Sunday, 13 October 2019

How much tax does superannuation really cost the government?

An article in today's SMH reports that $800b is now in the superannuation accounts of those of retirement age (over 65), which has meant a reduction in reliance of the age pension. Instead of the cost of the age pension rising from 2.9% of GDP in 2001 to a projected 4.6% by 2040, it is now projected to actually fall to only 2.5% by 2038. However, it is also reported that the cost of the concessional tax rates applied to superannuation means that it is costing 1.9% of GDP, which according to the Grattan Institute will rise to 3% of GDP by 2060.

However, while the age pension is a real cost to government, the cost of the concessional tax rate applied to superannuation is not as high as generally reported. Why? Because calculations of the 'cost' of superannuation assumes 'all other things being equal' ie. If someone with taxable income in the top (45%) marginal tax rate has SGL and salary sacrifice contributions into super taxed at 'only' 15%, this is costing the government 30% in tax concessions. However, the reality is that if superannuation wasn't available, those in the higher tax brackets would simply use other means to reduce their tax liability. The projected 'cost' also does not take into account planned changes to the higher tax brackets in 2024-25.

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Thursday, 3 October 2019

Diet week ending 29.09.19

Last week my cough persisted (it is only clearing up now) so I didn't do any fasting days, and indeed I didn't even follow my standard meal plan and I snacked quite a lot on confectionery and chocolates when I wasn't feeling well. So my average daily calorie intake for last week was quite high and I put back on most of the weight I had managed to shed.

This current week (so far) has also not been very good, diet-wise, and I've only got back onto my standard meal plan today (so no fasting days again this week). I'm also going back up to the lake house this weekend to visit my parents and collect DS2 (who was staying with them for the first week of the school holidays), so the coming weekend will involve several large home-cooked meals. But I'll do my best to avoid any more junk food/snacking during the weekend.

Next week I'll get back to following my standard diet plan, and also have a couple of fasting days  provided my cough has cleared up completely and I'm feeling 100%.


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Wednesday, 2 October 2019

Where to with regard home loan interest rates?

Recent interest rate cuts to 'historic lows' in Australia, combined with high property prices (especially in Sydney and Melbourne) have lead to a lot of speculation about how low interest rates will drop (after yesterday's 0.25% cut I've seen some pundits predict a further two cuts by the middle of next year), and when/if rates will increase again -- and by how much.

This is an especially hot topic amongst comments regarding property prices and loan affordability. Many comments are along the lines of 'prices are too high, and will drop 40% or more' -- which reminds me a lot of Dr Keen's prediction about a '40% fall in property prices) back in 2008. Many of the comments also assume that the current low interest rates are an aberration, and that home loan mortgages *must* rise substantially -- which will lead to mortgage stress and potentially a significant rise in mortgage defaults.

While home loan interest rates are certainly very low and can't fall much further (given that RBA cuts below 0% would be ineffective, so the focus would shift to QE instead. and that banks set home loan rates which also reflect non-zero deposit rates and their admin/overhead costs), this doesn't mean that home loan interest rates must rebound. After all,taking a really long view, current home loan interest rates are back down to what was considered 'normal' prior to WWII.

I've cobbled together a couple of historic charts of Australian average 30-year home loan interest rates below, and extended it to include recent rate changes. This chart shows that the current home loan interest rates might actually be 'normal' for an economy with low growth rates and inflation, and little prospect of major rises in productivity (unless AI turns out to have as big an impact as computerisation and robotics had in the 1970s-2000s).



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Tuesday, 1 October 2019

Net Worth: September 2019

My NW increased by $33.6K during September (1.45%) mostly due to the gains in the local and global stock markets flowing through to my geared share portfolio and also our SMSF investment. Our house valuation was slightly lower, based on sales data for our suburb, whereas the overall Sydney market has shown a rebound in property values (likely due to the two interest rate cuts by the RBA in recent months).

My NW data for this month includes a $1m increase in 'other real estate' as an asset, and a corresponding increased liability of approx. $1m in 'other mortgages' - this is due to my purchase 'off-the-plan' of a one bedroom apartment in a high rise apartment development (88byJQZ) in St Leonards. I paid the initial $5K 'holding deposit' using my 'portfolio loan', so that debt has actually been reflected in the net value of my 'Stocks' position, leaving $995K liability. When the balance of the 10% deposit gets paid when I exchange contracts this month, the 'other mortgages' figure will reduce to $900K (that balance will fall due when the apartment construction is completed and 'settlement' occurs - currently scheduled for Q1 2023), and the full $100K deposit amount will be reflected in my 'portfolio loan' balance as I am using that to pay the deposit. This will reduce the net value of my 'Stocks'  portfolio by $100K, which is a bit misleading, so I may do an ongoing adjustment to the portfolio loan figure and include the $100K 'deposit' amount as part of the 'other mortgages' figure.

I'll probably also add the stamp duty (payable 3 months after exchange of contracts) as part of the 'valuation' of my apartment, as this will probably be similar to the price differential for a completed unit compared to 'off-the-plan' pricing. In the unlikely event that the apartment development does not complete, I should get my deposit refunded and also be able to claim back the stamp duty payment.

Hopefully the property market 'correction' in Sydney is indeed over, and between now and settlement in 2023 the valuation of my apartment will have risen (so it shouldn't be a problem getting a mortgage for the balance due on settlement - I will have paid a 10% deposit, and banks usually prefer to only lend 80% of valuation).
As with all geared investments there are several risks in making this investment, including:
* property prices may not appreciate, or may decline (as was the case during the recent property slump) - but historically St Leonards has enjoyed an average gain around 6% pa. I've calculated that I would make some gain as long as prices appreciate by at least 2%pa during my holding period (10-15+ years).
* I may not be able to arrange finance (a mortgage) when the development is completed in 2023 and I need to 'settle' the balance. This seems unlikely as I have another unencumbered property that could be used as collateral for the loan. But if I am no longer employed it may be more difficult to obtain a mortgage.
* Interest rates may increase substantially - currently investor mortgage rates are around 3.5%-4.0%, and interest rates are currently being reduced. On the other hand, interest rates are at historic lows, so a substantial rise in interest rates is a distinct possibility in the medium-long term.
* I may not be able to achieve typical rental returns ($560/wk for a one bedroom apartment), or may experience high vacancy rates. However, as a new, 'luxury' apartment on the 39th floor with views towards the city, harbour, and harbour bridge it should be relatively easy to rent out and obtain above average rent.

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