Investing Wisdom from the Vault

Fusion Investing and Analysis has started a great ten day investment series. Going by the first days fascinating insights and shared wisdom this will be a great investing series. Day One features an eclectic compilation of Investing wisdom, fusing fundamental analysis, Mark Sellers, Warren Buffett, Phantom of the Pits, Turtle Traders, Elliot Waves, Philosophy, Charlie Munger, options and economics.

More on non-residency

http://www.self-managed-super.com.au/wp-content/uploads/2008/02/residency-issues-with-smsfs-jan08.pdf

http://www.superannuation.asn.au/SMSFs/default.aspx

http://www.ato.gov.au/super/content.asp?doc=/content/71439.htm&page=9&H9
Generally, the day-to-day business of an SMSF must be in Australia at all times during an income tax year. In addition, more than half of the total benefits in the fund must be from members who qualify as Australian residents.

SMSF with non-resident member

http://www.cleardocs.com/clearlaw/superannuation/smsf-members-overseas

Fund residency requirements generally

For an SMSF to be a 'complying fund' and receive concessional tax treatment, the SMSF must be an Australian resident fund. SMSFs are at risk of losing their complying status, if their members spend time working overseas. This is because the residency rules require trustees and the majority of contributing members to reside in Australia.

For a fund to remain resident, the fund has to satisfy the residency rules throughout an income year -- unless an exception applies.

The trustees' presence rule

Generally speaking, for SMSFs, the individual trustees of the fund must be the same people as the fund's members. Similarly, if a fund has a corporate trustee, then the directors of the trustee company must be the same people as the fund's members.

Under the residency rules, central management and control of the SMSF must be in Australia: this implies that the trustee directors or individual trustees must function in Australia. Although these are commonly called residency rules, on closer examination they actually involve a physical presence test, rather than a residency test.

The exception to the trustees' presence rule

However, there is one exception: a trustee or director may be absent from Australia for a continuous period of up to 2 years and still not jeopardise the fund's complying status. To start the 2 year period again, the person must return to Australia for a visit of more than 28 days.

The risk to the SMSF by a breach of the trustees' presence rule

The problem then, is that an overseas assignment of more than 2 years may well pose a residency problem for an SMSF -- unless the assignment is broken by a return to Australia for a month or more.

The active members asset rule

Non-resident members must not have more than 50% of the total fund of active members

Member residency requirements revolve around the concept of an "active" member. Generally speaking, an active member is a member who is resident in Australia and currently contributing to the SMSF, or having contributions made by their employer to the SMSF.

Under another rule, the accumulated entitlements of non-resident active members must not exceed 50% of the entitlements of total active members -- unless an exception applies.

The exception to the active members asset rule

However, there is also an exception to this rule. The amount of active member entitlements does not include those of a member:

• who does not contribute to the fund when they are non-resident; and
• who does not have contributions made by their employer to the fund in respect of periods of non-residency

This exception is available because the member is considered non-active.

Non-active, non-resident members still cause a problem…down the track

Even if that exception applies, a non-active, non-resident member will still present a problem to the SMSF if they are overseas for more than 2 years. This is because the SMSF will not be able to comply with the trustees' presence rule.

Telstra Update - Continue to Hold

7/6/06 Telstra Update

Expected dividends .14 cents a half

Share price 6/06/06 3.82

Return 7.3% plus franking = 8.4% net return

Super fund average price 4.70 return is 5.96% or 6.85% net. Still an excellent return.

Current return = $4,000 on 10,000 shares, Net is $4,600 or a 9.8% return.

Therefore, ignoring the decline in the Telstra share price is easy when comparing the return with risk free bank return of around 5.5% pre tax or 4.78% after super tax.

The other reason is ignore the price decline is that prior to the sale of the Telstra and in competitive fairness the regulatory stance weighing on Telstra is likely to be diminished. Telstra continue to sign up more broadband users than any other Australian telco and at some stage these factors should combine to increase the share price of Telstra.

Investors must believe that Telstra will lower it’s dividend to about 11 cents a half, 22 cents annually to account for the current share price. I.e. they are pricing in a 22 cent dividend or about a 6% return.

Conclusion: Continue to hold Telstra.

MMC Contrarian Limited Analysis

MMA

MMC Contrarian Limited

Original Analysis 06/06/06

Original Micro Thesis. 1

NTA Updates. 1

NTA Analysis. 2

History. 2

Investment fees. 2

Price ranges. 3

Acceptable aims to judge performance against 3

Dividends. 4

Original Micro Thesis

Investment Portfolio

As at 30 April 2005 MMC's portfolio was comprised of Listed Equities (37%), Hybrids (4%) and Fixed Interest and Cash (59%).

	May (M)
Equities	97	47%
Hybrids	8	3%
Fixed Interest and Cash	133	56%
Total	238

Intelligent investor rates as buy and thinks highly of management team.

Number of shares on issue 31/3/06, 216M with NTA of 112.1 cents (pre tax).

At 91.5cents this represents an 18% discount to NTA.

Recommend buying small starting position, compiling full analysis. If analysis returns good risk reward scenario aim will be to build eventual position of between 10-20% of the funds assets.

As MMC have such a high proportion of funds, 59%, in cash they should be buffeted from any market downturn and if such downturn occurs they will be in a strong position to profit from it.

This is an excellently run investment fund, trading at NTA discount of 17.5% and will instantly give the fund exposure to range of ASX listed companies.

NTA Updates

30 April 2006 – 110.9, order placed at 91.5 for 17.5 discount.

Cash has decreased from 147 144 in March to 133 now. Was this 14M used to pay dividend on 23^rd March 2006? 216M shares * 3 cents = 6.48M, so where has other gone. Check transaction over April and May. Perhaps they have used funds to buy back shares.

s

Check next quarterly update after end of June.

	31/1203	30/06/2004	31/12/2004	30/06/2005	31/12/2005	31/03/2006
Equities	13	74	92	98	85	94
Hybrids	0	15	24	8	6	6
Cash	185	122	123	134	156	144
Total Cap	198	211	239	240	247	244
NTA per
Before tax on unrealised gains	99.1	105.4	115.2	109.7	112.4	112.1
Dividends (cumulative)	0	0	1	2.5	4.5	7.5
Before tax on unrealised gains pre dividends	99.1	105.4	116.2	112.2	116.9	119.6
Share price	93	97	706	93.5	94.5	93

NTA Analysis.

Market Cap = 216M shares*.915 first buy price = 197.64M

Minus cash of 133 = 65M

So in effect you are getting $105M of shares of hybrids for 65M, a 38% discount.

History

MMC Contrarian is an investment company listed on the Australian Stock Exchanges (ASX) which primarily invests in other ASX listed securities. The Company was founded in December 2003 raising $200 million of capital from approximately 8,000 investors. The Company also issued 200 million options as part of the initial public offer, with an exercise price of $1.00 exercisable by 30 June 2005.

Investment fees

Management Fee

The Manager will receive a management fee equivalent to 1.25% per annum of gross assets of the Company, calculated and payable monthly in arrears by the Company.

Performance Fee

Where the Portfolio has increased in value over a 12 month performance calculation period, the Manager will also be entitled to a performance fee of 15% of:

• where the level of the All Ordinaries Accumulation Index has increased over that period, the amount by which the value of the Portfolio exceeds this increase; or
• where the All Ordinaries Accumulation Index has decreased over that period, the amount of the increase in the value of the Portfolio.

The total management expense ratio (MER) of the company including the management fee is anticipated to be approximately 1.5% per annum, excluding any performance fee.

1.5% of 238M is 3.57M a year or 300k a month. In management fees.

Price ranges

Argo Investments recently had a NTA of 1.30 and the lowest I can envisage MMC hitting is .80. Current shares 216M

The following price ranges are complied on spreadsheet and are based on 20% +/- equities and decreasing cash. We believe this to be a realistic conservative model and as highlighted in dividends section we will happily collect a 7.5% Net return while waiting for either or both of assets or NTA to improve.

NTA/ Assets	0.8	0.85	0.9	0.95	1	1.05	1.1	1.15	1.2
210	0.78	0.83	0.87	0.92	0.97	1.02	1.07	1.12	1.17
220	0.82	0.87	0.92	0.97	1.02	1.07	1.12	1.17	1.22
238	0.88	0.94	0.99	1.05	1.10	1.16	1.21	1.27	1.32
245	0.91	0.96	1.02	1.08	1.13	1.19	1.25	1.30	1.36
257	0.95	1.01	1.07	1.13	1.19	1.25	1.31	1.37	1.43

From my analysis and based on my predictions we have bought at the lower end of the NTA. There appears to be very little downside risk as it would take a 40% market decline to reduce the assets to 210M. This large market decline would cause a fall of only 15%.

Acceptable aims to judge performance against

Over long term on any position a 11% return is acceptable, a 15% return very good and a 20% exception. For MMC we target a 11-15% yearly increase, but will not be concerned about near term (less than 3 year) losses.

The primary reason for this table is to emphasis the long term nature of our holding and remove concerns caused by wasting time at share price watching. That is in 5 years time we hope the share price will be between 105 and 130 cents and we will have received 40.25 in dividends which will have provided a compounded net return of 46.35 cents for a total return of between 60 – 85 cents or 66 – 93%.

Returns	1.11		1.15
	91.5	Div Paid	91.5
Year 1	94.67	6.9	98.33
Year 2	97.60	7.5	105.60
Year 3	100.29	8.1	113.39
Year 4	102.70	8.6	121.77
Year 5	104.79	9.2	130.84
		40.25

Dividends

Management have predicted an end of year dividend fully franked of more than last year’s 2 cents. The last dividend was 3 cents and that is what we anticipate for the near future. A 3 cent dividend is worth 3.45 to the super fund.

At 91.5 cents this represents a Net 7.5% annual return.

Declared	Paid	Amount
30/06/04		1
31/12/04		1.5
30/06/05		2
31/12/05	23/03/06	3

Conclusion

Continue to buy MMA opportunistically over the next six months with maximum allocation set at 20% of fund or roughly 26k, about 28k shares. Any purchases in more than one month should have further NTA analysis using updated figures from June NTA.

Before committing greater than 10% of funds a further deeper analysis should be performed in to all facets of the company.

MMC Contrarian Limited Buy

MMA

MMC Contrarian Limited

Investment Portfolio:
As at 30 April 2005 MMC's portfolio was comprised of Listed Equities (37%), Hybrids (4%) and Fixed Interest and Cash (59%).

Intelligent investor rates as buy and thinks highly of management team.

Number of shares on issue 31/3/06, 216M with NTA of 112.1 cents (pre tax).

At 91.5 this represents an 18% discount to NTA.

Recommend buying small starting position of 4000 shares, compiling full analysis. If analysis returns good risk reward scenario aim will be to build eventual position of between 10-20% of the funds assets.

As MMC have such a high proportion of funds, 59%, in cash they should be buffeted from any market downturn and if such downturn occurs they will be in a strong position to profit from it.

This is an excellently run investment fund, trading at NTA discount of 17.5% and will instantly give the fund exposure to range of ASX listed companies.

NTA Updates

30 April 2006 – 110.9, order placed at 91.5 for 17.5 discount.

Closing in on longest bull

The current market has been rising for 38 months which is just short of the longest bull market in history.

Roc Oil Purchase (ROC ) and interests

We purchased a third position in ROC today at 3.94. Although the price has run up recently while we have been analysing this share, we used patience to buy at 3.94, as we decided to buy when the price was over four dollars.

This position is to establish our interest in the stock and represents a 1/3 of what we currently consider a full position. In many circumstances we will even buy more of a company than a full position, for example we see great value, options trading necessitates a larger position, in established companies with long track records which we are very comfortable holding for 5-20 years.

Buy 1000 ROC at 3.94

Fund currently looking at NAB, MMA, BPC and we have pre-registered for Snowy Hydro.

Looking to Buy NAB

Key Dates for NAB

2 June 2006* Ex-Dividend Date for 2006 Interim Dividend

8 June 2006* Record Date for 2006 Interim Dividend

13 July 2006* Payment Date for 2006 Interim Dividend

Closing Price: 35.23

We intend to buy NAB in thrids as part of our long term buy to hold strategy. We have been waiting for a market pull-back and believe now is a good time to by our first third in NAB.

The reasons for this include; the fund plans to ultimately own long term positions in the major banks and find NAB the most attractively priced at the moment. More later.

Why not Argo? MMC Contrarian

The fund decided not to invest in Argo at this point as investors have bid the share price up to NTA of 1.30. We view that as too rich a price to pay for their investing expertise.
The fund is now more interested in MMC Contrarian, which has around a .85 NTA if memory serves me well.

Super strategy full of pitfalls resurfaces

Take care before combining gearing, a unit trust, and your super fund writes Tony Negline

---

May 03, 2006

AUSTRALIAN financial services regulators have a favourite expression: "If it sounds too good to be true, it often is."

This warning is issued to remind investors to be careful before committing to anything too outlandish. Unfortunately, some people never learn.

When it comes to superannuation, which is a long-term investment with attractive tax concessions, there are plenty of ways to destroy a person's retirement nest egg.

And, with self-managed super funds (SMSFs) more problems can arise because the responsibilities of running a fund properly rest with trustees who must be members.

The Australian Taxation Office has repeatedly told us that if a trustee breaks the rules the fund may face consequences which can include taxing the fund's assets (excluding the fund's undeducted contributions) at 48.5 per cent of the assets of the fund.

An old strategy has resurfaced and before acting on it a trustee should seek some very robust advice.

The strategy is presented as a way of building an investor's superannuation assets via personal borrowings.

How does it work? An investor borrows money and places the money in a private unit trust.

The investor's SMSF also invests in the same unit trust.

With the total monies, the unit trust purchases an investment property.

The investor's borrowings are used to earn income -- which would be paid via distributions from the unit trust -- and therefore interest costs and other expenses associated with the property would probably be tax deductible.

Over the years following, the investor directs all of their compulsory and voluntary employer super contributions into their SMSF.

The SMSF trustee invests these new contributions by buying more units in the unit trust.

The investor would then repay the debt by redeeming their unit holding in the trust (the unit trust has the funds to pay out these redemptions because it has the additional investments made by the SMSF).

Over time, the super fund will become the only unitholder in the trust and if the property was sold then the gain would be taxed at concessional tax rates applying to super funds.

It's no exaggeration to say this strategy is very complicated and it would be very easy to make a mistake at some stage through a lack of vigilance by anyone involved in administering the strategy.

From a superannuation legislation point of view there are at least six issues that have to be addressed before a trustee should implement the strategy.

The first point to note is that a super fund cannot invest in anything unless its investment strategy allows that investment.

Further, the fund's trust deed must also allow the investment.

Thirdly, a specific super law does not allow a super fund to loan money or provide any financial assistance to its members or a member's relatives. In August 2001, the tax office said that a SMSF trustee cannot allow any property it holds directly or indirectly to be used as a security for a borrowing by a member or their relatives.

As a result, the property which is purchased by the unit trust cannot be used by the SMSF member as security for the borrowing they enter into in order to invest in the unit trust.

Also, the SMSF cannot allow the member's units in the trust to be used as security for borrowings.

The member would have to use some other asset as security for the borrowing.

In addition, an agreement would have to be in place between the SMSF and the other unit trust investor stating that the investor will only deal with their unitholding in such a way that would not cause the SMSF to lose its access to tax concessions or cause the trustee to breach any super laws.

Fourthly, some SMSF trustees may be tempted to use this strategy to transfer a property they already personally own into a unit trust and have their SMSF purchase units in the trust. Such a strategy might be seen as a handy way of extracting cash from the SMSF.

This can only happen with business real property. That is, it is always used wholly and exclusively in the running of at least one business.

Furthermore, parties deemed to be related to the SMSF (defined as SMSF members, their relatives or entities controlled by the members or their relatives) would not be allowed to rent the property unless it was business real property.

The only exception to this rule would be the situation where the SMSF's unit trust holding represents less than 5 per cent of the market value of the SMSF's total assets.

If the business real property is owned by a trust or company then that trust or company must not have any borrowings and must only be leasing business real property to SMSF related parties

Finally, we come to the sole purpose test. This states that a super fund must only be run for the purposes allowed by super laws.

The main purpose of running a super fund must be to provide retirement benefits for the fund's members. Would this arrangement be deemed to be an elaborate arrangement to channel super contributions into private hands?

It would be ironic if someone entered into the strategy, got its implementation wrong and was penalised as a result.

Tony Negline specialises in superannuation. He may be contacted at www.allthingsconsidered.biz

SMSF Transfer of personal assets to super

From http://funds.comsec.com.au/Features/Articles/TBC-Articles.asp?ArtId=193

If you have a self-managed super fund (SMSF) and own an asset outside your super, you may be able to transfer ownership of the asset directly into your fund. You’ll then be taking advantage of the 15% tax on earnings that applies to super, rather than paying tax at your marginal tax rate, potentially making a tax saving of 33.5%. The types of assets that can be transferred are limited, and you’ll need to find out whether your asset is one of them.

Even though you will probably have to pay tax on the transfer of ownership of the asset (and sometimes stamp duty), the long-term tax benefits may compensate for the short-term liability. If you’re self-employed and can claim a tax deduction for your super contributions, you can use your asset to make an “in-specie” contribution to super so that the tax deduction reduces the total tax you pay.

Although super funds are not permitted to borrow money to invest, they can access geared exposure to the share market through Regular Instalments.