Staff Updates
Notice of Extended Leave
Ken Wild will be on extended leave for all of June and July 2016. If you foresee any issues arising during that period that you would like to discuss with Ken before he takes leave, please make contact with our office to schedule an appointment as soon as possible so we can put in place the appropriate strategies or actions.
In Ken’s absence please contact the following staff members if any unexpected issues arise:
- Jodie Dickson – financial advice and investment related matters (email jodie@veritassolutions.com.au)
- Allison Reid – administrative matters (email allison.reid@veritassolutions.com.au)
- Rose Geary – administrative matters (email rose@veritassolutions.com.au)
Team Additions
Many of you will have already had the pleasure of dealing with her, but we would like to extend a very warm welcome to our team to Rose Geary. Rose joined us towards the end of the 2015 year as part of our Client Services team assisting Ken to deliver great outcomes. She comes to us well qualified, possessing a Bachelor of Commerce and Law and previous experience in a financial services environment.
Team Subtractions
With sadness, we advise that Maureen Wild will be moving on to pursue other opportunities after many wonderful years as a valued member of our team. Maureen’s last day will be Wednesday 27th April 2016 and while we will miss her expertise and smiling face, we wish her well in her future endeavours.
SMSF Minimum Pension Withdrawal Reminder
A quick reminder for our SMSF trustees about the importance of withdrawing the minimum pension amount from your superannuation fund before Thursday 30th June 2016. You can find each member’s minimum pension withdrawal amounts for 2016 in the covering letter we included with your 2015 financial statements. If you have any questions to do with your minimum pension requirements please call our office to discuss with one of our accountants.
Changes to Motor Vehicle Deductions for the 2016 Financial Year
The number of methods available for calculating your motor vehicle deductions has been reduced from four to two. The two methods that you can use for the 2015/2016 financial year are the log book method and the cents per kilometre method.
Log Book Method:
The log book method remains the same as previous years where you can claim the business use percentage of the vehicle. The expenses that you can claim under this method include the running costs and decline in value. You cannot claim capital costs (eg, the purchase price of the car, principal costs on money borrowed to buy it, and any improvement costs). The log book must be kept for a minimum of 12 consecutive weeks and is valid for the next 5 years.
Cents per Kilometre:
Previously, the rates for claiming a deduction of cents per kilometre were based on the engine size of your vehicle. In order to simplify this, the ATO has replaced these variable rates with a single rate of 66 cents per km regardless of the engine size of your vehicle.
Exceeding Your Maximum Pension Withdrawals for TRIS
A Transition to Retirement Income Stream (TRIS or TTRP) is a special type of pension that allows a member to access their superannuation benefits while still working once they have reached preservation age. There are specific restrictions which state that the maximum allowable withdrawal is 10% of the member’s balance. When a member has a TRIS and they exceed this maximum pension withdrawal limit within the financial year, they have breached the super laws and regulations that the super fund must abide by. The trustees of the fund need to be aware that the following may apply:
- The fund may become non-compliant and the trustees penalized.
- The TRIS will cease for tax purposes from the start of that financial year, meaning that the fund will not receive any current exempt pension income for year (will have to pay more tax!)
- As the TRIS has ceased, any payments made during the year are not considered pension withdrawals and will be counted as super lump sums for income tax purposes and Superannuation Industry (Supervision) (SIS) Regulation purposes.
- These lump sum payments will then be included in the member’s assessable income and may be taxed at the taxpayer’s marginal tax rates, without the benefit of any tax offsets. These payments are treated as early access to member benefits which is a breach of the SIS payment standards.
If you are unsure if you can withdraw certain amounts from your SMSF, please contact our office to discuss with one of our accountants before making the withdrawal.
The Hidden Influences of Your Brain – Part 2
In last quarter’s newsletter, we followed Mark & Meg as they purchased a car and discussed a number of hidden decision-making biases that they were exposed to. This quarter we will look at some common investment errors that result from underlying behavioural biases.
While Mark & Meg are a married couple and share the family income and expenses, they have quite different risk preferences and perspectives on investing. Both had assets before they met so have continued to manage their investments separately. Mark is a self-directed share investor, managing a portfolio of individual stocks. Meg mostly prefers to invest in managed investments.
Mark buys Ivoprotein Industries Ltd
Mark is considering a new investment opportunity that he recently read about, Ivoprotein Industries. It’s a small listed company that has developed a gene-based therapy that reduces appetite and can help the overweight. It has received FDA approval in the US and has signed up a distribution agreement with a major pharmaceuticals company. Sales are growing rapidly (albeit off a small base) and, given the global obesity epidemic, the potential market size is huge. Ivoprotein’s share price has risen from 5.5c just 18 months ago to 48c today.
What behavioural biases can you spot?
There is a collection of biases that are likely to predispose Mark to buy Ivoprotein. Firstly, there is a lot to like about Ivoprotein, and a lot to be excited about. An innovative new product; high sales growth; high share price growth; an expanding market opportunity (pun intended); a salient and easily understood investment story. These characteristics are likely to engage the reward pathways in the emotional centres of Mark’s brain making him feel good about the stock. In the complex and uncertain world of share market investing, feeling good about something can be an easy shortcut when deciding what to buy. However, unfortunately, good feelings don’t necessarily predict good performance!
Secondly, as we saw with assessing Audi’s maintenance record, we are subject to a range of information processing errors. These may lead Mark to extrapolate Ivoprotein’s share price growth, sales growth and commercial successes into the future. However, due to a phenomenon called “regression to the mean”, other things being equal, Mark should expect Ivoprotein’s stellar run to revert to closer to industry average performance for equivalent biotech stocks.
Thirdly, based on the success rate of other promising biotech companies like Ivoprotein, we would expect there to be a very small chance that Ivoprotein will go on to become a highly profitable global drug company. However, just like the small chance of winning the lotto, we tend to weight these small probability events more heavily in our decision-making process than we should.
The effects that lead Mark to buy Ivoprotein are common to many “growth” stocks, and have far-reaching implications for investment markets and strategies. We will explore these in later posts.
Meg sells Australian Equities Fund
While Mark watches the stock market daily, Meg tunes in to financial matters only occasionally. There are too many other things going on in her life, and it isn’t a passion of hers. However, it seems to her that whenever she reads something about financial matters it is bad news: there is a war starting somewhere or a central banker causing market to fall. Meg is going to sell some of her Australian Equities Fund to help pay for her new car. To reduce her risk, she’s wondering whether she should convert more of her fund to cash.
What behavioural biases can you spot?
Like Mark, Meg is subject to both emotional and information processing biases. A major cause of Meg’s thinking is likely to be her “loss aversion”. Loss aversion means, in part, that we fear losses roughly twice as much as we enjoy equivalent gains. Every piece of negative news increases Meg’s anxiety, making her increasingly predisposed to sell as the market falls. Of course, selling after market falls is the opposite of the conventional wisdom – meaning that Meg is at risk of selling at the worst time and being under-invested during a subsequent market rebound.
Meg is also subject to the “availability bias”. In theory, a fully rational investor should process all available relevant information before making an investment decision. Clearly this is not realistic, particularly for Meg given her competing priorities. We are therefore likely to act on information that comes to our attention. In Meg’s case, the information she relies on is what is presented to her via mainstream news channels. As a result, it has been filtered to reflect perceived news-worthiness, perhaps biasing it towards sensationalist (negative) events.
Mark sells Tintop Resources Ltd
Like Meg, Mark needs to free up some cash to help purchase the new car. He also needs to fund the acquisition of Ivoprotein. To do this he is thinking of selling his investment in Tintop industries. Mark bought Tintop for $2.33 a few months back. Since then it’s done well – rising to $2.81, netting him a healthy 20% gain. “I’ll lock in my profit,” Mark says to himself.
What behavioural biases can you spot?
While it may be completely necessary for Mark to sell something to fund his car purchase and other investments, choosing Tintop suggests Mark may be subject to the “disposition effect” which is the tendency to sell winners (ie investments on which we have made a gain) and hold onto losers. It is a function of two underlying effects: “mental accounting” and “loss aversion”.
Traditional finance theory suggests that a fully rational investor should view each investment in the context of its contribution to overall portfolio risk and its contribution to achieving their long-term financial goals. However, many investors consider each investment in isolation. This is a form of mental accounting. Given the complexities of investment markets and our finite brain capacity it serves a useful purpose. It simplifies investment decisions to a manageable level. However, it leaves us exposed to making individual stock selection decisions that do not improve overall portfolio performance.
We discussed part of the “loss aversion” effect with Meg’s decision to sell some of her Australian Equities Fund. Mark is experiencing a different aspect of it. Mark’s gain makes him feel good. However, the bigger the gain, the less additional satisfaction he derives. Conversely, were that gain to evaporate, his positive feeling would diminish rapidly. Studies suggest that investors consciously or subconsciously envision this scenario, and anticipate the regret they would feel if they didn’t sell when they had the chance. With diminishing pleasure from further gains, and large potential regret from not selling, off-loading Tintop may feel like a natural thing for Mark to do.
Unfortunately the disposition effect leads to bad outcomes for investors – leading them to sell stocks (winners) that continue to rise, and to hold stocks (losers) that continue to fall.
The Duties of a Company Director – Part 2
In last quarter’s newsletter, we discussed the basic duties required of Company directors. The following are further requirements that directors must fulfil in order to comply with the Corporations Act 2001.
Your annual statement
Each year within a few days after your company’s review date ASIC will send your company an annual statement.
The annual statement sets out the company’s details recorded in ASIC’s register, such as the names and addresses of its directors and secretary, registered office, principal place of business, ultimate holding company (if any), share details and members’ details.
If these details are correct and no other changes have occurred that require you to notify ASIC, then within two months after the review date you need to pay the annual review fee shown in the invoice that accompanies the annual statement, and the director(s) need to pass a solvency resolution.
If any details on the statement are no longer correct, you must update them. You have 28 days from the statement’s issue date to do so.
Pass a solvency resolution
The company’s directors must pass a solvency resolution within two months after the company’s review date, unless the company has lodged a financial report with ASIC within twelve months before the review date.
A positive solvency resolution means that the directors think that there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. You don’t have to lodge notification of a positive solvency resolution with ASIC, payment of the company’s annual review fee is taken to be a representation by the directors that the company is solvent.
A negative solvency resolution means that the directors think that there are not reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable. If the directors pass a negative solvency resolution ASIC must be notified within seven days after the resolution has been passed.
Changes in your company’s details
ASIC must be informed of certain changes to your company, some of the common changes are listed below. The Corporations Act requires officeholders to inform ASIC of these changes within a certain time period otherwise late fees may apply.
- Change of place you keep your Company Registers
- Change of officeholders or details of officeholders
- Resignation of director or secretary
- Change of registered office
- Change of company name
- Issue of new shares
- Change to members (shareholders)
- Changes to ultimate holding company
- Division or conversion of shares
- Negative solvency resolution
- Solvency resolution not passed
- Change of company review date
If you would like further information about the duties and responsibilities of a director, please contact our office. Further details can also be found on the ASIC website.