quote:

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Jim

“but as I keep trying to get through to him, you only pay tax on half of your capital gain, and it will be in time eroded dollars if you hold the property long enough.”

Quite right, thanks for reminding me. But dont forget that many people forget to allow for the investment return on the saved capital over the same period. Its all swings and roundabouts.

http://www.posigear.8k.com

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Crashy, I think you have this all backwards again. The capital saved by depreciation swings in favour of depreciation.

Let’s say I have a depreciation allowance of $10,000 in year 1. This gives me a tax refund of $4850. I’m going to put this refund straight back into a second property that is going to give me a capital gain averaging 7% for the next 25 years, after which it will increase to 1.07^25 * 4850 = $26323. (^ means to the power of) When I sell this property, I’ll have to pay cgt on this of {{26323-4850)*0.485}/2 = $5207. Therefore my net cash in hand owing to the contribution of that tax refund will be $21115.

Now what about the first property? Taking that tax refund back in year 1 will reduce my cost base accordingly, resulting in an increase in the cgt of (4850 * 0.485) / 2 = $1176. Big woop!

Lets just take those numbers back to today’s dollars, ie divide by 1.035^25 = 2.36 assuming an inflation rate of 3.5%. My contribution to the second property will be worth $8934, but my increase in cgt on the first property will be worth $497 in today’s dollars.

Maths of compounding is so fun!

Now for a bit more fun, lets assume we put that tax refund in year 1 into a good cash account that pays 7% pa, ie with no capital gain involved, just to see the effect of nipping away at your return by the tax man. This is the main benefit of capital gain, that you don’t pay tax on it until the end, which allows it to fully compound. (This was the subject of an earlier discussion)

Each year the taxman nips off 48.5% of your income, so effectively it compounds at 3.605% pa. After 25 years, my $4850 will increase by 1.03605^25 to $11756 cash in hand compared to $21115 with capital gain. (The tax has been taken out progressively so there is none at the end cf CG).

To be fair, the capital gain tax “divide by 2” rule saved $5207 in tax, but progressive tax is much worse than tax at the end. Same principle applies to trading stocks and property for that matter; the taxman nips your compounding tree in the bud each time you trade.
It’s all in the exponentiation!:

Yield | 10 Yrs| 25 Yrs| 40 Yrs |

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3%  |   1.3 |   2.1 |    3.3 |

6%  |   1.8 |   4.3 |   10.3 |

9%  |   2.4 |   8.6 |   31.4 |

12%  |   3.1 |  17.0 |   93.1 |

15%  |   4.0 |  32.9 |  267.9 |

Jim

This Telstra offer isn’t quite what you’re making it to seem Crashy, and I have serious concerns about some of your concepts you are touting. If TLS pays $5.40 per share, then $1.50 will be capital, and the rest fully franked dividend of $3.90. This will include an imputation credit of $1.67 as you say, ie a grossed up dividend of $5.57, which will be added to your taxable income. $1.67 just happens to have already been pre-paid towards your tax. You are saying that we can earn another $4 ($3.90) from another source without paying tax on it, owing to the imputation credit, which would be like prepaid tax on our other $4. What about the dividend though? It still attracts tax. As I’ve written before, it’s silly to think of imputation credit as some magical bonus. It’s just part of your dividend that has been taken out to prepay tax. If we earn another $4 elsewhere, then our income will be $5.57 + $4 = $9.57, and if we happen to be in the 48.5% tax bracket then we will owe $4.64 in tax, less the $1.67 already prepaid = $2.97 tax to pay. If we exclude the extra $4, then the net tax payable would be 0.485 * 5.57 – 1.67 = $1.03

Back to the TLS offer: Regardless of how much we paid for TLS, then if the buyback price is $5.40 as shown above, then we’ll have to pay an extra $1.03 in tax if we’re in the max tax bracket. The capital component of $1.50 will be taken from our cost base to determine our capital loss, which can only be offset against other capital gains or carried forward to offset future capital gains.

Let’s see what happens if you bought your shares in the T1 float for $1.95, then we’ll have a capital loss of 0.45c to offset against other CG. That will save 22c tax. Therefore net tax payable will be 81c, ie $1.03 – 22c, so cash in hand after the sale will be $4.59.
If we just sold on the market for $5.40 we would have to pay CGT on a gain of $3.45 (ignoring brokerage). Tax payable will be (0.485 * 3.45)/2 = 84c, so cash in hand after the sale will be $4.56.

Now compare with some poor soul who paid $7.40 in T2. With the buyback, capital loss will be $5.90, which will save $2.86 in CGT, so net tax payable will be ($1.83), so net cash in hand after the sale will be $7.23.
If sold on the market for $5.40, capital loss will be $2.00, which will save 97c CGT, so net cash in hand will be $6.37.
These and other tax brackets/ cost bases are shown in the following table:

| Cost |Tax | Cash fr| Cash fr| Buyback |

| Base |Br %| Buyback| Market | - Market|

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|----|

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| 1.95 |15.0|  6.30  |  5.14  |  1.16   |

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|----|

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| 1.95 |31.5|  5.46  |  4.86  |   .60   |

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|----|

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| 1.95 |48.5|  4.59  |  4.56  |   .02   |

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|----|

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| 6.00 |15.0|  6.91  |  5.49  |  1.42   |

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|----|

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| 6.00 |31.5|  6.73  |  5.59  |  1.14   |

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|----|

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| 6.00 |48.5|  6.55  |  5.69  |   .86   |

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|----|

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| 7.40 |15.0|  7.12  |  5.70  |  1.42   |

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|----|

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| 7.40 |31.5|  7.17  |  6.03  |  1.14   |

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|----|

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| 7.40 |48.5|  7.23  |  6.37  |   .86   |

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|----|

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NB with regard to capital losses used to offset other capital gains, it is much better if you use the loss to offset short term CG, ie achieved in less than one year. If you offset gain achieved over more than 12 months, then the tax will be on that gain divided by 2. Any loss will be offset before that gain is divided by 2, and hence you only effectively save half as much by the offset. Eg if you have a long term CG of $10, tax will be 0.485 * $10/2 = $2.42. If you have a loss to offset that gain, say $2 loss, tax will be 0.485 * $8/2 = $1.94, so your $2 loss has saved only 48c in tax. If you apply the capital losses from the Telstra buyback to long term capital gain then the table will look like:

| Cost |Tax | Cash fr| Cash fr| Buyback |

| Base |Br %| Buyback| Market | - Market|

|

|----|

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|

|

| 1.95 |15.0|  6.27  |  5.14  |  1.13   |

|

|----|

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| 1.95 |31.5|  5.39  |  4.86  |   .53   |

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|----|

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| 1.95 |48.5|  4.48  |  4.56  |  (.09)  |

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|----|

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| 6.00 |15.0|  6.57  |  5.45  |  1.13   |

|

|----|

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| 6.00 |31.5|  6.02  |  5.49  |   .53   |

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|----|

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| 6.00 |48.5|  5.46  |  5.55  |  (.09)  |

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|----|

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| 7.40 |15.0|  6.68  |  5.55  |  1.13   |

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|----|

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| 7.40 |31.5|  6.24  |  5.72  |   .53   |

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|----|

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| 7.40 |48.5|  5.80  |  5.89  |  (.09)  |

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|----|

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Worse still if you never manage to find some capital gain to offset against, the table will look like:

| Cost |Tax | Cash fr| Cash fr| Buyback |

| Base |Br %| Buyback| Market | - Market|

|

|----|

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|

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| 1.95 |15.0|  6.23  |  5.14  |  1.09   |

|

|----|

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| 1.95 |31.5|  5.32  |  4.86  |   .46   |

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|----|

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| 1.95 |48.5|  4.37  |  4.56  |  (.19)  |

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|----|

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| 6.00 |15.0|  6.23  |  5.40  |   .83   |

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|----|

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| 6.00 |31.5|  5.32  |  5.40  |  (.08)  |

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|----|

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| 6.00 |48.5|  4.37  |  5.40  | (1.03)  |

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|----|

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| 7.40 |15.0|  6.23  |  5.40  |   .83   |

|

|----|

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| 7.40 |31.5|  5.32  |  5.40  |  (.08)  |

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|----|

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| 7.40 |48.5|  4.37  |  5.40  | (1.03)  |

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|----|

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The conclusion is that the buyback may not be worth quite as much as you think, especially if you bought at T1 and you’re in the 48.5% tax bracket. One other important point: These comparisons were all done at the maximum buyback price of $5.40, but the buyback range is $4.20 to $5.40, so if they eventually only pay say $4.80 and you could have sold on the market for $4.99 (Friday’s close) then the buy back will be correspondingly less attractive than the market.
Jim

Spiders.
Satans own evil little creation!
I can not handle even the smallest ones..Im such a wimp LOL

~ If at first you dont succeed…destroy ALL evidence you ever tried to begin with! ~ :þ

Hi there.
What is your email address, so that I can email you please – I may be interested in what you can find on your three day hunt.
You can email me at lrobbie$netspace.net.au
Cheers
LR[]

Hi,
Tenants come in all shapes and sizes. I had tenants in a $400k property who gave me nothing but grief. My Grovely property is in an older area of Brissy – older house – and tenanted to a housing group. I get great rental income and the tenant has really looked after the place.
When she moved in I had quite a few phone calls and requests for changes like you have had. I simply listened to all of the requests and attended to the safety ones. Eventually she settled in and has been a model tenant ever since. The tenants in the other property paid a much greater rent and when I sold the property made my life hell – flooding gutters, making the dogs next door bark, closing curtains etc etc etc. Tenants are tenants – best of luck finding the middle ground with yours!!!
LR[]

10 year old: Mum..can I use the phone?
Me: OK but only for 15 minutes.

I got the phone back within the 15 minutes..I was impressed!! As I was telling her how happy I was she had paid attention (for a change LOL) the phone rang…. it was for her. The little bugger had arranged for her friend to call back so I couldnt put a time limit on the call. Kids learn to quick!! Just as well I know how to unplug the phone hahahahaha

.

~ If at first you dont succeed…destroy ALL evidence you ever tried to begin with! ~ :þ

nofear..NO FAIR!!! [}][] []

.

~ If at first you dont succeed…destroy ALL evidence you ever tried to begin with! ~ :þ

I have read martin’s critique of Steve’s book and I think what he is saying is not that it can’t be done but the book gives advice that is not practical for many of the intended audience.

I read it and I have to agree. I am sure there are one or two people that go to these seminars and read text like this that do make a killing, but Mr. Average will find it hard using the figures and advice in Steve’s book. And for all those that think they are on top, wait until interest rates go up, vacncy levels go up, with some of the tiny +ve margins Steve talks about, you could be in trouble.

thank you for than info…coz I saw the most gorgeous white rat. I also saw a fair colored ginger one that I loved at first sight.

Seeing as you know ALOT more than I do…can I ask if your rats bite or attempted to when u first got them? When we first got our mice the little buggers bit alot…and rats have larger teeth!

Smaointe…..thank you [] Hopefully you have helped persuade arty thats rats are good family pets!!

The girl at the pet shop said the albino ones tend to have shorter life spans…IM wondering if this is true.

Im guessing, bacause rats are so social…we should buy FOUR. Just in case….[][]