Australian Civil Liberties Union

Your Rights 2005

Chapter 16


General advice. Seek information. Sources of information. Investment advisors. Acquiring money to invest. Investment risks. Types of investment. Choice of Superannuation Funds from 1st July 2005.

See also Chapters on Rights of Consumers and Rights of Taxpayers.


A person wishing to invest money should be aware of all relevant reliable information, decide what he wishes to achieve, look for hidden dangers, and be prepared to change investments if new information becomes available. The general advice in the chapter on the rights of consumers suggesting you should know your rights, keep your cool, shop around, be prepared to complain and exercise care may be useful for the investor. Although some protection is given to the consumer of goods and services, and to investors, you must learn to protect your own interests by making full enquiries.

Gathering information

You should prepare a list of relevant information about your personal and financial situation for your own benefit, and to assist any financial advisors you consult. The information should include details on assets and liabilities, income, expenditure, insurance, health, family responsibilities, estimated date of retirement, job security, need for access to funds, preparedness to take risks, investment advisors you propose to consult (if any) and sources of written investment advice (newspapers, magazines, etc.).

What is your aim

You should always be ready to ask yourself questions and to direct questions to anyone from whom you are seeking advice.You should ask yourself whether your aim is to maximize income by achieving a high rate of interest. This aim will often involve some risk and some limits on accessibility to the funds invested.

You should ascertain the tax advantages of particular investments and whether your investments will affect your pension entitlement. Ask questions to establish whether you can rely on bank savings and a pension when you retire. For most people, investment in adequate superannuation should be given priority. Superannuation is an excellent investment for people in the highest tax brackets. Contributions are often tax deductible. You may decide to use “discretionary” money (not urgently needed) to pay off your mortgage; renovate and improve the value of your house; place it in “no hassle” 10 year insurance bonds; or “invest” in your own quality of life by travelling, obtaining new skills, or doing whatever you enjoy doing. You may feel that there is more to life than being anxious over high or even low-risk investments, and that acquiring status symbols and more assets and income can decrease your enjoyment of life. Investment decisions including a decision to spend rather than invest, are essentially personal and private decisions. Poor decisions whether based on the advice of experts or not are your decisions for which you are responsible.

As well as directing questions to himself, and to investment advisors and institutions in which he proposes to invest, the investor should seek information from newspapers, magazines, newsletters and radio talk back programs.When investments have been made he should seek to update his knowledge of his particular investments and to look for early warning signs of trouble and take appropriate action. He should decide whether he can cut his expenditure to make more funds available for investment, whether he ismore interested in capital growth than in income on investment, whether money can be obtained in an emergency from investment funds, and whether any of his investment can be frozen if there is a run on the investment fund. He should know the “rules of the game” for investors and whether the rules can be changed to his detriment if, for instance, his investment is frozen.

Obtaining information—Investor beware

In the same way as a prospective or actual tenant, car purchaser, demonstrator, testator or consumer should be aware of his rights and options, so should the investor. Books such as Making Money Made Simple, 161 Tax and Investment Strategies, How Safe are Your Investments; The Money Book; Super Made Easy and Real Estate Family Package, and magazines such as Australian Business, Personal Investment Monthly, Australian Investment, Business Review Weekly, and Personal Success, provide useful background information. An important investment can be to invest in books and magazines.

The business sections of newspapers, and the personal financial advice sections of newspapers, magazines and radio shows, can keep you updated. All major newspapers and many magazines have personal financial advice sections. Useful advice, knowledge and skills may be obtained through attending business and financial courses at various institutions. Most talk back radio stations have advice programs taking listener’s calls. Some investment advisors in the media may have investments in the area they recommend you to invest in and they should disclose that interest.

Investment Advisors. Picking an advisor from the telephone book or lists in magazines can be risky. You should obtain advice from advisors licensed by regulatory bodies such as the Corporate Affairs Commission and who are members of the Australian Society of Investment and Financial Advisors. Licensed investment advisors are employed by four basic groups, namely bank owned investment advice services, large independently owned services, services with significant shareholding by outside groups (usually Insurance Companies), or small independently owned suburban advice services. The extent to which bank and insurance owned services give objective advice varies a good deal, and you should ascertain whether the advisors mainly or exclusively promote investments in the bank or insurance company owning the advice service. You should seek advice from several sources and be satisfied that each advisor is aware of your aims, is an expert in the field in which you are seeking advice, discloses whether he will obtain a commission if you follow his advice, and discloses whether he is recommending an investment in which his employer has an interest. You should also ask yourself whether the advisor has recommended a spread of investments to give protection against failure in one area of investment, whether he can provide ongoing investment advice, whether he researches all investments before recommending them whether he has a hidden bias in favour of particular investments, and whether he is financially secure himself without any pressing need to obtain commissions by inducing you to make particular investments.

Money to Invest

You can borrow money in order to invest elsewhere but this can be hazardous and the interest payable can be crippling. The best source of money for investment is from your own resources.You can automatically set aside part of your income say at least 10% for savings, so that you live on no more than 90% of your income. You will have more money available for investment if you heed advice for consumers (Chapter 3) such as buying only things you really need and advice for taxpayers (Chapter 15) such as claiming all relevant deductions. You can also save money by shopping around for the best deals when buying goods, arranging discount holidays, and insuring your house and car, etc., at reasonable rates. Priorities are important.

You may think it is also important to “invest” in your health, knowledge of other countries through travel, and causes to which you are committed. Few people who gamble win large sums of money, and if they do, often dissipate their fortune. Few millionaires became rich as the result of a lottery or gambling on the races. Poker machines and lotteries make money for the governments but little for the gambler.

Plan Ahead

Only about 40% of people reaching the age of 65 will be retired or be in a position to retire on what Noel Whittaker calls a liveable income. Whittaker sets out the differences between those who win and lose financially. The winners obtain and apply financial advice from experts; invest wisely to produce growth as a hedge against inflation, defer short-term pleasures and aim for long-term gains; exercise discipline in spending; and avoid investing in things that lose value.Winners plan carefully towards useful goals and don’t assume that good present income will lead to financial independence—it won’t unless you plan for it. Winners have an optimistic attitude — financially successful people have a PMA (Positive Mental Attitude). These are good commonsense ideas to start from. Unless the basics are attended to, the structure built on it will fail.


General advice for the investor is no substitute for advice tailored to the requirements of individual investors. Advice for each investor should take into account the investor’s future aspirations, job security, debts, age, state of health, family commitments, capacity to take risks, need for superannuation, need for capital growth and possible need to have ready access to money. Many investment advisors recommend a spread of investments including fixed interest investments giving a constant return over the period of the investment, including debentures (a statement acknowledging indebtedness when a loan has been made) offered, for example, by finance companies.

Some advisors favour direct investment in bonds, debentures and interest bearing accounts, rather than investment in managed funds, to give the investor greater control over the money. Others recommend cash management trusts (e.g. Macquarie) for security and good interest rates; 10 year insurance bonds to avoid hassles; well managed listed mortgage trusts, and shares in “blue chip” companies such as BHP, and National Bank.

Some advisors believe most shares are significantly overvalued. Long term investors who know what they want to achieve, can often ride out market and share fluctuations and can take steps to be aware of problem areas which have recently been exposed.

Government Bonds. Bonds are the safest short term investment, but inflation reduces the real value of capital and interest. Although capital and interest are guaranteed, losses through inflation are also guaranteed. Interest payments are taxable, and you may sustain a loss if you sell before the bond matures. Some government bonds (e.g. Telecom) have the same advantages and disadvantages.Trading banks such as the Commonwealth, ANZ, Westpac, etc. are secure institutions in which to invest money. The Reserve Bank controls the Commonwealth Bank and the private banks and watches their exposure to large borrowers such as high flying entrepreneurs the cash available to meet withdrawals (liquidity), and the funds for shareholders available for hard times (capital backing). The Reserve Bank would provide funds to meet a run on a well managed bank, but it is not legally obliged to prop up a badly run bank. Its suspension should prevent any bank being badly run. Even with all this backing rumours can cause a run on a bank as occurred recently with the Bank of Melbourne. State Banks accept Reserve Bank requirements and are effectively guaranteed by State governments.

Building Societies, Credit Unions and Friendly Societies. These three types of institutions are regulated by different controls in different states. Although a state government may ’guarantee” a line of credit if there is a “run”, and collective protection funds may be set up by the institutions to provide security for the investor, they do not give the same security to investors as given by banks. Building societies and credit unions must report their activities to the Reserve Bank which however has no obligation to support them. Although supervised by State governments, the Farrow Group collapse, largely due to rumours, indicates that the supervision has been inadequate. If building societies lent, as they should, mainly for residential housing, the most secure form of investment, they should remain viable. Shareholders in societies are at greater risk than depositors, if the society is liquidated. Friendly Societies are largely confined to Victoria and do not have to report to the Reserve Bank.

Finance Companies. Most large finance companies are owned by the major banks. Interest rates are usually higher than for government bonds. The companies are not guaranteed by their parent bank but are relatively safe.

Trusts. Investment trusts, operating under rules in the trust deed, accept money from investors who wish to pool money for investment in various areas such as shares, government bonds, and real estate. A trust may be listed or unlisted. A listed trust is traded at the stock exchange in the same way as shares in a company, and investors can sell their investment through a stockbroker. Investors in unlisted trusts buy shares direct from the trust and can sell them back to the trust.The risk to investors in trusts depends on the ability of the manager of the trust, and the nature of the investments.

Property Trusts allow investors to become part owners of some of the best real estate sites in Australia. Problems arise if a lack of confidence develops, and many investors want their money back at the same time. A run on a trust can lead to the trust selling property in a depressed market, or freezing all investors’ funds for a period. Provided trusts invest in good properties with high occupancy by tenants, they can provide good returns and help to offset inflation.

Mortgage Trusts lend money to property owners using the property as security through a mortgage. Problems such as those experienced by Estate Mortgages may arise if the trust also borrows money from banks, and if the property developer borrowing the money cannot find a buyer for the property.

Equity Trusts involve investment in share markets in Australia and overseas. If the trust makes a good choice of shares and spreads the risk, there should be a good returns for the Investor who however, has no guarantee. Changes in exchange rates can affect overseas investments.

Cash Management Trusts give good security and returns. They invest in government and bank backed securities.There would have to be a significant breach of the trust deed before a capital loss occurs. Liquidity is assured but all income is taxable. Many investment advisors believe cash management trusts are a good investment in the current economic climate.

Insurance and Superannuation Bonds

Life insurance companies are subject to the control of the Insurance and Superannuation Commission which requires such companies to have sufficient reserves to guarantee the capital of the investor, by investing in government and bank backed bonds and securities. Other bonds, which are market backed, require the investor to take the risk. These bonds may give a higher return, but the risk will depend on the nature of investments made by the manager of the fund.As in most other areas of investment the higher the potential return, the greater the risk.

Ten Year Bonds. A form of investment that produces tax-free income after 10 years is a good form of long-term investment, and in the meantime, it constitutes a kind of financial discipline In the form of compulsory savings. One option recommended for those of about 50 years of age, is to invest in a ten-year tax paid savings plan, then put the tax-free income into an annuity at 60 years of age. This is excellent advance planning.

Superannuation. Those planning for retirement must aim for security rather than “get rich quick” offers and maintain their “solid assets” of home, car, etc., to fall back on.There are indications that the government will in future greatly restrict or even eliminate the pension. It is best to put money into superannuation if you haven’t already done so. Those in their twenties now starting work would do well to start preparing for retirement now, putting money into superannuation and insurance schemes. Every state has management investment firms offering guides to such matters as “rollover funds”, methods to minimize taxation, and the relative advantages of pensions, retirement payments, annuities and ADFs (Approved Deposit Funds) etc. Because the details of these funds will differ from time to time, it is best to get in touch with a financial advisor for up to date advice. New laws about Superannuation will come into force on 1 July, 2005, when employees will have 28 days to decide where their “super” is invested. Details are on the Association of Superannuation Funds of Australia website

Superannuation and Roll Over Funds. Superannuation is a safe long term tax effective investment to provide for security upon your retirement. There may be a fixed payment on retirement or a return of contributions and investment earnings. You may obtain death and disablement cover. Many employees are covered by employer sponsored Superannuation, but others, such as the self employed can obtain significant tax deductions on payments to a superannuation fund. To avoid the tax liability for lump sum Superannuation, payments, you should “roll over” such payments by investing in Approved Deposit Funds (ADF) or deferred annuities within 90 days of receiving the lump sum. This has the advantage of deferring, reducing or avoiding tax. ADFs are managed investment funds which can accept only eligible termination payments until you reach 65. You can invest your lump sum in a deferred annuity which gives regular payments of income for the rest of your life (or for a stated period). Deferred annuities may be sole life annuities which cease on the death of the investor, or joint annuities which allow the surviving spouse to roll over the investment. ADFs and deferred annuities are either income linked (mainly fixed interest securities) or unit linked, where fund managers have a wide discretion to invest. “Immediate” annuities are available only from Life Insurance Companies and income to you starts soon after your investment. At age 65 tax concessions for ADFs and deferred annuities (“rollover” bonds) ceases, and you should convert to an immediate annuity scheme to avoid lump sum tax.

Real Estate. You can invest in real estate by buying a property yourself and using rental from the property to pay off your mortgage. You can lend money direct to a property purchaser and secure your loan by a registered first mortgage. You can invest in a property or mortgage trust with the potential high returns and risk such an investment may entail. You should avoid highly mortgaged properties. As in other areas of investment, shop around for advice, decide what you want to achieve, evaluate the risks, and continue to monitor the investment through relevant investment advice in newspapers, magazines and newsletters specializing in particular investment areas.

Shares in Companies. You can invest directly in shares by buying shares through a stock broker who must be paid a commission when the shares are bought or sold. The share market can be risky for those without specialist knowledge themselves, or access to reliable professional advice. It is easy to get your fingers burnt, especially in a volatile market. If you buy good quality shares with franked dividends you may obtain significant taxation advantages. Stock exchanges can provide you with detailed information on the share market and often run useful investment seminars.You may prefer to invest in the share market through a well managed equity trust whose manager can spread the risk and keep a close watch on the market.

Keeping Records and Documents. It is advisable to keep all important records and documents in a safe place and advise a member of your family, a friend, your solicitor, your bank manager or your financial advisor as to their location. It is also advisable to keep photocopies of key documents in a different place, separate from the originals. This applies to documents such as certificates of title to your house, car registration papers, share certificates, debenture holdings, mortgages, 10 year bonds, tax returns, passports, travellers cheque numbers, wills, income received from investments, and capital gains.

You should keep a record of actual income you receive from investments and the date you receive the income, for tax purposes. Income from bond, bank, and debenture investments will be received at predictable times but other income may be received on your request. If investments have a capital growth component you may need to keep a record of capital gains each year to ascertain any liability for capital gains tax. You may be liable for tax on capital gains when assets are sold, excluding the family home, motor vehicles and certain personal use assets, acquired after September, 1985. If assets are held for more than a year and do no more than keep pace with inflation, it is unlikely you would be liable for capital gains tax on disposal.


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Australian Civil Liberties Union