Tax Payable for Offset vs FD vs No Property

[missgreeneyes]

I was trying to work out if it which would be the most tax effective:
1. Linking offset to IP loan - less interest deductible
2. Having no offset linked to IP and putting spare cash into an FD or high-interest-earning account. Pay tax on the interest earned on the spare cash. Also pay more interest on the IP loan but get to deduct more on the tax return
3. Having no IP altogether.

I pumped in the following figures into good ol' excel:
250k loan
100k offset
50k salary
$400/week rental income
7.7% pa property management fee

My calcs worked out as:

Scenario 1 - Linking offset to IP loan

Income
50000 salary
20800 ($400/wk x 52 weeks)
Total income $70800 pa

Deductions
$700 (insurance, strata, water, council etc etc)
$1,601.60 (7.7% property management fee)
$10500 (7% interest on 250k-100k loan)
Total deductions $12801.6

Total taxable income
57998.4

Scenario 2 - Having no offset linked to IP and putting spare cash into an FD

Income
50000 salary
20800 rental
6500 - 6.5% interest on 100k in FD
Total Income 77300

Deductions
700
1601.6
17500 - 7% interest on 250k loan
Total deductions 19801.6

Total taxable income
57498.4

Scenarion 3 - Having no IP altogether

Income
50000
6500 - 6.5% interest on 100k in FD
Total income 56500

Total deductions
$200 - bank fees and charges

Total taxable income
56300

Wuh? All 3 scenarios seem to come to roundabout the same figure.
In other words, it is better off owning a property as, if you rent it out and the rent covers the interest, you are getting a property 'for free'? (Strata/renovation headaches aside - I will make a note to detail my travails in this regard in another section of Somersoft)

If I changed the figures for any of the given variables, the net taxable income would still be the same. Until we get to negative gearing I suppose.

I'll do another spreadsheet with negative gearing another day.

Thoughts on this?

 

[Terry_w]

Hi Miss

Your spreadsheet must be wrong somewhere because the results must be different to each other.

assume:
250k loan
100k offset

Say you had a $250,000 loan with $100,000 in the offset
This means you only pay interest on $150,000

at 6% this would be $9000pa

If this is an IP loan then your taxable income will increase by $9,000 because your tax deductions have decreased.


If your income is $50,000 pa then you will be paying 32.5% for every $1 over $37,000.
So increasing your income by $9,000 will mean you pay $3375 in extra tax.

net gain is $9000 - $3375 = $5625

-

If you were to put $100,000 into an ING savings account then you may get just 4% interest.

$100,000 x 4% = $4,000
Tax on $4,000 = $1500
Net = $2,500

But you also have the higher interest on your IP loan so your taxable income is reduced by $9,000 (by not having money in the offset) and you therefore save an extra $3375 in tax.

So you are better off by $5875 ($3375+$2500) pa

-
If you had no IP and just put $100,000 in the bank then you would end up with about $2,500 after tax.

 

[Futurist]

From your figures.. these are my results..

At the end of the year, your net earnings are better off with the Offset Account.

Keep in mind:
a. I havent included medicare etc etc..
b. Your Savings with no IP will be higher since u kept your 10% deposit.

Did this in 5mins, so keep an eye out for miscalcs lol.

 

[Aaron_C]

Terry is right the only reason why your calculations are so close together is that you are assuming an FD rate of 6.50% - which is not going to happen these days. More like 4-5%, if you are lucky.

 

[missgreeneyes]

Hi Futurist
That table's fantastic. Sure beat laboriously typing in the figures one by one last night. How can I do one too with Open Office? I can upload an excel file but I want to display a printscreen like you've done.
I'm going out now I'll do some calculations when I get back (ha, who knew accounting could be such fun! Why don't they run courses like this at uni??)
When I meant the figures were 'the same' I didn't mean they were exactly the same. I meant they were about the same, give or take a few thousand.
What I was trying to find out was, would a person always, always, always be better off owning a property?
I am hypothesising that, for a person on any given income, are always they financially better off owning a property than not owning a property?
If a person buys a property and their net income after taxes is always in the range of about maximum $5000 less than if they didn't buy a property, then isn't the person getting the property more or less for free/the price of $5000?
With negative gearing (for which I have yet to do a table), is a high-income earner even better off if they can reduce their tax bill and also get a property? I am hypothesising that rich man's taxable income is 100k, and after tax he will get 70k. If rich man buys a property, he brings his tax bill down by due to negative gearing and ends up with 80k after tax.
Are there scenarios whereby a person is worse off owning property? The only scenario I could think of is a property market crash. Like if I bought a million-dollar apartment and it's value dropped to 600k and stayed there permanently (not short-term fluctuations).

Terry_w - you lost me there....I'll have another look at your post when I get back tonight....if you had a table I might be able to follow it.
Thanks!

 

[missgreeneyes]

From your figures.. these are my results..

At the end of the year, your net earnings are better off with the Offset Account.

Keep in mind:
a. I havent included medicare etc etc..
b. Your Savings with no IP will be higher since u kept your 10% deposit.

Did this in 5mins, so keep an eye out for miscalcs lol.

When you meant my 'savings would be higher since I kept my 10% deposit' - are you referring to the 10% deposit I paid on the home loan?
If yes, would I be better off even if I sold the property at a not-great price?
Let's say I bought a 400k property. I sell at 430k. Minus agent's fee of 1.5% (=6k). Net profit is 24k. So I pay back the 250k loan and get back my savings of 100k and the profit of 24k. Is this correct?

 

[Futurist]

Yes, correct. So at the end of the year, you would have your Net Earnings + 10% deposit that you kept. This also slightly increases the interest u earnt from a savings account had u kept it all there with the 100k.

No sure about selling, and what fees are involved.
I would imagine legal fees aswell as the agent selling fee.
CGT perhaps also?

What you have there is a simple formula.

+ 430k sell price
- 250k loan payback
- 6k agent fees
= 174k as the end result after the sale

Question:
In your example, a purchase price of 400k with a 250k loan = 62.5% LVR.
Which means u put in 37.5% deposit aka 150k ?

In that case, out of the 174k you get back from the sale of the property.
150k (deposit you put in)
+ 24k (cap growth)
= 174k

 

[Futurist]

To answer your previous question whether everyone is better off with a property - I would think that it depends on the property, the rental, the growth, and what you actually do with it.

Thoughts to consider:

a. Neutral geared property. Your rental income and expense are equal. So no change in your taxable income. So net earnings is the same.
b. You make a loss on an IP, you get to claim back as an expense. So lower taxible income = less tax paid.
c. You make a profit on an IP, your taxible income increases = you pay more tax.

You need an excel with your specifics to work out if you are better off or not at the end of the year. Because each case above can be good or bad depending on the individual.

eg
a. No change in net earnings, however you may get a good captial gain. You may not.. depends on the property.
b. You make a loss, so you pay less tax and possibly get a tax refund. Does the tax refund out weigh your loss so you have more cash in the pocket?
c. You make a profit Yay!. You get charged more tax. But does this also mean u end up with more cash in your pocket ?
----
Investors also consider renovating to add value, or add a granny flat to generate more rental. However, both of these means more savings spent and possibly borrowing more. And all this will mean more complex calculations.. so thats where you need to calculate it all your self or get an accountant, or financial planner to help you decide if its better or worse for your case..

 

[wobbycarly]

When you meant my 'savings would be higher since I kept my 10% deposit' - are you referring to the 10% deposit I paid on the home loan?
If yes, would I be better off even if I sold the property at a not-great price?
Let's say I bought a 400k property. I sell at 430k. Minus agent's fee of 1.5% (=6k). Net profit is 24k. So I pay back the 250k loan and get back my savings of 100k and the profit of 24k. Is this correct?

If that $400k property is in NSW, you also have about $13.5k of stamp duty on the way in. Now your "profit" is more like $10k. This could be eaten up by misc fees/charges.

http://www.stampdutycalculator.com.au/stamp-duty-nsw

 

[missgreeneyes]

Thanks everyone!
I'll do another spreadsheet when I have the time.
Thanks for correcting my figures Futurist. I was pumping random figures in late at night and didn't think about them too much.
I'll post results here when it's done