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Questions of the Week

Question 1: There are reports in the media today that Westpac could be facing a fine of billions of dollars due to money laundering. This is very concerning and comes at the same time as I am being offered the opportunity to buy new shares in their Share Purchase Plan (SPP). Should I still take them up?

Answer: Under the SPP, you will pay the lower of $25.32, or the weighted average trading price of Westpac shares on the ASX, less 2%, in the week leading up to the close of the offer on 2 December. This period hasn’t started yet (it starts next Tuesday), so you have no immediate market risk.

I will write more about this on Monday after I read the statement of claim, however my initial reaction is that any fine is likely to be less than $1bn (not billions of dollars as the media is so keen to play up) and that in due course, the market will move on from this issue. As it stands, I intend to apply for shares under the SPP.

Question 2: I should like your opinion on investing in Virgin Australia’s unsecured notes. They have a coupon of 8%. Originally, the issue size was $150m, however, due to strong demand, the offer was increased to $325m. Major shareholders are multinationals from Singapore and China plus Singapore and Etihad Airways. Is this an investment to consider?

Answer: As one of the experts noted at the Switzer Income Conference, single B rated issues (sub-investment grade) such as Virgin have (historically) a 17% chance of defaulting within 5 years.

An upside with Virgin are the major shareholders and its high profile. Arguably, “too big to fail”. However, in this scenario, there won’t be much sympathy for unsecured noteholders – rather, the sympathy will be for employees and customers. Certainly an investment to consider, as long as you understand that it is high risk.

Question 3: I have a question regarding lending to my SMSF. I have a fully set up SMSF investing in a property. The loan through my SMSF is over 6.5%. However, I can now borrow personally at 3.5% and would like to lend that money to my SMSF in order to save high interest rates. Can I do that ?

Answer (by Graeme Colley of Super Concepts): It is possible for an individual to obtain a loan personally and then on-lend the amount to the SMSF as a related party borrowing for purposes of a limited recourse borrowing. It obviously needs to meet the requirements of a limited recourse borrowing.

Where the superannuation fund has obtained a related party borrowing and the limited recourse borrowing arrangement is over property, it must meet the requirements of the ATO’s safe-harbour guidelines.  These require certain conditions to be met and are published in PCG 2016/5 which is available from the ATO website. Here is a link to a Q&A document: https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/SMSF-resources/SMSF-technical/PCG-2016/5-frequently-asked-questions/ [1]

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.