The US Fed TARP props "Toxic Cocktail" of "Too Big to Fail"

An excellent article by Simon Johnson professor at MITs Sloan School of Management, has been plublished today on Bloomberg.

Johnson restates the view that "the very effectiveness of US Treasury actions and statements in late 2008 and early 2009 had undeniable side effects, by effectively guaranteeing these institutions against failure, they encouraged future high-risk behaviour by insulating the risk-takers who had profited so greatly in the run-up to the crisis from the cosequences of failure.  And this encouragement isn't abstract or hard to quantify. It gives an unwarranted competitive advantage, in the form of enhanced credit ratings and access to cheaper capital and credit, to institutions percieved by the market as having an implicit Government guarantee."

The most interesting point of this article is that the Dodd-Frank financial-reform legislation was supposed to end too big to fail in some meaningful sense. But what has changed?   Johnson says:

"at the end of the third quarter of 2010, by my calculation, the assets of our largest six bank holding companies were valued at about 64% of gross domestic product - compared with about 56% before the crisis and about 15% in 1995."

"Our largest banks are now bigger, in dollar terms, relative to the financial system, and relative to the economy, than they were before 2008. So how does that make it easier to let them fail?"

For the full article click on this link: http://www.bloomberg.com/news/2011-01-27/banking-toxic-cocktail-is-too-big-to-forget-commentary-by-simon-johnson.html

Pimco pops Ben's bubble

Karen Maley for Business Spectator reports that PIMCO, globally the biggest bond trader, has dumped all of its investments in US government-related debt including US Treasury bonds and agency debt.

PIMCO’s founder and managing director, Bill Gross, has made little secret of his concerns that bond yields could rise sharply – and bond prices fall – when the US central bank’s $US600 billion bond buying program expires in June.

PIMCO’s flagship Total Return Fund slashed its holdings of US Treasury bonds and agency debt to zero at the end of February. A month earlier, such investments made up 12 per cent of the fund’s investments. 

At the same time, the $US236.9 billion fund boosted its cash holdings. The fund held $54.5 billion in cash at the end of February, a sharp rise from $11.9 billion it held a month earlier.

This is a stunning vote of no confidence in the policies of the US central bank by PIMCO.

For the full article click on the link below.

http://www.businessspectator.com.au/bs.nsf/Article/PIMCO-Bill-Gross-bonds-Ben-Bernanke-QE2-pd20110310-ESSLW?OpenDocument&emcontent_Maley

David Murray: "the relationship between house prices and incomes is uncomfortably high"

High Australian house prices have made our economy "vulnerable" to overseas events

Future Fund Chair, David Murray made some interesting comments yesterday at a Sky News panel which have been picked up in various papers today.

http://www.theaustralian.com.au/business/house-prices-seen-as-vulnerable-says-future-fund-chairman/story-e6frg8zx-1226022788109

Murray said that a rise in global interest rates would prompt Australian commodity prices to fall (cutting the income flowing into Australia) and would leave our economy exposed with high house prices.  He hoped:  "that won't happen and we can work it through," however, he observed: "But, by any normal set of measures, house prices in Australia are high."

NSW stamp duty law amendment affects SMSF trustees

Following on from the previous post, a classic example of the advantage of the "perpetual succession" characteristic of a corporate trustee is the July 2010 amendment by the NSW Government of its stamp duty laws.


The NSW Government has removed the $50 duty concession in respect of changes of trustees of a SMSF.  Accordingly if the trustees of a self managed super fund are changed and cannot meet the criteria set out in s.54(3) of the act, full ad valorem duty will be payable on the transfer of any dutiable property as a result of the change.  Ad valorem means the duty is levied in proportion to the value of the property which is subject of the tax.


These changes affect super funds based in NSW or based elsewhere but with dutiable property in NSW.  "Dutiable property" can generally be summarised as land, private company shares, units in a unit trust, business assets, statutory licences, an interest in a partnership and a number of other specific matters.  If you are not sure whether a specific instance qualifies then you need to contact us.


To enjoy the $50 stamp duty concession and not pay full ad valorem rates of duty there are three criteria which must be met and which can generally be summarised as:

• non of the continuing trustees (remaining after the retirement of a trustee) can be or become a beneficiary under the trust;
• none of the new trustees can be or become a beneficiary under the trust; and
• the transfer is not part of a scheme to avoid these provisions.

The only way that a SMSF can meet these criteria is if the new trustee is a company and therefore the only trustee of the fund.


You can see the argument in favour of using a corporate trustee for your SMSF - given the state based stamp duty laws this could turn into a really significant issue for SMSFs with individual trustees holding assets in a number of states in Australia with different laws applying.

Self Managed Super Funds - which kind of trustee is right for you?

SMSFs need a trustee - should it be a company?

Self Managed Super Funds are governed by legislation which dictate that a fund must have a trustee/s: this may be real people (at least two) or a proprietary company.  Many clients ask us: what are the reasons for deciding to use a company?  Isn’t it simpler and cheaper to have individuals as trustees?

The advantages of establishing a corporate trustee in most cases outweighs the additional costs of establishment and compliance.

A couple of basics:

• With individual trustees, all members must be trustees and each trustee must be a member.
• If the fund is a single member fund then the sole member can’t be the only trustee – another individual must be appointed as trustee (not an employee of the member, unless they are related).
• If using a corporate trustee, all members must be directors of the trustee company and all directors must be members of the fund.
• If a single member fund has a corporate trustee, the member can be the sole director of the trustee company or there can be another director (not an employee unless related).

There are disqualification rules relating to both individual and corporate trustees.  The policy is that a trustee must have the legal capacity, solvency and good character to fill the role.

Succession

As a company and an SMSF can continue indefinitely, certainly beyond the lifetime of a member, a corporate trustee can provide greater certainty and continuity over control of the fund in the event of the death or incapacity of a member.

Single member funds

A sole member is permitted to be a sole director of a corporate trustee or there can be another director (not an employee, unless related).

A company may not act as trustee if:

• A responsible officer (including a director, secretary or executive officer) is a disqualified person
• The company has commenced the insolvency process; or
• Action has started to wind up the company.

Lump Sum Payments

In 2006 the Australian Tax Office confirmed the power of individual trustees to pay lump sums out of a superannuation fund (without first starting to pay a pension).  It had been previously questioned whether individual trustees had this power as a matter of Constitutional law.

Now there is no difference between companies’ and individuals’ legal authority to make lump sum payments.

Change of membership

When a new member is introduced to a SMSF with individual trustees, that person is required to also become a trustee.

Trust assets must generally be held in the trustee/s name/s.  This therefore means a new trustee will require the transfer of title to all trust assets (eg property, managed funds, listed securities) to include the new trustee.  This process requires significant time in administration and transaction costs.

Similar administrative issues (and costs) arise when a member leaves a fund on death, retirement or for another reason.

By contrast, when members come in or out of a fund with a corporate trustee, they only need to become or cease to be directors of the trustee company.  ASIC must be notified of the changes but otherwise, legal title to all assets remains with the company.

A corporate trustee can save significant time and effort particularly where the fund has significant assets.

Trustee protection from litigation

Individual trustees carry joint and several liability which may expose an individual trustee’s personal assets to risk if litigation arises eg a personal liability action in relation to a property of the fund.

With a corporate trustee an action will usually be limited to the assets of the company, not exposing the company directors’ personal assets.  The risk of litigation will depend on what activities the trustees undertake.

Cost

ASIC establishment costs of a company are in the order of $600. A change of trustee deed may also be required. There are annual ASIC fees and accounting costs to consider as well.

Family company v dedicated trustee company

Sometimes our clients ask us whether they can use an existing family company as the trustee for their super fund.  We tell them it is possible so long as the company’s other roles are kept separate to ensure the assets of the fund are protected.

A dedicated trustee company can provide a clearer separation of assets and director interests and can further reduce the chances of mistakenly mixing fund assets with company assets and reducing the possibility of trustee conflicts of interest, and is often a preferred course of action.

Also, you need to remember that the family company directors must be restricted to the SMSF members which may not suit all situations.

Voting rights and decision making

A dedicated trustee company has the opportunity to control voting powers in proportion to individual members’ accounts.

It is possible to structure directors’ voting rights based on their account balances, giving those with higher balances more control.  This can make trustee resolutions smoother if there is an even number of votes or there is a relationship breakdown among trustees.

Members with smaller holdings in the fund should consider whether this approach suits their objectives and take advice on this issue.

Death of a director

The articles of association of a company may provide for the executor of a deceased member to be appointed as a director of the trustee company until the time death benefits are paid from the fund.  This is permissible under the SIS Act.

Some companies’ constitutions provide for this to occur automatically – and this may be very important in circumstances of complex family relationships to prevent disputes and the perception of unfair treatment.

We recommend our clients consider this issue on incorporation of their corporate trustee.  If you already have a corporate trustee of your super fund, you may wish to consider this issue afresh to avert problems down the track.

Conclusion

An SMSF with individual trustees may be simpler and cheaper at the outset. 

However, you should consider all these issues and from our experience we find that in many cases, a corporate trustee is the better option despite some additional costs.