Q&A Friday 28 May 2010
By VoV | Q&A Friday | Friday 28th May 2010Welcome to our new Q&A Friday feature. I expected to be inundated with questions and you did not disappoint me!
We don’t have room to answer all the questions I received, and some questions take more time to research, so we’ll carry all unanswered questions over to next week. In some cases it might not even be possible to answer a question. I’m sure you appreciate that our expert has to be careful about what he says!
I have selected James Usmar from Saturn Portfolio as our resident investment expert. James is one of the few ethical people I trust, from one of the few truly independent advisory companies I respect. Scroll to the bottom of the page for more info.
Q&A Friday will be published every Friday while there is demand. Email your questions to vern@vov.co.nz. We won’t publish your name.
Tax and finance company losses
Question: I want to know in what circumstances (if any) investors can claim losses on finance company debentures as a tax deduction.
James says: I am not qualified to give tax advice so please check with your accountant regarding your individual circumstances. My generic understanding is that you could claim losses if you held your investments on revenue account but not capital account, i.e. if you were a share trader rather than a buy and hold investor. Most buy and hold investors seeking [non-trading] income would hold the investment on capital account. So to add insult to injury no losses can be claimed sadly.
Diversified Mortgage Trust
Question: The “A” class has been repaid in full. I haven’t been able to find any information on what is happening with “B” class debentures. Their website is well out of date and not helpful. Does anyone have any recent information?
James says: There will be a newsletter from the manager and simultaneous commentary from the trustee on the week of 8th June.
South Canterbury Finance
Question: Please could you tell me how safe the South Canterbury Finance Secured Stock is under the Extended Government Guarantee? This is their latest offer at 8% p.a. return. And this is a great idea of yours, as I find that so-called advisers and brokers are too cautious / scared to give a straight answer to questions like this these days.
James says: By way of background, as part of a set of measures to stabilise the NZ financial system during the ‘credit crunch’ the Government stepped in and guaranteed certain financial institutions. In effect, if the institution covered by the guarantee failed, the Government would step in and repay qualifying investors their capital and outstanding interest.
The initial guarantee period ran from around the end of October 2008 to 12 October 2010. During this period the Government announced it would extend the guarantee until 31 December 2011. However, there were strict criteria that companies had to meet in order to be covered by the extension. Well over 50 companies were covered by the original guarantee but very few will now be covered by the extended guarantee. South Canterbury Finance being one.
Details of who qualifies can be found on Treasury’s website here:
www.treasury.govt.nz/economy/guarantee/retail/approved/index.htm
The normal risks associated with finance companies are contained within the investment statements and associated prospectus. Please read these carefully before investing. I am sure that by now you probably would not invest in finance companies unless the period for investment was covered by the guarantee anyway!
I suggest you broadly familiarise yourself with the “Crown Deed of Guarantee” for any company you are thinking of investing in that qualifies for the extended Government guarantee.
The key point of the guarantee is that if the company you are invested with defaults, the Crown will repay your capital and outstanding interest. The document does not contain a specific timescale that the Government would repay you or whether interest is paid up to the date of the Government repayment.
A precedent has been already set though, and my understanding with Mascot investors is that the Government repaid investors within about 12 weeks and included interest to the date of repayment.
In the case of Vision Securities, which went into receivership while covered by the Government guarantee, no clear date for repayment has been set and there is no way of knowing whether the Government will repay interest owed to the date of receivership or the date that they repay you your capital and interest.
It is extremely unlikely but not impossible that the Government would not meet its liability under the guarantee, although in what circumstances I cannot conceive. So if you justly assume that the Government makes good, and you invest in a company that fails, you may have to wait significantly longer than the maturity date to receive your repayment. The question you should ask yourself is: If the Government procrastinated for whatever reason, would you be able to wait?
It is also important to check that the investment you’re making is covered under the Government guarantee. The companies offering investments under the extended guarantee also offer non-guaranteed investments which run alongside the guaranteed ones, usually providing higher rates of interest – check carefully!
Equitable
Question: We have Equitable investment $17,000 due and not sure what to do. We put our eggs in many baskets and they all fell over so we are very cautious now. It is imperative we do not lose any more investments. Your advice will be very welcome.
James says: This very much depends on your circumstances, what your timescales are and what level of risk you are prepared to take. Equitable has survived well through very unfavourable conditions. They offer a range of Government guaranteed rates which may be worth considering depending on your circumstances. As difficult as it may seem, I recommend that you carefully seek professional advice.
A guide to helping you find an adviser can be found at the Securities Commission website here:
www.sec-com.govt.nz/invest/choosingAdviser/
Or here at Sorted:
www.sorted.org.nz/home/sorted-sections/investing/paying-your-adviser
About James Usmar
James was a qualified financial planner in the UK working for a tax consultancy firm. He specialised in investments through financial centres such as Jersey and the Isle of Man. James joined Saturn Portfolio as an investment adviser after immigrating to New Zealand in 2006.
About Saturn Portfolio
Saturn Portfolio is an investment advisory firm built on a history of trusted advice since 1988. They invest $160 million on behalf of clients. Four experienced client advisers work in the business. Saturn Portfolio is not aligned to any investment manager or product provider. This means they can freely select and recommend the most appropriate investments for you.
Their process is to discover and discuss your current situation, goals and investment knowledge. Once they assess your needs they give you a written plan, which they discuss with you and clarify any queries. They do not implement the recommendations until you give approval to proceed.
Importantly, Saturn Portfolio’s sole source of income is the fee you pay to them. They do not take any commission or brokerage from product providers. www.SaturnPortfolio.co.nz
Tags: Diversified Mortgage Trust, Equitable, James Usmar, Saturn Portfolio, South Canterbury Finance
Friday 28th May 2010 at 3:46 pm
Two errors in James’s comments:
(1)”So to add insult to injury no losses can be claimed sadly.”
Losses on finance company debentures *can* be claimed as a tax deduction in certain circumstances
(2) “In the case of Vision Securities, which went into receivership while covered by the Government guarantee, no clear date for repayment has been set and there is no way of knowing whether the Government will repay interest owed to the date of receivership or the date that they repay you your capital and interest.”
The Trustee for Vision Securities has announced that interest will be paid up until the date of principal repayment.
Friday 28th May 2010 at 4:01 pm
Patrick, the way I read James’ answer is that he says the same thing as you – that losses on finance company debentures can be claimed under certain circumstances, but as a general rule most investors would not be able to. So you are both in agreement. If you are an accountant, could you please expand on what those “certain circumstances” are? I’m sure many would love to know! Thanks.
Friday 28th May 2010 at 4:36 pm
The first thing people should do is go to
http://www.ird.govt.nz/tib
Select the March issue and read the article:
“”Trust in business of holding financial arrangements and allowed bad debt deduction”.
Friday 28th May 2010 at 5:16 pm
Thanks Patrick, interesting reading! It certainly does look as though it is only very exceptional circumstances that a tax deduction would be allowed.
It looks like the Commissioner denied the Trust’s claim for a bad debt deduction, and after appealing to the TRA it was ruled that there was “just, and only just” a sufficient level of activity to support the Trust’s claim that it was carrying on a business, not an investment activity.
I also note that the Commissioner considers that the judgement is confined to its particular facts.
This would all tend to support the view that for *most* investors, losses cannot be claimed.
However, if some investors were active share traders and paid tax on the capital gains, then it would appear they have a legitimate claim.
Friday 28th May 2010 at 6:54 pm
No, an investor’s activity in the share market is irrelevant. Tax is paid on capital gains on fixed interest investments (“finanancial arrangements”) regardless of whether one holds them on revenue or capital account – effectively the distiction doesn’t exist. Logically speaking then, capital losses are deductable. As you say it comes down to the level of activity. In the case mentioned, the trust held only 4 of “financial arrangements” and that was deemed to be a sufficient level of activity. Note that the key point is that they “held” them i.e. they didn’t have to be trading them. Many Vestar investors would have held at least 4 finance company deposits and would do well to investigate the possibity of making a claim. Certainly this would be a more productive activity than waiting years for “someone” to start a class action against the finance companies concerned. Good Luck !!