First Ranking Debenture Heads Pay Queue
Sun Herald
Sunday October 27, 2002
A PROSPECTUS I received for a secured first ranking debenture stock reads: ``Repayment of all debentures, accrued interest and reinvested interest is secured by a first ranking charge over the whole of the assets and undertaking of the company. This includes the mortgages and other securities held by the company." Does this mean the original capital invested is secure as in a term deposit? If not, what is a ``first ranking debenture"?
S R, Allambie Heights
A secured loan is backed by assets owned by the company which borrowed the money. A debenture is a piece of paper issued by the borrower confirming that the loan is secured by the general assets (and not a specific asset) of the company. All debentures are therefore secured, otherwise the loan paper would be titled an unsecured note.
A first ranking debenture is first in line to be paid out if the company is liquidated and the assets must be sold to satisfy creditors. A second ranking debenture is obviously next in line.
Shareholders are unsecured but in small companies the shareholders often run the company, know when it is about to go broke, and are in a position to make sure that any remaining cash is offered a good home. HIH proves that this also happens in big companies.
As I've mentioned before, the title given to the loan paper is not as important as the company that is standing behind it. For example, if I was offered first ranking debenture stock in Full Moon Mining (No Liability) or an unsecured note from BHP, it is obvious which one I would take if I wanted to minimise the chances of losing my money!Policy passed along
I TOOK out a life assurance policy with Australasian Catholic Assurance Company Limited in 1959. The last contact I had was in 1975 when its policies were in the hands of South British United Life Assurance Company. How can I trace my policy?
G G, Tyndale
South British United changed its name to NZI Life in 1974 and this in turn was taken over in 1992 by Zurich Life. Phone its client services; its number is 131551.
What's in novation?
I CAN take a novated car lease through my company when I go to buy my new car. Should I do this or take another standard lease arrangement?
ST, McMahons Point
I'm not a tax agent and you should put this question to your accountant.
However, just to explain to others, under a standard lease the employee pays the leasing costs, usually out of a car allowance. A novation is an arrangement where an employee transfers some or all of the obligations under a motor vehicle lease to an employer.
Most common is a full novation, where the lease payment obligations are transferred to the employer and hence there are no tax liabilities for the employee. (The employer can claim a deduction for the lease payments where the car is used for business or is part of a salary package, subject to the luxury car rules where the cost of the car exceeds the depreciation limit of $57,009 in 2003.)
Under a partial novation the employee transfers the obligation for the lease payments to the employer and this can have both income tax and FBT consequences.
Number crunching
WHAT do you think about the AMP Monthly Income Fund No2? The value of my shares ($57,000) has lost $4,000 over the past two years.
J T, Lake Munmorah
This is one of the old GIO Monthly Income Trusts, numbers 1, 2 and 3. No1 was designed to pay an income of 1 per cent a month, No2, 0.75pc a month and No3, 0.5pc a month.
As interest rates have fallen, the funds have had to dip more into capital to make their payments. In fact, the No3 Fund is the only one to record any capital growth at all in the past few years it started in 1993 and is priced at about $1.08. The other funds started at $1 a year earlier and are worth about 67 (No1) and 92 (No2).
Thus, your No2 fund has produced some 9pc pa (of the current value, not of the original value) and in the process has returned 33pc of the original value.
I've always felt the funds were well designed and performed their job well. In effect, they act as an allocated pension but without the benefit of a tax offset on their assessable income, although they do offer some franking credits.
The market is recovering and I note that your fund showed almost 2pc capital growth in the period to the end of September, according to Morningstar Research, so I don't think this is the time to sell.
To be frank, just relax
WITH allocated pensions, franking credits on Australian shares were lost as the relevant fund's earnings were not taxed. Only when the earnings were distributed were the pension payments subject to income tax, and then less a very attractive 15pc rebate. If the franking credits are lumped into interest and dividend returns, our taxable income will incorporate non-taxable franking credit income. Then any tax credits after applying the 15pc rebate cannot be carried over to other income.
AJ, ACT
Franking credits tend not to be counted in the PAYG tax taken out from each payment by the fund manager.
The majority of people use their annual income tax return to balance their income, the tax withheld and any franking credits passed on. Where insufficient tax is paid to use up all franking credits, unused credits can be reclaimed from the tax office via the tax return and only via the tax return.
So now you can stop worrying and relax, and enjoy your retirement!
© 2002 Sun Herald