Sunday, August 13, 2006

Get a Bank Boost, claim a tax deduction on life insurance


A fundamental rule of Investing
One of the fundamental rules of investing is "buy low, sell high". It was stated by legendary investor Sir John Templeton half a century ago, and sung by the Rogue Traders in their 2006 hit, "Way To Go". Templeton bought stocks at the start of WW2 when markets were low and turned a $10 000 investment into $4 million. The Rogue Traders turned a bunch of other people’s songs into a goldmine…

20% discount plus free steak-knives
Alright, so you may not receive free steak knives with your next property purchase, but you may well receive a price discount of 10% to 20% if you are patient. With property markets slowing down, it represents a great time to buy. Sellers are more motivated to haggle and the number of places for sale means that you may take your time to look around for the best deal.

Beat the banks
Contrary to popular belief, banks do not like to repossess people’s houses. Have a look around the branch: it is quite small. There is no place for them to store houses, cars or office blocks that they repossess from tardy payers. The banks do not have room to store physical "stuff"; what they do like to collect is money…

As recently as 1999, one of Australia’s largest banks sold a man’s business premises for 40% of its true value. (Do not ask "which bank?"; the more important question is "Why?") The reason why they sold his premises for 40% of its market value was because he owed the bank 40% of the value.

The bank was not interested n selling the premises for the best price; they were not interested in holding the property and waiting for the market to surge before selling it: they just wanted their money. They did not want land or profit, they just wanted the tardy loan off their books.

Plan ahead for the worst case scenario
As the bank would prefer to receive money rather than land, do yourself a favour and ensure that you can repay the loan, whether you are alive or dead. The bank will give you a loan if you can work and repay the money while you’re vertical, but do not overlook the inevitable. One day you will die, and if you die before you repay the loan, the bank would like to have money, not the building.

If you would like to get a loan for $500 000 and repay it over 20 years, then invest into a $500 000 life insurance policy before you visit the bank.

The bank manager will want to see the income sheets to see if you can pay for the premises or home while you are still alive and working. Show him the figures.

They will also need to conduct due diligence to ensure that the loan will be repaid when you die. Show him your life insurance policy.

You are now prepared for any eventuality and you will have cash to repay the loan, not assets. This ensures that the bank is protected from forced sale and that your family is protected from losing the asset to repossession. Be prepared to answer any question the bank throws at you and you will win.

Claim a Tax Deduction on your life insurance
If you are a self-employed person, there are many tax deductions available to you which are not available to your employed peers. (See "Is my Pizza Tax Deductible?")

While your friends may have a superannuation fund that is paid into by the boss, they cannot normally claim a tax deduction for paying into their own super*.

A self-employed person can claim a tax deduction for payments made to their own super fund. Your employee friends will not normally be able to claim a tax deduction on their life insurance cover*. A self-employed person can often claim a tax deduction on their life insurance...

You have already seen why the bank would prefer your debts to be secured with cash rather than with hard assets. The bank can actually insist that you obtain life cover in certain situations and make it a mandatory part of the loan conditions. The bank cannot insist which company you obtain the insurance with, and they cannot tell you whether you can claim a tax deduction or not. Call a good financial planner or life broker and find out what else you can claim (apart from the pizza).


Jeremy Britton DipFA SA(Fin)
Ph: 07 5443 5577 Mobile: 0410 INVEST

(*There are certain situations where an employed person may be able to obtain tax-effective super contributions or government assisted life insurance premiums. It is far easier to achieve if you are self-employed, but still possible for employees. Call your financial planner to see if you qualify.)
This article is for general information only and is not intended to constitute any form of financial advice or recommendation of, or an offer to buy or offer to sell, any security or other financial product. Jeremy Britton is an Authorised Representative (#298825) of Professional Investment Services Pty Ltd, ABN 11 074 608 556, AFSL # 234951. Approval #H488
We recommend that you seek your own independent legal or financial advice before proceeding with any investment decision, including purchasing, disposing or holding, of an asset, policy or investment.

No comments: