Question 1

You often hear people say ‘I’ve paid taxes all my life’ to justify – or exploit – government retirement benefits.

I wonder whether the taxes we have paid as average wage-earners cover the costs of the share of government services we have consumed?

AHHH, yes – I hear that all the time as well. Maybe not as much as I used to though.

To be clear, the age pension is a safety net payment. It is not an entitlement for everyone.

You are not paying into a welfare fund for your future age pension (that is what super is for).

However, having said the above, back in the 1940s there was a National Welfare fund and Social Services contribution levy established.

Both of these may have been sold as something similar to ‘we are taxing you and then using these funds to pay future social security payments’. It never happened though.

Both were abolished. But this could be why people still think their taxes are somehow used to pay them a future age pension. Indeed, Treasury’s 2020 Retirement Income Review noted that the National Welfare Fund and Social Services Contribution “may have been perceived by some older Australians as pre-funding their age pension entitlement”.

In fact, age pension and all social security payments are just paid from consolidated taxation revenue.

For those who are interested in the history and myth of the age pension, this article on Treasury’s website provides a detailed overview.

As to whether an individual breaks even over their lifetime, i.e. taxes paid versus services received, that will differ for everyone.

I try to take a positive approach. I want to be a net contributor, i.e. pay more tax than benefits I receive. I want to be comfortable in retirement and not have to rely too heavily on the age pension. And I hope to be in good health and stay out of trouble, not be rely on health services, law enforcement and anything else the government subsidises.

Of course, I still want the government to spend my taxes very carefully and not overtax me, though.

Taxes paid versus services received is what politics is all about and finding the right balance for our society is crucial.

Question 2

My wife does not want to buy an investment property with the equity from our house. Do you think the tax advantages of the rental would help us pay off our mortgage?

She is worried that if the rental doesn’t have a tenant we would be unable to pay off two mortgages.

Thanks, Michael

Hi Michael,

Investment properties are certainly popular in Australia. About one in five households holds an investment property and many of them have done well. However, the cost of buying/holding/selling is often overlooked, as well as the risks.

Looking at the costs first, people often say something like “I bought a property for $700,000 and sold it for $850,000, so I made $150,000”. What they ignore was stamp duty, loan fees, interest, land tax, maintenance/renovations, selling fees and CGT.

These all need to be considered when deciding whether to purchase.

As for risks, as your wife pointed out, not having it fully tenanted is a big one, as is having tenants who don’t pay. There is also a risk that the property may go down in value, especially if only held for a few years.

You will also need to factor in possible interest rate changes and whether you may need to access these funds quickly in the future.

Another risk that is frequently forgotten is opportunity cost. You should not compare buying an investment property with doing nothing. It must be compared against other investments you could also make: Say, shares, superannuation, ETFs or managed funds.

I perhaps sound negative, but it’s important that people are fully aware of what they are getting into.

Craig Sankey is a licensed financial adviser and head of Technical Services and Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives.