Time For Losers To Hang In There And Ride Out The Storm
Sun Herald
Sunday September 29, 2002
ABOUT 18 months ago I put $4,000 in a managed fund and the current balance is $3,370.15. Should I wait for a few years or exit now and take aloss?
RW, Cooma
Generally, I am not in favour of sitting within a fund as a long-term investor while the value crumbles away. If I believe markets are about to enter a long-term decline, I prefer to sit in cash or in a large and secure mortgage fund and thus avoid or minimise loss of capital, simply because we cannot really forecast when the end of the drop will occur.
But remember that the whole point of the game is to grow one's capital, and hence, if I think the market looks low and about to rise, then I prefer to invest at these low prices, or at least not withdraw.
In July, the US market fell as much as 50 per cent below its March 2000 peak and, after rising in August, has fallen in September though not yet to its July low. It could fall another 10pc, but I suspect that, from October on, we should see a huge rebound in the US market, following its huge fall over the past two years, unprecedented since the 1930s.
So, no, this is not a time to withdraw. I could be wrong if the market then falls further, say, in the event of an Iraqi war, but the underlying economics in both Australia and the US are strong and it should prove a temporary downturn.
Unwelcome fees
LAST year I applied for the income tax withholding variation, which means I am not required to pay tax for the previous year. I have three small allocated pensions, only one of which has activated the withholding variation while the other two (ING and NRMA now Clearview) continue taking out tax. This means that I will still be forced to go to an accountant to do a tax return to recoup that tax they have taken out. Can I demand they pay my tax agent's fees?
JM, Armidale
Since the Senior Australians Tax Offset (or SATO) came in, which gives non-pensioners the same tax reduction as pensioners, this has become an increasing problem.
One problem is in informing institutions paying you an income. If there is more than one source, you are required to fill in an S15-15 form the income tax withholding variation formerly known as an S221D form. The ATO then contacts the institution which, if it is so set up, can cease deducting tax.
The funds handling billions of dollars and paying out millions in pensions, distributions and interest have, in the past, all properly set up their complex computer systems to withdraw PAYG tax, as they are required to do.
SATO has now created a larger class of non-taxpaying citizens and, to meet their needs, the institutions must change their software. Other changes also need to be programmed in, for example, the superannuation-splitting legislation coming into force next year.
I understand that both Clearview and ING are unable, or unwilling, to change their software immediately and thus cannot stop withdrawing PAYG until the computer system is changed, hopefully next year.
Are you justified in requesting that they pay your tax agent's fees? I think it's worth a try.
Worthless notes
THE AMP Reinsurance Note registry has advised me that my notes were redeemed in full and cancelled from August 16, 2002. According to the newspaper, the exit price of AMP Income Security (ASX code AMQHA) was $90.70, with the maturity date undated. Can I keep AMQHA and wait for the price to be higher or must I redeem as soon as possible?
AP, Willoughby
You are confusing two different securities and to explain this I need to go back to 1999 when AMP took over GIO.
At the time, AMP offered to swap AMP Income Securities with a face value of $100 for GIO shares of equivalent value.
Income Securities are also known as floating rate notes (FRNs) and pay a flat rate of interest over and above the current short-term interest rate. They are listed on the ASX with the code AMQHA.
There are no plans to redeem these securities and it will continue to pay its quarterly interest, currently 6.2 per cent pa. As you mention, the price of these FRNs is about $90, so any original holder who sells would crystallise a 10pc loss on the original value.
(Two of the FRNs listed in the paper each day DO have maturity dates, but AMQHA belongs to the majority which do not and hence its maturity date is undated. There was some talk early on that the companies might redeem their FRNsif the tax office changes its treatment of them but nothing has come of that to the best of my knowledge.)
At the same time, AMP felt the need to offer GIO shareholders a promise that they could still participate in any returns from GIO's reinsurance division, should there be any, even though losses were expected. (Although they obviously didn't expect losses to the extent that they emerged.)
So AMP came up with the idea of reinsurance notes which were basically a promise to pay a share of the profits from that division to ex-GIO shareholders.
If I remember right, the losses were over $1 billion and hence no payments were made at all to reinsurance note holders.
With the passing of June 30, 2002, the reinsurance notes became worthless and have been cancelled.
They were not listed on the ASX.
© 2002 Sun Herald
