Archive for the ‘News’ Category

SMSFs and insurance: death and permanent disability cover

February 22nd, 2012

One of the recommendations of the Cooper Review of the superannuation system, accepted by the government, will require self-managed superannuation funds (SMSFs) to consider death and permanent disability insurance as part of the fund’s investment strategy.

The main reason for the recommendation is the alarmingly low level of life insurance inside SMSFs. Less than 13 per cent of SMSF members have life insurance.

This is significantly less than the levels of cover within traditional superannuation funds, where cover is often provided automatically.

Under current laws, SMSF trustees are not required to obtain any insurance cover for members, nor do they need to consider insurance as part of the fund’s investment strategy.

The proposal is that the Government will amend the superannuation law so that SMSF trustees must consider life and total and permanent disablement (TPD) insurance.

Although there is no commencement date for the proposal, SMSF trustees should review their investment strategy with regards to insurance in readiness for any change.

This can be considered as part of the member’s financial planning strategy, in association with any other current insurance they may have inside and outside superannuation.

Insurance cover taken out by the trustees of an SMSF can provide a valuable source of liquidity and the ability to pay increased benefits to fund members or their beneficiaries in the event of a member’s death or disability.

Another instance may allow an SMSF that has borrowed under a limited recourse borrowing arrangement to repay part or the entire loan in the case of the death or permanent disability of a member.

Case study

Noel and Nancy have $200,000 each in their SMSF. They use the $400,000 as equity to borrow $600,000 for $1million property.

In the event of Noel’s death, a $200,000 benefit must be paid (as a lump sum or pension), but the SMSF has no other assets. The property may need to be sold, which could be at a low point in the market.

Furthermore, transaction costs may be incurred in repaying the loan early. In effect, the investment strategy of building long-term wealth for the members has fallen into disrepair as no insurance has been taken out as a protection measure.

With prudent planning we can secure the outcome. Let’s assume in the event of death, the objective is to repay the SMSF borrowing and pay a net lump sum death benefit of $1million.

The SMSF purchases a $1.6million policy on each life. In event of death, the $600,000 SMSF borrowing is repaid and a $1million cash benefit can be paid (including $200,000 member balance).

The property can be retained as no forced sale is required. Including insurance as part of the fund’s investment strategy has allowed Noel and Nancy to achieve their objectives.

How is the insurance cover established?

Insurance held via an SMSF is owned by the trustee of the superannuation fund (ie, it is not owned personally).

When applying for cover, it is important to ensure the owner is clearly identified as the trustee, for example ‘John and Jane as trustees for the JJ super fund’ or ‘JJ Co. Pty Ltd as trustee for the JJ super fund’.

All SMSF assets, including insurance, must be kept separate from personal or business assets.

Insurance premiums can be paid using the fund’s cash balance or superannuation contributions/ rollovers.

What are the tax concessions?

While the focus should always be on the need for insurance, cover within an SMSF can provide valuable tax concessions.

For one, the SMSF trustee can generally claim a tax deduction on the insurance premium, excluding trauma cover.

In addition, superannuation contribution strategies (eg, salary sacrifice) can reduce the effective cost of cover by using pre-tax dollars.

Other strategies available include personal deductible contributions, co-contributions, spouse contribution tax offsets, and contribution splitting.

How can proceeds be accessed?

Upon successful claim, the insurance proceeds are received by the SMSF trustee. A payment can only be made to a member, beneficiary or the member’s estate if a condition of release is met.

A condition of release includes temporary disability, permanent disability or the death of the member.

The SMSF trustee is bound to make a decision as to whether a member meets a condition of release, just like all other fund trustees.

This requires the SMSF trustees to apply an appropriate level of due diligence, and ensure appropriate documentation is retained.

If a condition of release is met and the rules of the fund allow, the benefit may be paid from the SMSF in the form of a lump sum or income stream.

An income stream can be a very tax-effective option, particularly for eligible dependants, and it allows funds to remain within the SMSF environment.

Can a policy be transferred into an SMSF?

An SMSF cannot acquire an insurance policy from a member, or a relative of a member.

However, a policy can be terminated and a new policy issued on similar terms to be owned by the SMSF, provided there are no underwriting issues.

For some clients, having some or all of their insurance cover within their SMSF can provide valuable cash flow and tax advantages.

It should be borne in mind that using SMSF assets to purchase insurance may have the effect of reducing their account balances over time.

Insurance proceeds are able to increase the amount available to a member, dependants or their estate should something happen to them.

They can also be used to maximise the tax-effectiveness of insurance benefits, as the superannuation fund has access to special tax deductions for premiums which are not available personally.

Source: Money Management

RBA keeps cash rate on hold

February 8th, 2012

The RBA unexpectedly kept the cash rate on hold at 4.25%. It seems that the Board took some comfort from the improvement in financial market sentiment since early December, primarily driven by the actions of policy makers in Europe. With growth expected to be close to trend and inflation close to target, the Board decided the current monetary policy was appropriate for the current environment. However, the Board noted that should demand conditions weaken materially, it will provide scope for easier monetary policy.

Press release

Rate cut hopes fade

February 6th, 2012

 

 

The chance of another interest rate cut by the Reserve Bank tomorrow is diminishing – potentially given major banks a break from a flurry of bad publicity.

Until last weekend, the odds were heavily in favour of the RBA making it three rate cuts in a row when its monetary policy board meets in Sydney.

Surprisingly strong jobs news from the US, though, and broad-based market rallies since the start of the year have given the central bank scope to delay another cut.

“People are looking at that data and saying the US labour market looks the best it has since the recession started,” said UBS interest rate strategist Matthew Johnson. “So, the case for the RBA to cut rates tomorrow is materially weakened.”

The US unemployment rate last month dropped to its lowest in almost three years, adding to recent signs that growth in the world’s biggest economy is accelerating. The RBA lowered interest rates in November and December to help bolster growth at home as worries about the state of the global economy prompt consumers and businesses cut back borrowing.

“In November and December markets were extremely volatile, confidence was very weak and there was a lot of uncertainty about the international situation,” said ANZ Bank head of economics Ivan Colhoun.

“The European and market situation has not continued to deteriorate significantly. In fact, markets are a lot calmer,”

Mr Colhoun said, adding that data on Australia’s mining investment boom show that it is accelerating.

“It may be we’ve seen the last cut unless Europe falls in a complete heap,” he said.

Each-way bet

Financial markets are basically hedging their bets that the RBA will leave rates on hold tomorrow.

As of this morning, the chance of the RBA will slice another 25 basis points off its cash rate to 4 per cent is about 52 per cent, according to cash-rate futures monitored by Bloomberg. That’s down from an 80 per cent chance on Friday.

Most economists are still tipping a rate cut tomorrow, according to a Bloomberg survey conducted last week – although that may change as analysts consider the US jobs figures.

Another signal of a shift in sentiment, though, is the local bond market this morning, which suggests the central bank is more likely to stay put.

The March 10-year bond futures contract was trading at 96.075 (implying a yield of 3.925 per cent), down from 96.235 (3.765 per cent) on Friday.

The March three-year bond futures contract was at 96.690 (3.310 per cent), down from 96.820 (3.180 per cent).

RBC Capital Markets economist Michael Turner agrees the case for an RBA rate cut has weakened over the past week.

Mr Turner is sticking to his prediction that the RBA will move tomorrow – but that the commercial banks won’t pass along the full reduction to borrowers.

“The RBA will prefer to be on the slightly easy side of neutral, which means 25 basis points of cuts from the RBA and 15 basis points of cuts from the banks,” Mr Turner predicts.

“Of course the arguments against the cut have strengthened over the past week or two,” said Mr Turner, who pointed to the stronger US jobs data, as well as a number of strengthening manufacturing indexes in the US and Europe.

Bank warnings

In recent weeks, commercial banks have grown increasingly adamant that they won’t pass along in full any cut in interest rates to borrowers. They argue that their own funding costs are largely independent of the RBA’s cash rate and they have an obligation to maintain profits for shareholders.

“Banks are conscious that the community is concerned that many people are doing it tough,” said Australian Bankers’ Association chief Steven Münchenberg late last week. “Banks also do not under-estimate the anger many borrowers will feel if all RBA rate cuts are not passed on.”

“For these reasons, banks have been absorbing the higher costs of bank funding for over six months now and have not passed these costs on to borrowers.”

“But banks need to balance the concerns of borrowers on the one hand, with the interests of lenders, including retail depositors and superannuation funds, on the other.”

Bank profits will probably re-emerge as a hot topic in coming days with National Australia Bank due to release its market update tomorrow. The Commonwealth Bank is also scheduled to release its half-year results next week.

 

Source: Chris Zappone, The Age- Business Day, Bloomberg

Malaysia grants temporary licence to Lynas Corporation

February 2nd, 2012

Malaysian authorities have  granted approval to Australian miner Lynas Corp to operate its 700 million ringgit ($A217 million) rare earth plant.

The Atomic Energy Licensing Board says it will grant Lynas a temporary operating license. It must submit plans for a permanent disposal facility within 10 months and make a $A47 million financial guarantee with the government. The approval on Wednesday eases uncertainty for Lynas and investors after speculation that the licence could have been rejected in the face of opposition from political parties and residents near the plant ahead of national elections expected within months.

The board warned on Wednesday that the licence can be revoked if conditions are breached.

“The temporary licence has been approved with conditions. If these conditions are not met, the temporary licence can be suspended or cancelled and subsequent applications for the licence will not be considered,” the atomic licensing board and the Ministry of Science said in a joint statement.

 

Source: The Age- Business Day, Reuters- Niluksi Koswanage

Click here to read Media Announcement from Lynas Corporation- AELB announces its approval of temporary operating licence

 

Investment sign of economic strength

February 1st, 2012

Treasurer Wayne Swan says a new report showing continued growth in major investment projects is another example of the economy’s strong fundamentals.

Deloitte Access Economics says investment projects continued to progress through the planning stages during the December quarter, despite the backdrop of an uncertainty global economy.

The independent economic forecaster said importantly for current economic activity, much of the growth in investment projects has been in definite projects – either under construction or committed to commence soon. “The value of projects underway provides a healthy buffer against a potential global slowdown in 2012,” Deloitte Access Economics partner David Rumbens said on the release of the forecaster’s Investment Monitor for the December quarter today.

It shows that the total value of projects grew by a further 2.1 per cent in the quarter, compared to the previous three months, to a staggering $912.7 billion.

Projects have increased 17.5 per cent over the year. Of these, definite projects reached a value of $415.4 billion, a massive 43 per cent rise over the year. Mining projects account for 46 per cent of all investment projects under construction or committed.

Such projects had helped to deliver the strongest growth in business investment spending ever seen during the September quarter 2011, and at a time when other sectors of the economy were in the doldrums.

“This is not likely to be the end of the investment surge in Australia,” he said.

Mr Rumbens expects investment levels to continue rising over 2011/12 and the following two years, driven by a healthy pipeline of projects awaiting approval, in which mining projects will again dominate.

Mr Swan said the report was yet another example of our economy’s strong fundamentals. “(It) shows why Australians can be confident in our country’s outlook,” he said, adding that people should ignore the Opposition’s attempts to talk the economy down.

 

Source: AAP, Market News

Housing woes strain banks

January 30th, 2012

A slowdown in Australia’s housing market is starting to strain bank balance sheets, with the nation’s biggest lenders being forced to pay top dollar to lock in longer-term funding.

Commonwealth and Westpac have tapped local investors for a combined $6.6 billion in recent weeks, paying a premium to secure bonds with a maturity of five years at a time when Europe’s debt problems continue to push up costs.

This month, ANZ raised $1.2 billion in 10-year funds from European investors in the most expensive raising so far this year. ANZ is also planning to sell four-year bonds to Japanese investors over the next few weeks.

This high cost is adding to pressure to push through additional interest rate rises on home loans as banks seek to protect profit margins.

While Australian banks remain well funded, senior bank executives privately concede a slowing housing market, as well as pressures across Australia’s east coast economy, has meant home loan customers now are taking longer than expected to pay off mortgages.

”The economy has been slowing down, therefore the asset profile has been getting longer and longer,” said one bank executive who specialises in treasury operations. Under bank accounting rules, loans made to customers are known as assets. The executive said five-year bonds in Australia ”are probably as long as you can go”, but they will help lengthen the banking system’s funding profile.

UBS chief economist Scott Haslem said the recent bond issues by CBA and Westpac set ”an expensive benchmark and pressures bank margins”.

It also suggests smaller banks ”may now find it difficult to lend profitably”, he said. This strengthens the case for the Reserve Bank to cut interest rates by 25 basis points at next week’s board meeting as it seeks to keep the cost of credit low.

The latest accounts for CBA show its average funding book is currently running at 3.6 years, down from 3.8 years in fiscal 2010.

Through a complex process used to fund home loans, banks generally calculate that most mortgages will be paid down in five to eight years, rather than the 25 to 30-year time frame in which most borrowers take out a loan

This is due to several factors such as owners selling properties part way through the loan period and paying off the entire debt. Some borrowers often pay off more than the minimum mortgage rate, speeding up the sell-down.

But a cooling property market has led more owners to stay in existing property.

At the same time, rising consumer caution is curbing additional mortgage payments with more funds being channelled into shorter-term savings.

A second bank executive said the longer funds being raised by banks put additional pressure on profit margins already being squeezed as Europe’s economic problems cause havoc on global wholesale markets.

”Nobody wants to see the term [funding] shorten; that’s why banks are now paying top dollar,” an executive with another major bank said. ”The problem is whether the cost can ultimately be passed on to the borrower.”

The first two months of the calendar year are traditionally the busiest time for banks raising wholesale funds. But global concerns over Europe’s sovereign debt problems have pushed up pricing, causing wholesale raisings to slow sharply. Since the start of January, banks have raised $12.8 billion here and offshore, figures compiled by Deutsche Bank show. This time a year ago raisings were running at $23.9 billion, the figures show.

Deposits now comprise about 50 per cent of bank funding, but banks must raise the shortfall through a combination of short-term and long-term wholesale funding.

Australian banks need to borrow as much as $80 billion over the next year to replace maturing funds, analysts say. Much of this will be covered bonds, which are bonds secured by assets such as home loans.

 

Source: Eric Johnston- The Age, Business Day

World Trade Organisation rejects China appeal on mineral curbs

January 30th, 2012

Photo Source: Reuters

World Trade Organisation judges rejected China’s appeal of a ruling that found restrictions on exports of nine raw materials break global rules and give the country’s manufacturers an unfair edge over competitors.

The WTO concluded on July 5 that Chinese quotas, export duties and license requirements on overseas shipments of industrial ingredients including coke, zinc and bauxite are discriminatory. The restrictions have stoked tensions between China and its trading partners, which accuse the Chinese government of having unfair commerce and currency policies.

US Trade Representative Ron Kirk called the Appellate Body report a “tremendous victory,” particularly for manufacturers and workers. The decision “ensures that core manufacturing industries in this country can get the materials they need to produce and compete on a level playing field,” Kirk said in an e-mailed statement from Washington.

Today’s affirmation of the initial panel ruling may prompt the US and the European Union to make good on threats to complain at the Geneva-based WTO over Chinese restraints on exports of rare earths, a group of 17 elements used in high-tech products such as Boeing helicopter blades, Nokia cell phones and Toyota hybrid cars.

‘Deeply troubled’

The outcome of this case obliges China to bring the challenged measures into compliance with the rulings, the European Commission said in a statement from Brussels. “However, the EU continues to be deeply troubled by China’s use of export restrictions not only on the specific products at issue in this dispute, but also on rare earth and many other industrial raw materials.”

Appellate Body judges urged China to modify its policies on raw-material exports to ensure they “do not operate to bring about a WTO-inconsistent result.”

“China respects the rulings of the WTO and will apply reasonable policies to administer resource products in accordance with the WTO rules, so as to realize sustainable development,” the Chinese mission in Geneva said in an e-mailed statement.

China, the world’s second-largest economy, is the top producer of cadmium, gold, indium, iron ore, lime, lead, manganese, mercury, molybdenum, phosphate, salt, tin, tungsten, vanadium and zinc. Its export restraints have caused worldwide supplies of many raw materials to plummet, sending prices higher and providing an incentive for manufacturers to move to China to take advantage of the cheaper materials.

Economic importance

The commodities at issue in the WTO complaint, filed by the US, the EU and Mexico, also include magnesium, manganese, silicon carbide, fluorspar, silicon metal and yellow phosphorus, which are used by the steel, aluminum, automotive and chemicals industries.

The EU said imports of the raw materials covered by the case reach 1 billion euros ($1.3 billion) a year and that “the economic importance is well beyond this figure as those represent inputs for the production of a large range of products.”

China argued that the restrictions are necessary to conserve exhaustible natural resources and ease overproduction and emissions of carbon and sulfur gases from furnaces. The US, the EU and Mexico said the curbs discourage the export of materials that are “critical” for their manufacturers, while keeping them cheaper and readily available in China.

Rare earths

Rare earths became a political and legislative issue after China moved to limit domestic output and slash export quotas in July 2010 by 40 percent, souring ties with major users including the US and Japan, where buyers have cut usage after prices soared in the first half of 2011. The Chinese government, which supplies 95 percent of global rare earths, said on Dec. 28 it was leaving the 2012 overseas sales caps virtually unchanged.

The US Energy Department said earlier this month that limited supplies of five rare-earth minerals — dysprosium, terbium, europium, neodymium and yttrium — pose a threat to increasing use of clean-energy technologies such as wind turbines and solar panels. While prices of rare earths fell in the second half of 2011, they remain volatile, leading some companies to search for ways to consider reducing reliance on the minerals, the Energy Department said.

China has said the curbs protect the environment and are in line with its WTO commitments. The country’s Inner Mongolia Baotou region produces so-called light rare earths such as lanthanum, cerium and samarium. Heavy rare-earth production, concentrated in the south of China, includes the elements dysprosium, gadolinium and terbium.

 

Source: Jennifer M. Freedman, Bloomberg


Related Coverage:

Updated Media Coverage- China Rare Earths Safe from WTO ruling on export curbs

Middle Kingdom still reigns on rare earths- The Age, Business Day

Banks pull cash from Europe

January 27th, 2012

Australian banks aggressively cut their exposure to Europe’s troubled economies as the region’s debt crisis intensified late last year, pulling billions of dollars in funds from Belgium, France and Spain.

At the same time, Europe’s banks cut more than $US8 billion worth of loans from the Australian economy, as they began to feel a funding squeeze in their home market.

Still, figures to be released this morning from the Swiss-based Bank of International Settlement show Australian banks increased their exposure to Italy by more than $US700 million in the September quarter even as fears spread that Europe’s third-largest economy would not be able to meet its massive debt obligations.

There were also signs that funds were being shifted to Switzerland, which is not a member of the euro zone.

The most dramatic change has been with private and public debt in Spain, where Australian-bank exposure was cut to $US212 million at the end of September from a little over $US1 billion in the June quarter.

Australian banks cut their exposure to Portugal entirely during the second half of last year. And since the end of 2009, they have had no direct exposure to Greece.

Elsewhere, exposure to France fell slightly to $US11.6 billion at the end of September from $US11.7 billion three months earlier. Lending to Belgium, home to troubled bank Dexia, was cut by more than $US330 million.

The figures also provide an indication of which banking systems are likely to take the biggest hit as talks continue to persuade holders of Greek bonds to take hefty losses as part of a debt restructuring. They are being pressed to accept losses of 60 to 70 per cent of face value.

France’s banks have the biggest exposure to Greece, with loans of more than $US43 billion. German banks also have significant exposure, nearly $US37 billion. Both countries have cut their exposure sharply over the past year.

The BIS figures also show how the debt crisis is being felt around the world. From June to the end of September, French banks pulled more than $US4.5 billion worth of loans from the Australian economy. Italian, Irish and Spanish banks each cut exposure by hundreds of millions of dollars as they repatriated capital.

German banks appeared to make up some of the shortfall, increasing their exposure to Australia by nearly $2 billion.

While the BIS figures provide a snapshot of banking-sector risk, they do not give bank-by-bank exposure. Nor do the banking statistics include a currency breakdown or information on which claims are marked to market and which are held to maturity.

Separate figures from the bank regulator, the Australian Prudential Regulation Authority, showed France’s BNP Paribas shaved $855 million from its direct lending book here over the past year. Societe Generale trimmed more than $260 million in loans.

The APRA figures does not include syndicated loans.

 

Source: Eric Johnston, The Age- Business Day