Assumptions & Calculations
Here we give a bit of an understanding of how some of the calculations are performed in the Investment Calculator and the assumptions used.
How does the timing work?
The projection period begins at Year 0. This symbolises today, or now.
Example: purchase a property in year 0.
This is saying purchase the property now. The property value will come in now, you will start receiving any rent now, and you will have to start making any repayments now.
Any deposit required will be taken from your savings account or line of credit that you have entered as your existing balance.
Year 1 represents the end of the 1st year. Year 2 represents the end of the 2nd year etc.
Example: purchase shares at the end of year 3 for $10,000 with 5% p.a. capital growth
At the end of year 3 the value of the shares will be $10,000. At the end of year 4 the value will have grown by 5% ($500) so you will see the year 4 value of $10,500.
Example: purchase a property in 3 years.
The property will be purchased at the very end of the 3rd year. Because it was not held from the very start of year 3. no cash flows will occur in year 3.
In year 4 you will a full years cash flows will occur; a full year of rent will be received, a full years worth of expenses will be paid etc. because the property was owned from the very beginning of year 4.
Cash Flows are separated into 2 sections:
- Cash from salary and investments (Ongoing Cash in and Cash out relating to your investments & job)
- Cash from financing (Money coming in or out from drawing down loans, repaying loans, purchasing assets or selling assets)
These 2 sections are added together to give the total cash flow. If the total cash flow is positive it is paid to your savings account, home loan, or line of credit depending on what which you have chosen in the personal details section. If the total cash flow is negative the amount will instead be taken from one of the above accounts.
How is the money allocated?
You can choose where to put the money that is left over in the personal details section. You can either add it to your savings account or pay down your home loan. Note that if you choose the home loan option once your home loan reaches 0 any surpluses will automatically be added to your savings account.
What if my cash flow goes negative?
The calculator will first drawdown any savings that you have. When your savings reach 0 a line of credit will be drawn from. The line of credit can be seen as drawing on any equity you may have such as your home, your investments, or drawing from a credit card.
Interest will be charged at the same interest rate chosen for savings.
If you begin to see increasingly large amounts in the line of credit account it is a good indication that you can’t afford the investment strategy.
9% of your salary and bonuses is added to super. Using a percentage ensures any changes to your salary or bonuses also work into your super.
Example: you enter a salary of $95,000 and a bonus of $5,000 to make a total of $100,000. $9,000 will be contributed to super and you will be paid the full $100,000 making a total of $109,000 in super, salary, and bonuses.
- For people older than or equal to 50 there is a 50,000 cap for financial years 2010/2011 and 2011/2012 (2 more financial years)
- this 50,000 is static.
- For people under 50 there is a 25,000 cap that increases with the inflation level chosen
- Bring-forwards are not capable for people =>65
Where possible the tax calculations performed in the calculators have been checked and verified correct with the ATO.
Income Losses are carried forward and are used to offset future tax payable on income only. They cannot be used to offset future capital losses.
Tax concessions and offsets such as LITO, Family Tax Benefits etc. are not included. The only tax offset that is included is franking credits.
The Investment Calculator allows you to choose the tax rates used in the personal details section. These rates will be used throughout the calculations. Tax rates cannot be varied into future years, we are currently adding support fo this.
You can enter custom tax rates from the personal details section.
The Medicare Levy is calculated as 1.5% of taxable income. Because the Medicare Levy tax laws are quite complex to make things simpler the Medicare Levy of 1.5% is always added. There is no Medicare Levy reduction for low income earners in the calculations.
There is the option to choose whether to apply the Medicare Levy Surcharge or not via the Investor Details page under Inputs.
Check out our Medicare Levy Surcharge and Medicare Levy Explained Guide for more info on the Medicare Levy.
You can also use our online Income Tax Calculator for simple calculations.
Check out our How Does Depreciation Work With Investment Properties? Guide for a more general explanation about depreciation.
1. Construction – aka Building & Foundations
The following formula is used:
Deduction = Construction Cost * Deduction Rate
Note that depreciation for construction depends on the year of construction chosen.
- If purchased before 1979 there is no period over which a deduction can be made.
- If purchased between 1979 and 1983, or after 1986 there is a 40 year period
- over which a deduction can be made at rate of 2.5% each year.
- If purchased between 1984 and 1986 there is a 25 year period over which a deduction can be made at a rate of 4% each year.
The construction depreciation is counted as ‘capital works’ by the ATO and so reduces the cost base for the property for capital gains tax calculations.
This follows the ATO guidelines.
2. Depreciation for Fit-Out
These items relate to fixtures and fittings such as fridges, furniture, and TV.
The ‘prime cost’ method is used as specified by the ATO.
The formula used to calculate the deduction is:
Deduction = Fit-out Cost * (100% / Asset’s Effective Life)
Where the fit-out cost is the value chosen in the properties page.
The Asset’s Effective Life is 30 years from the date of property purchase for proposed properties and from today for existing properties (for simplicity purposes).
What happens to the fit-out when I sell the property?
The fit-out is no longer used for investment purposes once the property is sold and so is no longer deductible.
It is assumed that the Fit-Out will also be sold when the property is sold either with the property or separately. The Fit-Out value comprises part of the property value.
There are no tax effects on what happens to the fit-out because the fit-out depreciation claimed every year means that no tax will be payable or refundable on the sale.
Fit-Out does not affect capital gains.
Franking Credits & Dividends
Franking Credits are calculated according to the following formula:
Div * [Tc / (1 – Tc)] * fp
Tc = company tax rate. fp = franking percentage, Div = Cash Dividend Received
The cash dividend is treated as a cash flow if not re-invested. If re-invested the value is used to purchase more shares / units at the share / unit price at that time.
The grossed-up dividend amount is what is used to determine your taxable income from shares / managed funds.
Franking Credits are added to the cash dividend figure to give the grossed-up dividend amount.
They are then used to offset your tax payable.
If the franking credit offset is greater than your tax payable you will receive a refund equal to the difference.
If you would like to see how franking credits work in general you can see our Franking Credits Explained guide in the Investment Guides area of the site. You can also use our online Franking Credits Calculator to calculate the franking credits on your cash dividends.
Capital Gains Tax
You can choose the year a property was purchased for any existing properties. If the property was purchased before 1985 no capital gains tax is payable. If the property was purchased before 1999 the capital gain is calculated using both the indexation method and the discount method. The lessor of both is used.
For any purchase after 1999 the discount method is used since the indexation method is not allowed.
The cost base adds selling costs and purchase costs and subtracts construction depreciation claimed in previous years.
John sells a property for $814,447 that he bought for $500,000. He paid purchase costs of $17,990 in stamp duty and $250 in loan-set up costs. When he sold the property he paid $10,000 in selling costs. He had also claimed $62,500 in depreciation over the time he held the property.
|Minus: Cost Base|
|Loan Set-Up Costs||250|
|50% discount||Divide by 2|
|Taxable Capital Gain||174,354|
Since John had held the property for more than a year he can apply the 50% capital gains tax discount making the total taxable capital gain $174,354.
Capital Losses are carried forward and are used to offset future capital gains tax payable only. Capital losses cannot be used to offset future tax payable on income.
The calculations used have been fully confirmed with the ATO.
Shares / Managed Funds
The average price paid method is used. Shares / units are purchased at a price that increases each year at the chosen capital growth rate.
The rate of inflation can be chosen.
The inflation rate will not change any investment values or income from investments. Investment value growth rates and income rates are chosen separately.
The following items increase automatically with the chosen rate of inflation each year:
- Ongoing property expenses including: Accounting, Body Corporate Fees, Council Rates, Repairs and Maintenance, Electricity & Water Charges, Borrowing Expenses, Insurance, Land Tax, Other Ongoing Deductible Expenses.
- Lifestyle Expenses
- Ongoing Super Fund Fees ($ p.a.)
- Ongoing Non-concessional Contributions
You have the option as to whether the following items automatically increase with the chosen rate of inflation:
- Other ongoing expenses
The Investment Calculator allows you to make changes in different years in the Yearly Changes page. The $ value you enter will be higher in the calculations by the inflation level at that time.
If you do not want to see the effects of inflation just change the inflation rate to 0%.
Want to know more about the calculations and assumptions? No worries, just reply below or contact us.
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