Real After Tax Term Deposit Returns for Australian Savers are Negative; Savers Punished. Debtors Rewarded. Tax and Inflation Work for Borrowers and Against Savers.
Tweet Topic Started: 6 Mar 2012, 11:00 AM (20,813 Views)
From the above link in my OP... 'The average tax rate (total tax as a proportion of income) for a worker earning the male average wage in Australia has been steady at around 22 per cent over the past 40 years. The marginal tax rate (the rate of tax paid on an additional dollar of income) for the same worker has averaged around 35 per cent.'
wern
theoretically someone could have always picked the bank with the highest interest rate while having no other income which means they are unlikely to pay any tax on their interest income (and if they do pay tax it will be far lower than 35%), which blows his whole graph to hell
The graph is based on the average person. Theoretically, individuals might do any number of things in order to out-perform or under-perform the average.
A negative gearing property would yield a negative gearing result regardless if you rent out the entire investment property or rent out a portion while living in it. The taxpayer is required to apportion the expenses and rental income accordingly, but a property does not become less likely to have negative gearing, just because you are apportioning it.
E.g. Investment property: Income generating portion: 100% Total Rental income $9000 p.a. Total expenses $9900 p.a. Investment loss $900 (9900-9000) This 900 bucks is used to deduct against other income sources. i.e. Negative Gearing.
Rent out a portion while living in it: Income generating portion: 1/3 Total rental income $3000 p.a. Investment loss $3300 p.a. Investment loss $300 This 300 bucks is used to deduct against other income sources. i.e. Negative Gearing
Trojan and Kenny: Kenny attempted to answer your question. His reasoning seems very sound but it doesn't reflect the way it works in the market.
The problem with your calculations Kenny is that if I rent out a 3rd of my property I will not be renting it at 1/3 of the market rent. It doesn't work like that.
In blacktown (I just randomly picked this suburb) , the median property price currently is 357000 as per http://www.rs.realestate.com.au/cgi-bin/rsearch?a=sp&s=nsw&u=blacktown If you borrow the full amount, at 7% interest, the total interest will be $25000. 17% of this amount will be $4300 Granny flats rent for $260 per week in this area = $13520 per year = profit
Let's say the median price doesnt incloude a granny flat, so you build one for $80,000 Interest would be 7% * 80000 + 4300 = $9900 = profit Add other expenses such as council and water rates = $3000 (overblown figure) * 17% = 510 = 13520 - 9900 - 510 = profit
From the above link in my OP... 'The average tax rate (total tax as a proportion of income) for a worker earning the male average wage in Australia has been steady at around 22 per cent over the past 40 years. The marginal tax rate (the rate of tax paid on an additional dollar of income) for the same worker has averaged around 35 per cent.'
From your link: The average tax rate (total tax as a proportion of income) for a worker earning the male average wage in Australia has been steady at around 22 per cent over the past 40 years. The tax rates in Australia have declined massively in the last 20 years. Therefore this "average" is actually not applicable to your graph. If you provided an average tax rate for the same period as your graph then you could claim that it is somewhat accurate. Here is some supporting info from the ATO (pay attention to the rates as well as the income brackets) - http://www.ato.gov.au/individuals/content.aspx?doc=/content/73969.htm
Quote:
The graph is based on the average person. Theoretically, individuals might do any number of things in order to out-perform or under-perform the average.
You are actually supporting what I wrote about your misleading statements. An average person doesn't rent out a portion of their house which therefore means that the average person enjoy "no rent to pay" and "stability of tenure" and "negative gearing benefits" in that one investment.
The average tax rate (total tax as a proportion of income) for a worker earning the male average wage in Australia has been steady at around 22 per cent over the past 40 years. The marginal tax rate (the rate of tax paid on an additional dollar of income) for the same worker has averaged around 35 per cent.'
The tax rates in Australia have declined massively in the last 20 years.
The word 'steady' suggests no recent decline. An average marginal tax rate of 35% seems about right - remember that the average person works, so the average person will pay tax on their savings at the marginal tax rate because the savings income will be above and beyond their regular income. As per the treasury document, this is 35% for the average person.
$35,001 - $80,000 ... $4,350 plus 30c for each $1 over $35,000 $80,001 - $180,000 ... $17,850 plus 38c for each $1 over $80,000
Right, so logically, the average is going to be somewhere between 30c and 38c cents in the dollar. That's the income range most people would fall into.
If it's not exactly 35%, it's going to be pretty close... maybe 33%? Not really going to make any difference to the analysis.
Treasury says 35%, so I'll go with that until proven otherwise.
Trojan and Kenny: Kenny attempted to answer your question. His reasoning seems very sound but it doesn't reflect the way it works in the market.
The problem with your calculations Kenny is that if I rent out a 3rd of my property I will not be renting it at 1/3 of the market rent. It doesn't work like that.
In blacktown (I just randomly picked this suburb) , the median property price currently is 357000 as per http://www.rs.realestate.com.au/cgi-bin/rsearch?a=sp&s=nsw&u=blacktown If you borrow the full amount, at 7% interest, the total interest will be $25000. 17% of this amount will be $4300 Granny flats rent for $260 per week in this area = $13520 per year = profit
Let's say the median price doesnt incloude a granny flat, so you build one for $80,000 Interest would be 7% * 80000 + 4300 = $9900 = profit Add other expenses such as council and water rates = $3000 (overblown figure) * 17% = 510 = 13520 - 9900 - 510 = profit
Why is it necessary to assume renting out part of your home means renting out a granny flat? More importantly, why is it a valid assumption?
The word 'steady' suggests no recent decline. An average marginal tax rate of 35% seems about right - remember that the average person works, so the average person will pay tax on their savings at the marginal tax rate because the savings income will be above and beyond their regular income. As per the treasury document, this is 35% for the average person.
I appreciate your reliance on this data, however I disagree with it:
So a difference of 12% in average marginal tax rates over 20 years is anything but "steady". And this data states it was stead for double that time frame.
The net personal marginal tax rate in Australia for an average worker with no children is 31.5 per cent, placing it ninth lowest in the OECD-30 and fifth lowest in the OECD-10.
I redrew my chart with a tax rate of 31.5 instead of 35%. The change is barely even visible. It really makes no difference to the analysis.
Why is it necessary to assume renting out part of your home means renting out a granny flat? More importantly, why is it a valid assumption?
I didn't make this assumption. I stated the usually people who rent out part of their home are renting a granny flat. You are nitpicking a topic that is a deviation from the OP. I only went down this path to support my comment that the OP's statement about enjoying all these benefits when you purchase a house rather than put your money in a term deposit was misleading. With a granny flat you are renting out 17% of the property. That same property (200 sq M) if you are renting a single room (12 sqM or less) is far less than 17%. If you factor in 50% of the usage of the kitchen, bathroom and living room you are looking at around 12sq m + (12 sq m + 12sq m + 20sq m) * 50% = 12 + 22 = 34 = 17% of the 200 sq m. So you have a very comparable % to a granny flat. Since the rental market for share accomodation is extremely small (ie flatmates.com.au lists 14 properties made available in the sydney CBD in the last 2 weeks. ) I did my calculations on granny flats.
Quote:
I did a quick search on realestate.com.au to see how many properties at or below 350K comes with an existing self-contained granny flat. Out of 99 advertised properties, none come with an existing self-contained granny flat.
Lets say the house can sell for $500000 and is 200 sq M without the granny flat (5 BR 2 Bath + "ample storage space under the house" as well as a spa and workshop suggests it is at least that. Granny flat is 45 sq M as per the ad.
Well, you'd have to agree the current average must be somewhere between 30 and 38, right?
Here is a source putting the current average at 31.5% for an average worker with no children...
The current rate for the average worker is 30%. You can add 1.5% for the medicare levy (which gets the 31.5% but then you would have to add it to the other rates I mentioned and would arrive at the same result I posted.
Quote:
I redrew my chart with a tax rate of 31.5 instead of 35%. The change is barely even visible. It really makes no difference to the analysis.
The point I am making is that the figures you are using aren't accurate (even the averages). Can you also use the term deposit highest interest rate for each period? A sensible investor would do their research and go with the highest interest bearing accounts, not the "averages". If you are trying to make a point about this, then you should use figures that are conservatively in your favour (ie lower tax rates, higher interest rates) otherwise it looks like you are just pushing an agenda. This is further implied by your other statements in the OP (which I stated are misleading).
Where is your graph comparing capital growth adjusted for rental profits/losses, tax and inflation? You mentioned capital gains as a positive thing for a property owner and you use tax as a negative thing for interest earners. But capital gains are also taxed if you are an investor as are rental profits if you make any. No mention of this is made.
And finally historical figures are useful when the current market conditions match historical conditions - which means that you can compare this market to your figures. But considering the current economic situation (GFC) and soon-to-be-implemented changes (carbon-tax and mining tax), it isn't accurate to assert that historical figures about interest and property can have any bearing on future predictions.
If someone puts their money in the bank today, they know that unless the bank becomes bankrupt (which is extremely unlikely in Australia due to APRA) they will have that money + interest (net of tax) tomorrow. That can't be said for property value.
I didn't make this assumption. I stated the usually people who rent out part of their home are renting a granny flat. You are nitpicking a topic that is a deviation from the OP. I only went down this path to support my comment that the OP's statement about enjoying all these benefits when you purchase a house rather than put your money in a term deposit was misleading. With a granny flat you are renting out 17% of the property. That same property (200 sq M) if you are renting a single room (12 sqM or less) is far less than 17%. If you factor in 50% of the usage of the kitchen, bathroom and living room you are looking at around 12sq m + (12 sq m + 12sq m + 20sq m) * 50% = 12 + 22 = 34 = 17% of the 200 sq m. So you have a very comparable % to a granny flat. Since the rental market for share accomodation is extremely small (ie flatmates.com.au lists 14 properties made available in the sydney CBD in the last 2 weeks. ) I did my calculations on granny flats.
I wrote: 357000 + 80000 for a granny flat = $437000 (higher than your figure of 431k)
Lets say the house can sell for $500000 and is 200 sq M without the granny flat (5 BR 2 Bath + "ample storage space under the house" as well as a spa and workshop suggests it is at least that. Granny flat is 45 sq M as per the ad.
I have a few things to complete before i head home today, so I will be short with my response - apologies if my answers are not adequate.
Your calculation is entirely based on a "granny flat" scenario, which you mentioned is the most frequent occurrence (i.e. usually). That is an assumption you made. I questioned why is this a valid assumption.
Shadow made the statement that:
Quote:
Meanwhile, sensible homeowners enjoy capital gains, no rent to pay, stability of tenure, negative gearing benefits, and inflation reducing the real value of their home loans, leading to a comfortable rent-free, debt-free, asset-rich retirement.
You protested that it is that you CAN'T have no rent to pay, stability of tenure and negative gearing benefits concurrently.
Quote:
Home owners can't enjoy "no rent to pay" as well as "negative gearing benefits". If you live in the home you enjoy "no rent to pay" and "stability of tenure" without "negative gearing benefits" for that investment. If you are renting the property you are enjoying "negative gearing benefits" without "no rent to pay" and without "stability of tenure" for that investment. But you can't enjoy all three for the one investment.
I merely disagree that it does not become more unlikely because the expenses are apportioned for a negatively property.
I'm sure you are aware that negative gearing looks at net rental loss, not merely mortgage interest expenses, which includes but not limited to the following: http://www.ato.gov.au/individuals/content.aspx?menuid=0&doc=/content/00270214.htm&page=9&H9 advertising for tenants bank charges body corporate fees and charges cleaning council rates electricity and gas gardening and lawn mowing in-house audio/video service charges insurance building contents public liability interest on loans land tax lease document expenses preparation registration stamp duty legal expenses (excluding acquisition costs and borrowing costs) mortgage discharge expenses pest control property agents fees and commissions quantity surveyor's fees repairs and maintenance secretarial and bookkeeping fees security patrol fees servicing costs, for example, servicing a water heater stationery and postage telephone calls and rental tax-related expenses travel and car expenses rent collection inspection of property maintenance of property water charges. Depreciation on capital works Depreciation on plants and equipments.
Depreciation on capital works (e.g. construction) of a $80,000 granny flat at 2.5% is $2000 p.a.
Australian Property Forum is an economics and finance forum dedicated to discussion of Australian and global real estate markets and macroeconomics, including house prices, housing affordability, and the likelihood of a property crash. Is there an Australian housing bubble? Will house prices crash, boom or stagnate? Is the Australian property market a pyramid scheme or Ponzi scheme? Can house prices really rise forever? These are the questions we address on Australian Property Forum, the premier real estate site for property bears, bulls, investors, and speculators. Members may also discuss matters related to finance, modern monetary theory (MMT), debt deflation, cryptocurrencies like Bitcoin Ethereum and Ripple, property investing, landlords, tenants, debt consolidation, reverse home equity loans, the housing shortage, negative gearing, capital gains tax, land tax and macro prudential regulation.
Forum Rules:
The main forum may be used to discuss property, politics, economics and finance, precious metals, crypto currency, debt management, generational divides, climate change, sustainability, alternative energy, environmental topics, human rights or social justice issues, and other topics on a case by case basis. Topics unsuitable for the main forum may be discussed in the lounge. You agree you won't use this forum to post material that is illegal, private, defamatory, pornographic, excessively abusive or profane, threatening, or invasive of another forum member's privacy. Don't post NSFW content. Racist or ethnic slurs and homophobic comments aren't tolerated. Accusing forum members of serious crimes is not permitted. Accusations, attacks, abuse or threats, litigious or otherwise, directed against the forum or forum administrators aren't tolerated and will result in immediate suspension of your account for a number of days depending on the severity of the attack. No spamming or advertising in the main forum. Spamming includes repeating the same message over and over again within a short period of time. Don't post ALL CAPS thread titles. The Advertising and Promotion Subforum may be used to promote your Australian property related business or service. Active members of the forum who contribute regularly to main forum discussions may also include a link to their product or service in their signature block. Members are limited to one actively posting account each. A secondary account may be used solely for the purpose of maintaining a blog as long as that account no longer posts in threads. Any member who believes another member has violated these rules may report the offending post using the report button.
Australian Property Forum complies with ASIC Regulatory Guide 162 regarding Internet Discussion Sites. Australian Property Forum is not a provider of financial advice. Australian Property Forum does not in any way endorse the views and opinions of its members, nor does it vouch for for the accuracy or authenticity of their posts. It is not permitted for any Australian Property Forum member to post in the role of a licensed financial advisor or to post as the representative of a financial advisor. It is not permitted for Australian Property Forum members to ask for or offer specific buy, sell or hold recommendations on particular stocks, as a response to a request of this nature may be considered the provision of financial advice.
Views expressed on this forum are not representative of the forum owners. The forum owners are not liable or responsible for comments posted. Information posted does not constitute financial or legal advice. The forum owners accept no liability for information posted, nor for consequences of actions taken on the basis of that information. By visiting or using this forum, members and guests agree to be bound by the Zetaboards Terms of Use.
This site may contain copyright material (i.e. attributed snippets from online news reports), the use of which has not always been specifically authorized by the copyright owner. Such content is posted to advance understanding of environmental, political, human rights, economic, democratic, scientific, and social justice issues. This constitutes 'fair use' of such copyright material as provided for in section 107 of US Copyright Law. In accordance with Title 17 U.S.C. Section 107, the material on this site is distributed for research and educational purposes only. If you wish to use this material for purposes that go beyond 'fair use', you must obtain permission from the copyright owner. Such material is credited to the true owner or licensee. We will remove from the forum any such material upon the request of the owners of the copyright of said material, as we claim no credit for such material.
Privacy Policy: Australian Property Forum uses third party advertising companies to serve ads when you visit our site. These third party advertising companies may collect and use information about your visits to Australian Property Forum as well as other web sites in order to provide advertisements about goods and services of interest to you. If you would like more information about this practice and to know your choices about not having this information used by these companies, click here: Google Advertising Privacy FAQ
Australian Property Forum is hosted by Zetaboards. Please refer also to the Zetaboards Privacy Policy