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 (20,812 Views)
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.
Thanks for explaining where you are coming from. Although I might not agree with you that most people who rent out part of their property is renting out their granny flat (I know of people who rent out 1 bedroom of a 2 bedroom apartment), I'm happy to let that slide.
In effect you are saying if they don't have an annual shortfall between income and expenses, then they can't negative gear. But isn't that the same with every other investment? eg. Margin lending to buy shares. Most people who borrow to buy shares make more in the sharemarket than it costs them in interest expenses. So using your logic, would it be right to say people who borrow to invest in shares can't negative gear either?
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.
The source data is linked in my first post. You're welcome to draw your own chart, using the lowest possible tax rate, highest possible TD rate etc... please draw it whatever way best pushes your agenda and then we can discuss your own version of the chart.
Myself, I'm happy to go with the averages. In the same way when looking at the performance of property as an investment, we normally look at averages, medians etc, rather than choosing the best performing property at the lowest possible mortgage rate and highest possible rental yield, and then using that as a proxy for property in general as an investment.
Averages are used for a reason - they represent the majority. But if you wish to draw a chart using outliers - go for it.
wern - what do you think the average real after tax return on current term deposits is for average earners? Just roughly will do.
Here's some rough figures I've played with. Term deposits depend on the term and bank but look to be about 5.5% at the moment. The average worker has a marginal tax rate of 31.5% (including medicare). CPI is currently at 3.1%.
So lets imagine $1000 put in a term account. After a year the $1000 will be $1055. In "real terms" the $1055 will be reduced to $1055/1.031 which equals $1023.28. The tax charged on the $55 interest will be $55 x 0.315 which is $17.05. Therefore the real amount left will be $1023.28-$17.05 which is $1006.23.
So the real after tax return, with these figures, will be 0.6%. Do you agree?
In effect you are saying if they don't have an annual shortfall between income and expenses, then they can't negative gear.
Correct
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But isn't that the same with every other investment?
No. The legislation allows negative gearing only for certain investments.
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eg. Margin lending to buy shares.
This can be negatively geared if the shares pay dividends that are at least somewhat comparable to interest on a term deposit (meaning that you are able to offset the losses against your other income, such as wage, which meanms that your tax refund will increase as a result of your loss).
So if you purchase shares in a mining exploration company (which typically don't pay dividends) and take out a loan to buy these shares and make a loss every year (which you would as long as you held the shares since no income is received) that loss can't be offset against other income, therefore no negative gearing.
This also applies to investment in property if you are investment for capital growth instead of rental income - ie if you buy an apartment off-the-plan and sell it on completion you can't negatively gear it while it is being built. Or if you buy a piece of land in order to develop 4 townhouses with the condition that they be sold off the plan (which is the case with most developments) you also can't negatively gear it.
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So using your logic, would it be right to say people who borrow to invest in shares can't negative gear either?
It is from my understanding of Tax Law (and unfortunately the Tax Law is illogical sometimes).
wern - what do you think the average real after tax return on current term deposits is for average earners? Just roughly will do.
Here's some rough figures I've played with. Term deposits depend on the term and bank but look to be about 5.5% at the moment. The average worker has a marginal tax rate of 31.5% (including medicare). CPI is currently at 3.1%.
So lets imagine $1000 put in a term account. After a year the $1000 will be $1055. In "real terms" the $1055 will be reduced to $1055/1.031 which equals $1023.28. The tax charged on the $55 interest will be $55 x 0.315 which is $17.05. Therefore the real amount left will be $1023.28-$17.05 which is $1006.23.
So the real after tax return, with these figures, will be 0.6%. Do you agree?
Quote:
Do you agree?
Yes
There's no need to use averages. After tax return = (1 - marginal tax rate) * interest
If you are earning income of between 37000 and 80000 your marginal tax rate (inclusive of the medicare levy) is 31.5%. Therefore after tax return = 0.685 * interest rate
Real return = after tax return - inflation Inflation as at Dec 2011 is 3.1% Therefore Real return = (0.685 * interest rate) - 0.031
Using your example (where interest rate is 5.5%): Real return = (0.685 * 0.055) - 0.031 = 0.006675 = 0.667 % Which is close to zero.
The source data is linked in my first post. You're welcome to draw your own chart, using the lowest possible tax rate, highest possible TD rate etc... please draw it whatever way best pushes your agenda and then we can discuss your own version of the chart.
Myself, I'm happy to go with the averages. In the same way when looking at the performance of property as an investment, we normally look at averages, medians etc, rather than choosing the best performing property at the lowest possible mortgage rate and highest possible rental yield, and then using that as a proxy for property in general as an investment.
Averages are used for a reason - they represent the majority. But if you wish to draw a chart using outliers - go for it.
I am not trying to push an agenda. I am only shedding some light on your OP. If someone wants their agenda to be received positively they need to use figures that are very difficult to refute. And they should be open to constructive criticism, especially if they are spending time putting graphs and other data together (personally I greatly appreciate the effort you put into your OP even though I disagree with the conclusion you draw in it).
There's no need to use averages. After tax return = (1 - marginal tax rate) * interest
If you are earning income of between 37000 and 80000 your marginal tax rate (inclusive of the medicare levy) is 31.5%. Therefore after tax return = 0.685 * interest rate
Real return = after tax return - inflation Inflation as at Dec 2011 is 3.1% Therefore Real return = (0.685 * interest rate) - 0.031
Using your example (where interest rate is 5.5%): Real return = (0.685 * 0.055) - 0.031 = 0.006675 = 0.667 % Which is close to zero.
Ok, your answer is close to mine but to be strictly mathematically correct you shouldn't simply subtract the inflation rate from the nominal return. In that example you subtracted 3.1% CPI from the 5.5% return and that gives 2.4%. But what you should do is divide 1.055 by 1.031 and subtract one, which gives 2.3%. It doesn't matter much for low inflation over a short period but it does matter over longer periods. For example, a return over 10 years might be 100% and inflation might be 50%. Just doing a subtraction would indicate a real return of 50% but the correct way would be to divide 2.00 by 1.50 and subtract one - giving only 33% real return.
You can think of it this way. Say the CPI was 100 last year and its 103.1 this year. That is saying that the real value of $100 last year is the same as $103.1 this year. To convert this year's prices to last years prices you need to divide this year's price by 1.031 to get $100. If you subtract 3.1% from this year's price you'll get $(103.1x0.969) which is $99.90, a small error.
Although I might not agree with you that most people who rent out part of their property is renting out their granny flat (I know of people who rent out 1 bedroom of a 2 bedroom apartment), I'm happy to let that slide.
i know of many people who rent out a room or two to friends, i know of no one who rents out a granny flat. i don't know where you would go to get stats on this? looking at gumtree there are far more renting rooms than GFs.
those i know who rent out rooms do not claim NG as they don't declare the income.
This can be negatively geared if the shares pay dividends that are at least somewhat comparable to interest on a term deposit (meaning that you are able to offset the losses against your other income, such as wage, which meanms that your tax refund will increase as a result of your loss).
So if you purchase shares in a mining exploration company (which typically don't pay dividends) and take out a loan to buy these shares and make a loss every year (which you would as long as you held the shares since no income is received) that loss can't be offset against other income, therefore no negative gearing.
This also applies to investment in property if you are investment for capital growth instead of rental income - ie if you buy an apartment off-the-plan and sell it on completion you can't negatively gear it while it is being built. Or if you buy a piece of land in order to develop 4 townhouses with the condition that they be sold off the plan (which is the case with most developments) you also can't negatively gear it.
I meant income producing investments but left out the clarification Thanks for pointing it out.
Still don't think I'll agree to call things non-negative gearable based on the assumption that their income is greater than all the expenses to generate that income.
You said you are a tax accountant in another thread. If one of your clients asked you if renting out part of their own home was negative gearable, would you say no?
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