High Income Earner Tax Minimisation Strategies? Property? Other?

someguycalledpaul on 28/06/2018 - 21:19
Last edited 28/06/2018 - 22:02

Hi OzB,

I'm in a very fortunate position to be well remunerated for the work I do. Focusing on future growth opportunities at work (Regular PAYG role) is one way for me to grow my net wealth… but at the other end of the spectrum tax minimisation strategies may drive incremental benefit?

Current Situation:

  • Paying 100K+ In tax as an individual per year, my tax deductions last year were $4K.
  • Mortgage ~5K / mo repayment
  • No Investment Properties, no investments outside of super.
  • Household ATI - $370K+

Questions

  • Hoping to find someone in a similar situation who can explain what steps they have taken to minimise tax, and provide a view of the additional (post tax $) outlay requirements, and the associated risk with the strategies selected?

note:

  • I understand I should seek financial advise, but considering I've had my share of 'bad' financial advice and seen my family get some shocking advice I'm looking to the community to get a perspective.
  • I'm not here to 'boast'. If this is how you read this post apologies as this wasnt my intent.
Financial

Comments

        • bobbified on 02/07/2018 - 18:32
          +2

          @ely:

          Thanks for your time in laying out the details for me.
          Every time I watch the Federal Budget, it seems to be focussed on families with kids (including childcare), and retirees (although the news for retirees isn't always positive).

          Better paternity leave seems to be offered more recently by larger companies so that might be somewhere to look if you need more kids! haha

        • ely on 02/07/2018 - 18:56

          @bobbified: Well, you know politicians are all talk :D The things that would make a meaningful difference, like a family tax threshold, would probably cost them too much - it would be about $15k a year reduction in tax for me (~$300/week), and I imagine that single earner families are pretty common. Even the tax cuts that the Libs are promising in the mid 2020s are only going to save me $7k and that's going to cost them a fortune (although they're hoping wage inflation by then will make it cost a lot less) :D

          That said, they do hand out a lot of cash to families, it's just cut off at a pretty low level of income for things like FTB. Given the insane cost of childcare in this country the subsidies that they hand out for those must be pretty staggering and you've got to earn a hell of a lot (like OP) in order to not get a lot of cash out of that if you're sending your kids to childcare (although you've also got to be forking out a lot of your own money for that).

  • Telcius on 29/06/2018 - 16:15
    +7

    You're looking for a Legitimate tax minimisation options as an employee? you're options are somewhat limited:

    • Superannuation - as mentioned already you'll be close to the cap from mandatory employer and div 293 would apply;
    • Work related expenses - You'll need to spend a dollar to save 47 cents so whatever that benefit you get from that deduction should be more than the 53 cents.
    • Salary Sacrifice - does your employer offer this for you?
    • Negative gearing - You should seek your own financial advice but in my opinion negative gearing investments(securities or property) primarily for a tax benefit is stupidity.
    • Donation to DGR - self explanatory
    • blackfrancis75 on 02/07/2018 - 11:38

      in my opinion negative gearing investments(securities or property) primarily for a tax benefit is stupidity.

      Could you elaborate on this?

      • MercSal on 02/07/2018 - 11:54
        +5

        Not the poster, but Neg Gearing is just recording a loss on an investment i.e renting a house out for less than you pay in loan repayments on the said house. Unless you do it as part of aggressive capital gains growth strategy, it's pretty stupid to lose money just to save tax.

        • burgermaniac on 02/07/2018 - 18:13
          -1

          Yes but you have the house at the end on it? Which in Sydney can be sold for millions.

        • josho9 on 02/07/2018 - 20:05

          The point is that 1) you are betting on capital gains (which you are effectively leveraging); and 2) you are often deferring the point of realising those capital gains until after you retire, so they are taxed at a lower rate.

      • username1 on 02/07/2018 - 11:59
        +1

        Because you’re essentially spending $1 to save $0.40.

        Say you pay $100 interest to the bank, you claim negative gearing and get back $40 from tax. You’re $60 worse off than if you didn’t bother doing anything.

        Sure, you’ll get a tax benefit, but your overall amount of money will be less than if you just didn’t bother (looked at purely from a tax benefit perspective, ignoring whether it’s a good investment, etc.)

        • ely on 02/07/2018 - 14:20

          Sure, but most people are doing it with the expectation of future capital gains. The expense is 100% deductible, while the gains are only 50% taxable and because you have control over when the capital gains event occurs your can plan to have them at a time when your taxable income is already lower for whatever reason.

          It's a stupid system that should be done away with, but it's not stupid to take advantage of it. I do hope that the property market crashes and leaves the (profanity) that do smashed though.

        • username1 on 02/07/2018 - 17:17

          @ely:
          The point is that it’s in people’s interest to get out of needing to claim negative gearing.

          You’ll be better off being positively geared, so using negative gearing as a way to pay less tax doesn’t work.

      • Telcius on 03/07/2018 - 13:31

        I don't believe negative gearing shouldn't be the significant motivating factor to invest.

        Best advice I ever got was'good investments should create tax problems, not solve them'.

        Not saying don't use it or that it's a bad thing (I have used it myself), just that it shouldn't be a primary consideration in most cases. Don't forget Negative Gearing literally means you're losing money. I cringe whenever I hear someone say we invested so we can use negative gearing. You should invest because you think it has a good yield, will appreciate in value, you want to preserve wealth for the next generation etc.

        • blackfrancis75 on 05/07/2018 - 09:28

          But this is the mentality that's been created by the current policy - people hear about how Negative Gearing is an "unfair" advantage for people who are rich enough to afford to use it, so they're desperate to jump on board for FOMO. As long as they're leveraging this great tax break, they're mimicking the investment strategies of the 1%. Property values never go down, right??

  • MustacheFire on 29/06/2018 - 22:53
    +2

    Do you have any savings? Step 1 accumulate some.

    In your personal name, the best you can probably do is a negatively geared property investment. Will reduce your tax - but you need to have confidence in capital growth to make it a worthwhile investment over time.

    If you are saving a material amount of money, then set up a family trust through an accountant. Earnings on investments in the trust can be directed to family members to minimise tax. Over time, the assets in the trust will accumulate and earnings will be material compared to salary. But with much greater flexibility on tax outcome compared to your salary.

    This isn’t financial advice - talk to a planner / accountant

  • skywards on 29/06/2018 - 23:47
    +2

    So you are paying 100k in tax and you have zero investment properties? What are you spending with your take home pay?

    • someguycalledpaul on 30/06/2018 - 21:29

      aggressively repaying PPOR currently.

      • dufflover on 01/07/2018 - 13:52

        What is your cost of living? Like fancy cars or regular holidays? (Nothing wrong with enjoying life btw)

        Just wondering because I pay more than 5k into my mortgage (aggressively paying it off like you say) with far less income than that. Of course I'm very stingy too generally lol

  • Skramit on 30/06/2018 - 19:50
    +1

    Interest only investment loans for shares, property or both.

  • AustriaBargain on 30/06/2018 - 20:43
    +4

    If you paid all of your money to me and marked it as an expense, then your tax obligation for the money would be gone. I am willing to do this for you.

  • goraygo on 30/06/2018 - 20:54
    +2

    I see a lot of people say salary sacrifice.

    For instance, if you already have a car that is acceptable to you, salary sacrifice for a new car for tax reduction is not really worth it. You ended up paying more than maintaining your current car.

    • easternculture on 30/06/2018 - 20:58
      -3

      If you are on the highest tax bracket, then a novated lease packaged to your salary is a more wise option

      • kingmw on 30/06/2018 - 21:29
        +3

        Still spending money to save 48.5% back in tax. If he doesn't need a new car then it is not worth it.

        • someguycalledpaul on 30/06/2018 - 21:31
          +17

          agreed. my current car is worth about 2k. It works. #ozbargain-spirit

  • lukelegend on 30/06/2018 - 22:12
    +33

    I’m in a similar situation as the OP, but I’m self employed.

    I currently put 25k into super, 37k drawings to myself (wife has government job which we live on), kids get 18,200 each for “working” in the business, the rest goes into a parking company and pays 30% tax.

    I have a family trust with corporate trustee runnng the business name, I also have a seperate company purely to hold the excess funds to later use in retirement ect. The 30% tax is already paid, so I just pay the top up tax if i Withdraw it later.

    I also have 1 investment property that i use for depreciation on the wife’s side, and also some shares. I have a 75k car that I chattel mortgage with 3 year loan and no bubble to max out the repayments and sell privately every 3 years for cash.;)

    We own our home outright already. So can live off our incomes very well, but being a tight arse, I love oz bargain :)

    • burningrage on 30/06/2018 - 23:06
      +2

      Why the neg? Neutralize!

    • whirlpool_guy on 01/07/2018 - 00:41
      +1

      Is family trust expensive to run? Who should consider it?

      • lukelegend on 01/07/2018 - 02:33
        +6

        The family trust is so I can distribute the income the business makes to myself, family members, company etc. I’ve had it a while so can’t remember what it cost to set up, but it wasn’t too much. The company trustee is for asset protection in case of law suit etc. we have another property trust but that’s a seperate story.

        I pay about 5k a year for an accountant to do all my tax returns for the companies, trusts and personal returns.

        If you trade under a family trust you can distribute the income the business makes so this means you can reduce the tax margin you would normally pay on the profit

        If you trade under a company you can’t distribute easily, I guess you would have to put people on payg but then have to pay super etc etc

        If you trade as a sole trader you can only pay yourself the profit and get taxed on the whole lot.

        Hope that makes sense

        • kingmw on 01/07/2018 - 10:03

          There are PSI rules so setting up a family trust may not alter how much tax you pay.

          Companies have to distribute their dividends (profits) according to share ownership (i.e. 10% of shares gets 10% of the dividends) so makes it harder to distribute to individual tax thresholds.

        • Telcius on 01/07/2018 - 18:11
          +1

          @kingmw: Just have a family trust own the company shares so you can stream the dividends if/when you pay them.

          I have seen a lot of PSI income streamed, because either their accountant doesn't understand the rules, or just doesn't worry about them. I've never heard of anyone being penalised for it though.

        • lukelegend on 01/07/2018 - 19:53

          @Telcius:

          Just have a family trust own the company shares so you can stream the dividends if/when you pay them.

          Exactly what I have set up and never had an issue

        • kingmw on 01/07/2018 - 22:02
          +2

          @Telcius: I'm certain it is illegal to stream PSI income through a company/trust to reduce your tax or allow more deductions. This comes under the condition called GAAR rules (General anti-avoidance rules). However the ATO has to audit you first to know but they can come after your tax returns for the last 7 years.

          https://www.ato.gov.au/Business/Personal-services-income/In-…

        • lukelegend on 01/07/2018 - 22:10

          @kingmw:

          I'll have to look into this, but i have very little PSI income so this wouldn't affect my situation.

        • Telcius on 03/07/2018 - 13:39

          @kingmw:

          No doubt its against the rules - and i don't advocate streaming PSI.

          I was just saying I've worked in public practice for 15 years and heard/read about people getting caught for FBT/Super/incorrect trust deeds and dozens of other things but I've never heard or read about anyone getting pulled up over streaming PSI.

          Not sure if that's because its hard to pick up, hasn't been a focus for the ATO or I just skipped the correct articles. Although you could probably find some cases on google without much trouble

    • AustriaBargain on 01/07/2018 - 04:30

      Why put so much into super, and not invest some of that money into your own business (which is yourself)? You don't believe your business is worth investing in, you think the super with the Australian government 40 years from now will be a safer bet? As a self employed person you aren't obligated to put any of it into super iirc.

      • lukelegend on 01/07/2018 - 19:55

        Yes, this is probably a good option also, but I have very little time as it is. I used to do that but found myself just spending the money rather than investing it.

    • locknuts on 01/07/2018 - 12:19

      This guy gets it.

    • dajackal on 01/07/2018 - 19:28

      Best reply so far. Just wondering when you sell the car for cash do you need to account for it on the books or is it effectively fully written off by then?

      • lukelegend on 01/07/2018 - 19:57

        The trust still owns the car, there is a value placed on the car at the end of the 3 years after depreciation etc. it's usually pretty low and when selling the car I usually get more that the value the accountant puts on it, you are meant to put it back into the trust and it will see it as extra income i think. you can always pocket the excess balance etc ;) but i'm no accountant.

    • CalmLemons on 01/07/2018 - 20:30
      +1

      Yes, this is the best reply and we do the same thing too. Unfortunately the OP is PAYG in which his real only option is to negative gear, buy properties under companies/trusts develop etc and then pay the tax out up to the 30% parking company tax.

      Unfortunately, the above would probably take up a lot of the OPs time.

      • Hirolol on 02/07/2018 - 05:08

        What’s a parking company?

        • lukelegend on 02/07/2018 - 10:11

          Just a company setup to recieve funds from the trading family trust. a company is a seperate entity so trust distributions can be paid to the company to hold onto and reduce your taxable income as companies pay 30% tax.

        • onevstheworld on 02/07/2018 - 11:56

          It's the same as a bucket company.

          If you take money out for your own use, it will attract the difference between your tax rate and the company rate, so it technically is tax neutral. But it does lets you defer your tax liabilities to a time of your choosing (e.g. after you retire and have a lower/no taxable income)

          It does add a lot of admin headache though

    • 1Kenobi on 02/07/2018 - 22:03

      How do the excess finds get transferred into the seperate company ? Via a franked dividend?

  • freakatronic on 30/06/2018 - 22:32
    +2

    Remember to claim a pair of work boots per year, laundry, and a pair of expensive sunnies.

  • Hksmaso69 on 30/06/2018 - 22:57

    All you need to do is buy a farm tonight and say you lost $100,000 overnight because farms dont make profit

    • AustriaBargain on 01/07/2018 - 20:04
      +2

      A church is also a good investment opportunity. You can pick up a church with a few hundred paying members on the books, hire a new preacher to bring in more people and reward members who bring in some whales with some face time. You can spin it off into a private school in no time at all, where even more rules won’t apply to your religious endeavour.

    • Smulder on 02/07/2018 - 09:59

      You can't claim a business loss against your other income if your taxable income is over $250,000.

      • h4zey on 02/07/2018 - 12:46
        +1

        the question is, can you even claim business loss against your other income even if your taxable income from other is lower than 250k

        • Smulder on 05/07/2018 - 13:45

          If you pass one of the four non-commercial loss tests, then yes you can.

      • kingmw on 02/07/2018 - 16:33

        Can only claim a business loss against your business profits not against your salary. However you can carry losses over to next financial year until you make a profit or the business winds up.

  • [Deactivated] on 30/06/2018 - 23:04
    -1

    Ask your employer if they can shift you from PAYG employee to PTY LTD.
    Seems like many high salary paying jobs are offering this option these days.
    Then do everything what already commented above.

    • May4th on 01/07/2018 - 10:41
      +1

      PSI rules means in most salaried jobs it's not feasible as ATO hs closed a lot of loopholes around income splitting

  • Cheap Steve on 30/06/2018 - 23:07
    +2

    Agricultural schemes were very popular in the nineties and noughties until the GFC did everyone a big favour and wiped them out. Anyone remember Timbercorp?

    Also remember movie schemes back in the day like Crocodile Dundee, Reckless Kelly and Lightning Jack.

    So much money has been lost spending $1 on dumb investments to get 50 cents back.

  • redslert on 30/06/2018 - 23:35

    Very consistent replies above, for high income employees there is nothing much you can do to minimise tax.
    Negative gearing is the only option, but it means you will need to be responsible for a larger loan while only saving maybe a few percentage points from your tax rate… more headache with paper work and tenants to deal with.

    • congo on 02/07/2018 - 01:16

      But you will have capital growth, which definitely has been worth it in recent years.

  • prozerran on 01/07/2018 - 00:10
    +3

    Being a PAYG and not self employed then you can't take advantage of possible income splitting (or sharing with othe adult family members - kids will pay very high rate of tax above minimal threshold).

    The main way you can 'reduce' tax is to make investments under the lower income member (ie your wife) so income/capital gains tax is lower. Eg buy shares/managed funds under her name.

    Yes you can borrow for investments under your name for shares/property, but dont just borrow for the sake of a tax deduction (as you only get 49c back for every dollar you pay)- make sure your investments are sound. If you are not confident then get advice or get the professionals to do it for you eg managed funds or even etf. Property is a little harder.

    Super is good but you are probably near your maximum level- so make sure you stay under your concessional level or else there will be severe penalties (and you prob would pay 30% tax due to earning over 300k). And honestly you probably dont want to wait for the cash until you are 65.

    Yes you are doing the right thing and reducing your non dedectible assets such PPOR(main house).

    Unfortunately there is no magic way to avoid a high rate of tax. Be careful of what most of the people on this forum suggest.

  • Shiny Mew on 01/07/2018 - 09:20

    What do you do for a living? Property developer, business owner or salesperson?

    • someguycalledpaul on 01/07/2018 - 09:39
      +17

      I really dont understand why people think like this. Look at the diverse input I've received? Alot of it very helpful in proving some context and recommendations. I'll use this and continue my own research, prior to engaging someone for "professional" advice.

      • CheapSticks on 01/07/2018 - 10:14
        +8

        Just ignore comments like that mate.

      • SeVeN11 on 01/07/2018 - 11:39
        +2

        Best advise is your own research.
        I've talked to professionals and I have not found a good one, or end up handballing me to a random graudate or they are just don't know what they are talking about.

        I've done a lot of research in this field because and hate it when I know more than the advisor, have to point them to the tax code or tell them about a tax ruling. Worse ones are when all they want to do is tell you things you can buy yourself at high cost. It's like selling me milk for $10 when I know I can buy it for $2. It will work for people who don't know what milk is, but there's always someone gullible or vulnerable.

        PS: no advisor I've visited have ever recommended I invest in a low cost index fund because they don't make commission or get paid from that advise.

        PSS: I think you're doing the right thing by researching in this method.

      • echelon6 on 02/07/2018 - 10:54
        +1

        Also professionals you would pay 2k to, for a chat and a follow-up email, don't know shit. Why would you take advice from someone who is, in all likelihood, worth a tenth of what you're worth? Take advice from those who have done what you're trying to do.

        I would consider someone an adviser if they're self-made and worth millions. Anyone else purporting to be an adviser of some sort is just a modern-day insurance salesman.

        And I agree with the above poster - places like here are full of hidden genuine talent. Probably more so than the adviser floor of CBA lol.

  • DD91 on 01/07/2018 - 09:42

    Investment Property. Buy in an area where yield is low - negatively gear - offset losses against PAYG income. Consider an I/O loan to max tax savings. Be mindful doing this in an over-saturated market where growth potential is non-existent.

    SMSF - Speak to an account/wealth planner as setting up one yourself can be mind boggling. Remember if you're rich OPT (Other Peoples Time), OPM (Other Peoples Money)

    Charity - More you give the more you get. Consider monthly payments to charities.

  • bad hombre on 01/07/2018 - 09:57
    +3

    Most loopholes have been closed up over the years. If you own a business that makes a bit of cash then a trust structure may help distribute income between family members to minimize tax but it costs money to administer and report on. Best paying for advice than asking on here. Any advice should he taken as opinions and paraphrasing readings as most won't be qualified to give advice.

    I don't like negative gearing as a concept, would rather earn passive income and pay tax than lose money to gain a tax rebate. I've been taking lower paying and easier jobs as my passive income goes up - frees up a lot of time, still find myself time poor so how couples working full time with kids and manage everything without help is beyond me!

  • minotaurian on 01/07/2018 - 10:15

    Insurance Bonds, you deposit your post-taxed earnings, on withdrawal, you will receive 30% tax offset of the deposit, hence 15% goes into your pocket. The kicker is by Waiting 10 years and boom, no CGT tax as well on profits. The catch, the max deposit every year is 125% of the following year. So if you want to put lots of money in insurance bonds, you need to have lots of saving lieing around.

  • gr70 on 01/07/2018 - 10:38
    +3

    At $4k deductions with what you have described - as a salary earner - you are doing well already … where do these deductions come from?

    Prior to Kevin Rudd, probably the best way was to have a second business - eg a farm - that you ran at a loss with the losses incurred contributing to the capital value (so long as the ATO didn't refuse the deduction saying it was a capital cost - eg, you would say it was fencing repairs, not building a new fence) and then sell at a profit down the track with the CGT discount - this was a way that you could convert otherwise highly taxed income to a capital gain in a tax effective way. But, under the Rudd govt this was changed so that it is now only available to people making less than $250k. It was changed for this very reason - the ATO look at the data of high income earners to see where the deductions are hurting them and then close the "loophole". Now you can only carry losses forward to claim against actual profits.

    I would be happy if they brought in the $2,000 standard deduction because aside from negative gearing there is nothing else that I know of (although I would like to see the minotaurian solution fleshed out).

    And don't spend too much on professional advice - I doubt they will be able to say much more than maximise your super and put as much as you can into your PPOR and hope for capital growth (the sole remaining tax haven). Would love to be proved wrong by someone with better answers and will accept any criticism once the magic bullet solution is revealed.

  • frostman on 01/07/2018 - 10:47

    How much tax do you pay if you transfer 25K per year to Super?
    i.e how much tax do you pay on the 25K?

    • kingmw on 01/07/2018 - 13:38

      15% usually but >250k income, Div 293 applies and then the tax rate on concessional contributions are 30%

    • onevstheworld on 01/07/2018 - 14:03

      My understanding is; Div 293 means that if you earned $249,999 all 25k of your concessional super contributions are taxed at 15%. If you earned $1 extra, then all of a sudden that same 25k is taxed at 30%. It's pretty abrupt.

  • echelon6 on 01/07/2018 - 10:53
    +6

    There are SO many laws designed to f over people like you - high earning PAYG middle class. Your class of people are who's paying for the bulk of our social spending. I run a small biz and I have so many more options (legal + illegal but all of which I have plausible deniability / can reasonably get away with). You really have 0 options. Here's all your options considered:

    1) super sal sac? already talked about above - your 9.5% already hits the concessional cap - any further and you actually end up paying ECT
    2) negative gearing? pffft yeah lose money to save on tax, great plan
    3) and some have suggested you should incorporate into a pty ltd - read up on Personal Services Income rules - you're trapped

    You're so trapped.

    Doctors, lawyers, etc. Study hard, work hard, climb the ladder, only to get reamed.

    Realistically, save like crazy, put savings into investments inside family trust, use trust to divert income to lower income family members, maybe consider point 2 - some properties are worth negatively gearing.

    • Skramit on 01/07/2018 - 15:41
      +1

      I agree in spirit about high income earners getting screwed over with high taxes, but point 2) is incorrect.

      Negative (or positive) gearing is a fantastic way of minimizing tax and investing at the same time. It doesn't just "lose money" if you invest wisely.

      • echelon6 on 02/07/2018 - 10:51
        +1

        Negative (or positive) gearing is a fantastic way of minimizing tax

        So, basically, everything? lol

        I know what you tried to say. But I disagree. CG should never be considered guaranteed, it's always a gamble. I would never invest in something that costs me to hold, in the hope of CG.

        • Skramit on 02/07/2018 - 11:01

          So, basically, everything? lol

          Not everything, no.

          it's always a gamble

          Not at all. Don't fall into the common trap of confusing risk with gambling. They are not the same. Gambling relies on pure luck (depending on the game). Investment risk is a sliding scale and you can minimise risk if you invest properly with solid foundations.

          That's why it pays to do your research and invest wisely. Investing is not gambling if you get good advice, do your research and invest in the right assets at the right times. And knowing when to sell as well helps too.

      • TheOtherLeft on 02/07/2018 - 12:08

        I'm sure those who invested in property related to the mining boom thought they were on a sure thing. Of course many won big but those who stayed in too long also lost big.

        • Skramit on 02/07/2018 - 12:26

          Very true, but investing in shares or property is never set and forget. Investments should be monitored and changed with the market where necessary.

    • bizarredeal on 01/07/2018 - 22:50
      +3

      Couldn't agree more.

      Also if you want to be a hardworker in oz and look for a second job - you come worst off.

    • lainey13 on 02/07/2018 - 00:18

      This is not middle class.

      • echelon6 on 02/07/2018 - 10:48
        +3

        What it is is someone who's done well at school and uni, and have made no major mistakes with degree choice / career choice, and has done what they ought to have done throughout their 20s and 30s, and is now a late 30s / early 40s senior-middle manager. This is what I call 'average amongst the above average'. It's not too special in today's society. It is middle class.

        • lainey13 on 02/07/2018 - 13:47
          +1

          It's not too special but you are still ignoring the MAJORITY of Australian society.
          Mean income for 2015-2016 was $47,692. Another figure is Full-Time Adult Average Weekly Total Earnings in November 2017 was $1,628.10 from the ABS. ($84661.2 for 53 weeks)
          Stop suggesting that a household earning over $300k is "middle class". In your world maybe but it really isnt the case in the world of statistics and majority of Australian households.

        • sator on 02/07/2018 - 16:32

          @lainey13: You're absolutely correct. The household income should be lowered to $200k to be considered solidly middle class. Any more is upper-middle.
          '$84661.2 for 53 weeks' is comfortably poor. I would hardly consider that as middle. Middle probably begins at $120k.

        • echelon6 on 02/07/2018 - 21:47
          +3

          @lainey13: Mean includes people who ought not be included. Consider this analogy - finding the mean speed of marine animals, do you include shellfish? jellyfish? My point is, many people aren't even trying. OP obviously has worked hard to get to where he is today, he obviously values material success, he tried / is trying his best, it mattered / matters greatly to him, and I can assume similar values are important to him in spouse selection. What about the people who decided to (profanity) around in their 20s, finding themselves through travel, or a flashy financed car, or drugs etc. What about the young mum of 5 who just really wanted lots of kids in her 20s, but 10 years later she's struggling to make ends meet. I don't know - maybe I shouldn't call it middle class, maybe I'm thinking of a different concept that is yet to be labelled, but we'll call it 'mean amongst those who cared' - then yeah, OP is normal. Back to my analogy, fish only.

        • Zachary on 04/07/2018 - 20:26

          @sator: Man if I was earning even $84661.2 a year, I'd be rich!

          SO I guess less than 120k a year is low class? Geez… I wonder how many are low, middle and high class citizens?

        • engineeringprof on 05/07/2018 - 16:39

          @echelon6: totally agree with this. See so many slouchers in their 20-30’s

  • SeVeN11 on 01/07/2018 - 11:28
    +10

    Firstly great job! I think people in your situation need to be praised more so others will look up and try and achieve what you have achieved.

    If your intention is to increase your networth I would go and invest in random things just for the sake of deductions.

    Do what you can on deduction with your accountant etc. Max superannuation, novated lease(most probably better to pay it with cash as it's most probably not worth your time trying to save cents when there's dollars around to be picked up… Unless you have an expensive car), Home office, mobile,internet, etc. But it will be limited.

    The worst thing you can do now is to debt up if your income source is not guaranteed for more than the term of the debt. ie. If you lose your job or interest rate goes up 2-3% and you already purchased 5-10 investment property today, it will destroy you…

    My thoughts are I don't think you should focus on deduction and you should focus on capital allocation instead.

    1) you most probably have a mortgage of $1-1.5m which you could most probably repay in 4-6 years if you are discipline. If you allocate tour savings the return is ~4% (your interest rate) this is after tax savings

    2) you most probably don't have time to focus on investment/investing given your job and want something pretty easy to manage. I recommend low cost index fund. Warren Buffet has been saying this for many decades. Just buy VAS from the ASX it's a low cost index fund run by vanguard. It is equivalent to the asx300 and has a historical dividend rate of 4% with 4% captial growth. It's super easy to do your taxes as everything is electronic.

    If you are older you might like this reference if you are younger you might prefer this. Else Google low cost index fund investing.

    3) If you have a husband/wife, I would buy it in their name as their marginal tax rate would be lower than yours. Alternatively you can set up a trust (I would not prioritise this as it will become an excuse to not start) to hold all of this and have flexibility to distribute the income to family members (if you have children etc. Or family member don't mind helping you). This will be your marginal tax rate savings which is very high returns if your other 1/2 does not work. If you think about it if you had $100 sitting in your bank account, you earn $2 and ATO takes $1. If this money was in your husband/wife name who has no income, ATO takes nothing.ie you earn $1 or 100% more.

    ie. Dumb thing to have money joint accounts.

    4) increase your savings rate i.e. spend less money. This really depends on how old you are.

    Basically the aim is to funnel all your earnt income and reallocate it to build a portfolio (say ASX:VAS) and forget about it. Pretty much what your superannuation is doing.

    If and when you get more after advanced and comfortable you can put other stuff in your portfolio, like property, bonds, businesses, gold, art, cars, etc.

    If you have more time go research property, but keep in mind there's been changes to depreciation and may not be as generous as before as a tax deferment strategy. It just takes more time to research, learn, execute and maintain a property transaction.

    Its a 2 step program (after you do some homework and get comfortable with this method)
    1) go online and open a share trading account under you husband/wife name
    2) buy ASX:VAS

    If you can't do that, it might mean subconsciously you are not ready.

    FYI. I've been doing this for a while but started with property first and now moving to the low cost index fund. For me I find myself more comfortable with property and really need to step up my game. It's a bit different to know you have $1m in a property vs $1m in ASX:VAS… But I'm getting there.

    Good luck.

    • bizarredeal on 01/07/2018 - 22:41
      +1

      Hi. Very nice read. Thanks.

      Did you mean:
      If your intention is to increase your networth I would NOT go and invest in random things just for the sake of deductions.?

      What are the differences in property and shares?

      Correct me if I am wrong. From my understanding:
      Both if gains capital will end up paying CGT when sold. Both have income source. Dividend payments and rent.
      But property can help with offsetting tax (depreciation, interest) while shares cant?

      Can you please share your thoughts?

      Also you have mentioned VAS heavily. Why is it a good buy at $80. Do you think it's a upward climb only?

      • SeVeN11 on 02/07/2018 - 19:49
        +2

        yeah forgot to write the NOT :)

        For a beginner with no time and don't really want to think, property has so much more opportunity for people to make excuses to actually begin.

        Benefit of property is borrowing at 80% without a margin call.
        The cons are: you have to deal with tenant, property manager, trades, depreciation schedule company, strata manager, other owners of the strata, insurance companies, water corporation, local council etc. In addition, you have to track everything from each of these sources for taxation. There are so many points of decisions and paper trail. If you are not discipline in paperwork you won't accumulate more than a couple of properties because it's such a pain in the butt.

        Most property are yielding 3-4% gross yield, net of all the expenses its most probably 1-2%.

        With shares, if you choose to borrow you can also claim interest and all related expenses such as brokerage and other expenses. The dividend rate is also the net dividend yield and its usually fully franked. i.e. its' net of all expenses and even taxes to a large extent.

        Regarding depreciation, it's true there is there is no direct depreciation in shares, but with the changes in the tax rules on depreciation on property where you can no longer depreciate plant and equipment until you physically bought it. i.e. renovation/construct the property. it closes the benefit quite a bit. Keep in mind depreciation is a tax deferring strategy. i.e. it reduces your cost base and you end up with more capital gain at the end which you will have to pay the tax. This is not so obvious to the novice.

        if direct depreciation is the only reason why you buy a property, that's a bad idea. Negatively gearing means you're losing networth.

        Keep in mind the ASX:VAS is a collection of the top 300 stock on the ASX. These companies do depreciate, the dividend you get is net of all those things. They also deal with all the supplier/customers accounting etc. This is the most stress free paperless investment you can make.

        Also, property is actually yielding 1-2% net of operating expenses and interest expense while the index is 4-5% (after franking credit) net of operating expense and interest expense.

        The biggest benefit that I see with share is if you can't get off you butt and
        * click a few buttons to fill out the online application form,
        * take a few photos for 100 point ID check and email it the online broker
        * send some money to the account
        * click a button to buy the stock
        ….then you're not ready to invest full stop. If you have an excuse for doing all the above steps, then there is no way you are going to succeed in property investing or anything else… it will be significantly more time consuming and comes with a lot more challenges. In this case, its best to just put all your money into superannuation and term deposit and forget about all this.

        To get to most probably the most important question you've asked….
        "Do you think it's an upward climb only?"
        NO, I do not… nothing is. Your superannuation, business, small business, your job, property, shares does not only go upwards. I do believe generally things will get better and hence these things will generally go up in price (at least by inflation) How do I know which one? details below…

        "Also you have mentioned VAS heavily."
        Because of the above, that's why ASX:VAS is a good option (you can find other equivalent if you like, this is just a starting place because its the lowest cost index fund you can get). ASX:VAS is made up of the top 300 stocks on the ASX and its currently heavy weight in the Banks, Resource Companies and Consumer Non-Cyclical (i.e. Coles/Woolies). If the Australian economy changes, the index will also adjust accordingly. i.e. I don't need to think about what the market will be like in 10, 20, 30 years time. All the Banks might die and the Australia market could be made up of tech companies… who knows… but I don't think the do anything to adjust. If a company dies, it drops out of the top 300 and its replaced by something new and rising. The index has an upward bias to weed up companies that dies and include companies that grows.. Plus all the CEOs sitting on those companies have big fat bonuses riding on their stock price going up so they'll do whatever it takes (rightly or wrongly)… because they are so big, they are kind of above the law. Look at all the Royal Commission stuff right now… I doubt anybody is going to jail or will be individually fined… all those companies will just a slap on the wrist with fines which they've already provisioned for.

        If you bought a bad property, or franchise, or single stock, or anything you're screwed… You can think its your skills that made you pick the right thing, but I suspect its luck unless you can scientifically prove it. I know I thought I was the smartest person in the world picking things, but looking back… what I picked went up, but so did everything else and some of them went up a lot more… so who's to say I was that smart apart from the fact that I decided to allocate my capital somewhere. If I put in anywhere 10 years ago it would be fine regardless

        "Why is it a good buy at $80?"
        I don't care about price, it might drop by 50% tomorrow or the day before you decide to retire. That's really luck… The funny thing with this question is nobody ever ask this when ~10% of their income goes into superannuation. Superannuation just buys the equivalent of the ASX index at any price… they don't ask for your permission.

        • bizarredeal on 04/07/2018 - 15:52

          Thanks again. Good bit of information to start venturing out and testing the waters.

    • abb on 03/07/2018 - 09:33

      1) A200 is a new ETF that appears to be better value than VAS (although only 200 instead of 300, so either one is a fair call).

      2) International diversification dawg. VGS, VTS/VEU, anything. Don't go all in on Aus.

      3) it's "net worth", not "networth".

    • Unified on 04/07/2018 - 00:02

      Hi SeVeN11,

      Very well explained and I am on the same path to ASX200 Shares however not on ETF yet. Currently looking to sell off some of the shares I have within Super and planning to buy ETFs. Was thinking of A200 however now need to rethink since I read yours.

      Currently I have portfolio of shares from ASX200 within Super through direct purchase for dividend paying. And a small portfolio outside super with a retail broker platform for growth shares. Thinking of winding down all super direct shares into ETFs like VAS or A200 and outside super continue to topup with growth shares.

      Your thoughts?

  • gr70 on 01/07/2018 - 12:08
    +2

    I might just add that my advisor says just put more into super - regardless of breaching the concessional cap, because once its in there is still preferential tax treatment. His advice was that there is basically no other way - keeping in mind (I think) that if you do want to purchase property, you can still do that through super and get the negative gearing "benefit" (and yes, you can't access it till retirement; don't know if you get the CGT discount in a super fund, which you would otherwise).

    To answer frostman's question, if $25k goes in the contributions tax is 30% since he is over the $250 fat cat threshold.

    Paying in after-tax dollars receives no benefit on the way in, obviously, but once there gets taxed preferentially (at 15%) compared to the marginal rate if outside of super. I don't know if the changes last year changed the tax treatment once inside the fund (ie, 15%), but my memory is that the super funds objected to that proposal because it would be administratively difficult for them to have 2 classes of members - some at 15% and some at 30%.

    Even if (and you will) end up with more than $1.6 million in retirement, the tax on the amount not in the retirement account is still concessionally taxed at 15% - so its still attractive.

    Against that, I have a friend who says put all your money in the most expensive home you can afford since the PPOR is the only thing that seems untouchable by both sides of politics. Whereas, super / pensions have become increasingly less concessional for high income earners. (And super was not "invented" by the Labor Party - in the old days you could claim a full tax deduction on money you paid into your pension. High income earners did this. Over time, the concession has been whittled away. The Labor party brought in compulsory super, mainly so that "working families" would have more in retirement and be less of a drain on the old age pension)

    Finally, with the regular changes made, it is hard to keep up with, so please don't accept any of my assertions as to the operation of super without checking first. And even if I am right, there is still legislative risk going forward. But its hard to see that super will be taxed than worse than your marginal rate of tax for income received outside of super.

    • CheapSticks on 03/07/2018 - 10:03

      If you are putting over $25k inside super - for amount above $25k you have the opportunity cost of that capital as well as outside super investment you can still claim CGT discount and borrow ML. So not clear cut.

  • IWoNdEr on 01/07/2018 - 13:15

    Get a good lawyer and advisor in the Bahamas.

  • Apue on 01/07/2018 - 13:20
    +3

    A 250k earner is asking a tax advice in ozbargain? You are asking a real bargain!!

  • iamapineapple on 01/07/2018 - 15:42
    -1

    I might suggest also heading over to /r/personal finance on reddit where they might be able to give you more advice

  • Skramit on 01/07/2018 - 15:44
    +2

    Using the equity in your home, take out an investment loan to buy shares.

    Buy decent yield blue chip, slow steady growth shares.

    Reduce you tax with the interest payable on the loan. The dividends in the current market should just about cancel this out. Enjoy capital growth.

    Also see a stockbroker and pay for quality advice, don't dive in by yourself.

    • CheapSticks on 01/07/2018 - 16:27

      do you have any stockbroker you can recommend?

    • bizarredeal on 01/07/2018 - 22:45

      Sounds interesting. Why isn't many people borrowing to buy shares and offset the interest against personal income?

      Does it have to be a marginal loan? Or can it be just an investment loan?

      Can you please share your thoughts?

      • Skramit on 02/07/2018 - 08:44
        -1

        Because many people don't know you can do it. It's certainly more risk than an investment loan to buy property which is more of a slow burn, but it's almost always higher return with a balanced portfolio. Also the funs are liquid so you can sell the shares and close the investment loan much more easily than an investment property if you need to close it down. or you can sell half or a quarter etc. It's more flexible than property in that way. Property is a bit more set and forget for 10+ years, plus can be more of a hassle with all the landlord addons :D

        You don't need a margin loan which are even higher risk, you can essentially take out an investment loan like you would for an investment property, but buy shares instead. The alternative to a new, separate investment loan facility is to split your offset account into a separate offset account and draw down on that to get a better interest rate. This just takes a bit more effort to calculate the interest claimable, but no big deal if it's separated out properly.

        Common Scenario:

        Home Value: 800k
        Home Loan: 400k
        Take out investment loan of 100k @ 5% interest
        Total debt 500k

        Buy 100k of shares with approx 5% yield. Income ~5K per year. Interest 5k but it's tax deducible.

        Put all profits into your home loan and pay down your home faster.

        After 5 years:

        Home Value: 880k (10% growth)
        Home Loan: 300k
        Shares Value: 120k (20% growth)

        Take out 100k more investment loan.

        Existing shares hopefully work say 120k.

        Total 220k in shares.

        Total debt remains 500k

        Rinse and repeat etc…. This is a long term "wealth building" strategy so you get a 50% reduction of CGT if you hold shares for over a year. This is not ma quick wins strategy. you also need the balls to be able to ride out the lean periods on the stock market, as there are far more ups and downs than property. if you're a panic seller, this is not for you.

        Some people also take out a line of credit and use that to pay the interest only loan, and the line of credit interest payable 'may' be tax deductible. ;) Speak to an accountant.

        Note: using random figures for illustration of concept. Your results may vary :)

      • chumlee on 02/07/2018 - 15:14

        Because there could be a stock market correction at any time and you could see your wealth decline on paper whilst stull paying interest on the margin loan.

        Margin lending works really well during crashes so you can load up.

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