IO or P&I ? A technical analysis ! (very long)

[Sim]

Reply: 4.2
From: Sim' Hampel


Great, thanks Michael... this is exactly the type of discussion I was hoping to encourage.

I will have a look into adding some capital gain analysis into the equations and see how that affects things. I expect that I will be able to show that at a certain level of growth, we can make more money by investing with IO loans than with P&I. I'll let the number speak for themselves though... stay tuned !

 

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Re: The Taxman doesnt cometh bearing gifts..

Reply: 3.1.3
From: Terry Avery


I agree with Duncan, the taxman's help is returning your money to you.
Anyone managed to get back more tax than they have paid? As near as I can
figure if you make a large enough loss so you pay no tax you can carry
forward the excess loss against other income in future years. They don't pay
you some of other's people's money, just allow you to offset it against your
own income.

The same for the tenant paying it off for you. Hey the rent the tenant pays
you is your money. The tenant is not giving it to you because he feels good
about you. He gives it to you in return for the use of your asset. It is
your entitlement. Any excess dollars are yours to keep so consider very
carefully how you use them. Reinvest them, pay off some principal, the
choice is up to you but don't be complacent about the money. We are running
businesses here not a fete (you know the kind, bake a cake that costs you
$10 so it can be sold for $6 because no-one is going to pay more. I haven't
worked the logic of that one out yet.).

I guess my tenet is watch every dollar.

 

[WebBoard]

Re: The Taxman doesnt cometh bearing gifts..

Reply: 3.1.2.2
From: Terry Avery


Yep, you have it right that it is the legislators who decide what we can
have. They took away negative gearing in 1985 and brought it back in 1987.
Their skins are apparently more important than a few lost tax dollars.

The US abolished negative gearing and despite the outcry they stuck to their
guns. It has shaped an entirely different market there.

 

[IanF]

Reply: 4.1.1.1.2
From: Ian Findlay


Hi all,

I agree with GoAnna. The tax system in Australia encourages IPs by giving tax breaks. This basically derives from the problems governments with housing poorer people.

There are two options:
1. Encourage the private sector by tax breaks (Australia)
2. Build up public rental properties e.g. council houses (UK model).

I prefer option 1 (not just because I benefit from the tax breaks) but also owners tend to take better care of their property and will turf out bad tenants. In option 2, the state is too cumbersome to look after its rental properties and many fall into severe disrepair thus lowering rental income etc. There is also the tendency for rental ghettos to be formed which over time only have troublesome tenants and ultimately no-go areas.

GoAnna is right that I have experience of overseas rental property (I have a unit in South London). The UK has no tax breaks (neg gearing etc) for IPs other than very limited CGT exemption therefore most units are owner occupied unless rents totally pay mortgage which is only beginning to happen now with lower interest rates.

From my experience it is not cost effective to have IPs as investment vehicles in the UK unless you own them outright and can charge high rents.

This leaves only shares which may be fine, but again no tax advantages. This is why most the % of people having shares (outside super) is low (<25% compared to 70% odd for Oz). The main savings vehicle in the UK is super and the vast majority of people make compulsory contributions before tax i.e. compulsory salary sacrifice.

I, with many others in this forum suspect, feel that it is better to encourage people to save for their financial future rather than spend and depend on the state particularly with the very scary projected demographics leaving almost no young people to pay for a huge aged population through their tax dollars.

What I'd do is:
1. Have a spending tax (you can call it a GST if you like Mr Howard).
2. Compulsory super for everyone.
2. Increase rate of super contributions for both employee and employer but offset by having compulsory salary sacrifice.
3. Tax free interest on savings up to a set amount say $10,000
4. Tax on credit card buying (say 0.5%), which would help fund a pension safety net for lower earners.

I've probably said enough to go off topic and get shot down in flames,

Ian

 

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Reply: 4.1.1.1.2.1
From: The Wife


I don't agree, the Australian tax system is not conducive to wealth building.


Some light trivia: Mr Justice Oliver Wendell Holmes observed in Compania de Tobacos v Collector, that " taxes are what we pay for civilized society" At the other extreme, Mortimer Maxwell Capwell suggested that " there is one difference between a tax collector and a taxidermist - The taxidermist leaves the hide".


South Australian Government was the first to introduce income tax in 1884, at a flat rate of 1.25%.


NSW had an attempted to introduce an income tax in 1886, but opposition was so vehement that the proposal was dropped. Indeed, one member of parliament is quoted as saying that: " If the devil had sent a representative here to institute a means of destroying the morality of the people, he could have found no better instrument than an income tax".


Quotes from "Australian Taxation Law" 10th edition by Woellner Barkoczy Murphy.



One final thing I'm curious about, those that believe Australian tax IS conducive to building wealth via tax breaks, are you people believers in holding property in your own name? My personal experience is that people who hold property in their own name achieve the 'magic 7 ish" properties, and feel they are wealthy/have achieved the pinnacle of property investment.


In my experience, these people don't know HOW to get past that amount of property, and that its not tax effective to.



Can it then be broken up into two camps,


Yes:Tax laws are effective in helping build wealth thru property/no companies /trusts


No: Tax laws are NOT effective in helping build wealth thru property/ yes companies /trusts


Have I given the pot another stir?


TW.
~Life is a daring adventure, or nothing at all~

 

[aam]

Reply: 4.1.1.1.2.1.1
From: Apprentice Millionaire


Hi TW,

>I don't agree, the Australian tax system is not conducive to wealth building.

In relative terms (e.g. compared to other countries' tax systems) or absolute terms? Either way, I don't believe *any* tax system is conducive to wealth building.

When I write that the taxman is assisting me in allowing my deductions, I must state that I would rather he didn't take any of my money at all!

>At the other extreme, Mortimer Maxwell Capwell suggested that " there is one
>difference between a tax collector and a taxidermist - The taxidermist leaves the
>hide".

Love it!

As to stirring the pot, do you then think that there are people who will focus on tax and how to minimise it, and hence not progress past a certain point in their wealth building journey, and others who leave it to an expert and concentrate on the wealth building journey? Is that what you are alluding to?

Cheers
Apprentice Millionaire
(aka Jacques in the old forum)