For those feeling brave

By MARY HOLM

I enjoy reading your weekly article, but I haven't seen any comments on the various banks and financial institutions that regularly advertise in the Herald, offering 9 or even 10 per cent return - quite a bit more than term deposits of the big banks.

I would be interested to know your view on how safe they are, what the schemes are and how they compare with each other.

A. I'm sure you won't find any banks offering such high returns.

Banks work under tougher regulations than other finance companies and that makes them safer to invest in. But it also means the returns they offer are lower.

What about other financial institutions? When you're looking at an investment, it pays to look at the world from the perspective of the outfit you're considering investing in.

Let's say Big Opportunity is offering 10 per cent on deposits. It might plan to use that money to buy or develop businesses or properties, or it might lend it to others.

If it's buying or developing, it must expect to make higher returns than the interest it is paying out to you. Otherwise, why bother?

What can we say about any venture with an expected return of more than 10 per cent? It must be fairly risky.

If things go awry, interest payments to depositors might be smaller or later than planned or they might not happen at all. Depositors might even lose their money.

Similarly, if Big Opportunity is lending to others, it will charge them higher interest rates than it is paying you.

Why would those borrowers pay more than 10 per cent? Because banks have judged them too risky to lend to at a lower rate.

Again, if the borrowers collapse, the depositors' investments might too.

No one in business pays more than they have to for anything. Big Opportunity is buying the use of your money for a period. If it could raise enough money at less than 10 per cent, it would do so.

The trouble is that savvy would-be investors look at how it operates, the track record of its managers and what it plans to do with the money.

To get enough of them on board, Big Opportunity has to pay a large enough premium over banks to compensate for the fact that the investment is riskier.

Another reader who asked a similar question to yours commented: "It intrigues me that those offering the best rates are the less well-known names."

And it's true that the market will rate an institution as riskier just because market players don't know much about it.

I'm not saying that you should necessarily stay away from Big Opportunity.

In one of the good bits in his book Rich Dad, Poor Dad, Robert Kiyosaki says: "Don't listen to poor or frightened people. They can always tell you why something won't work. A few years ago, a friend told me he was excited because he found a 6 per cent certificate of deposit. I told him I earn 16 per cent from (a particular investment). The next day he sent me an article about why my investment was dangerous. I have received 16 per cent for years now, and he still receives 6 per cent."

Kiyosaki has a point. If you're prepared to take on more risk, there's a good chance that you will be rewarded for it - as long as you can live with the chance that you will lose the lot.

A good approach for those feeling brave is to spread your money around several of the institutions offering higher returns. It's highly unlikely that they will all go belly-up.

To find out more about each one, ask for an investment statement and prospectus. Check to see if there is a person or company you can count on to put more money in if things go wrong.

And find out how you can get your money out, if you unexpectedly need it early.

You might be best to get some guidance from a financial adviser or stockbroker.

I should add, though, that some advisers and brokers don't put their clients in any Big Opportunities.

"New Zealand has a dreadful record of these outfits going bust or changing ownership, which creates uncertainty," says one stockbroker.

If you must invest in them, he says, "Keep it short-term, so you can reassess it when it matures."

He and others think that it's better to use shares or property for your risky investments.

For fixed-interest investments, they stick to Government or Government-owned institutions such as State Owned Enterprises, or bank or bank-owned institutions.

The last include UDC, owned by ANZ, and BNZ Finance, owned by BNZ, both of which tend to pay a bit more interest than the ordinary banks.

Q. What is meant by secured or unsecured debenture stock? Reading through the prospectus of either, it does not seem to make any difference if they go broke.

A. There certainly is a difference, say the experts.

If you hold secured debenture stock and the company goes broke, the trustee who acts on behalf of you and other debenture holders has a "registered debenture charge" over the company, says David Levin of PricewaterhouseCoopers.

That means that the trustee can seize and sell the company's unmortgaged assets to raise money to pay you back. "You're first in the queue," says Clynton Hardy, of Tower Trust.

If you hold unsecured debenture stock, you've got no priority if the company fails. You are just another ordinary creditor. As Mr Hardy puts it, "You share the risk with everyone, including the milkman."

Still, unsecured creditors do have some control. A company that issues either secured or unsecured stock operates under a trust deed that contains restrictions. These help to protect your interests.

The owners might promise not to: later grant security to others ahead of you, sell the firm while it owes money to stockholders or let its equity fall below a certain level. The company must report to the trustee regularly, have the accounts audited and so on.

Mr Levin says he can understand your perplexity in reading prospectuses. "A secured investment in a badly managed company can be riskier than an unsecured investment in a strong company."

If you are having trouble working out what's what, I suggest you get a financial adviser to help you.

Q. You state in your column of July 15 that, "the IRD says the PAYE system is now more accurate. You've probably had the right amount, or close enough to it, deducted from your income during the year."

Such a claim strikes me as totally daft. It relies on all payroll systems being correctly set up, all employers being totally scrupulous and all payroll clerks making no mistakes.

Previously, wage and salary earners could use the IR5 calculation to determine whether they had been correctly taxed. What can they do now?


A. I went back to the person at Inland Revenue who made the "daft" claim, and I reckon that he has backed it up fairly well.

For starters, the IRD has made it easier for taxpayers to choose the correct code, which dictates how much tax is taken out of their pay.

He says: "We've changed the rules for lump-sum payments and secondary employment so that if you're earning more than $38,000, for example, you're not having insufficient tax deducted.

"Taxpayers earning more than $38,000 can also choose to have their resident withholding tax [on interest and so on] at the right rate."

As for the accuracy and honesty of employers and payroll clerks, the spokesman understands your concern. He says that every month IRD checks the information sent in by employers. "We are continually in touch with employers, discussing any issues with them."

Inland Revenue has support teams specifically for employers, and regular newsletters explaining common mistakes. If an employer is not passing on withheld taxes to the IRD, "we take a dim view of that."

One thing the department looks for in its monthly checks is people who seem to be on the wrong tax codes.

There might be someone using the M code in two jobs, when it's meant to be used only for your main job. Or someone with a student loan whose income for the year has reached, or looks likely to reach the level where they must start making loan repayments.

These people are sent letters suggesting they change their tax code. If they don't, they are likely to be sent a personal tax summary at the end of the year. That will probably lead to their paying extra tax.

What if they do change their code, but not for a while?

To give a bit of leeway, the IRD has a $200 threshold. If it seems that someone has underpaid their taxes but on income of less than $200, that won't be a trigger for the IRD to send them a personal tax summary.

"If people want to check, they can. We're not actually preventing it. But the idea behind simplification is that you don't need to bother any more," says the spokesman.

The first step on checking is to ring 0800 227-774 and ask the IRD to send you a worksheet. Then, if it turns out you've got money coming to you, you can ask for a personal tax summary.

* Got a question about money?

Send it to:

Money Matters

Business Herald

PO Box 32, Auckland

or e-mail: maryh@journalist.com.

Please note: Letters should not exceed 200 words. We won't publish your name, but please provide it and a (preferably daytime) phone number in case we need more information.