 2005. In the meantime, it really comes down to this: how generous is your employer?

How super rules can go wrong

OUR son died in a car accident. He had no dependants, two small super policies that were only employer contributions, and a death benefit attached to one of them. These were paid out equally to myself and my husband. Tax at the rate of 16.5 per cent was deducted from the super contributions and, from the death benefit, tax at the rate of 29 per cent. But we were stunned to discover the monies paid would also have to be included in our taxable income for that year. This has led to my husband ending up with an additional tax bill, and myself being grossly overpaid by the Family Assistance Office. This seems grossly unfair. M.K.

You have run into one of the most ridiculously complex areas of super.

It sounds as though the super fund had bought some life assurance cover for your son.

This is common in public super funds and is usually bought at low cost with the fund claiming a tax deduction for the premiums paid.

If a death benefit is claimed, the money is paid by the life company to the super fund.

As it does not come from a taxed super fund the money is seen as untaxed income (which means that it can be taxed up to 31.5 per cent) when paid out of the super fund. Here, the rules get really stupid.

Your son appears to have accumulated some savings in his super fund, which were taxed on entry in to the fund. That money would have been taxed at 15 per cent.

So there is a mix of taxed (to be taxed low on exit) and untaxed (to be taxed high on exit) benefits. The law then divides this up in the ratio of the amount of time worked (the taxed portion) to the time from the date of death to age 65 (the untaxed portion).

As a result, a person who dies young has a large untaxed portion.

In the case of your son, who had no dependants, the money was passed by his estate to you minus tax at the rate of 15 per cent on the taxed portion and 30 per cent on the untaxed portion.

The death of a young person with no dependants, and with a life policy within his super fund, sees a much higher rate of tax being paid than a person with the opposite attributes.

But there may have been yet another complication. Super fund trustees, by law, only pay death benefits to dependants or to the estate. If your son, in fact, left no will, then the trustees may have thought they were doing you a favour by paying you directly.

The result, however, would be that you, and not the estate, included the money in your assessable income. And this is what would have affected your family tax benefits.

It is an unusual situation in that it appears that everything that could go wrong, did.

You have both my condolences and sympathy.

Write to: Personal Investment, PO Box 3001, Tamarama, NSW 2026.

Help lines: tax 132 861; banking ombudsman 1800 337 444; pensions 132 300.

© 2004 Sun Herald

Back to News Index | Back to Home