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.