What general methods are there for people to reduce the amount of income tax they pay?
I'm aware that there are things that can be done, however, I don't know a great deal about things related to finance and economics.
I work 2 jobs:
Job 1: $80k per annum
Job 2: $30k per annum
Cheers
Currently renting but plan on buying a house when interest rates increase and prices reduce a bit.
the amount the price will increase in the time you wait versus the amount you think will come down in that period may actually be worse off
I am extremely conflicted on this when reading people's comments on house prices.
I've held off for the last two years because people are always saying houses are so overpriced and its going to crash or it has to come down. The last two years, house prices have gone up significantly. Now people are saying that prices should fall because of an interest rate increase. Have no idea when I should consider buying.
@kikm828: buy when you are ready not when people tell when you should buy…
if the housing market crashes as they say, what do you think the % difference would be in the area you want to buy?
don't know where you are, but in places that are in high demand because of schools, facilities, transport, and infrastructure, i highly doubt any down turn in the market generally will affect the property prices in those areas.
like ozbargain, when there is a sale lots more people than usual would jump be interested. it will be the same with property, as soon as there is a whiff of a down turn the people will be out in droves to compete again and drive prices back up again. it's a never ending upward cycle.
don't know where you are, but in places that are in high demand because of schools, facilities, transport, and infrastructure, i highly doubt any down turn in the market generally will affect the property prices in those areas.
Not only that, but why are you buying the house? To flip it in 5 years, or to raise a family over 20+ years?
@kikm828: Have a look at a graph of house prices over time in Australia. There is a pretty solid trend.
@Kangal: Sure, and that's generally pretty good advice. The thing to take from the house pricing over time graph, is that even when there have been periods of instability, high interest rates etc, house prices haven't dumped.
@brendanm: Yet we have never seen interest nowhere this low, ever, so this is going to be interesting going forward.
I feel confident there won't be a housing market crash, but it could be death by a thousand cuts for some people, as prices will first stabilise, then very smallish declines when interest rates start to rise, for years to come. I'd say this is about as good as it gets for quite a while.
@TilacVIP: I agree, some people who are mortgaged to the eyeballs will be stuff d if rates rise. Prices may even to down slightly, I just don't think there will be a "correction", like some are waiting for.
@kikm828: Major city prices are stabilising atm but you can't time the bottom or the top.
If I was a guessing person, I would say it will go down because of the war, poor Aus/China relations and an impending recession (likely) but by how much and by when is impossible to know.
Get in if/when you can because -
a) if it drops, the prices will eventually recover with time and are likely to keep rising again. It's unlikely that politicians will let them drop to bargain bin prices seeing as many of them have a sizeable real estate portfolio.
b) if it rises, then you're stuck chasing house prices for who knows how long.
@leelemon: The main reason prices don't tend to drop is because people don't usually sell off if they'll make a loss. They just sit and wait for parity or better. Sure, if the fundamentals are wrong and they're forced to sell because of defaulting on their loan, but when you own a leveraged asset, selling low is always a bad idea.
@dogboy: Well if I was smart, or had just a little bit of financial intelligence, I would have bought a house years ago.
I'm not and I've continued to rent and I didn't expect prices to rise by a lot in the last two years.
@kikm828: Buy a cheap place in a suburb that is within 50-75% of your max mortgage. Closer to a capital the more in demand no matter the possible corrections. Preferably not a strata either but that's more related to lifestyle choice than relevant to best financial choice.
@kikm828: If there are people waiting to buy and proces go down then those people will buy and prices will go up.
If you find a house that you like and you think it's a price you can reasonably pay off then just buy it.
I paid more for my house in 2020 but I have no regrets because I now have my own home I can do whatever I want with.
@kikm828: People have been saying that it is overpriced and will crash soon for as long as I can remember.
@kikm828: people have been saying houses are overpriced and are totally going to crash anytime soon for about 15 years now lol
@kikm828: I could have bought in 2004,2005.
I held off because people said that. In Brisbane, those properties I could have bought have now gone up at least 3x in price or more. FML.
@kikm828: My friend with cash to buy a home in 2008 criticised me jumping in and recommended I wait for the crash. It's now 2022 and he can no longer afford to buy his own home.
@kikm828: If you're buying to live in it just buy when you need it.
A year's worth of rent vs the price movement means it's probably a wash at best.
@kikm828: Don't hold off because of comments on house prices. You'll be too busy chasing comments saying that it is a good time.
@kikm828: Never try to time the market, especially if you don’t know much about economics ir finance.
But personal view, forget about house prices crashing down to pre covid levels. Probably zero chance of that happening so this is probably the new median price give or take.
@kikm828: IMO House prices will never crash in Australian capital cities. If prices go down in any significant amount, the majority will simply withdraw their homes from the market reducing supply.
They may crash in holiday suburbs, or where there is a glut of apartments.
House prices are a product of the maximum people can afford to pay. If interest rates go up, the price will go down, but your mortgage payments will be equivalent
@kikm828: Buy when you can afford to buy and are able to make the repayments with some level of comfort
interest rates going up will also mean your borrowing capacity decreases. will you be able to borrow enough to be able to buy the property that you want? Will projected property price drops be enough to cater for your decreased borrowing capacity?
also factor in the amount of rent that you've paid whilst waiting for the right time to buy.
Timing the market VS Time In the market
Didn't house prices crash during the 2008-2009 GFC?
If a world war breaks out, would house prices drop?
In the old days interest rates was 20%, don't think we will see that again, but 10% is possible.
There maybe more back auctionswhen interest rate is 10%.
@congo: Yes probably… but banks will also stop lending out money. Unless you have lots of collateral no bank is going to lend you money in a volatile market.
Also those that can afford it will hold o n to investments rather than sell. So supply will also be low..
Those that get affected are those over leveraged or that can't repay multi million dollar loans for mansions even at a 50% discount you won't be able to afford.
@Archi: The assumption here is that people arent greedy and over leverage and banks arent greedy which is what happen in the GFC.
But you maybe right, it is not likely.
@congo: Interested to know how many properties out there are investment properties AND held by people that take out excessive loan to finance. My suspicion: just a small % relative to people looking to buy a house to live in. Most properties were bought by foreigners that took along with them huge sum of cash. The market has structurally changed in Sydney. I don’t think rates matter that much anymore.
Put money into super for the First Home Super Saver Scheme if you've never owned a house before.
Personal contributions (i.e. not what your employer pays already) are taxed at 15% rather than your marginal tax rate (32.5% over 45k at the moment). You can put in up to $15k a year/$30k total that you can later withdraw to spend on a house. Keep in mind your contribution cap.
The scheme is poorly thought through and may end up hurting you due to the time line between starting your savings and then finally using it in 3-5 years time and your salary has doubled.
@unwashed00: There is a mismatch between the tax benefit you get at the start versus what you're taxed when you cough out the funds down the track. Depending on what has happened since such as being pushed up to a higher tax bracket. The nature of the program is you're likely to start young and also likely to be earning less.
The program is ill-thought through because it isn't easy savings. So once again it rewards the financial literate and those who have access to advisors, which is why we have housing issues to begin with.
You could also be selling down Super assets during a share market down turn but the housing market may not reflect those trends. Again this hurts young people the most.
@plmko: Not only that but some people have said it just increases house prices if people can just access super.
Not to mention the compounding you lose by taking out money now, which could grow to hundreds of thousands by the time people retire.
I regularly contribute to my super but I know I’ll be hurting myself badly when the money is withdrawn for a house.
@Ghost47: Exactly. Super should be used for retirement only and not as another source of funds for a house. Neocon libs are terrible.
@ankor: Also, people might argue “well your house is going to increase in value anyway”, but the thing is unless you rent out a room or reverse mortgage the house you won’t be getting any cash flow at all from it (and obviously can’t sell the house because you need to live there, unless you downsize). Unlike super which you can easily draw down on as you get older with a few button clicks.
We’re going to have a lot of asset rich, cash poor people in the future as a result of high house prices.
@Ghost47: Sorry, but how exactly does the FHSS scheme damage your superannuation nest egg? The scheme doesn't allow you to dip into your mandatory contributions, rather, it encourages you to make voluntary contributions you otherwise wouldn't have made. Last year the ABC made a similarly misguided argument against the scheme in a podcast episode they've since deleted.
@Ozybargdias: Isn't it better to just save it yourself so you dont pay tax while putting it in your super?
@DrScavenger: It's better to not pamp post-tax income in super funds.
People lose access to the money and won't get alpha on their investments.
@DrScavenger: The whole idea of FHSS is that you save on income tax by diverting pre-tax income into your super. The scheme would be pointless if it relied on post-tax contributions.
you otherwise wouldn't have made.
Because you’re making the assumption one wouldn’t make these contributions in the first place. I personally contribute extra money into my super and plan to do so all the way until I retire.
If I choose to put $30,000 into super without the intention of using it for the FHSSS, that would compound to hundreds of thousands by retirement. Choosing to withdraw it for the FHSSS will prevent that from happening won’t it?
I used this, was nice to have that deduction on my tax return.
From 01/07/2022 the total is getting bumped to $50k.
You also get "earnings" on these contributions. Not their actual earnings from the super fund, but at least it's something. I didn't have it in there long enough to care much for the earnings.
I feel like I must be misunderstanding how the FHSS works, because the calculations I've done don't look great. Consider the following:
Therefore the maximum dollar benefit derived is $9k… In a country where the median house price is over $1 million. That's less than 1% total benefit.
Don't get me wrong, any 'free benefit' is good, but that's a dismal amount even based off a ridiculously best case scenario.
Surely I'm misunderstanding something here?
@jetblack: There's not even that much of a benefit, you pay tax on it when it comes out too at your marginal tax rate less a 30% rebate. Essentially all you save is ~15%, less if you're originally on a marginal tax rate less than 30% (although all you need to do is earn over 37k for that). And at $180k+ you're not going to have much scope for staying under the contribution limits
However look at it this way, if you're a first home buyer then the best entry level is more around $600-700k. That will get you things like the first home buyers grant, stamp duty concessions, FHLDS and such. These all stack together too.
Salary sacrifice $10k a year for 3 years, you'll come out the other end with about $25k cash to put towards a house (including interest). Add $10k FHOG and the concessional interest programs, that's enough money to actually move into a $600-700k house. No more paying rent, paying down a loan instead. However take than $10k a year as wages, you're going to be about $6k behind that point, or 25% of your needed funds as a deposit. It takes an entire extra year to get there. Which for many people is $20k a year in rent instead.
This is also why buying a house under $600k is impossible, because they're all snapped up by people using the varying concessional programs to save basically nothing to get into a home. And while it seems risky having such minimal amount of capital in a home, anyone who did this 3 years ago would be laughing right now.
@jetblack: You understand it just fine. It's not great, but it's better than a kick in the pants? Perhaps coming back to OP's post… I wouldn't buy a house and use this scheme just to avoid a small amount of tax :-P.
As @freefall101 said, you also pay tax when it comes out. I didn't quite make the $30k deposit threshold but by my calculations I was $4k ahead, which is basically @freefall101's 15% estimated saving. I bought a $400k townhouse so that's 1% benefit. It was 2 years old so no FHOG (QLD), but I'll take the $4k for doing what I was going to do anyway.
@vorsprung: I think it's fair to say it's worth taking if you can make use of it. Its just a little underwhelming that it's sold in it as a way to help people buy their first home, when realistically $4-9k isn't going to change your ability to buy a place.
I fell off the chair when I read this….
Prices reduce? Good luck with that…
Start thinking like an investor. Interest on loans is typically the largest deduction on an investment property.
Hear hear! I thought it was a requirement for OzBargain membership to have at least three investment properties!!!
I'm pretty sure the ATO website lists the types of deductions you can claim.
Unfortunately your income is probably not in the range where you can possibly make 'investments' to further reduce your tax payments, but only you know your financial position, which is more than just your income. An accountant or financial planner can give you advice.
If you give up one of the jobs, you will pay less tax.
Additionally, if you give up some income, you pay less tax.
And more play time.
Seek a financial planner.
Nah.
For a 110k salary LOL
Terrible attitude.
On less than that i built an investment portfolio of half a mil over time (timing played a big factor in that). I did that with personal financial acumen.
If OP doesn't know how to invest / manage finances / understand tax - you can never earn too little to pay someone to help improve your financial position
Some are free for a first visit and will actually look at your asset holdings and how best to use that. Cash heavy likely they'll recommend some form of stock holding otherwise they'll say housing because of the cheap loans to gain a large chunk of capital to grow.
I earn a fair bit and went to a well regarded accounting firm for financial planning advice. Their advice was:
Anyone with a brain can figure all of that out. It was profoundly unhelpful.
Anyone with a brain can figure all of that out
Yet they can't… Many, Many people:
1. Don't save
2. Don't put extra in their super
3. Take on additional high interest debt
4. Don't know or understand how or where to invest
5. Don't have a will (noting that doesn't help with the OP's situation)
a financial planner can certainly help relieve them of $2k for a standard template printout - life insurance, a will, and managed investments that will profit the financial institution that employs the financial planner
Talk to an accountant for proper advice. But I'd say the average person usually claims WFH, uniform and washing expenses.
Salary sacrifice into your super if you can afford it.
Quit the job that pays 80k, this will significantly reduce the amount of tax you pay.
Por que no los dos?
pay your 'accountant' millions in fees and receive it in a kickback.
set up a shell corporation and pay it for services and receive dividends.
So you're the friend that suggested this…
give up the $30k job and run a cash-only business on the side
😉
Solid strategy. Not sure if $100k combined income is enough to justify this method.
Your accountant would be next on OzB asking. Client wants to pay me millions and receive kickback. How do I reduce my taxable income.
Become a tradie and work for cash.
Tax evasion.
I don't know.
They like cash for some reason and always give discounts.
🙈🙉🙊
Same can be said for some asian restaurants/convenience stores. They've been doing it for years.
@Lanushi: They do, I heard a commercial in the background a few weeks ago on TV saying their slogan. It's also on their 'about' section on their website, "supported by the unique selling proposition Pay Less Pay Cash"
@Lanushi: Be careful, with the predominantly Asian crowd visiting here, you'll be called a racist and bigot in no time. Can't wait for the down votes, bring 'em on niches!
Don't forget all the other tax write-offs they get as well. This is the real reason why tradies in this country are like kings. Half their pay is cash in hand tax free and then they claim tax write-offs for everything from clothes, tools, fuel, car, etc. Office workers can claim almost nothing. Bloody ridiculous.
How is it ridiculous when they use those items for work? I'm sure you could claim your pens and paper?
Can't claim RM Williams and Gucci unfortunately
@tensionday: if you take away the brand… it's just a pair of shoes and a bag…cant see a problem with claiming those items.
much like a laptop.. you can buy a $1000 laptop or $3000 laptop. no one is going to question why $3000 laptop is purchased as it may perform the same as a $1000 laptop. if you were a data entry clerk.
gucci laptop bag for $2000 if fair game,
Gucci cross body coin purse however is questionable.
@tensionday: Dunno about the Gucci, but a "farmer" I know claims his RM Williams clothing and his Porsche Cayenne "4WD work vehicle".
Tradies can claim their dog who sits in their ute/truck all day.
@TheOtherLeft: Plus dog food (possibly vet bills?). Anyone who has a home business and a dog can also claim it as the dog can be considered a form of security. Then if you have clients coming to the house, you can add coffee, hot chocolate, toilet paper, tissues, repairs, etc. All within a percentage of portion of house used for business of course.
An obvious example is that if you are required to wear a suit, you get no deduction for buying one even if this is the only reason you own it.
You don't already have 3 investment properties?