How Safe Is My Money

The Sun Herald

Saturday June 27, 1992

George Cochrane

Q MY wife and I are age pensioners and jointly have $115,000 invested in bank and building society term deposits with the Commonwealth Bank, Advance Bank, NAB, Westpac, St George, Newcastle Permanent Building Society, and Greater Newcastle Building Society. We also have debenture stock with ESANDA and also Telecom loans.

We are not looking for more interest, more pension or reduced taxation. We want to know if our funds are quite safe and secure with the above institutions - especially Westpac where we have invested $70,000 for three years. Recent announcements by Westpac are startling.

In the next two months, $75,000 of our investments spread over most of the above institutions are due to mature. Should we roll them over or move the funds into traditionally safer havens such as the Commonwealth Bank and Telecom?

I G, Toukley

A THE question of the safety of our financial institutions is often a legally grey area. Recently introduced rules now demand that banks have a small proportion of capital in reserve for each dollar lent on home loans, a higher ratio for business loans and so on (called, in the jargon, risk weighted capital adequacy ratio). All Australian banks, including Westpac, meet these capital adequacy requirements. Using this criterion, one could say that all banks in Australia are safe.

However, only deposits with the Commonwealth Bank have a Commonwealth Government guarantee. All banks (that is, those with a banking licence and not some that might market themselves as "mortgage banks") are legally required to be under Reserve Bank supervision. This is good for producing generalised statistics but, as we have seen, it does not stop banks from undertaking unwise lending practices.

Under the 1959 Banking Act, the Reserve Bank is required to "protect depositors", but it does not guarantee them. Nor does it guarantee any bank. Using this criterion, all banks except one are only as safe as our faith in the system.

New Telecom bonds issued since 1991 do not carry a Government guarantee. Older bonds retain theirs.

Thankfully, no building society in NSW or Queensland has gone broke in this recession. Until now, societies have been subject to different rules in each State but a new federal body, the Australian Financial Institutions Commission(AFIC), is planned to begin operating on July 1 (but still subject to parliamentary approval) and will introduce nationwide rules. For example, societies will be subject to capital adequacy requirements similar to that of banks.

Also, if the need arises, AFIC can call on other societies to contribute cash to support a fellow society. These rules are likely to see some weaker societies merge with stronger ones, although there is little pressure for this among NSW societies.

Newcastle Permanent claims it is one of the strongest institutions in the country with a risk-weighted capital adequacy ratio of 23.8pc, well above the 8pc required under AFIC. Greater Newcastle is also regarded as a strong institution with 12pc.

Q MY wife and I bought a South Coast holiday house five years ago. We paid$50,000 and if we sell it now we will get about $100,000.

What is the best thing to do to avoid capital gains tax, for example, pass it over to my children or daughter-in-law?

If we sell it now, how much would I have to pay on capital gains tax?

M V, Rockdale

A SINCE you bought it after September 19, 1985, it is subject to capital gains tax. If you give the holiday house to anyone it will be deemed by the Tax Office to be a sale and tax is liable.

If you leave it in your will to anyone, then they will pay tax on it only when they sell it, with tax assessed on the profits calculated since your purchase date and price, not your date of death. If they choose to live in it then no tax will be assessed for those years they use it as their principle home.

To calculate the tax payable, you and your wife will each be liable for half the profits or $25,000, assuming you have invested in joint names and jointly funded the house. (A recent tax case ruled that investing in joint names does not automatically mean the profits are jointly owned if in fact only one of the partners funded the investment.)

To calculate the tax on your $25,000 capital gains, you divide it by 5 and add the $5,000 to your assessable income. Suppose you paid tax on $20,000 during the year, then the additional tax paid in rising from $20,000 and$25,000 is $1774. Multiply this by 5 and the tax for which you are each liable is $8,870.

Of course, if your wife earns nothing that year, then she pays no capital gains tax since the tax paid on $5,000 is nil, and 5 times nil is nil.

Q MY husband is 29 and I am 27 and we were both made redundant last year. My husband and I have our own business which is going well. We bought our home in 1987 and paid it off this year with my redundancy money. We still have some of his money in a rollover fund (ANZ). What we would like to know is:

* Should we sell our home and buy a larger one in a better suburb and get a mortgage; or

* Buy a unit on the Gold Coast and rent it out and use the rollover money to buy it as well as having a mortgage.

C M, St Marys

A I AM glad to see redundant employees doing well on their own efforts. As I explained last week, I do not think this is the time to be buying new houses. Since your home is already paid off, I suggest you leave your money in the rollover fund for a rainy day for a year. Think it over in the light of subsequent events this time next year.

© 1992 The Sun Herald

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