From: chris@suite.sw.oz.au (Chris Maltby)
Subject: Re: Negative Gearing
Organization: Softway Pty Ltd
Date: 20 Nov 92 05:05:43 GMT

In <1992Nov19.061221.9683@cs.su.oz.au> yar@cs.su.oz.au (Ray Loyzaga) writes:
>In article <chris.722147967@suite.sw.oz.au> chris@suite.sw.oz.au (Chris Maltby) writes:
>>There's no doubt that negative gearing of rental property is only
>>a winner for the investor when inflation is higher than interest
>>rates/marginal tax. This is not true at present. I also agree that
>>there are more valuable investments that could be made than speculation
>>(because that's what it is) in real estate.

>No, it is always a winner, it reduces the cost of funds.

Sure, it reduces the cost of funds. It's only a long term winner
when the capital gain + profits exceeds the accumulated losses you
make along the way. This is simple arithmetic.

>Inflation affects the investment dynamics because a longterm investment
>i.e. 10 years leads to an increase in return while the capital
>investment shrinks in current dollar value. Thats why people with home
>mortgages that have been around for 15 years think nothing of the $400
>monthly repayment, whereas back when they first took it out $400
>per month was a great slab of their take home pay.

Like I said, inflation is vital to the calculation. If there is no asset
price inflation (like now) then there is no capital gain. You make a loss
overall - a smaller loss than otherwise because of taxation, but a loss
nevertheless. If you put the money in a bank you would have made a profit;
a smaller profit than otherwise (also because of taxation) but a profit
nevertheless. Negative gearing only works when the rate of inflation is
more than the perceived cost of funds. You might assert that this is a
likely state of affairs over the long term, but it isn't just now.

>>Among them, and particularly favoured, are equities (ie Shares). An
>>investment in some business (especially your own) is much more likely
>>to add value to the GDP through multiplier effects, and produce
>>employment, exports etc etc. To make this attractive, income from

>Well, to tell you the truth, property investments help the GDP and are
>affected by the multiplier, as you end up paying someone for an asset
>and guess what they do with the money ... yup they probably invest it.

No. Speculating in asset price inflation doesn't add to the GDP. Investing
in plant and equipment does help it heaps. This is why all that "growth"
in the economy over the 80s yeilded little of real value in Australia. It
was just swapping existing assets for more and more tokens, not actually
making more assets.

>>companies in the form of dividends has a tax-paid component (dividend
>>imputation), which can be used as part of your tax payment.

>>Thus is you borrow (say) $100K at 10% to buy blue-chip shares returning 6.1%
>>dividends, your net loss is $4K pa before tax. This will be offset against
>>other income. Additionally there is a further $3900K of tax credits to be
>>used to offset tax on other income. You don't need even need a capital

>Not quite right, you get 39 cents in the dollar for FULLY-FRANKED shares
>(which is still usually limited to the blue chip stocks), you get less
>for partially franked stock, and zero for unfranked stock.
>And you calculation is wrong, you would get 39% of the dividend as a
>tax credit (39%*6.1%) or $2379, not the $3900 (or even $3900K :-))
>that you are talking about.

No Ray, my calculation is right. Dividends are paid out of the after-tax
profits of companies. The actual dividend paid represents 61% of the total
notional dividend, with the other 39% being imputation credit (tax paid
by the company). Think about it. The notional dividend is added to your
taxable income, and the imputation credit is added to your tax paid. The
difference (10% roughly of the notional total, or 16% of the dividend at
a tax rate of 48.5%) is the effective tax rate on the dividend. Magic.

>>gain on the shares to make this worthwhile. Of course, the risk of capital
>>loss on shares is much higher than on residential property.

>Sure is higher, particularly in the last 12 months, the stocks are
>at a 5 year low, which when you think about it puts it at the October '87
>crash level.

A good time to buy!

>>Nevertheless, you should all rush out now and invest in the future of
>>Australia, and make heaps on it. Why not choose high-tech industries too.
>>Just avoid woodchips, tobacco and uranium (:-).

>Most high-tech companies are listed on the second board, and they have
>been extremely unstable, a prudent investor would avoid burying a whole
>lot of their money there. Of course this still leaves the door open for
>the State banks of Victoria and South Australia to play a role ...
>If you want fully franked shares you will be investing in banks
>and large industrial companies. Avoid ANZ, its current 100% franking is 
>about to be reduced drastically next year.

This is a bit pessimistic. There are plenty of profitable smaller companies
on the exchange, or you could make your own (like I said). If you invest
in industries instead of speculators, those who do instead of those who
deal, you'll do much better in the long term...
-- 
Chris Maltby - Softway Pty Ltd		Internet: chris@softway.sw.oz.au

PHONE:	+61-2-698-2322	"I'm waiting for X-Windows to become just that;
FAX:	+61-2-699-9174	 Ex-Windows" - A McGrath.
Newsgroups: aus.politics