CPA advice corner: Building Off farm assets

The CPA gave his graingrower client this advice: "It appears you will soon be in a position to divert some of your income to an off-farm investment. The objective would be to create an asset that would give you a financial backstop in years of poor crops and a nest egg for your eventual retirement".

"What kind of investment would be appropriate?" asked the grower.

There were three basic options, said the CPA.

Direct property investment, such as a rental property (residential, industrial or commercial) is a possibility in a major town or city. It was worth keeping in mind that a range of income-producing buildings that met certain criteria were eligible for special write-off deductions to capital expenditure. These write-offs, or tax deductions, ranged from 2.5-4 per cent per year, depending on the type and construction date of the investment building. "They are not the most important factor in choosing a property investment, but when a building meets the other key requirements such as desirable location and being in strong demand, they can make a difference to your bottom line returns," said the CPA.

A portfolio of managed funds allows maximum diversification. "True diversification lowers your risk and enhances your profit potential," said the CPA. "You are not properly diversified unless you invest, through different fund managers, in cash, fixed interest, shares and property. The portfolios of those funds should be diversified across different industries, such as food, media, banks, minerals, and technology. They should also give you exposure to different geographical areas, such as Asia, the USA and Europe, as well as Australia. The advantage of investing in managed, or pooled funds, is that you can achieve an optimum level of diversification with a relatively modest investment. And, if it suits your overall strategy, you can use loan funds to gear your investment for a potentially higher rate of return."

Direct shares in strong companies with solid growth prospects would provide income and capital growth, and also a stream of tax credits, or rebates, through dividend imputation. "Provided that your overall financial situation is sound, shares can also be a suitable asset for gearing strategies to increase your potential rate of return. Adding borrowed money to your own investment capital gives you the capacity to invest in a wider range of shares."

"What do you think 1 should do?" asked the grower.

"We will need to talk about your overall financial situation, your personal and family objectives, your retirement plans and CPA Advice Comer is provided by your attitude to risk. After that, I will be able to make some recommendations," said the CPA.

CPA Advice Corner is provided by Australian Society of CPAs