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Real After Tax Term Deposit Returns for Australian Savers are Negative; Savers Punished. Debtors Rewarded. Tax and Inflation Work for Borrowers and Against Savers.
Topic Started: 6 Mar 2012, 11:00 AM (20,813 Views)
Shadow
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Evil Mouzealot Specufestor

wern
 
Shadow, your graph is faulty.

There is no such tax rate as 35% in Australia.
Shadow
6 Mar 2012, 11:00 AM
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.
Edited by Shadow, 30 Mar 2012, 02:05 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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wern
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kennyjaiz
30 Mar 2012, 01:39 PM
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.

As an investor, renting out part of your home usually means renting out a granny flat. As far as floor area is concerned, a 40 sq m granny flat would represent 17% of an averaqe property's floorspace (200 sqm house + 40 sqm granny flat). the floorspace average is derived from
http://www.greenlivingpedia.org/House_size_comparisons
and
http://www.abs.gov.au/ausstats/abs@.nsf/Previousproducts/1301.0Feature%20Article262005?opendocument&tabname=Summary&prodno=1301.0&issue=2005&num=&view=

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

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wern
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Shadow
30 Mar 2012, 01:54 PM

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.

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Shadow
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Evil Mouzealot Specufestor

wern
30 Mar 2012, 02:58 PM
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.

Quote:
 
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

$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.
Edited by Shadow, 30 Mar 2012, 03:27 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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kennyjaiz
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wern
30 Mar 2012, 02:49 PM
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.

As an investor, renting out part of your home usually means renting out a granny flat. As far as floor area is concerned, a 40 sq m granny flat would represent 17% of an averaqe property's floorspace (200 sqm house + 40 sqm granny flat). the floorspace average is derived from
http://www.greenlivingpedia.org/House_size_comparisons
and
http://www.abs.gov.au/ausstats/abs@.nsf/Previousproducts/1301.0Feature%20Article262005?opendocument&tabname=Summary&prodno=1301.0&issue=2005&num=&view=

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?
Edited by kennyjaiz, 30 Mar 2012, 03:39 PM.
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wern
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Shadow
30 Mar 2012, 03:07 PM
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:

The average salary at the moment is 53716.
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6302.0

The marginal tax rate for the average worker is currently 30% (on income between $37000 - $80000

In 1992 (the earliest record I can find for average wages from ABS) the average wage was $26000
http://www.abs.gov.au/AUSSTATS/free.nsf/log?openagent&63010_1193.pdf&6301.0&Publication&277CE66285B4A727CA2572250007373E&0&Nov%201993&10.02.1994&Previous
The marginal tax rate at that level was 38%, however if someone earned above $36000 (ie they eanred interest above $10000) the rate increased to 46%. So lets say an average rate of 42% (average of 38% and 46%)

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.
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Shadow
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Evil Mouzealot Specufestor

wern
30 Mar 2012, 03:34 PM
I appreciate your reliance on this data, however I disagree with it:
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...

Quote:
 
http://comparativetaxation.treasury.gov.au/content/report/html/06_Chapter_4-08.asp

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.

Posted Image

Posted Image
Edited by Shadow, 30 Mar 2012, 03:53 PM.
1. Epic Fail! Steve Keen's Bad Calls and Predictions.
2. Residential property loans regulated by NCCP Act. Banks can't margin call unless borrower defaults.
3. Housing is second highest taxed sector of Australian Economy. Renters subsidised by highly taxed homeowners.
4. Ongoing improvement in housing affordability. Australian household formation faster than population growth since 1960s.
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wern
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Quote:
 
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.

The cheapest property with a granny flat:
http://www.realestate.com.au/property-house-nsw-blacktown-109332686

is advertised at 431k.


I wrote: 357000 + 80000 for a granny flat = $437000 (higher than your figure of 431k)

Quote:
 
http://www.realestate.com.au/property-house-nsw-blacktown-109405711
The existing granny flat is renting at $185p.w.


That is already being rented. It could have a long term tennant from years ago. You should be using new rentals data, not existing rentals.
Regarding this listing, how long has it been listed? Would it sell for the listed price? If not, how much is it worth? The only sale on that street that is anywhere near this price was 11 Raymond st for $457000.
http://www.onthehouse.com.au/buy/results/map/?Suburb=Raymond+St%2C+Blacktown%2C+NSW%2C+2148&State=NSW&PageNr=1&SurroundingSuburbs=0&PriceLeft=&PriceRight=5000000&BedroomsLeft=0&BedroomsRight=10&BathroomsLeft=0&BathroomsRight=10&CarSpacesLeft=0&CarSpacesRight=10&PropertyType=HOUSE&ListingType[]=Sold&Search=Search&ne=0&sw=0&zoom=0&SaveRecentSearch=yes&MaxResults=250

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.

Interest at 7% = $35000
Apportioned = 45 / (200 + 45) = 18.5%
Interest claimable = $6475 (35k * 7% * 18.5%)
Rent received = 185 * 52 = 9620 = profit
Interest

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wern
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Shadow
30 Mar 2012, 03:45 PM
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.
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kennyjaiz
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wern
30 Mar 2012, 04:19 PM

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)




That is already being rented. It could have a long term tennant from years ago. You should be using new rentals data, not existing rentals.
Regarding this listing, how long has it been listed? Would it sell for the listed price? If not, how much is it worth? The only sale on that street that is anywhere near this price was 11 Raymond st for $457000.
http://www.onthehouse.com.au/buy/results/map/?Suburb=Raymond+St%2C+Blacktown%2C+NSW%2C+2148&State=NSW&PageNr=1&SurroundingSuburbs=0&PriceLeft=&PriceRight=5000000&BedroomsLeft=0&BedroomsRight=10&BathroomsLeft=0&BathroomsRight=10&CarSpacesLeft=0&CarSpacesRight=10&PropertyType=HOUSE&ListingType[]=Sold&Search=Search&ne=0&sw=0&zoom=0&SaveRecentSearch=yes&MaxResults=250

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.

Interest at 7% = $35000
Apportioned = 45 / (200 + 45) = 18.5%
Interest claimable = $6475 (35k * 7% * 18.5%)
Rent received = 185 * 52 = 9620 = profit
Interest
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.
Edited by kennyjaiz, 30 Mar 2012, 05:21 PM.
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