Eureka Correspondence

Members discuss endowment bonds; small caps; and ghost cities.

Endowment bonds for children?

Endowment bonds are often suggested as useful for seniors to get delayed income. Could they also be used for children to avoid the heavy tax on family investing for them? An endowment bond for a grandchild that matures when they would need money for university or buying a house seems like a good idea but I haven’t seen it advertised as such.

SG

Philip Bayley’s response: Endowment bonds are ideal for seniors looking to generate a regular income stream and this is especially so if the bonds are held within a self-managed superannuation fund that is in the pension phase. Endowments bonds are also ideal for other long-term savings goals but one needs to be aware of the tax treatment of the bonds.

If the endowment bonds are of the type offered by the Endowment Bond Exchange Limited (see Pros and cons in endowment bonds) then tax must be paid annually on the accrued value of the bond. So while the holder of endowment bond has received no income from the bond, as this will only be received at maturity, tax must still be paid on the increased value of the bond each year.

As for investing children, this is area fraught with traps for the unwary.

The Australian Taxation Office (ATO) takes a very dim view on adults investing in the name of children, as this might be simply a ploy to divert their own taxable income. As a result, investment income earned by children is taxed at 66% after the first $416.

It is recommended that you seek professional advice before investing on behalf of a child.

Small cap confusion

Regarding small caps, for me the problem lies with there being too many to pick. Are there any companies, listed or otherwise, that concentrate solely on small caps? So that I can participate but use the expertise of others?

Phil Elliott

Brendon’s response: You can invest with a small cap fund manager and there are quite a few in the market to choose from. There is also an Australian small cap exchange traded fund (ETF). It may be best to speak to your financial adviser as to the best way forward for you.

Ghost cities

I’d like to know Adam Carr’s opinion on Chinese ghost cities.

IM

Adam’s response: Thank you for your letter. Some years ago I had the pleasure of visiting China and the ghost cities were explained to me as the Chinese way of urbanisation. That is, the government designates a section of the populace for modernisation, the city is built and over the years the people relocate into the new city. Now, I can't state categorically that this is how it’s done in all cases, but I did see at least one case of this as evidenced by the two cities - old and new. I was assured this approach was quite common.  Sometimes parts of the old cities are then used as tourist attractions. More broadly, we know only two well that the Chinese government has no qualms relocating large numbers of people - just think of the Three Gorges Dam where, at the time, some reports suggested 4-5 million were relocated. With that in mind and given the still low rates of urbanisation, I'm not sure that ghost cities reflect some massive over investment or housing supply glut as is the common wisdom.