, Author at Housing Affordability Tasmania

Session 4 Free Electric Car $60,000

In session 3 we discussed the Pension Loan Scheme. You can borrow $572 per FN as a single pensioner and $862.60FN as a married couple if you own your residence or an investment property. It is payable fortnightly or can be paid as a lump sum of $14,872 or $22,427.60 for the first year and fortnightly thereafter. You do not have to pay the loan as the loan + interest accumulates until it reaches approximately 50% of the value of your property at which stage your fortnightly payment may stop.

You still do not have to pay back the loan until you die or sell the property.

You can use the loan for any purpose: medical equipment, holiday or just supplement your living costs. The best use of the loan is to buy investments.

You could set up an investment funds for the beneficiaries of your will or for your grand children.

Pension affected under the income test

We have seen that maximising your pension depends on a strategy of converting income to capital gain or invest in a property because of the depreciation allowances. We will have a separate session about the Pension Maximiser Plan (Session 6) which is ideally suited to people affected under the income test

Pension affected under the asset test

There is only one strategy for these pensioners and that is to reduce assets to increase the pension.

You can do this by gifting, a holiday, medical treatment etc but also by using the Pension Loan Scheme.

People assessed under the asset test are probably the poorest people of all. They normally will have one or 2 investment properties which have increased in value over the years and moved them into the asset test.

They lost their pension and the income from the property is normally less than the full pension.

Then there are repairs on the investment properties

They are probably worse off than people on the full pension.

They are asset rich and income poor.

The first thing to do is to sell the investment properties and probably buy a new property to take advantage of the depreciation allowances

I can certainly give information on an individual basis to at least double your income.

In the mean time how about a new $60,000 new car at absolutely no cost to you?

Your aim is to reduce assets and increase your pension

You are in a very strange situation that the government will give you money for nothing.

The Pension Loan Scheme was originally designed for people owning their residence and use the equity in their homes to supplement living cost. You have been struggling all your life working for your home and the home is finally paying you back and is now working for you.

If you borrow money against your residence it does not reduce your assets as Centrelink does not take that loan into account.

If you borrow against your investment property Centrelink takes that as a liability which reduces your assets

For every $1 dollar borrowed, your pension increases by 7.8 cents or 7.8%

You must spend that money in things that will not be regarded as assets.

This could be a holiday, charity, medical, furniture, and a lease

A lease is not regarded as an asset. As long as you pay your lease payments the object is still owned by the lessor.

Any lease will do, but the obvious one is a car. It could also be furniture, solar panels, insulation etc.

Let us take a $60,000 electric car. Your loan pays the lease payments.

So you pay 3.95% ( which you do not have to pay) and get a 7.8% increase in your pension , that is 3.85% or almost 4% for nothing.

If you now invest your extra 7.8% into say shares and add the lease payments after they stop in say 5 years to the investment then that investment returning say 7% using compound interest, exceeds your accumulated loan in 13 years and you have had a $60,000 car for absolutely nothing.

On top of this you have reduced your living costs. Electricity is cheaper than petrol. And if you used the same system for solar panels and insulation you have further reduced cost of electricity and heating.

You have to be careful with the investments as they could be regarded as assets, In that case your loan will still be repaid but it will take 17 years.

Your estate on death is reduced by the loan.

If you make the investments in the name of your beneficiaries they are no longer your assets and do not affect Centrelink. The investments will cancel out the loan.

Rather than investing in bank shares, the best investment would be to use your 7.8% increase in your pension to reduce a non-tax deductible home loan of your children.

Better still if the investment is in the name of your beneficiaries in which case it is not your asset and does not affect Centrelink.

I myself invest in the name of my grandchildren. I will never give money to my children or grandchildren because they will only spend it on expensive cars, holidays smoking or drugs. The funds can only be used as a future deposit on their house purchase.

Self Funded Retirees

You can borrow $1716FN as a single or $2587 as a married couple

Investment in new property is the best option

Further strategies will be discussed in sessions 6,8 and 10,11 and 16

Session 5 Stop Smoking $16M in retirement. Compound interest

We have seen that we can get a free $60,000 car by taking advantage of compound interest.

In this strategy we are borrowing money under the Pension Loan Scheme and invest money in the stock market.

After the first 5 year the loan exceeds the investment by a considerable amount but just because a little bit of extra return between 3.95% and 7% the investment will catch up with the loan in 13 years and makes you free of debt.

As a youngster I never took advantage of information about compound interest until many years later when I became an investment adviser.

Let us consider smoking

Say cigarettes cost $50 per packet and a 21 year old smokes a pack per day and spends $350 per week. This will service a loan of $250,000.

If the investment returns 7% it doubles ever 10 years

10 years $ 500,000

20 years $1,000.000

30 years $2,000,000

40 years $4,000.000

50 years $8,000.000

60 years $16,000,000

I smoked a packet a day at age 21 and I am 81 now, 60 years later . Nobody told me about this but I could have had $16m by now. Still have to repay the $250,000 but I can cope with that.

You may have problems with getting a $250,000 loan but you can buy bank shares on a margin scheme which means that the lender (stockbroker) uses the shares as security on a Loan to Valuation Ratio (LVR) of 70%. This means that if you want to buy $1000 of shares you need cash of $300. In other words every dollar you spend allows you to by $3.33 of shares.

This will add 5 years to the example, So instead of having $16m you would only have $14m. Hardly worth it.

In these equations I have only assumed a 7% in the growth of the shares . If we also take into account the dividend of the shares it will increase wealth considerably.

At a 3% dividend the doubling reduces from 10 years to 8 years , now giving you 32M in retirement

At a 7% dividend the doubling reduces from 10 years to 6 years now giving you 128M in retirement

Present return of bank shares is 7% growth and 5 % dividend.

Do your own research.

Of course if you smoke only 1 pack per week you have to reduce all figures by 1/7 giving you still a potential wealth in retirement of $9M

I am too old now to take full advantage of compound interest but we have seen that under a Pension Loan Scheme one of the options was to set up an investment trust for your grand children.

You can get an advance of $14,257 under this scheme and if you invest that for them at the birth of a grandchild.

They will then have:

$ 28,514 When 10 years old

$ 57,028 When 20 years old

$114,056 When 30 years old

Enough for a deposit on a house.

Of course if you have 3 grand children they will only get $38,019 which may still be enough for a deposit on a house

Session 6 Pension Maximiser Plan

This Plan is unique to Housing Affordability Tasmania Pty Ltd and essentially converts Income to Capital Gain

On a local scale in Tasmania we are already active in solving the Affordable Housing Crisis using our company

Housing Affordability Tasmania Pty Ltd.

Please visit our website www.hat.house

Affordable Housing Strategies.

It is my aim to solve the Affordable Housing problem with 2 specific demographics in mind:

1 Pensioners

2 First Home Buyers

The objective is to provide a safe and secure investment for retirees and an opportunity for First Home Buyers to acquire a home under a “ Lease And Option To Buy” strategy.

At the same time the strategy will provide affordable long term ( 5 years) rental accommodation for first home buyers and other retirees.

Give pensioners a fair go. Pension Maximiser Plan (PMP)

Approximately 16 % of Australians or 4 million people are over age 65 and this will increase to 10 million in 50 years time.

80% of these people are on a full or part pension.

Assets of this group of people are approximately $2,000,000,000,000 ( 2 thousand billion)

Let us say that 1% of these people are interested in providing affordable accommodation for first home buyers and retirees. This would provide $20 Billion or at say $250,000 per dwelling give a potential of 80,000 new dwellings.

Retirees on a part pension are treated very unfairly. They are by far the highest taxed entities by a country mile.

A single retiree on an combined pension/income of say $45,000 will pay the following “tax”

For every dollar earned:

Loss of pension for every dollar earned in excess $212 per fortnight 50.00 cents

Loss Pensioner tax rebate SAPTO .½ of 12.5cts (starts at $34,919) 6.25 cents

Loss of Low income rebate LIT, ½ of 1.5 cts ( starts at $41,089) 0.75 cents

Tax ½ of 30% ( income $45,000 – $135,000) 15.00 cents

Medicare levy ½ of 2% (starts at $33,738) 1.00 cents

Total 73.00 cents

How unfair is that !

How can we reduce this “tax” ?

Centrelink and the Taxation Dept have different rules. There is for instance no negative gearing for Centrelink ( losses cannot be offset against other income). Building allowances on property (Division 43) are not allowed but it appears that Centrelink will still allow depreciation for plant and equipment (Division 40) . Taxation department still allows both types of depreciation.

There is however one Centrelink concession left for retirees and that is Capital Gains . This means that a dollar of Capital Gains is worth a lot of money to a retiree.

Capital Gains is not regarded as income for Centrelink.

It is regarded as an asset but this will normally not affect the pension.

This makes property a very good investment for retirees on a part pension.

Using the example above , a dollar of Capital Gain is worth the following,

Pay Capital Gain after 1 year @ ½ x 30 cents = 15 cents

Therefore a retiree will have 27 cents left for every dollar earned but 85 cents left for every dollar of Capital Gain after paying Capital Gains Tax. This is a 315% increase

Or in other words; $1 Capital Gain is the equivalent of $3.15 of normal income

Pension Maximiser Plan (PMP). Positive Homeowner Plan (PHP)

The strategy is as follows:

A company develops an affordable housing complex of say 20 town houses. Development costs are $40,000 for the land and $240,000 for the property. The properties are valued @ $300,000 at completion. Houses are constructed.

Under the Positive Homeowner Plan (PHP) first home buyers are approached with the help of Housing Tasmania to sign a 5 year lease and an “option to buy” the property in 5 years time. This is not unique as it is very similar to “Rent to Own” or “Lease and Option to Buy” schemes, but treated slightly differently.

The company leases out the property to a first home buyer at 5.2% of valuation.

For instance if the property is valued at $300,000 , the rent would be $300 per week.

After a suitable period (say one month) the house is sold to a retiree as a going concern (thereby avoiding GST)

A retiree buys the property at 80% of valuation . The property is leased back to the developer at 5.2% or $240 per week.

Note that this rent is lower than market rent of $300 per week but our company is also looking at joint ventures with Community Housing Providers where we want to provide rents at 20% below market value.

The development company leases in turn to the first home buyer at $300 per week. ( the 5 year agreement with the first home buyer is already in place)

The first home buyer will ultimately also be assessed on the capacity to pay outgoings ( rates, water, insurance). This amounts to approximately 1% of the valuation or $3,000 per year. The tenant does not pay this but must set it aside in a sinking fund, helping with a deposit.

“National Seniors” could assist in presenting the investment strategy to retirees. Alternatively, retirees themselves could be secure 5 year tenants with the same option to buy.

House is bought by the Tenant in 5 years time at Present Valuation ($300,000) + 3% + Outgoings (rates ,water and insurance over the 5 years.) ( say $345,000). Outgoings would amount to say 1% ( $3000 per year for a $300,000 house) It is better that during the 5 years the retiree pays outgoings as it reduces income for Centrelink. Retiree gets 73% back. If paid by the tenant as a lump sum

after 5 years it can be regarded as Capital Gain. The retiree can pay for this as he receives $3,000 per year as interest ( rent) on his $60,000 invested.

The retiree now has a Capital Gain of (3% + 1 %= 4%)

We have seen that the actual return is 3.25 x other income. Therefore total return on funds would be : 4% x 3.25 = 13 % + Rent (5.2%)

Rent will effectively be taxed at 73% and is therefore not very good income. Therefore it would be advantageous to be neutrally geared. No income for Tax or Centrelink. Roughly speaking this would mean a 20% deposit or a loan of $192,000 on a $240,000 property.(80% of valuation $300,000)

The retiree uses own funds of $48,000. Alternatively the funds can be withdrawn from Super but that requires a Self Managed Super Fund. In that case use the $48,000 as a deposit for the house (20%).

You can now borrow the other 80%.

It will be essential that a lender be found that will lend the money. Normally a lender will be reluctant to lend money to a retiree . However, there is very little risk for the lender as the ideal exit strategy is in place. The loan will be fully repaid in 5 years.

The Bank will still look at servicing capacity but you already have a signed pre-lease from the development company ($240 per week ).

If you own your home you can also borrow money from the government under the Pension Loan Scheme ( Home Equity Access Scheme). Minimum loan is 50% of the pension or 572FN for a single pensioner or $286 per week.

Total amount for repayment = $240 + $286 = $526 per week which is more than sufficient to service a $240,000 loan.

The end result is that the retiree will make more than 21 times as much or 2025% more than a bank deposit @ 3%. *

$48,000 in the bank @ 3% per year 5 years $ 7,200 After “tax” 73% = $ 1,944
Capital Gain 3% + Outgoings 1% over 5 years = $48,000 After Tax 15% = $ 39,600

which is 2025% more

However this is not where it ends as depreciation allowances can also be taken into account.

(see Sessions 8, 26,27 and 28 )

The Development Company has the following advantages

By securing income from the lease over a 5 year period it will be easy to obtain finance to construct the properties
It is easier to get pre-leases than pre-sales. Arguably the financier would prefer pre-leases
There is no GST payable if the leases are for 5 years

This strategy is beneficial to the developer and the first home buyer .

As far as the pensioner and developer are concerned it is equally applicable to commercial property.

i.e The developer constructs an office in a business zone and leases it out on a 5 year option to buy to a tenant ( engineer, doctor, podiatrist etc) . After one month the pensioner buys the property from the developer at 80% of valuation with a lease back to the developer at 7% of purchase price.

The developer guarantees a buy-back of the property in 5 years at purchase price + 3%

This session was based on a contribution of $48,000.

In Session 7 we have taken a different a different approach and withdraw the full purchase price from superannuation and also discuss depreciation in more detail.

Session 7 Death of a partner Some personal experiences

This happened to me last year when my partner died

I was the sole beneficiary and Executor and obtained probate after 6 months.

I had to sell a property owned by my wife and close a bank account owned by her.

I had all the passwords and could still operate the account.

The account was in her name but there were a number of automatic debits and credits

My life insurance

RACT

Car Insurance

Medical Insurance

And automatic credits from a foreign pension and income from my wife’s property.

To operate her account verification was required by sending a message to her phone. I was not using the phone for outgoing calls but only for incoming messages , like verification from the bank. I had stopped paying the monthly fee and the phone was still working for incoming calls. Because I had not paid for 6 months Telstra closed the account and I lost the phone number and no longer could receive messages.

Contacted the bank and told them that as Executor I had to operate the account . They wanted all the details, birth certificates of me and my wife certified copies of my license, death certificate and probate. Post office charges $5 for a certified copy and a driver’s licence front and back is 2 copies so costs you $10

Not enough says the bank, we also want details of your assets and liabilities and how you have achieved your wealth . We have to do this under the Money Laundering and Terrorism Act

What !. I flatly refused . They said they had to do this because I was now regarded as their customer and I told them that I was not their customer and they were now interfering with the task of an Executor and they had absolutely no right to do this. Most of the details of the automatic debits and credits were in the account and I could not even fnd out how much and to whom direct payments were made.

So the bank closed the account and all direct debits and credits were stopped so I was now without pension payments and property income. My life insurance, car insurance, RACT membership and medical insurance lapsed. The Bank did not inform me that automatic credits and debits had been stopped. They still refused access to the account but I found out that I could close the account without telling them about my wealth. So I closed the account.

So a warning.

Keep your partner’s phone open

Do not phone the bank until you have sorted everything out otherwise they close your partners account.

In the next session 8 we will discuss how we can solve the biggest time bomb when a partner dies and the surviving partner has to survive on a reduced pension

Pension Maximiser Plan ( PMP) , Positive Homeowner Plan (PHP)

Session 8

This is part of a series of sessions on Finance for Pensioners and a solution to the Housing and Rental crisis in Australia

One of the biggest problems in retirement happens when one of the partners dies. All in the sudden the surviving partner will be assessed as single but the assets and income have not changed very much. The pension will more than likely be considerably less and the result can be that income will be half that of previous income.

If married income was in excess of $41,000, the single pensioners on the same income will now pay tax and is in the position of paying 73cts in the dollar back to the government.

Let us see what happens to income when the partner dies and how we can rectify some of the problems. Can we use the Pension Maximiser Plan ( Session 6) to restore a single pension to the equivalent of a married pension

Our aim is to restore the single pension to the equivalent of the married pension and also incorporate deemed asset in your or your partner’s superannuation fund

We are using the same strategy as in Session 6 but with some different figures.

In session 6 we used $48,000 as a deposit on a property and borrowed the rest. In this session , if possible, we withdraw the full purchase price from the super . Of course a combination of session 6 and 8 can be used.

There is a problem with withdrawing money from your super and buying an investment property if you are affected under the income test. There is a chance that any rental income Any rental incoinvesting i

Most of what follows is a duplication of Session 6 with some different figures and a larger deposit on the purchase of an investment property.

A company develops an affordable housing complex of say 20 town houses. Development costs are $50,000 for the land and $300,000 for the property. The properties are valued @ $400,000 at completion. Houses are constructed.

Under the Positive Homeowner Plan (PHP) first home buyers are approached with the help of Homes Tasmania to sign a 5 year lease and an “option to buy” the property in 5 years time.

The company leases out the property to a first home buyer at 5.2% of valuation.

For instance if the property is valued at $400,000 , the rent would be $400 per week.

Under the Pension Maximiser Plan (PMP) after a suitable period (say one month) the house is sold to a retiree as a going concern (thereby avoiding GST)

A retiree buys the property at 80% of valuation or $320,000. The property is leased back to the developer at 5.2% .($320 per week)

The development company leases in turn to the first home buyer at $400 per week. ( the 5 year agreement with the first home buyer is already in place)

“National Seniors” could assist in presenting the investment strategy to retirees. Alternatively, retirees themselves could be secure 5 year tenants with the same option to buy.

House is bought under the PHP by the Tenant in 5 years time at Present Valuation ($400,000) + 3% + Outgoings (rates ,water and insurance over the 5 years.) ( say $480,000). Outgoings would amount to say 1% ( $4000 per year for a $400,000 house) It is better that during the 5 years the retiree pays outgoings as it reduces income for Centrelink. Retiree gets 735% back. If paid by the tenant as a lump sum

after 5 years it can be regarded as Capital Gain. The retiree can pay for the outgoings as he receives $4,000 per year as interest ( rent) on his $64,000 invested.

The retiree now has a Capital Gain of 3%+ 1% Outgoings = 4%

We have seen that the actual return is 3.25 x other income. Therefore total return on funds would be : 4% x 3.25 = 13 % + Rent (7%)

For a pensioner rent will effectively be taxed at 73% and is therefore not very good income. Therefore it would be advantageous to be neutrally geared. No income for Tax or Centrelink. Roughly speaking this would mean a 20% deposit of $64,000 or a loan of $256,000 on a $320,000 property.(80% of valuation $400,000)

The retiree uses own funds of $64,000.

If you have $64,000 in your super you can release that to act as a deposit .However you need a Self Managed Super Funds to do this.

The property was valued at $400,000 and the retiree buys it at 80% or $320,000 which is the equivalent of a $80,000 deposit. We are still trying to find a lender that will recognise this deposit in which case the retiree does not need any money at all and can borrow the full $320,000.

The end result is that the retiree will make more than 20 times as much or 2025% more than a bank deposit @ 3%. *

$64,000 in the bank @ 3% per year 5 years $ 9,600 After “tax” 73% = $ 2,592
Capital Gain 4% over 5 years = $64,000 After Tax 15% = $ 54,400

which is 2025% more ( outgoings are paid from excess in rent).

However this is not where it ends as depreciation allowances can also be taken into account.

(see Appendix D)

The Development Company has the following advantages

By securing income from the lease over a 5 year period it will be easy to obtain finance to construct the properties
It is easier to get pre-leases than pre-sales. Arguably the financier would prefer pre-leases
There is no GST payable if the leases are for 5 years

This strategy is beneficial to the developer and the first home buyer .

As far as the pensioner and developer are concerned it is equally applicable to commercial property.

If you own your residence we can arrange a loan of $256,000 for you.

The income from rent (5.2%) will equal the interest on the loan (5.2%) so the loan does not cost you anything. .

The capital gain is only paid in 5 years time so what do you do for cashflow now.

The first thing to do is enter into the Home Equity Access Scheme and you can increase your single pension by $572FN . This is in the form of a loan but you can pay it back from your $64,000 capital gain in 5 years time. Your pension as a married couple was $1725.20FN and you now have a pension of $1716FN ( 1.5 x single pension) which will solve your immediate problems. This will also increase your income and together with the rent from your new property will now qualify you for a loan of $256,000

If this all sounds complicated, it is not really. I can set up a strategy for you in 5 minutes.

With proper planning it will be possible that the death of a partner will not adversely affect the income of the surviving spouse.

Appendix D

This section is not essential but it is useful if a retiree wants to use depreciation allowances to the fullest and maximise returns in super.

We have used the following parameters in an example:

House Purchase Price $400,000

Purchase Price for Pensioners $320,000

Rent $400 per week

Deposit $64,000

Loan $256,000

Construction Cost $300,000 of which $30,000 is Plant and Equipment

The end result is that the retiree will make more than 20 times as much or 2025% more than a bank deposit @ 3%. *

$64,000 @ 3% per year 5 years = $ 9,600 After “tax” 73% = $ 2,592
Capital Gain 4% over 5 years = $64,000 After Tax 15% = $ 54,400

which is 2099% more ( outgoings are paid from excess in rent).

However this is not where it ends as depreciation allowances can also be taken into account.

Married Pensioners .

It is unlikely that married pensioners will pay tax. They generally do not have to submit a tax return but they can still claim for the cost of running an investment property ( rates, water, insurance, property management etc). ATO and Centrelink will accept 1/3^rd of the rent as costs. In our example it means that Centrelink will accept $143 per week ($7,436 per year) as costs. Real costs are approximately 1% of the value of the property or $4,000 per year. Married couples can therefore receive an additional $3,436 per year which is not assessable for Centrelink.

The pensioners can also claim Section 40 depreciation allowances. In our example construction cost of the building was $300,000. Plant and equipment will be approximately 10% or $30,000

For the first 5 years this will average out at 1/5^th per year or $6,000 per year. Rental income therefore , for ATO and Centrelink purposes , can be further reduced by $6,000 per year. ( Total $3,436 + $6,000= $9,436). The property is therefore well and truly negatively geared.

Centrelink does not allow negative gearing , but the pensioners can take advantage of this by putting more of their own money into the property ( reducing the loan).Whatever money they put in they will have an effective return of 5.6% . Because it does not affect their pension they do not lose 50cts in the dollar. The effective return is therefore at least double that @ 11.2%.

Single Pensioners

For single pensioners there are larger problems but also larger opportunities.

If married income was in excess of $41,000, the single pensioners on the same income will now pay tax and is in the position of paying 73cts in the dollar back to the government.

A single pensioner can have additional property rental income of $9,436 per year. This additional income is not assessable for ATO and Centrelink . Where we have seen that capital gain dollars are worth $3.15 of ordinary income, this completely unassessable income is worth $3.70 of ordinary income ( $1 instead of 27cts). This is the equivalent of $34,948 of ordinary income.

On top of this the ATO also takes into account Division 43 building allowances. In our example this would be $6750 per year ( ($300,000-$30,000)/40). Normally tax payable would be 30% so this is an additional normal income of $2025 per year. (see also Session 16)

Therefore any additional income or increased amounts in superannuation will no longer affect the pension

Summary/Example

Retiree invests $64,000 into a $320,000 property ( Loan of $256,000)

If assessed as a single pensioner earning in excess of $37,000:

Capital gain in 5 years $64,000 after tax $ 53,600 = $ 10,720 per year

Rent @ 7% on $64,000 per week less rates ,insurance etc $ 480 ($4,480-$4,000)

Extra income from excess in rent (7%-5.6% x $256,000 $ 3,584

Total $ 14,784

Compare $64,000 in the bank @ 3% after “tax” $ 518.40

Increase in return $ 14,265.60 per year or 2750% better

This is getting close to restoring a single pension to a married pension

Session 8 Restore Single Pension to Married Pension PMP

Restore Single Pension to Married Pension. PMP

Pension Maximiser Plan ( PMP) , Positive Homeowner Plan (PHP)

This is part of a series of sessions on Finance for Pensioners and a solution to the Housing and Rental crisis in Australia

If married income was in excess of $41,000, the single pensioners on the same income will now pay tax and is in the position of paying 73cts in the dollar back to the government.

Our aim is to restore the single pension to the equivalent of the married pension and also incorporate deemed asset in your or your partner’s superannuation fund

We are using the same strategy as in Session 6 but with some different figures.

There is a problem with withdrawing money from your super and buying an investment property if you are affected under the income test. There is a chance that any rental income will be taxed at 73%.