Budget 05 - End of negative gearing

[Bear924]

Hi all,

I've just be sussing out the new budget tax cuts and am very impressed with the size of high income tax cuts. 80% of taxpayers will now face a top marginal tax rate of 30%, which would suggest to me that many of the tax advantages of negative gearing are less usefull for more and more people. Esp. when you consider that the new top tax rate is 125k :eek: .

Do you think these changes will reduce the number of people willing to carry rental property loses due to the decreased tax returns?

Obviously bracket creep will kick in over time however at the moment my wage rises aren't keeping up with tax bracket increases.

[natedog]

hey bear, being a lower paid J.O.B. worker it wont really affect myself, but if it does discourage higher paid workers from getting into property investment purely for the tax relief, this could mean less investment property available for tenants meaning higher rents meaning less of a loss against expenses, isnt this what happened in the 80s when negative gearing was actually abolished?

[MichaelW]

Bear,

I'm not an accountant, and this is probably a lot of hogwash, but my thinking is that any income tax cuts actually make REI more lucractive. I'd much rather the government reduced my taxes upfront than forced me to calculate a NG deduction to reduce them. Here's a little example which might help clear it up:

With income tax:

Gross income $100K
Negative Gearing $20K paper loss
Amended gross income $80K
Tax at 50% $40K
Net income $40K in the pocket

Assume reduced income tax:

Gross income $100K
Negative Gearing $20K paper loss
Amended gross income $80K
Tax at 25% $20K
Net income $60K in the pocket

So, assuming scenario 1 is the current tax rates this model assumes I can live on $40K net per annum and still hold assets with a $20K NG deduction. If taxes decrease then my net income has increased to $60K and in fact I could double my negatively geared assets and claim a $40K deduction and still end up with my net income of $40K to cover living expenses.

A reduction in income taxes only makes real estate investment MORE attractive, not less so IMHO. Sure the negative gearing impact on your tax return might not be so significant, but you've already got that tax back care of the government's generous tax cuts. I'm sure there's some accountant out there who will tear this little analysis to shreds so please do so if I'm off the mark...

Cheers,
Michael.

[alexlee]

In general, the idea of negative gearing is that you pay $1 out for extra expenses (on top of rental income, etc) and the government gives you back your marginal rate of tax 'back' as savings. So if your marginal rate of tax is 30% instead of 42%, it means that $1 of loss now costs you 70 cents instead of 58 cents.

Of course, this changes with depreciation as well (since that's not a cash loss).

Bottom line, in my opinion, it makes neg gearing less attractive. But that might be good for property investors because it weeds out the people who are in it just to 'save tax' (dubious anyway) and leaves more deals to the real investors.

Puts more money in people's pockets to pay rent, too!
Alex

[Kiwi Investor]

To me negative gear is not a strategy that is for everyone.

As an investor I look at the opportunity and do what is best for me based on my plan and goals.

I don't think it will be the end of negative gear.

KI

[Nobleone]

Hi All,

Can anyone provide a web link to a basic breakdown of the budget?

I tend not to watch much TV so I missed the whole exciting episode. :eek:

Cheers, Nobleone. :D

[paulzag]

The transcript should be at www.treasurer.gov.au/tsr/ content/transcripts/2005/038.asp

Check Treasury's website. Commentary in all the papers and online at http://www.smh.com.au and http://www.afr.com.au

I think purely tax driven IP strategy pushed by some "investment advisors" will now be replaced by other more exotic schemes or even margin loans into the stock market.

Regards

PaulZag
Dreamspinner

[lizzie]

lower tax rates also mean lower cg rates. although, as my husband is currently in the highest bracket and will drop down if the budget is passed, i am looking forward to having more in the pocket ... he currently pays 50c in the dollar (incl medicare) and we don't get a damned rebate or subsidation anywhere.

although i would rather be earning in a higher bracket than getting payouts.

[MichaelW]

So if your marginal rate of tax is 30% instead of 42%, it means that $1 of loss now costs you 70 cents instead of 58 cents.

Bottom line, in my opinion, it makes neg gearing less attractive. Alex,

Sure the loss now costs you 70c instead of 58c, but the government has already given you the difference (12c) back as a tax cut! So, in fact, you're still better off!!

Assuming tax was zero, that would be like saying the loss now costs you 100c instead of 58c and how bad is that! But, you'd be tax free and not need NG to reduce your taxable income.

The only way the tax cuts will make negative gearing less attractive is if certain individuals are pursuing it solely as a way of reducing tax on their income. This is stupid if they are, because its like throwing away a dollar so the government can give you back 30c in tax. Now that the government has already cut taxes, they don't need NG to do it for them. They now already have more money to blow on conspicuous consumption for doodads like plasma TVs etc. But, for the true investors, the tax cuts make our position better net net. So, in fact, should mean more spare money for investing and result in increased deductions through NG, even though the % return may be smaller now.

In an ideal investors world, there'd be no taxes and no such term as NG. Then we'd all be much richer as we'd have all that spare income to invest. You'd still carry losses on your holding costs on IP, but you wouldn't be able to claim the tax back as there's no tax in the first place.

Bring on the ideal investors world I say! :D

Cheers,
Michael.

[Bear924]

Hi all,
I've enjoyed reading everyone's replies, thank you Michael for putting the time into your posts. My belief is that everybody has a valid comment on what might happen because each person invests for different reasons.

If I'm an average punter currently earning $80k per year and paying 50% on any money he earns over $70k he might decide to look at a method of reducing tax ... talk about reducing tax and money people think negative gearing into property. Mr Punter does some calculations and realises that he'll 'save' money by negative gearing and therefore purchases a low yielding/ high capital growth potential house.

New tax laws and Mr Punter still earns $80k per year however now the max. tax he'll pay is 42%.. plus he gets more take home pay for money earnt in the lower brackets. Logic would suggest that Mr Punter would save this windfall and invest it, rather than trying to obtain the money via tax refunds etc - I believe this is what Michael is saying - and I agree that $$ wise it is better to get the money up front then getting it back via tax.

Instead Mr Punter spends his windfall on consumer rubbish because he now has less motivation to save tax. If he decides to invest, the weighting towards a low yield, high cap. growth property may appear to be reduced and therefore he purchases something in the outer suburbs.... maybe even cashflow postive properties to try and get into the top tax bracket.

The end story is that he's decided to back off the negative gearing approach .... thus the death of neg gearing (obviously it would still exist however it will be less attractive to Mr Punter)

[MichaelW]

Bear,

Nice post! And worthy of a little kudos too I think...

Good point that average Joe punter is less likely to resort to negative gearing to claw back some dollars. He's got em already so can just burn them!!!

Makes it all the better for us investors since I like the NG properties with their higher potential capital gain. The less punters playing in my sand pit the better!

Cheers,
Michael.

[Merovingian]

So, Labor wants to double the tax cuts for Australia's lowest income earners (http://www.abc.net.au/news/newsitems/200505/s1367400.htm), yet he wants to stop Mr. Costello's tax cuts by opposing the legislation which will engage the tax cuts... :confused:

Am I missing something here? Is Labor thinking about themselves or the Australian public as a whole? Wouldn't it be logical to pass the legislation regarding these new tax rates, hence giving Australians a tax cut regardless?

No wonder Labor have not been voted in office for the last 4 terms...

Is this dumb politics or am I missing something?

[Aceyducey]

Merovingian,

If Labour said, 'oh that's a great budget we'll support it' they wouldn't get coverage & next time they questioned government economic policy the Libs would point the finger and say 'well you supported our budget without question'.

Politically Labor has no real option but to find fault with the budget & use it as a platform to say how they'd do it better.

The risk is that people see Labor as holding up tax cuts and think less of them....but that's a smaller risk than not speaking now and being seen as irrelevant.

Come July it makes no difference anyway - Labour won't be able to stop ANY legislation. We'll see some interesting bills on the floor then!

Cheers,

Aceyducey

[Philby]

Tax cuts for the rich while the guy and gal on struggle street fall further behind with cuts to services the rich can easily afford. With the rich already minimising their tax with creative (and expensive) accountants. The poor pay the same price at a petrol pump but the rich man has a leased vehicle etc
Am I missing something

[Aceyducey]

Yes you are Philby,

But you'd have to step outside of your prejudices to understand it.

It is right in front of you.

Cheers,

Aceyducey

[TomL]

Tax cuts for the rich while the guy and gal on struggle street

blah blah blah

Am I missing something

I'll fill you in.

IMHO Australia is still the lucky country.

Almost ANYONE can make a decent go of it here - opportunity abounds. Just ask anyone that lives in war torn, 3rd world, communist, famine stricken or dictatorship run country. Why are they all lining up at our gates?

I just wish things like mental health services were taken care of better - THIS is one of the the demographics that truly needs help - stuff the tax cuts for everybody. Why is Labor focusing on the battler? Votes. And people fall for it. That makes me sick. They cloud the real issues and squabble like a bunch of pigs ina pen. If anyone truly cared they would look after our war vets, the mentally ill, the old, the incapacitated, the homeless, the destitute etc etc.

If anyone is gonna complain, take a step back, look at the big picture and realise that anyone living in Australia (and especially if you are reading this forum) is OH SO LUCKY. The rich in this country as far as I can tell are people that are willing to make a go of it. For the majority - Not through corruption, not through lies, deception etc etc etc. And especially not through Tax Cuts.

Hard honest smart work, and the country that enables it to work..

Thats what I reckon.

T.

[MichaelW]

Philby,

I'm a leftist tree hugging hippy, but even I see the merit in this budget. I took your post as tongue in cheek and hope it was? :rolleyes:

BTW, the tax cuts are capped at $5,597 regardless of how much you earn. So, this hardly equates to some enormous hand out to the super wealthy... And its the poorest income earners that are getting the greatest tax cut as a % of income earned. The economic stimulus of aligning our taxation thresholds with the median of developed countries will be significant.

Beazley is just grandstanding as Acey pointed out. He has no choice than to beat his rather oversized chest and say that Labour could have done better. Unfortunately, even I concede, that on the economy the libs tend to win hands down. If only they weren't so in favour of unilateral diplomacy and so anti international rule of law, I might actually be able to vote for them in good conscience. :D

Cheers,
Michael.

[Thommo]

According to The Australian, as empty nesters with two modest incomes, we got zip in the pre-election budget and did little better in this one.

I believe that the first thing which should have done is simply lifting the threshold. Everybody gets a bit then.

Thommo

[knightm]

We all have them acey - we just don't all admit to them.

[WillG]

According to The Australian, as empty nesters with two modest incomes, we got zip in the pre-election budget and did little better in this one.

I believe that the first thing which should have done is simply lifting the threshold. Everybody gets a bit then.

Thommo

Lifting the threashold would probably cost a lot more than the proposed tax cuts and wouldn't have as much political gain.

[quoll]

What gets me is the average Blue Collar working at GM Elizabeth is on $50k so the tax cuts are going to help a hell of a lot of Blue Collar workers. Most factory workers I know are on $40k - $60k.

bloody politicians

cheers
quoll

[Philby]

Yes you are Philby,

But you'd have to step outside of your prejudices to understand it.



If a fair go for all stamps me as being prejudiced then i did miss something

[MichaelW]

Philby,

I agree Acey's post was probably a little harsh, but a fair go for all is exactly what this budget creates. In the past it was only a fair go for those on modest incomes, or for those willing to stay at home and milk the system.

This budget goes some way to levelling the playing field and creating a much fairer system.

IMHO,
Michael.

[Rixter]

In relation to Negative gearing any tax cuts or changes in brackets will not make any sort of difference to those investors who currently pay NO tax or who are receiving tax credits. :cool:

[Spiderman]

What gets me is the average Blue Collar working at GM Elizabeth is on $50k so the tax cuts are going to help a hell of a lot of Blue Collar workers. Most factory workers I know are on $40k - $60k.


Bear in mind that factory workers are a declining proportion of the workforce in an economy now dominated by service industries.

These stats (from the 2003 HILDA survey) show the annual pre-tax income distribution for adults (aged 18-64 with positive incomes), and the corresponding tax cuts in the budget.

Poorest 25%: $6,830 per year ($80 tax cut)
Median: $29,890 per year ($312 tax cut)
Richest 25%: $49,000 per year ($312 tax cut)
Richest 10%: $70,000 per year ($1752 tax cut)
Richest 5%: $90,000 per year ($2752 tax cut)
Richest 1%: $162,000 per year ($4502 tax cut)

cited from http://imaginingaustralia.blogs.com/imagining/2005/05/the_shifting_mi.html

Some say that an opportunity for bigger reforms has been squandered (given the budget surplus). One of the popular suggestions is some form of flatter tax system.

Left-wing economist John Quiggin has some harsh words to say about flat taxes here:
http://johnquiggin.com/index.php/archives/2005/05/13/flat-taxes/#more-2382

But as an exercise it would be interesting to compare the revenue consequences of and winners and losers arising from a contest of our current system versus one with either 1. an Estonian-style single rate flat tax with a threshold exemption and fewer deductions or 2. a Joh for PM/John Stone-style flat tax as advocated in 1987.

Under a flatter system with fewer deductions:

* Low income earners may or may not be better off; this depends on where the tax free threshold is set.

* Families with children would be worse off (assuming family tax credits go). A alternative of having a higher tax free threshold per child could overcome this, but is more regressive than Howard's current family tax arrangements (which tapers off at higher incomes).

* Medium-high income earners on PAYE jobs with few deductions would almost certainly be better off, with the benefits increasing with income. This would include your blue-collar factory workers aspiring to earn $60k. Bill Shorten (who represents a shrinking number, albeit with growing incomes) would love this!

* In contrast PAYE earners with significant deductions (which could vanish) may be either the same or worse off. The effect of entering into an arrangement (eg an investment scheme) for the sake of deductions may be relatively less attractive compared with doing nothing.

* Any egalitarian notion that the tax system is a vehicle for income redistribution from high to low is lost. (though the effectiveness (and even disirability) of this is open to question with current tax arrangements).

So like any system a flatter taxes have winners and losers, and the size of the losses (without introducing extra complexities) may have spooked politicians, no matter how desirable radical reform may be.

My suspicion though is a lot of this doesn't matter a great deal.

Budgets seem to give 'turns' for various groups.

One of the earlier Costello budgets was generous to self-funded retirees. A later one was generous to low-middle income families with children. This budget is unambiguously beneficial to high income earners*. Next year's the pendulum may swing to help some other group.

So the overall distributional effect of budgets when averaged over 5 - 10 years might not be all that great, no matter what heat is generated at the moment!

Rgds, Peter

* A note on 'high income earners'. Australian egalitarianism eschews the 'rich/high income' and 'poor/low income' labels, as we all like to call ourselves 'middle income', regardless of whether our annual income is $20k or $100k pa.

This is even though a dispassionate observer would define an earner in the top 10 or even 20% as being 'high income'. Politicians promising 'tax cuts' (whether it be Keating in the 80s or Costello in the 00s) like to go along with describing 'high income' as 'middle income' so that they are seen to govern 'for all of us' and earn less derision from the proletariot.

[Jamie]

Tax cuts for the rich while the guy and gal on struggle street fall further behind with cuts to services the rich can easily afford. With the rich already minimising their tax with creative (and expensive) accountants. The poor pay the same price at a petrol pump but the rich man has a leased vehicle etc
Am I missing something
If a fair go for all stamps me as being prejudiced then i did miss something

Philby,

Currently, a person earning $80k makes 4 times the income of someone earning $20k, but pays over 9 times as much tax, while a person making $200k makes 10 times the income but pays more than 31 times as much tax - how much more of a fair go for all would you like?

Jamie.

[Les]

Methinks Philby needs to have a good read of an earlier 5 star post:-

http://www.somersoft.com/forums/showpost.php?p=38211&postcount=1

Put it in perspective for me.....

Regards,

[Philby]

Methinks Philby needs to have a good read of an earlier 5 star post:-

http://www.somersoft.com/forums/showpost.php?p=38211&postcount=1

Put it in perspective for me.....

Regards,

Ya got me on that one!!
My point is that we are becoming a more user pay "democracy" and we are leaving a lot of people behind. Those that can pay will survive and the rest ????

[House_Keeper]

Methinks Philby needs to have a good read of an earlier 5 star post:-

http://www.somersoft.com/forums/showpost.php?p=38211&postcount=1

Put it in perspective for me.....

Regards,

That was a great Post!

Thanks for reminding us of it Les.

Cheers,

[Merovingian]

Methinks Philby needs to have a good read of an earlier 5 star post:-

http://www.somersoft.com/forums/showpost.php?p=38211&postcount=1

Put it in perspective for me.....

Indeed it does put it in perspective.

This is the same argument used in a letter to the editor in yesterday's The Advertiser regarding the tax breaks. A greater proportion of people in the top tax bracket actually create jobs for people, who are in the lower tax brackets. Rewarding 'the rich' like this in turn helps 'the poor'. :confused:

[austini]

Hi gang,

This article gives a few examples of the effect of the budget tax changes on neg gearing:

http://www.smh.com.au/news/Money/Negative-gearing-goalposts-shift/2005/05/13/1115843369655.html

Cheers - Gordon

[lizzie]

what i would really like to see is a system where income is taxed on the "household earnings".

for example, a stay at home mum with a partner on $70,000k pays 47% tax ($32,900 tax and keeps $37,100 in hand) and gets very little in the way of family allowance ... whereas a household with two working adults, each earning $50,000, only pays 30% tax on $100,000 ($30,000 tax and keeps $70,000 in hand).

i know it would be difficult to police at the begining and obviously stay-at-home kids would have to be excluded, but surely it could be a far fairer system.

[skater]

what i would really like to see is a system where income is taxed on the "household earnings".

for example, a stay at home mum with a partner on $70,000k pays 47% tax ($32,900 tax and keeps $37,100 in hand) and gets very little in the way of family allowance ... whereas a household with two working adults, each earning $50,000, only pays 30% tax on $100,000 ($30,000 tax and keeps $70,000 in hand).

i know it would be difficult to police at the begining and obviously stay-at-home kids would have to be excluded, but surely it could be a far fairer system.

It would also cut down on the amount of de-facto relationships where he works & she gets a pension.

[XBenX]

Bear in mind that factory workers are a declining proportion of the workforce in an economy now dominated by service industries.

These stats (from the 2003 HILDA survey) show the annual pre-tax income distribution for adults (aged 18-64 with positive incomes), and the corresponding tax cuts in the budget.

Poorest 25%: $6,830 per year ($80 tax cut)
Median: $29,890 per year ($312 tax cut)
Richest 25%: $49,000 per year ($312 tax cut)
Richest 10%: $70,000 per year ($1752 tax cut)
Richest 5%: $90,000 per year ($2752 tax cut)
Richest 1%: $162,000 per year ($4502 tax cut)

cited from http://imaginingaustralia.blogs.com/imagining/2005/05/the_shifting_mi.html

Some say that an opportunity for bigger reforms has been squandered (given the budget surplus). One of the popular suggestions is some form of flatter tax system.

Left-wing economist John Quiggin has some harsh words to say about flat taxes here:
http://johnquiggin.com/index.php/archives/2005/05/13/flat-taxes/#more-2382

But as an exercise it would be interesting to compare the revenue consequences of and winners and losers arising from a contest of our current system versus one with either 1. an Estonian-style single rate flat tax with a threshold exemption and fewer deductions or 2. a Joh for PM/John Stone-style flat tax as advocated in 1987.

Under a flatter system with fewer deductions:

* Low income earners may or may not be better off; this depends on where the tax free threshold is set.

* Families with children would be worse off (assuming family tax credits go). A alternative of having a higher tax free threshold per child could overcome this, but is more regressive than Howard's current family tax arrangements (which tapers off at higher incomes).

* Medium-high income earners on PAYE jobs with few deductions would almost certainly be better off, with the benefits increasing with income. This would include your blue-collar factory workers aspiring to earn $60k. Bill Shorten (who represents a shrinking number, albeit with growing incomes) would love this!

* In contrast PAYE earners with significant deductions (which could vanish) may be either the same or worse off. The effect of entering into an arrangement (eg an investment scheme) for the sake of deductions may be relatively less attractive compared with doing nothing.

* Any egalitarian notion that the tax system is a vehicle for income redistribution from high to low is lost. (though the effectiveness (and even disirability) of this is open to question with current tax arrangements).

So like any system a flatter taxes have winners and losers, and the size of the losses (without introducing extra complexities) may have spooked politicians, no matter how desirable radical reform may be.

My suspicion though is a lot of this doesn't matter a great deal.

Budgets seem to give 'turns' for various groups.

One of the earlier Costello budgets was generous to self-funded retirees. A later one was generous to low-middle income families with children. This budget is unambiguously beneficial to high income earners*. Next year's the pendulum may swing to help some other group.

So the overall distributional effect of budgets when averaged over 5 - 10 years might not be all that great, no matter what heat is generated at the moment!

Rgds, Peter

* A note on 'high income earners'. Australian egalitarianism eschews the 'rich/high income' and 'poor/low income' labels, as we all like to call ourselves 'middle income', regardless of whether our annual income is $20k or $100k pa.

This is even though a dispassionate observer would define an earner in the top 10 or even 20% as being 'high income'. Politicians promising 'tax cuts' (whether it be Keating in the 80s or Costello in the 00s) like to go along with describing 'high income' as 'middle income' so that they are seen to govern 'for all of us' and earn less derision from the proletariot.


What we need is a progressive tax system rather than regressive one...

[Aceyducey]

Ya got me on that one!!
My point is that we are becoming a more user pay "democracy" and we are leaving a lot of people behind. Those that can pay will survive and the rest ????

Philby,

You don't 'leave people behind' by changing tax rates.

You leave them behind by not providing education.

That's an entirely different matter.

Cheers,

Aceyducey

[Philby]

last time I looked education is moving to user pays
youse payse four wot ewe gait!

[Les]

A couple of further points struck me.....

These stats (from the 2003 HILDA survey) show the annual pre-tax income distribution for adults (aged 18-64 with positive incomes), and the corresponding tax cuts in the budget.

Poorest 25%: $6,830 per year ($80 tax cut)
Median: $29,890 per year ($312 tax cut)
Richest 25%: $49,000 per year ($312 tax cut)
Richest 10%: $70,000 per year ($1752 tax cut)
Richest 5%: $90,000 per year ($2752 tax cut)
Richest 1%: $162,000 per year ($4502 tax cut)
I found it interesting that this survey puts the median at ~$30,000 pa - compare this with the figures I've heard for SEVERAL YEARS that say that AWOTE is around $40,000.

My take on this, is that the Hilda survey is including the multitude that are on pensions. While the AWOTE (by its definition) relates to working individuals. Anyway, good to see (from the graphs) that the lowest earners gain nearly 20% (or keep 20% of what they previously paid in Tax).

Re Philby's comment on "rich man and poor man paying for fuel", how about the fact that the "rich man" contributes FAR MORE to upkeep of roads, hospitals, education, social benefits, etc. - yet the "poor man" still gets to enjoy (most of) these too. See Jamie's figures......
Currently, a person earning $80k makes 4 times the income of someone earning $20k, but pays over 9 times as much tax, while a person making $200k makes 10 times the income but pays more than 31 times as much tax - how much more of a fair go for all would you like?
Jamie. great post, Jamie :cool:

My second thought is that some people are thinking in terms of a "handout" when looking at the change in Tax Scales. In fact, it is nothing of the sort. What it IS, is that we don't have to PAY quite as much. (They're not taking as much of OUR OWN MONEY!!!) And that applies across the board. The "lightening" of the higher-end Tax Scales could even encourage lower income earners to take a second job (as I did in MY earlier years). Far more FAIR for these people now than before....

It's all part of reducing the "Tax Creep" that we witness on a regular basis - for those unfamiliar with the term, it's where an increase in our wage takes us "across the threshold" into the next higher Tax Scale. If the latter were to remain unchanged for (say) 10 years, then nearly EVERYBODY would be in the highest marginal Tax level.



As one of the higher income earners, can I say that I am happy to contribute my share in looking after pensioners, disabled, etc. - and, indeed, I've been paying around the AWOTE amount (average wage) in TAX each year. But, please don't begrudge me paying a little less when a Govt. decides to change the Tax Scales. I am where I am because of the choices I've made, and YOU could do (or could have done) the same.

Even with this latest adjustment, I'm sure I'll still be contributing a LARGE CHUNK of my income to assist those not so able to look after themselves. The graph on Spiderman's link says I'll likely be paying 8 - 9% less (which means I'll STILL be paying way over 90% of the average pre-tax wage as my contribution to others).

I pay around 40% of my income in Tax - it may now drop to around 36% (guessing - NO, I WON'T get 8 - 9% off the TOTAL amount !!) but compare this with what percentage YOU pay !!! Then talk to me about "guys and gals on struggle street" - I've been there too, and come through it !! You can too !! Hope you don't take quite as long as I did.... ;)

And (food for thought) I read somewhere that the Great Depression came about because TOO MUCH wealth was held by TOO FEW people. The answer here is to have a larger number of higher wealth individuals to offset the balance. Make YOUR way up the scale and help the country to stay clear of lop-sided wealth distributions.

Regards,

[Spiderman]

I found it interesting that this survey puts the median at ~$30,000 pa - compare this with the figures I've heard for SEVERAL YEARS that say that AWOTE is around $40,000.

My take on this, is that the Hilda survey is including the multitude that are on pensions.


Not only that, but it includes tertiary students (assuming they have postive income) and the increasing proportion in part-time and casual work.

And other AWOTE figures I've seen quote this around $49000pa. I'm not sure if this is mean or median; the median would be more representative for these sorts of comparisons.


The "lightening" of the higher-end Tax Scales could even encourage lower income earners to take a second job (as I did in MY earlier years). Far more FAIR for these people now than before....


This is related to the idea of 'providing incentives to work more' and is allied to marginal (not average) rates of tax.

If top marginal rates are punitively high (eg around 80% in the 1950s, 66% in the 1970s and 60% pre-Keating) well-advised non-PAYE earners will find legal ways to get around it (as we saw in all the tax evasion schemes of the early 1980s).

The 'incentive' argument won the day and Treasurer Keating dropped the top marginal rate down to less than 50%.

If we agree with the incentive argument (as most people here do), then it would seem fair that everyone should be entitled to keep more than half of what extra they earned.

But this is not the case at the moment. Due to the complex interplay between i. the income tax system, ii. family tax benefits and iii social security there are some groups of lower-middle income earners who are facing effective marginal tax rates of 80%+ (some even 90%+).

This is very close to a poverty trap and reduces incentives dramatically. For some people this might not be an issue, but it should be for those who claim that financial incentive is a powerful motivator of human action. Aiming so that no one faces a effective marginal tax rate higher than the current top marginal income tax rate sound fair.

But to do it either means lowering tax for these groups (eg a higher tax free threshold for families with kids on a per-child basis) or reducing the extent that benefits claw back as income rises.

Such a thing is often labelled 'middle class welfare', makes the social security system less targeted to those genuinely in need and of course requires higher taxes (or less generous tax cuts) to pay for it all.

Less generous tax cuts may then mean 'less incentives' for other people. That is unless the system is reformed so that marginal rates more approach the average, although flat taxes have other issues.

Nevertheless if 'incentive' really is as important as politicians would indicate, then it would give highest priority to cutting the 80% EMTRs down to 47% and if it can be afforded, subsequently lowering the higher marginal rates as well. But this requires much more radical tax reform than any Australian government has attempted to date.

Becuase this hasn't been done seems to indicate that 'incentive' is more talk than anything else. Which might not be a bad thing given that we are not all economic beings motivated by money and the notion that financial incentive commonly influences behaviour is not universally held anyway (eg there are many lower income people who work even though social security might provide almost as much).


It's all part of reducing the "Tax Creep" that we witness on a regular basis - for those unfamiliar with the term, it's where an increase in our wage takes us "across the threshold" into the next higher Tax Scale. If the latter were to remain unchanged for (say) 10 years, then nearly EVERYBODY would be in the highest marginal Tax level.


Getting rid of bracket creep is very easy; it's just that no treasurer has had the will to do it (and sustain it)!

Just keep the tax rates the same and index the thresholds by CPI each year. Then no one can claim that they are being 'left behind' (note that the lower two tax thresholds of around $6000 and $21000 have remained unchanged for years, the upper thresholds have increased greatly and family benefits have been extended).

Of course indexing thresholds is too sensible and the politicians will never do it as it denies them of revenue that can be used to deliver phoney 'tax cuts' later on.

Regards, Peter

[austini]

Hi gang,

One interesting point made in an earlier article is that any loss of negative gearing benefits as a result of finding yourself in a lower tax bracket is offset by a reduction in CGT when you sell.

Cheers - Gordon

[XBenX]

Getting rid of bracket creep is very easy; it's just that no treasurer has had the will to do it (and sustain it)!

Just keep the tax rates the same and index the thresholds by CPI each year. Then no one can claim that they are being 'left behind' (note that the lower two tax thresholds of around $6000 and $21000 have remained unchanged for years, the upper thresholds have increased greatly and family benefits have been extended).

Of course indexing thresholds is too sensible and the politicians will never do it as it denies them of revenue that can be used to deliver phoney 'tax cuts' later on.

Regards, Peter

Peter,

Indexing to CPI wouldnt work - but I see your point, perhaps we could index to real wages growth....

Id have to agree though. Id be extremely suprised to see this ever happen...

[Philby]

Should this occur in the lucky country?

[yadeh]

Bottom line, in my opinion, it makes neg gearing less attractive. But that might be good for property investors because it weeds out the people who are in it just to 'save tax' (dubious anyway) and leaves more deals to the real investors.

Puts more money in people's pockets to pay rent, too!
Alex[/QUOTE]

Hi Alex

So, do you guys mean that in general buying property with negative cash flow (negatively geared) is not a good idea, and we should look for IPs which have positive cash flow (at least with the help of Depreciation)?
Yadeh

[Apocalypse]

Should this occur in the lucky country?

Despite 14 years of unbroken economic growth, nearly one in 10 Australians lives below the poverty line, which is set at half the average disposable income.

With standard distribution curves or percentiles this sort of definition will always have a fair chunk of people under it. "Poverty " is such a relative term - in Australia it often means no pay-TV, a mobile phone without a colour screen or camera in it, and having to drink non-top shelf spirits...

[Aceyducey]

The poverty line in Australia for a couple is more than 40x the average weekly living wage in some parts of the world.

Aren't we doing it tough!

http://www.melbourneinstitute.com/miesi/poverty/Dec2004.pdf
http://www.dawn.com/2005/02/20/ebr3.htm

Cheers,

Aceyducey

PS: I choose to have no Pay-TV, a black & white mobile phone with no camera and prefer to buy no frills soft drinks if I buy them at all. Does that mean I choose to live an impoverished lifestyle?

[Nobleone]

Hi All,

I'm with Acey on this... My wife and I also choose not to have pay TV, we have no mobile phones, we choose not to get caught up buying the latest electronic 'gadgets', we have no subscriptions except for API & KPI magazines (tax deductable), we purchase 'home brand' whenever possible, we will eat at a restaurant maybe once a year, and we would eat fast food/takeaway maybe 5 times a year...

We don't feel impoverished at all.

Cheers, Nobleone. :D

[skater]

We also have no pay TV, only one mobile (paid for by work), buy home brand foods, no playstations, take lunch to work & school, but we also live in a housing commission area. There are many around the area that we live in that would be considered living in poverty (ie on pensions and/or unemployment benefits).

My children often complain that its not fair, their friends have pay TV, playstations, lots of expensive brand name clothes, money to buy lunch at school & lots more money to spend on the weekend. I will also add that their friends for the most part have parents that are on benefits. REAL poverty in Australia is only a very small minority.

[geoffw]

we have no subscriptions except for API & KPI magazines (tax deductable)My accountant didn't allow those as deductible- it was a grey ara. ATO's reasoning was that there was a lot of material which was not directly relevant to the way we invested (even including the PI mag with an article on me). we would eat fast food/takeaway maybe 5 times a year...I eat a lot of takeaway- does that make me rich?

[nic]

Bottom line, in my opinion, it makes neg gearing less attractive. But that might be good for property investors because it weeds out the people who are in it just to 'save tax' (dubious anyway) and leaves more deals to the real investors.
Alex

I agree. It's amazing how many people do not even understand negative gearing and act on principle 'the more you spend the more you save'. They don't realise that you will never get back from tax more than you spend (except if you have a very large depreciation). A friend of mine wants to start a home business so she can get tax back. When I was buying my first investment property and the seller wanted a long settlement my friends urged me not to accept it because, they said, you want to start 'saving tax asap'. The prices have just started going up, and I for my part was quite happy to control an appreciating asset without paying a cent for as long as I could.

Nic

[Apocalypse]

...
PS: I choose to have no Pay-TV, a black & white mobile phone with no camera and prefer to buy no frills soft drinks if I buy them at all. Does that mean I choose to live an impoverished lifestyle?

In a lot of people's eyes...yes. Particularly a lot of those actually close to that arbitrary line. If they can't afford the things I outlined - which are basic essentials in their eyes - they cry poverty...

Of course it's not true poverty. Then again, I'm not saying there's not people doing it tough.

[nic]

I choose to have no Pay-TV, a black & white mobile phone with no camera and prefer to buy no frills soft drinks if I buy them at all.

Never even felt tempted by these. However, today I got a craving and bought Pringles chips... for the first time in my life. But then, I was born 50. :)

Nic

A mobile phone is for making and receiving calls, I presume. So why would anyone want colour and a camera?

[marc1]

Tax cuts for the rich while the guy and gal on struggle street fall further behind with cuts to services the rich can easily afford. With the rich already minimising their tax with creative (and expensive) accountants. The poor pay the same price at a petrol pump but the rich man has a leased vehicle etc
Am I missing something

You are.
This budget is the first in many that addresses the injustice of low tax brackets. In fact I advocate an absolute flat tax rate with no threshold whatsoever, where we all pay the same rate of tax.
The flatter the tax rate the more the disincentives for earning more are removed.

So int this case of tax cuts and "budget for the rich" :rolleyes: what I say is simple, whoever wants to have great tax cuts, all he needs to do is earn more money!
After all the amount we earn is our own choice and no one else's, the rational person thinks and then acts. some think rich and become rich, some think poor and become poor.

[Philby]

.................................................
So int this case of tax cuts and "budget for the rich" :rolleyes: what I say is simple, whoever wants to have great tax cuts, all he needs to do is earn more money!
After all the amount we earn is our own choice and no one else's, the rational person thinks and then acts. some think rich and become rich, some think poor and become poor.

Does that mean we all become entrepenuers/motivational gurus!!!

Easy to say "whoever wants to have great tax cuts, all he needs to do is earn more money!"
My argument is that tax cuts are fine but what about the fundamental services that are being slashed/privatised/minimised/ and user pay systemised. Seems that Howard - "the battlers friend" is putting a lot of the essential things that Joe Public requires, out of reach on pay day, after he has put petrol in his car to get to work, fed the wife and kid(s), etc.
The wealthy can afford to have choice and become richer, seems Joe Public has to work more to earn more.
A fair go for all???? or for those that have the means and screw the rest?

[the.j]

the more you spend the more you save'.
Nic

I used to work at a minesite that had a Happy Tuesday - $1 cans - 'The more you drink the more you save' :D

[Aceyducey]

So int this case of tax cuts and "budget for the rich" :rolleyes: what I say is simple, whoever wants to have great tax cuts, all he needs to do is earn more money!
After all the amount we earn is our own choice and no one else's, the rational person thinks and then acts. some think rich and become rich, some think poor and become poor.

Marc,

It's been said that if all the money in the world was distributed equally to every person, within a few years the rich would again be rich, the poor would again be poor, and everyone else would be happy working for the rich for their crust.

I don't think that changing a tax rate provides the motivation for people to become rich. Nor does it inhibit those who really strive to do so.

High tax rates as a reason to not get ahead is an excuse used by those who don't choose to put in the effort required to achieve their dreams.

Everybody can achieve wealth. Few ever want it enough to cut through their own justifications and strive for it.

Cheers,

Aceyducey

[marc1]

Marc,

It's been said that if all the money in the world was distributed equally to every person, within a few years the rich would again be rich, the poor would again be poor, and everyone else would be happy working for the rich for their crust.

I don't think that changing a tax rate provides the motivation for people to become rich. Nor does it inhibit those who really strive to do so.

High tax rates as a reason to not get ahead is an excuse used by those who don't choose to put in the effort required to achieve their dreams.

Everybody can achieve wealth. Few ever want it enough to cut through their own justifications and strive for it.

Cheers,

Aceyducey

I agree wholeheartedly of course, yet mine was an answer to a stock statement.

Whoever is dissatisfied with his condition has already given the first step towards change. The problem arises when people are content and propose to remain where they are and for the rest to give a step back.

Dissatisfaction is good, but must be followed by the recognition that action must come from us doing something not for others to relinquish something.

Nevertheless, governments all over the world use the tax system to pluck their carrots offering to be re-elected, this being the main focus of any government.

For re-election different groups are targeted, free tax thresholds Robin Hood style for the masses, high tax break for the middle class, it all depends of how the spin doctors have done their sums and who will be prompted to vote next time around.

I say this again, the only really just and uniform tax system is a flat rate, revenue neutral (probably at a guess around 20%) for absolutely all tax payers from the kid at McDonalds at $5000 to the board member on $300k no different. That is justice. Of course who will survive the headlines "Mean J.H. taxes the unemployed $200"?

It is the same with Land Tax. If we really need a Land Tax, it should be for all properties regardless of ownership or use. One tax for all, this way it would be a much smaller percentage to reach the same revenues. Yet who would face the headlines "Mean premier taxes pensioner with $100 Land Tax"?

It is much easier to tax the mean greedy speculators who push the prices of housing up for their own egotistic goals. This attitude must be punished where it hurts most, and that is the hip pocket. We await eagerly new laws to curb the other ways mean rich people escape taxes. Did you know that Sydney and Havana will be soon sister cities?