Property income

13.16    Property incomes are received by the owners of financial assets and non-produced non-financial assets such as land and mineral and energy resources. Property income accrues when an assets' owner puts the asset at the disposal of other institutional units. Units with surplus funds lend or provide equity finance to other units and derive property income in the form of interest, dividends, etc. Owners of land and mineral and energy resources arrange leases or other contracts with other units who pay rent to the owners. Regular payments made by lessees of mineral and energy resources are sometimes known as royalties but are treated as rents in the national accounts. A distinction is made between rent, which is a form of property income derived from non-produced assets, and rentals payable under operating leases relating to produced assets, including dwellings and other buildings. Under operating leases, rentals are treated as output of the lessor and purchase of a service by the lessee.

13.17    Property income is recorded net of intra-sector receipts and payments (i.e. property income flows within an institutional sector are not recorded because they cancel out on consolidation). While the household sector may be disaggregated into its business (unincorporated trading enterprises) and non-business subsectors, property income flows between these subsectors are considered intra-sector and are netted out. In relation to property income payments by the household sector, a distinction is drawn between consumer debt interest paid by households and interest on loans for business purposes paid by their unincorporated trading enterprises.

13.18    In the ASNA, property income is presented for the following categories: interest, property income attributed to insurance policyholders, dividends, rent on natural assets and reinvested earnings on direct foreign investment and investment funds.

13.19    Interest is receivable by the owners of financial assets such as deposits, loans, and securities other than shares. Interest is the amount that the debtor becomes liable to pay the creditor over a given period of time without reducing the amount of the principal outstanding. However, interest that accrues and is not paid may be added to the principal amount. In the system, the addition of outstanding interest to the principal constitutes a separate financing transaction. Under the accrual basis of recording used in the system, interest which, under the terms of the contract, does not have to be paid until the asset matures, nevertheless must be attributed to the accounting periods over which it accrues. Under a financial lease the lessor is treated as making a loan to the lessee. Interest on such loans is a component of the lease payments, which have to be broken down between interest and repayment of principal.

13.20    Banks and similar financial intermediaries largely finance their operations by charging higher interest rates on their loans than they pay out on deposits. In effect, the interest paid by borrowers, referred to in the 2008 SNA as 'bank interest', can be regarded as comprising two components, a service charge and a 'pure' interest flow. Likewise, the 'bank interest' paid to depositors can be viewed as a 'pure' interest flow from which a service charge has been deducted. The 2008 SNA refers to the pure interest as 'SNA interest’. As these service charges cannot be measured directly, the imputed charges are accordingly referred to as financial intermediation services indirectly measured (FISIM).

13.21    FISIM for a particular category of financial intermediaries is the sum of the imputed service charges for both borrowers and depositors. The service charge on borrowers is calculated as the level of loans outstanding multiplied by the difference between the average interest rate received on loans and a 'pure' interest rate. Similarly, the service charge on depositors is calculated as the level of deposits multiplied by the difference between the 'pure' interest rate and the average interest rate paid on deposits. The reference rate should contain no service element and reflect the risk and maturity structure of deposits and loans and could be determined as being equal to a particular market rate of interest. The ASNA uses the mid-point between the average interest rate on loans and the average interest rate on deposits (for practical reasons) as the reference rate of interest, and the long-term bond rate for institutions that are not deposit taking institutions.

13.22    FISIM output is estimated for the following financial intermediaries: banks, other depository corporations, central borrowing authorities and securitisers. The interest flows recorded in the sectoral income accounts are after adjusting the actual interest flows by FISIM relating to both borrowers and depositors. Consequently, interest paid by banks (and similar financial intermediaries) and received by depositors is increased by the amount of FISIM payable by depositors, while interest received by banks (and similar financial intermediaries) and paid by borrowers is reduced by the amount of FISIM payable by borrowers in each institutional sector (e.g. households, general government, non-financial corporations).

13.23    There are two schools of thought on the measurement of income flows on tradeable securities during times of changing interest rates. The debtor approach records the interest accruing at the contractual rate agreed at the time of issue of the security. The creditor approach records the interest accruing at the current market interest rate. Proponents of the debtor approach argue that it records the legal liability of the debtor to the creditor. Proponents of the creditor approach argue that it is consistent with the market valuation principle. The 2008 SNA recommends the debtor approach be applied for recording interest accruing on debt securities. However, the ABS believes that this approach leads to complications as interest rates may change after the date of issue of variable interest rate instruments. Therefore, the ASNA applies the creditor approach as the best reflection of the market reality in terms of valuing the underlying instrument and the interest that accrues over the life of the instrument.

13.24    Property income flows also include imputed flows relating to life insurance, pension funds and non-life insurance operations. Three distinct categories of such flows are included in the sectoral income accounts:

13.25    Imputed interest from life insurance and pension funds to households is recorded as the current income earned by statutory funds on behalf of policyholders. This income mainly comprises interest (adjusted for FISIM) and dividend income earned by the funds, but it also includes net rental income earned on real property such as office buildings which are owned by the statutory funds (separately constituted long-service leave boards are also included with these funds). In effect, the net increase in policyholders' equity in the funds (excluding capital gains and losses) is regarded as being transferred from the funds to households and is also recorded as an imputed flow in the sectoral financial accounts from households back to the funds (recorded as Net equity of households in reserves under the category Insurance technical reserves).

13.26    Premium supplements are recorded as an imputed property income flow from non-life insurance corporations to policyholders. Premium supplements represent income earned on the technical reserves of non-life insurance corporations, which consist of unearned premiums (most premiums are paid for a full year in advance) and unpaid claims (which arise because of delays in finalising the payment of claims). Premium supplements do not include any income from the investment of insurance corporations' own funds. The interest component of the investment income is net of FISIM.

13.27    Imputed interest from the general government sector to households is recorded on account of the unfunded superannuation schemes operated by the general government sector.

13.28    In Australia, most governments operate, or used to operate, superannuation schemes that are unfunded or only partly funded for their employees. Some general government schemes have one component funded through direct employee contributions, and another (the employer's contributions) which is unfunded. Other general government schemes comprise only an unfunded employer component.

13.29    In the ASNA, the increase in the liabilities of a public sector employer due to the current services provided by employees covered by unfunded superannuation schemes must be imputed. Public sector accounting standards specify how such imputations should be calculated.

13.30    The value of these imputed contributions is estimated as the amount which the employer would be required to pay into a separate superannuation fund if the scheme were to be operated as a fully funded scheme. The general government employer does not transfer the imputed contributions into a separate superannuation fund, but instead effectively borrows this amount and should therefore pay property income on the outstanding liability of the unfunded scheme. Consequently, a further imputation is included in the income accounts of general government and households for imputed interest on the accruing liability to pay unfunded superannuation.

13.31    For the purposes of deriving the imputed flows on account of general government unfunded superannuation, a notional superannuation 'fund' is created which is treated as a financial asset of the household sector and a liability of the general government sector. Consistent with the operation of funded schemes, imputations are derived for both the employers' contributions to the notional fund and property income on the notional use of the assets of the fund in each period by general government. Only the imputed employers' contributions are included in compensation of employees, government final consumption expenditure and GDP. Both components, however, impact on household and general government saving. This approach ensures that government final consumption expenditure and GDP are not affected by whether general government superannuation schemes are funded or unfunded. The outstanding liability in relation to unfunded superannuation schemes is recorded as a liability in the general government balance sheet and as an asset in the household balance sheet.

13.32    Corporations raise equity capital through the issue of shares, and shareholders become entitled to dividends as a form of property income for having placed funds at the disposal of the corporations. Dividends include all distributions of profits by corporations, whether or not the distributions are called dividends. Issues of bonus shares in lieu of dividends are not included. In the ASNA, dividends are not recorded on a strict accrual basis, with the time of recording dividends being the point at which the share price starts to be quoted on an ex-dividend basis (rather than at a price that includes the dividend). Super dividends occur when the dividends are disproportionally large relative to the recent level of dividends and earnings. They are treated as a financial transaction, specifically the withdrawal of owners' equity from the corporation.

13.33    Dividends payable to general government by public corporations (or quasi-corporations) record that part of the income of public corporations which is paid to general government, whether described by the corporations (or quasi-corporations) as dividends or transfers of profits. Income tax and other forms of taxation are excluded.

13.34    The sectors and subsectors total dividend payable and receivable estimates are used to derive a dividend matrix of the flows of dividends between the various sectors and subsectors of the economy, including the external sector. Rest of the world, general government and public non-financial corporation dividend flows are allocated to their counterparty sector based on annual ratios. The quarterly sectoral estimates are then aggregated up to determine total dividends received and paid by each of the domestic sectors.

13.35    Dividends paid by financial corporations and private non-financial corporations are benchmarked to the annual estimate using data from APRA and ASX100 financial reports. Dividends paid by private non-financial corporations and financial corporations, and dividends received by private non-financial corporations, households and financial corporations are then calculated as the sum of their lower level counterparty information. This matrix represents a balanced system so that total payments equal total receipts and therefore there is no quarterly imbalance.

13.36    Quasi-corporations are unincorporated enterprises that behave as if they were corporations. Quasi-corporations cannot distribute profits by way of dividends because they are not corporations. Nevertheless, the owner of a quasi-corporation may choose to withdraw some or all of the entrepreneurial income of the quasi-corporation. Such withdrawals are the conceptual equivalent of dividends and are distinguished in order to separate the income of the quasi-corporation from the income of the owner.

13.37    Because quasi-corporations must, by definition, keep a full set of accounts, withdrawals of income should be explicitly identified in the accounts. Such withdrawals must be distinguished from withdrawals of funds realised as a result of the disposal of assets, which constitute capital disposal by the quasi-corporation and withdrawal of equity (a financing transaction) by the owner. Withdrawals financed by liquidating large amounts of accumulated retained earnings are treated in the same manner. Conversely, funds provided by the owner so that the quasi-corporation can acquire assets or reduce liabilities are treated as equity injections – there is no concept of negative withdrawals of income.

13.38    Reinvested earnings relate to that component of income that is not distributed to equity and or unit holders in direct foreign investment enterprises, and resident and non-resident investment funds in the form of dividends. In effect, retained earnings are treated as if they are distributed and remitted to investors in proportion to their ownership of the equity in the enterprise or fund and then reinvested by them. They are imputed transactions, with offsetting entries being recorded in property income flows in the income account and the 'shares and other equity' items in the financial account.

13.39    A foreign direct investment enterprise is either a branch (including unincorporated joint ventures) of a non-resident enterprise or an enterprise, either corporate or unincorporated, in which at least one foreign investor owns sufficient shares to have an effective voice in the decision making processes of the enterprise. In these cases, an amount of the enterprise's retained earnings, proportional to the ownership of the foreign direct investor, is imputed as a remittance of property income to the foreign direct investor, even though the remittance does not take place in practice. An equal amount (with opposite sign) is shown as reinvestment of retained earnings, a financing transaction. This treatment is adopted because it is considered that direct investors, through their significant influence on the operations of the direct investment enterprise, are able to determine the level of distributed income and therefore the reinvested earnings of the direct investment enterprise.

13.40    Reinvested earnings on direct foreign investment are measured on the basis of the direct investors' equity share in the gross operating surplus, transfer income and other current income of the direct investment enterprise. Gross operating surplus represents income from the normal operations of the enterprise and does not include holding gains or losses. Earnings of direct investment enterprises are measured after deducting a provision for corporate taxes and consumption of fixed capital.

13.41    Investment income attributed to holders of shares or units in investment funds is shown as two separate items. The first of these is the dividends distributed to investment fund shareholders. The second is retained earnings attributed to investment fund shareholders. These earnings are attributed to the investors as an imputed dividend payment and an imputed purchase of additional equity (reinvestment). This treatment adds to the fund's equity and its liabilities to the unit holders and leaves the investment fund with no saving and increases the saving of the investor. This treatment is adopted for investment funds on the grounds that investors are able to withdraw and reinvest their equity in the investment funds.

13.42    Rent is the income receivable by the owner of a natural resource (the lessor or landlord) for putting the natural resource at the disposal of another institutional unit (a lessee or tenant) for use of the natural resource in production. The resource rent is applicable for rents on land, native standing timber and mineral and energy resources. Note there is a distinction between rent and the rentals receivable and payable under an operational lease. The latter are treated as sales or purchases of services whereas the former is property income.

13.43    Rent on land is recorded as accruing continuously to the landowner throughout the period of the contract between the landowner and tenant and is equal to the value of the accumulated rent payable over that period of time. The owners of mineral and energy resources, whether private or government units, grant leases to other institutional units permitting them to extract deposits over a specified period of time in return for the payment of rent. These payments are commonly referred to as royalties.

13.44    Property income estimates are derived by constructing matrices of the flows of property income between the various sectors and subsectors of the economy, including the external sector. The matrices represent a balanced system so that total payments of property income equal total receipts of property income. The interest and dividends matrices are by far the largest and include each of the broad types of financial institutions as well as the non-financial sectors of the economy. The matrices relating to land rent and rent on other natural assets are compiled at the institutional sector level only.

13.45    The tables below outline the data sources and methods used in the estimation of annual property income by type of property income in current prices.

13.46    On a quarterly basis, property income estimates are compiled for each sector, including private and public non-financial corporations. The external account is compiled using Balance of Payments statistics.

13.47    The tables below outline the data sources and methods used in the estimation of quarterly property income by sector by type of property income in current prices.