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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 (20,811 Views)
wern
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zaph
30 Mar 2012, 06:38 PM
tax legislation allows negative gearing for any income producing asset.
Only if the income is assessable. Hence my examples. Read them carefully. The ATO will confirm them.
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wern
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Trojan
30 Mar 2012, 07:08 PM
If one of your clients asked you if renting out part of their own home was negative gearable, would you say no?
If someone asked me if something was negative gearable, I would ask them to be more specific in their questions. If they want to know if they can get a tax benefit from renting part of their home out then I would tell them that yes they can get a tax benefit if:
1. They make a loss
2. They have other income that they are being taxed on, which this loss then reduces (and therefore creates the tax benefit, as less tax is paid due to their rental loss)
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wern
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Trojan
30 Mar 2012, 07:08 PM
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.
"Negative gearing" simply refers to getting a tax benefit by making a rental loss. The loss is usually achieved by the interest on the rental property loan. You can't have negative gearing if you are making a profit. The concept is explained in depth here:
http://www.moneybuddy.com.au/personal-finance/tax-and-negative-gearing

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Trojan
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wern
30 Mar 2012, 11:23 PM
"Negative gearing" simply refers to getting a tax benefit by making a rental loss. The loss is usually achieved by the interest on the rental property loan. You can't have negative gearing if you are making a profit. The concept is explained in depth here:
http://www.moneybuddy.com.au/personal-finance/tax-and-negative-gearing
Thanks. I do understand that there is no loss to offset against your salary if you are making a profit every year.
Its the assumption that people who rent out part of their home will automatically make a profit which I disagree with.
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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wern
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Sarah Perkins
30 Mar 2012, 06:02 PM
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.
You need to simply subtract the inflation rate from the nominal after-tax return
http://www.investopedia.com/terms/r/realrateofreturn.asp
http://stocks.about.com/od/understandingstocks/a/Realret020105.htm
http://www.investopedia.com/ask/answers/09/real-rate-return.asp#axzz1qbQZwhA4
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wern
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Trojan
30 Mar 2012, 11:27 PM
Its the assumption that people who rent out part of their home will automatically make a profit which I disagree with.
Most people who do will make a profit. This is from my experience. Perhaps you could look at my comment as an opportunity to make money and try to work something out for yourself. ie if you are a home owner-occupier and have enough room for a granny flat, and live in Sydney, to build a new granny flat would cost less than $90000 (you can get pre fabricated granny flats at a far lower cost). If you borrow the full 90k at 7% interest (slightly inflated) you have a weekly interest cost of $121 (90000 * 0.07 / 52). So if you can achieve rental income higher than this amount then it might be a good investment opportunity for you.
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Trojan
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wern
30 Mar 2012, 11:40 PM
Most people who do will make a profit. This is from my experience. Perhaps you could look at my comment as an opportunity to make money and try to work something out for yourself. ie if you are a home owner-occupier and have enough room for a granny flat, and live in Sydney, to build a new granny flat would cost less than $90000 (you can get pre fabricated granny flats at a far lower cost). If you borrow the full 90k at 7% interest (slightly inflated) you have a weekly interest cost of $121 (90000 * 0.07 / 52). So if you can achieve rental income higher than this amount then it might be a good investment opportunity for you.
Thanks but I have 2 kids and a dog and would rather have to whole house to ourselves.
I also don't want a pro rata capital gains tax liability when I sell my home (nor the accounting and record keeping that comes with it)
I put trolls and time wasters on my ignore list so if I don't respond to you, you are probably on it ....
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Sarah Perkins
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wern
30 Mar 2012, 11:29 PM
Those links are wrong. Doing a simple subtraction gives an approximate answer for small returns and low inflation. It doesn't work for large returns over long periods as I explained previously.

Here's the correct method, exactly as in my previous posts:

http://personalfinance.byu.edu/?q=node/457

Quote:
 
Understand How to Calculate Real Returns

A real return is the rate of return you receive after the impact of inflation. As discussed earlier, inflation has a negative impact on your investments because your money will buy less in the future. For example, forty years ago a gallon of gas cost twenty-five cents per gallon; currently, gas costs $2.90 per gallon. While the gas hasn’t changed (much), the price has increased. To keep your real return constant (in other words, to maintain your buying power), you must actually earn more money in nominal terms.

Traditionally, investors have calculated the real return (rr) as simply the nominal return (rn), or the return you receive minus the inflation rate (π). This method is incorrect. It is preferrable to always use the following formula:

(1 + nominal return (rn)) = (1 + real return (rr)) * (1 + inflation (π))

To solve for the real return, divide both sides of the equation by (1 + inflation (π)). Once you've divided, the equation looks like this:

(1 + nominal return (rn))/(1 + inflation (π)) = (1 + real return (rr))

Then, subtract one from both sides to get the following:

Real return (rr) = (1 + nominal return (rn))/(1 + inflation (π)) – 1


An accountant should really know this.
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Steve99
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zaph
30 Mar 2012, 06:33 PM
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.
Granny flats are practicaly illegal now. Only if your granny is in it, then when gone must be pulled down in most cases. Cant be any real stats on them.
Edited by Steve99, 31 Mar 2012, 07:39 AM.
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TED BULLPIT
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Another desperate plight Shadow, its debtors like yourself that will be severely punished, but your extreme desperation has grown from your extreme debt which will grown into your extreme punishment :lol:
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