Should I Sell Property Fund Units?

The Sun Herald

Saturday August 8, 1992

GEORGE COCHRANE

Q I WOULD like your advice about the Advance Property Fund.

I bought 32,000 units in Advance Property Fund No 5 at 50c each in 1987.

The units are now listed on the stock exchange and their value has dropped markedly.

I had intended to keep these shares for the long term. Should I retain these units or sell? What would your suggestions be for reinvesting the money

C P, Padstow

A ADVANCE Assets combined its No 2 Split Property Trust and No 5 trust into one and listed on April 9 as the Advance Property Fund with Growth, Income and Combined units.

Your units in No 5 trust were valued at 37.43c in April and you were issued 1 Combined unit with a Net Tangible Asset (NTA) backing of $1.72 for every 4.6 units you owned.

These have since been revalued down to $1.62 and are now $1.13 on the sharemarket making your original $16,000 now worth $7,860.

In mid-July, Advance forecast that Combined units would earn 11.2c income for the 12 months to June 93, yielding around 10pc. Of this, 15pc is tax-free(stemming from depreciation of buildings) and another 30pc tax deferred(stemming from depreciation of equipment).

For other readers, I note that Advance is allowing switching off market(i.e. in the manager's office rather than through the stock exchange) from Growth and Income units into Combined units at NTA every three months after their regular quarterly update valuations. Full valuations are done each December.

I note that at least one other major property trust is forecasting falls in income as rents fall and I would expect this to carry through to all other commercial property trusts and this is likely to lead to further falls in NTA's over the next year or two.

I tend to think your investment is unlikely to show much capital growth but if you reinvest the income you will at least be achieving some 10pc growth before tax, assuming no major falls in income.

If you sell then you can carry forward capital losses against future capital gains but I suspect this will not be of much immediate use. You could switch to Income units which are forecast to receive 20c in the next 12 months.

These receive 8/9ths 4 of income and 1/9th 5 of capital growth and are now $1.80 showing a yield of 11pc.

My preference at the moment is for fixed interest and Government Bond funds which are returning around 10-12pc, but without any tax benefits. Examples are BT Bond Fund, AMP or GIO Fixed Interest funds.

Q MY wife and I have built a house for us and my daughter (deserted) and her two teenage daughters. Its total cost was $300,000 for house and land.

Because my wife and I are aged pensioners and both we and our daughter (who is working) need to supplement our meagre incomes, we planned to sell the new house to a Sel-Stay organisation which we understand will pay as much as 50pc of the value of the house. Such money would then be invested somewhere.

Could you recommend some Sel-Stay organisations and advise how best to invest the sum that they are prepared to pay us?

C J, Menai

A I KNOW of two products. Sel-Stay (tel (02) 262 6177) acts as a specialist real estate agent, offering to introduce investors to people(mostly aged) seeking to sell their (Sydney-only) homes and then stay in them.

A number of flexible schemes are offered whereby a homeowner actually sells the property and receives between 25-40pc of the value of the home. They can then live in it either for the rest of their lives or until they move elsewhere.

On death or departure, there may or may not be payment of the outstanding money, depending on the agreement.

The deals are obviously structured to give the investors a high return and therefore are not necessarily to the financial advantage of the elderly person in the long term.

Given the current state of the market, there seems to be little enthusiasm for the arrangements.

Department of Social Security rules covering such sale and leasebacks were changed recently when the Social Security Amendment Bill was given Royal assent on June 26.

The DSS looks to see if the deferred payment (i.e. paid on death or departure) in such an arrangement is greater than the difference between the asset limits for homeowners and non-homeowners.

For example, suppose in your case, you accepted a 33pc payment (or$100,000) with $200,000 deferred until sale after age 80.

Now the assets test limit (after which the age pension begins to reduce) is$160,000 for a married homeowner and $240,500 for a married non-homeowner and the difference is $80,500. (For singles, the figures are $112,500, $193,000 and $80,500 respectively.)

In this example, the amount of your deferred payment ($200,000) is greater than $80,500 and so you are considered to be a homeowner for the purposes of the assets test.

The amount owing ($200,000) is thus not classed as an asset and you are thus not eligible for rent assistance.

The $100,000 you receive in cash is counted as an asset and the income you receive on investing it counts towards the income test.

Where the amount owing is less than $80,500, you are treated as a non-homeowner for the assets test.

The deferred payment is assessed as an asset as is the money you receive in cash. The income test will count the income received on the money invested but does not assume a deemed income on the deferred amount.

A second product is a "Money for Living" mortgage loan from the Advance Bank, for people or married couples both over 68.

The bank will lend up to 20pc of the house ($60,000) in your case with a minimum of $20,001.

The current interest rate charged is 10.25pc (0.5pc over the home loan rate) and the loan does not need to be repaid because the interest is added to the capital every month.

The home must be sold on death and the loan repaid.

The application fee is around $300.

Under DSS rules, the first $40,000 borrowed under such "home equity loans"is not seen as income and is disregarded for 90 days by the assets test.

But on investing the money all the income is assessable under income test from day one.

I suggest that the best thing you can do is to stay in your house.

If you are really strapped, you can trade down to a $200,000 house.

At least you will then have something to leave your daughter.

Q WE have $60,000 and soon will be living permanently in the Philippines.

We would like the interest to be paid annually into our account in the Philippines. How should we invest? What investment is offered there? Can we convert all our Australian dollars to a stronger currency giving us more pesos? Can we invest the money outside the country legally? Can we take it with us? So many questions |

J F, Wentworthville

A THERE is nothing to stop you investing in Australia and having interest sent overseas.

I know little about investing in the Philippines.

I suggest you invest in a safe, high interest investment, such as NSW Treasury Corp 10-year bonds now paying 8.4pc.

Your ownership of the bonds is listed on a registry kept in Sydney (i.e. you do not carry any bonds around with you).

If you need the money, you can then send a request by mail that some or all be cashed in and mailed to you. Tel (02) 551 9938.

Since you are leaving Australia permanently, you will be classified as a non-resident and the tax implications vary with the type of investment.

If you invest your money in bonds or with, say, a bank, you are obliged to give it your overseas address (which also allows you to avoid giving a tax file number).

The bank will extract "withholding tax" of 10pc on interest payments.

If you invest in, say, BHP shares, BHP will extract 30pc withholding tax on unfranked dividends paid to a non-resident living in a country with which Australia does not have a tax agreement, or (usually) 15pc for those tax agreement countries with one or two exceptions.

The Philippines is one of those exceptions with the rate being generally 25pc. For franked dividends, no withholding tax is payable.

If you should invest in a trust, such as a mixed trust paying both interest and dividends, then the trustee is required to pay the withholding taxes.

Wherever withholding tax is taken out, or tax-producing franked dividends, then the income does not need to be shown on an Australian tax return by a non-resident.

You are unlikely to buy a property, or invest in a property trust but, for the record, different tax conditions apply.

Note that the Chatswood Tax Office Advisings section has a pamphlet available explaining how people who become non-residents during the year need to prepare their tax return. Call (02) 419 9319.

© 1992 The Sun Herald

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