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Tax Return Overdue

November 4th, 2007 at 11:05 am

I spent lunchtime at work sorting out what stocks had been sold during the last financial year, and it turned out that they'd only been a handful of them. Unfortunately two of them didn't have complete information in my capital gains transactions log (I only started back-filling all the missing data earlier this year). This meant that I had to wade through the paperwork files for my past seven returns this evening to find the information relating to DRPs over that period.

When I checked with my dad this evening he told me that his accountant hadn't been able to complete the tax return for the farm partnership, so I'll probably have to use an estimate when I lodge my return, and then lodge a ammendment request later on when the correct figure is known. This is a nuisance as my taxable income also has to be reported on DW's tax return as it affects the calculation of any family tax benefit she may be entitled to.

I didn't get my tax return completed this evening. I still have to work our the capital gain made on one US stock holding (in my "Little Book that Beats the Market" portfolio). And I also haven't pulled together all the income and expenses data for my sole trader business (it started out as a website design business but these days most revenue comes from this blog ie. not much). Which reminds me - once I've finished my tax return I also have to lodge the annual BAS statement for my "business". I'm having a day off work on Friday, so I'm hopeful that I'll be able to get everything finished off that day. If I'm really lucky dad's accountant might have the partnership tax figure ready by then. I'll probably have to pay a $110 fine for lodging a late tax return, but there won't be any penalty interest as I expect to be due a small refund (due to our rental property being vacant for a few months last Christmas time). Hopefully there won't also be a fine for DW's late return or my overdue BAS statement...


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Enough Wealth 2007

Interest Income FY2006/7

July 20th, 2007 at 11:22 am

I took a day of annual leave today - in theory to have some quiet time while DS1 was at school to sort out my paperwork for my tax return. I didn't get as much done as I'd hoped - I had to call ps146 in the morning to do a "role play" assignment via telephone as part of the DFS(FP) course I'm doing, so I didn't get started on sorting and filing until after lunch. And then DW had to go to the school early in mid-afternoon to collect DS1 as he had a bit of a chest cold which had triggered an asthma attack. He had a mild temperature (~1 deg) when he got home, but he seems OK this evening. He's still a bit wheezy and having puffs of Ventolin every few hours, but hopefully going to bed early and a good night's sleep will seem him better by morning.

Anyhow, I did manage to add up all the interest payments I'd received last year. Aside from a couple of joint accounts (where I have to include half the interest on my tax return, but the accounts are actually used exclusively by DW these days) I had a total of nine interest bearing accounts in use last year. A couple of them are linked to my margin lending accounts, and some were online accounts used to earn interest on my 0% CC balance transfer arbitrage activities. All together I earned a total of $1,783.98 in interest last financial year. I'll probably end up paying 30% income tax on that interest. Although I had various tax deductions (superannuation salary sacrifice, margin loan and rental property interest) to reduce my taxable income, I also received some unplanned capital gains during the year due to takeover activity affecting my stock portfolio. I still estimate that my total taxable income will end up within the 30% tax rate band.


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Enough Wealth 2007

Tax Reduction - Part 6

July 6th, 2007 at 02:02 pm

Medical expenses can consume a large chunk of ones cashflow, and also have tax implications. Firstly, medical insurance. In Australia there is universal public health coverage. A 1.5% medicare levy is charged based on your taxable income (there are some exemptions and reductions for special cases such as low income households) which contributes towards the cost of public health in Australia. There is also a medicare levy surcharge (MLS) of an additional 1% of taxable income is charged when your income is above the threshold and you don't have private hospital insurance. The threshold for an single taxpayer is $50,000 and varies for different family types. For example, DW and I have 2 children, so our MLS threshold is $101,500. In previous years when DW and I were both working fulltime we would have had to pay the surcharge if we didn't have private hospital insurance. So the monthly insurance premium of $144.20 was good value as it was close to what the surcharge would have cost anyhow. This year our combined taxable income will be a lot less (around $60,000) as DW is working part-time and also salary sacrificing around half of her wage into superannuation, and I am salary sacrificing around half of my wage as well. As the monthly insurance premium has increased to $151.45 we could save $1,817.40 by cancelling out insurance. We'd have to take up coverage again when DW resumes fulltime work. However, I don't think I'll cancel the insurance as it is very useful if you ever need "elective" surgery (otherwise you'll be on the public hospital waiting list, which can be very long).

The second tax aspect of medical expenses is the Net medical expenses tax offset. Net medical expenses are the medical expenses you have paid less any refunds you got, or could get, from Medicare or a private health fund. You can claim a tax offset of 20% – 20 cents in the dollar – of your net medical expenses over $1,500. There is no upper limit on the amount you can claim. For example, our total medical expenses on GP visits, specialist consultations and tests, pharmaceuticals, dental work and optical costs was $7,191 in the past 12 months. Our total refunds from medicare and our private hospital cover was $1,340 for this period, leaving us "out of pocket" to the tune of $5,851. This means I can claim a tax rebate of 20%x($5,851-$1,500) = $870.20, which is better than nothing. So it's important to keep all receipts for pharmacy, dental and optical expenses as medicare only has a record of the expenses that you claimed a refund for (mainly GP and specialist doctor and hospital costs).

Although it would be interesting to know the ratio of our health expenses to the benefit we've received from medicare and our private hospital insurance, it's not easy to calculate. For one thing the medicate levy only pays for part of the governments expenditure on public health. A larger amount comes out of consolidated revenue. Also, aside from the obvious medicare refunds that you have to apply for, there is an inbuilt subsidy for medicines via the PBS (Pharmaceutical Benefits Scheme) which isn't printed on pharmacy receipts.


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Enough Wealth 2007

Tax Reduction - Part 5

July 1st, 2007 at 07:43 am

In past years I've made investments into agricultural schemes. Aside from the 100% tax deducibility of the inital investment, ongoing annual management fees, land rent and insurance premiums are tax deductible each year. Eventually I'll hopefully get a reasonable return on these investments in timber (hardwood for wood chips and teak for sawn logs) and sandlewood (for incense). Although this sort of investment provides income tax deferral rather than 'converting' income into capital gains, it is still worthwhile as you get to benefit from the returns generated from the investment of the deferred tax amounts, plus tax cuts in recent years have meant that my marginal tax rates will be lowered when the investments produce income than would have been the case in the years when the initial investments were made. In addition I'll be able to use this income to help cover living costs in future years, so I'll be able to salary sacrifice more of my salary into retirement savings than would otherwise have been the case.


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Enough Wealth 2007

Tax Reduction - Part 4

June 30th, 2007 at 07:26 am

The next large deduction item on our annual tax return is the expenses for our rental property. As it is owned in joint names with DW, we work out the total deductible expenses using the ATOs worksheet for rental properties, and divide each item in half to include on each of our personal tax returns (Australia doesn't have joint filing, although many government benefits such as Family Tax Benefit are based on the combined income of couples). The deductions for rental properties are fairly standard, such as interest on the mortgage loan (make sure you don't include any amount of your payments that is actually principal repayment), cost of repairs, council rates, land tax, water rates and insurance. Some other expenses associated with purchasing a rental property (such as solicitors fees, loan stamp duty etc) are deductible for the first five years after purchase, with 1/5 of the total expense being claimed each year.

If you only had the property available for rent for part of the year (either bought it during the tax year, or had the property off the market for part of the year) you can only claim a pro-rata fraction of the expenses. The ATO also takes a dim view of claims for expenses where the property wasn't really available for earning a rental income. An example would be where a holiday property is used by the owner during the peak rental season.

Another trap to watch out for is claiming deductions for repairs that are actually improvements. Improvements can't be claimed as an expense, but are taken into account as part of the cost base of the property when you eventually work out capital gains when the property is sold.


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Enough Wealth 2007

Tax Reduction - Part 3

June 29th, 2007 at 12:51 pm

Once all the income items have been completed it's time to get to work on itemising my deductions. The biggest one for me is the interest paid on the margin loans I've used to buy stocks for my share portfolio. I pay some interest up to 12 months in advance (in late June) to bring forward the tax deduction, and the remaining interest component is part each month as it accrues. My overall gearing level is fairly modest - around 50% loan-to-value ration (LVR), which corresponds to a debt:equity ratio of 1:1. As the interest paid on the margin loan is more than the dividends received, I get a net income tax deduction from my stock portfolio. Eventually capital gains tax will be paid on realised gains when stocks are sold, but, provided they've been held for more than 12 months before being sold, the capital gains tax rate is effectively half my marginal income tax rate (the actual calculation is to apply my marginal tax rate to 50% of capital gains).

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Tax File Numbers Still "optional" for Superannuation Accounts After 1 July

June 26th, 2007 at 11:28 am

One of the changes made in the change to "Simper Super" went relatively unnoticed until now. All the media attention was around Retirement account withdrawals being tax free for retirees over 60 under the new rules, and the last minute opportunity to contribute up to $1 million into super before the new contribution limits come into effect on 1 July. It's only now that people have started to realise that under the new rules you will be hit with a 46% contribution tax rather than the usual 15% tax on pre-tax contributions if you haven't given your TFN details to your super fund manager. You also won't be able to make any undeducted contributions into a super fund after 1 July if you haven't given them your TFN - which would mean you can't get the co-contribution.

The media seems to have bought the government line that this change is all to do with making it easier to find the owners of "lost" super accounts. I think it has a lot more to do with clamping down on tax avoidance - the fact is that there have been a lot more tax file numbers issued to individuals than really exist in Australia. In the early days it was possible to open bank accounts under false names (no 100 point worth of ID was required back in the early 80s), and it was also fairly easy for someone to get multiple TFNs when they were first introduced (often by using a copy of a birth certificate obtained for a deceased person). These extra TFNs (under false names) were used to avoid tax. I'm sure there are still quite a few people working multiple jobs and using a different TFN for each, thereby getting the benefit of multiple tax free thresholds and low marginal tax rates. Up to now each of these jobs would have paid compulsory SGL amounts into a super account under those same false names. If the TFNs are provided for these super accounts the data matching used to find "lost" super accounts could help identify where one person appears to have multiple TFNs in use. If a TFN isn't provided for an account it could be a trigger for the ATO to check if the account appears to be legit. At the very least the lack of a TFN would mean any future contributions into the account would attract the top marginal tax rate.

I'm amazed that anyone in the media has swallowed the line that the requirement for TFNs will be used to reunite "lost" super accounts with their owner. After all, if the owner knows about the account and provides the TFN, it can't be "lost".

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Tax Reduction - Part 2

June 24th, 2007 at 09:51 am

Interest and Dividends are simple income items to calculate, with the only wrinkle being where a bank account is in joint names with DW I have to count half the interest earned on my tax return. This year I'll have earned more interest than usual, due to having a sizeable amount of 0% APR money invested from balance transfer offers. I usually don't leave too much cash sitting in interest bearing accounts as it is more tax effective to invest the money in high yield shares that pay fully franked dividends. With franking credits you have to declare the value of both the dividend received and the company tax paid, but you get a tax credit for the company tax that was paid. If your marginal income tax rate is less than the 30% company tax rate you will end up getting the surplus franking credit refunded.

For dividend income I keep all the dividend statements in one folder as they come in during the year, and also record the amounts into a spreadsheet. This makes it easy to spot if a dividend statement has gone missing, as there won't be the usual two dividends paid during the year. I've tended to less participation in dividend reinvestment schemes over the years - a combination of the extra paperwork required to keep track of the individual lots issued and the resultant complications in eventually calculating the capital gains when the stock is sold, and the phasing out of dividend reinvestment discounts by companies. Back in the 80s and 90s it wasn't unusual for DRPs to offer a discount of 5% or more of the average share price when issuing stocks under a DRP. These days most companies don't offer any price discount, so the only saving is the lack of any brokerage fee (but this is also not worth much now that online brokerage fees are so low). I still participate in a few DRPs where the number of shares issued is rounded up to a whole number. With small holdings the difference between getting 4.2 and 5 shares issued can significantly boost the dividend yield.

I also get all my dividends paid electronically into the one savings account, so it is easy to reconcile the dividend payments on my bank statement with my dividend spreadsheet. If any dividend statement has gone missing it will still appear on my bank statement, although I'll then have to do some research to check if the dividend was fully franked so I can compute the franked and unfranked components of the dividend payment and the corresponding franking credit.

If everything reconciles I can simply copy the spreadsheet totals of franked dividend, unfranked dividend, and franking credit into my eTax return. I also print a copy of the spreadsheet and store it and my dividend statements in the Tax Pack in case I eventually get a tax audit.

If I didn't manage my finances in a tax effective manner my salary income and my dividend income would combine to push me into the 42% tax bracket. As it is, using salary sacrifice and margin lending I end up with a total taxable income significantly less than my salary income alone would be. This means that my marginal tax rate is 30% (which applies to interest etc) and capital gains (held over 12 months) are taxed at only 15%.

Next - "Other" income in the Tax Pack Supplement

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Tax Reduction - Part 1

June 23rd, 2007 at 10:43 am

The Australian Financial Year end on 30th June, so it's time to start working on this year's tax return and to get organised for next financial year. My tax affairs are reasonably simple - I have some investments and a "business" that is run as a sole trader, so it just forms part of my personal tax return. I've always done my own taxes, so I've learned the relevant tax return requirements for my investments over the years as I started investing in each new asset class and investment vehicle. In this series of posts I'll go through the various parts of my tax return and how they relate to my investment strategy.

Even though I use eTax to submit my tax return, I still work through the "Tax Pack" as it helps get my documentation organised and I can scribble notations about any unusual aspects of the item calculations. I usually organise my paperwork and receipts in the same groups I used last year, and it's easy to work through the current Tax Pack using last years as a guide to what information goes in which section.

The tax return starts out with personal details. The information for this section is generally the same as last year, unless I've moved house. There's always a question about whether this will be my last tax return - I expect the answer to this will always be "no".

The first question in the income section is about salary income and PAYG tax paid. By the time you get around to filling this in it's way too late to do anything about this. I previously reduced this a bit by arranging for salary sacrifice of $450 a fortnight - whereby my employer reduced my salary by the requested amount and makes a corresponding increase in the amount of employer superannuation contribution paid into my retirement account. The means that this part of my salary won't be taxed at my marginal tax rate, but will be taxed at the 15% superannuation pre-tax contribution rate. When making these arrangements for the first time it's a good idea to double check that you're employer won't reduce the compulsory 9% SGL amount. For next FY I've requested the salary sacrifice increase to $1600 per fortnight. The only reason I can afford to do this is that I withdrew $34,000 of non-preserved, undeducted contributions from my superannuation fund.

Next post I'll go through interest and dividend income items.

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Super Kaboom!

June 13th, 2007 at 12:45 pm

An article in today's

Text is SMH and Link is
SMH shows that the expected boom in superannuation contributions is occuring. Under the rules announced for the introduction of the "Simpler Superannuation" reforms to the Australian retirement savings tax laws, there is a one-off window of opportunuity to contribute up to $1m into your superannuation account before 30 June 2007. This is to "compensate" for the removal of age-based contribution limits with a flat limit of $50K pa of pre-tax (concessional, aka undeducted) contributions and $150K pa of after tax contributions. The new maximum contribution amounts will be indexed to increase in $5K jumps to keep pace with inflation.

This got me thinking about what the maximum amount that can be accumulated during your working life be under the new "Simpler Super" rules. Unlike the model of a minimum wage worker I posted a couple of days ago, this model has to make a few "bold" assumptions:

* the maximum contributions are made each year from age 18 to 65 ie. $50K pa pre-tax contribution via the SGL and salary sacrifice, and $150K pa of undeducted contributions. Although the $50K pre-tax and $150K undeducted contribution limits could easily be reached by a middle-aged, upper-management employee this is unrealistic for the under-30s worker. So this contribution rate would require some outside source of income. For example rich kids with an inheritance or a trust fund. I'm not fussed that very few people would possibly meet this requirement, we're just looking at what the extreme case could be under the new Superannuation rules.

* undeducted contributions aren't taxed on entry into a Superannuation account and pre-tax contributions are taxed at the concessional 15% rate

* the superannuation account is invested in a high-growth asset mix, achieving a real (inflation adjusted) net return (after fees and taxes) of 5% pa average for the 47 year investment period (up to age 65)

So, how much would this theoretical "rich kid" accumulate in their Superannuation account by age 65? Just over $37 million in today's dollars! And this amount can be withdrawn tax-free as a lump sum or a pension after age 60 (when "retired"). And this amount is per person, so a rich couple could accumulate a total of $74 million in this tax-sheltered environment.

As there is no gift tax in Australia, I imagine many rich households will be gifting $150K pa to each of their adult kids each year to put into their SMSF. The main downside of implementing such a strategy would be the legislative risk involved with locking this investment away until age 65. There could easily be further changes to the tax treatment of superannuation in the future.

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Reducing Tax by Pre-paying Margin Loan Interest

June 7th, 2007 at 02:52 pm

As the end Australian financial year draws to a close on 30th June, it's time to make arrangements to pre-pay up to 12 months interest on my margin loans. I owed $116K to Comsec, so I prepaid the next 12 months interest on $100K of the balance. I also took up the option to capitalise the prepaid interest. I had some other funds sitting in online savings accounts, so I used that money to repay the remaining $16K of variable rate margin loan. This will mean that I don't have to make monthly interest repayments on the Comsec account for the next 12 months.

I expect I'll soon receive the paperwork to prepay interest on my other margin loan account with Leveraged Equities. I currently have $150K prepaid with them, which I'll reduce to $140K as I have around $6K sitting within the cash management account in my LE due to recently selling my Qantas shares. I'll put that money towards the interest prepayment, so I'll only have to come up with another $6K for the interest prepayment. This will leave only a few thousand dollars of margin loan debt requiring monthly interest payments.

One benefit of making the interest prepayment is that you get a slightly lower interest rate than the monthly variable rate (but this is offset by the opportunity cost of the prepaid interest amount for an average of 6 months). But the main benefit is that you bring forward the tax deductible interest expense by 12 months, so you gain an extra tax deduction the first year you do this. However, each subsequent year you are simply using the prepayment of the next year's interest to substitute for the current year's interest (that was prepaid the previous tax year). At some time in the future you have to unwind the prepayment arrangements by having a year with no tax-deductible interest payment, or possibly a series of years with slowly decreasing interest deductions. I plan to schedule this to occur when I'm retired and over 60. At that time (under the new Simpler Super rules) I'll be living off tax exempt Superannuation pension income, so the tax I pay on any dividend income from my margin loan portfolio will be very low, so getting the tax deduction for interest payments will no longer matter.

Anyhow, interest prepayment on margin loans is just the "icing on the cake" - the main benefit of using margin loans is to get a bigger stock portfolio, but have tax deductible interest payments slightly larger than the dividend income from the portfolio. This basically means that you have no net taxable income from the stock portfolio, and instead only make capital gains on the portfolio. If the gains are on assets held more than 12 months before sale, the applicable tax rate is half your marginal tax rate.

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AU shares - portfolio update: 30 May 2007

May 30th, 2007 at 02:07 pm

I had planned on selling off my portfolio of Australian stocks during the next financial year to reinvest the proceeds within our SMSF, but I've decided against this course of action as the realized capital gains would minimize the benefits of shifting the investment into the tax-sheltered SMSF. Instead I'll just salary sacrifice a large part of my salary into super each year (up to the A$50K deductible contributions limit). Since I'm not planning on selling off my portfolio in the next year I've decided to prepay 12 months interest on the bulk of my margin loan balances, so that I can take the usual tax deduction this financial year. For my Comsec loan I've sent in the paperwork to prepay $100K out of the $116,612.16 loan balance, at an interest rate of 8.75%. If I have any spare income during the year (eg. from takeovers) I'll pay off the remaining $16K of variable rate loan remaining. I'll also prepay $120K of the $150K loan balance on my Leveraged Equities margin loan before the 30th June.

For the next two years I'll be supplementing my salary income with the $34K I withdrew from my superannuation account. This will allow me to salary sacrifice at a high rate for those two years. After that time I'll look at slowly selling some of my Australian stock portfolio each year to allow me to continue salary sacrifice into our SMSF. If I get enough pay rise in the next couple of years to offset the amount I wish to salary sacrifice, I'll retain the existing stock portfolio holdings until I retire, at which time I'll have a very low assessable income (under the new Simpler Super rules pension income isn't taxed after you turn 60) and I could then sell off a portion of my holding each year without accruing much CGT liability. Until 75 I would still be able to contribute the proceeds into super while drawing a pension. After 75 I wouldn't be able to contribute into my own super, but I could start to contribute any excess funds into the super accounts of DS1 and DS2. Under current rules up to $150K a year of undeducted contributions could go into each of their accounts each year. As they will be in their 30s by that time I don't expect that they would be contributing that much into their super accounts yet.

All this planning assumes that the superannuation tax rules don't change much in the next 30 years - a most unrealistic assumption! This plan will obviously have to be updated as the rules and our financial situation changes over time.

Current holdings:
Leveraged Equities Account (loan balance $150,000.00, value $316,303.73)
stock qty price mkt value margin
AAN 295 $15.22 $4,489.90 70%
AEO 1,405 $2.04 $2,866.20 65%
AGK 510 $15.32 $7,813.20 70%
AMP 735 $10.01 $7,357.35 75%
ANN 480 $12.00 $5,760.00 70%
ANZ 1,107 $28.78 $31,859.46 75%
BHP 748 $31.06 $23,232.88 75%
BSL 781 $11.27 $8,801.87 70%
CDF 6,943 $2.02 $14,024.86 70%
CHB 118 $51.01 $6,019.18 65%
DJS 2,000 $5.13 $10,260.00 65%
FGL 3,751 $6.27 $23,518.77 75%
LLC 481 $19.82 $9,533.42 70%
NAB 316 $42.40 $13,398.40 75%
QAN 2,175 $5.06 $11,005.50 70%
QBE 983 $31.56 $31,023.48 75%
SGM 830 $27.08 $22,476.40 70%
SUN 963 $21.16 $20,377.08 75%
SYB 2,880 $4.37 $12,585.60 70%
TLS 5,000 $4.78 $23,900.00 80%
TLSCA 3,000 $3.31 $9,930.00 80%
VRL 1,500 $3.20 $4,800.00 60%
WDC 783 $20.77 $16,262.91 75%

Comsec Account (loan balance $116,612.16, value $229,848.59)
stock qty price mkt value margin
AGK 240 $15.32 $3,676.80 70%
AAN 139 $15.23 $2,116.97 70%
APA 4,644 $4.22 $19,597.68 70%
ASX 200 $48.39 $9,678.00 70%
CBA 130 $55.03 $7,153.90 75%
CDF 43,997 $2.02 $88,873.94 70%
IPEO 54,000 $0.019 $1,026.00 0%
IPE 8,000 $0.995 $7,960.00 60%
IFL 1,300 $10.25 $13,325.00 60%
LDW 1,350 $7.81 $10,543.50 0%
NCM 300 $21.68 $6,504.00 60%
OST 2,000 $6.52 $13,040.00 70%
QBE 607 $31.60 $19,181.20 75%
RIO 60 $94.55 $5,673.00 75%
THG 4,000 $1.02 $4,080.00 50%
WBC 300 $26.03 $7,809.00 75%
WPL 220 $43.68 $9,609.60 75%

Changes to portfolio since last update:

I sold my Qantas shares on the market for $5.39 on the last day before the takeover offer closed. I guessed correctly that the APA offer would fail to reach the required acceptances to proceed, and over the next few days the QAN share price dropped, as had been expected. However I had expected the price would drop to under $5.00. In fact the stock price has since increased after the Qantas management released an upbeat assessment of their prospects, and is now trading around $5.60. The proceeds of the sale reduced my loan balance below the $150K I had prepaid interest on for this financial year, so Leveraged Equities automatically moved the surplus amount into the linked Cash Management Account so I'm at least getting some interest on this bit of borrowed money.

My AMP holding increased by 15 shares due to a dividend reinvestment. I no longer enrol in DRP for new stocks I buy as there is little if any price discount and the hassles of keeping records for CGT calculation outweighs the benefits. I simply use dividends to help pay the interest on my margin loans.

My QBE holding increased by 17 shares due to a dividend reinvestment.

My SUN holding increased by 113 shares due to a Share Purchase Plan offer I took up.

My SYB holding increased by 32 shares due to a dividend reinvestment. This company is currently subject to a take over offer, which pushed the price up from $3.70 to $4.37. As the offer is a cash plus stock mix I may decide to sell my holding on the market rather than accept the offer.

Budget Night Benefits

May 8th, 2007 at 12:37 pm

The Australian Treasurer handed down the annual budget tonight, and, as expected in an election year, there are some generous handouts to "middle Australia" (ie. swinging voters). Those of personal interest are:
* A "one off" doubling of the government superannuation co-contribution for the 05/06 financial year. This means that DW and DS1 (who both made $1000 undeducted contributions into their superannuation accounts that year), will get a total of $3,000 in co-contribution, rather than the expected $1,500.
* Tax cuts at the "bottom end" starting from 1 July 2007. The threshold for the 30% rate has been increased from $28,000 to $30,000, and the low income earners tax rebate has increased from $600 to $750, which means anyone with taxable income less than $30K will pay 0% tax on the first $11,000 of income (the 15% tax rate normally applies above $8,000).

Having recently withdrawn $34,000 of unrestricted, undeducted, non-preserved money from my superannuation account (prior to the rule changes taking effect on 1 July), I'll now be able to salary sacrifice a large fraction of my salary for the next two years. This will
a) save tax on the sacrified amount (super contribution tax rate is 15% rather than the income tax rate of 30% which would otherwise apply)
b) reduce my taxable income down to around $30,000, so I'll be eligible for the $1,500 government superannuation co-contribution if I make a $1,000 undeducted super contribution (it may even end up being $3,000 if this year's "one off" increase ends up being repeated!)
c) substantially reduce our combined family taxable income so we are eligible for some Family Tax Benefit payments.

The others changes won't immediately affect us, but the childcare rebate changes should be good once DS2 starts preschool in a couple of years.

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How I Added $10,000 to my Net Worth Today (maybe)

April 30th, 2007 at 12:40 pm

Amid all the hoo-ha about the changes to "Simpler Superannuation" from July 1 this year are some less-pleasant, little-know aspects. For example, from 1 July all payments made out of superannuation will be treated as a mixture of undeducted and deducted amounts per the overall mix across all your superannuation accounts with a particular trustee. For example, if you had a total balance of $400,000 and $100,000 of this was due to "undeducted" contributions, any withdrawal after 1 July will be deemed to be 25% undeducted and 75% deducted.

What does this matter? Well, some people will have amounts within their superannuation accounts that they can withdraw at any time. Called unrestricted, non-preserved amounts, I think these are generally undeducted contributions made into superannuation prior to 1999. (All contributions after then are preserved until retirement age). Currently, if you decide to withdraw an unrestricted, non-preserved amount you can nominate how much of the withdrawl is to be from the deducted and undeducted components of your superannuation account.

For example, of the $335,000 in my superannuation account, $55,000 is an unrestricted, non-preserved amount that I can withdraw at any time. My undeducted amount is $34,000, so under the current rules I can withdraw $34,000 as an unrestricted non-preserved amount and don't have to pay any tax on that amount. If I withdrew the maximum possible ($55,000) I'd have to pay some tax on the $21,000 "deducted" component (which was contributed into the fund out of pre-tax salary).

However, if I withdrew the same $34,000 unrestricted amount after the new rules come into force on 1 July, the amount would be treated as roughly 90% (34K out of 335K) "deducted" and only 10% "undeducted" - and I'd have to pay around 20% tax on the $31,000 undeducted component. So, withdrawing this $34,000 after 1 July would cost me an extra $6,000 or so in tax!

But wait, there's more...

Another other benefit of withdrawing $34,000 tax-free from my superannuation account before 1 July is that I could then use this amount over the next two years to replace around $48,500 of my taxable income (with a marginal tax rate of 30%), and I could therefore afford to salary sacrifice an extra $24,000 pa [1] into superannuation without reducing how much cash I have available to pay my bills. The benefit of doing this is two-fold. Firstly, the salary sacrificed amounts will only be taxed at the 15% superannuation contribution rate, rather than my expected marginal tax rate of 30% (which applies to income between $25K-$75K). The second benefit is that be doing this large salary sacrifice my taxable income should be reduced from around $55,000 to around $30,000 and I'll then be eligible to get a government co-contribution of up to $1,500 if I make a $1,000 undeducted contribution into my superannuation account.
Current Situation If salary sacrifice an
extra $24,000 pa
Taxable Income $55,000 $31,000
Salary Sacrifice $10,400 $34,400
SGL contribution $ 7,400 $ 7,400 [2]
Income Tax due -$11,850 -$ 4,650
Super Tax due -$ 2,670 -$ 6,270
Super co-contrib $ nil [3] $ 1,300
(if make a $867 undeducted contribution)
Total after tax $58,280 $63,180

This means I'd end up with an extra $4,900 pa (tax saving and co-contribuction) by making the increased salary sacrifice. However, this is only possible as I have the extra $34,000 tax-free withdrawal from my superannuation account to supplement my income for the next two years. Otherwise my after-tax "take-home pay" would have been reduced from $43,150 to only $26,350.

By making these arrangements I'll end up with the following over the next two years:
Current Situation New Situation
Super Balance $335,000 $301,000 (withdraw $34,000)
Take-home pay $43,150 $31,000 (salary sacrifice)
Super withdraw nil $17,000 pa (split over 2 years)
Total cashflow $43,150 $48,000
Super contrib. $17,800 pa $43,100 pa
Super tax. -$ 2,670 pa -$ 6,270 pa [4]
Super balance $365,260 $374,660
after two years (ignoring earnings)

The only material impact of thisarrangement will be that the ratio of undeducted:deducted money in my superannuation account will be higher if I withdraw $34,000 of undeducted funds and recontribute via salary sacrifice (deducted funds). However, as all pension payments made from a superannuation account after you retire (and are over 60) are tax-free under the new "Simpler Super" rules, this shouldn't have any real effect in the long run.

[1] Under "Simpler Super" there will be an overall cap of $50K pa in deducted contributions - so you have to make sure your total of salary sacrifice and employer SGL amounts doesn't exceed this.
[2] My employer calculates the required 9% superannuation contribution levy based on my original salary (ie. before salary sacrifice is deducted). Legally it is possible for an employer to only contribute 9% of the actual salary paid (ie. after deducting the amount salary sacrificed). So it's important to check this with your employer before making salary sacrifice arrangements.
[3] The government superannuation co-contribution (up to $1500) is available on a 1.5:1 basis for undeducted contributions made into superannuation by employees with incomes up to $28,000. For incomes above $28,000 the maximum amount reduces until for incomes over $58,000 you're not eligible.
[4] There's no 15% contribution tax on the government co-contribution

DISCLAIMER: I'm not a financial planner, accountant, tax lawyer or in any position to give advice. This is just information about what I'm currently planning to do, and what I *think* the implications are. I checked my superannuation details (unrestricted non-preserved balance and undeducted component) with my superannuation fund, and I asked the Australian Tax Office "Simpler Super" help line about whether the new rules treating all withdrawals as being in the same undeducted:deducted ratio as the overall account would apply to unrestricted, non-preserved amounts. The ATO help line rep didn't know, and he had to go ask a "specialist" in this area to come back with the opinion that yes, this rule seemed to apply to all withdrawals by persons under age 60. As the ATO only gives binding private rulings about income tax questions and not superannuation, this seems about as definitive an answer as I can obtain. You could get professional advice from a financial planner, if so make sure that they really know the answer (since the ATO wasn't even sure!).

My Saving and Tax Rates

April 19th, 2007 at 02:53 pm

It's a bit hard to work out exactly what my savings rate is. Apart from my salary I also get dividend income from my stock portfolio, but the dividends are mostly used on paying interest on my margin loans. To simplify things I did a calculation of my direct savings as a percentage of my gross salary:
Saving stream % of salary
Employer Superannuation contribution 8.25 % (The 9% SGL as a % of total salary including the SGL)
My Superannuation contribution 11.62 % (as a pre-tax "salary sacrifice")
Other savings/investments 9.72 %
TOTAL Savings Rate 29.60 % of gross salary

I've included principal repayments off my portion of our home loan as part of my "savings" but haven't included the interest payments on our home and investment property loans.

I also did a rough calculation of what taxes I'm paying:
Federal - Income tax & Medicare levy 13.81 %
State taxes - Land tax & GST* 3.72 %
Local taxes - council rates 1.28 %
TOTAL Tax Rate 18.81 % of gross salary
or 31.17 % of taxable income

* although the GST rate is 10%, unprocessed food is GST-free, so the average GST on my grocery bills is only 1.86%

The federal tax is based on the tax rate applicable to net "taxable income". It's a bit misleading to quote it as a percentage of gross income, as it includes tax paid on dividend income. State and Local taxes are a function of consumption (GST) and real estate assets (land tax and council rates). As a percentage of my Net Worth my annual tax bill is a much more modest 1.51%. But this figure doesn't include taxes paid on superannuation fund earnings (@ 15%), superannuation pre-tax contributions tax (@ 15%) or any Capital Gains Tax (@ half my marginal tax rate, say 15%) on realised gains. However, if I move assets into my superannuation fund and only realise gains when it is "pension" mode (after age 60), there would be much less capital gains tax due.

We have no gift tax or death duties in Australia, which helps with intergenerational transfer of wealth.

Overall, it appears that income from all sources (salary, investment income, capital gains) ends up being taxed at around 15% on average, with little "double taxation" occurring (due to franking credits and no gift tax or death duties). And the new "simple super" offers good opportunities to greater reduce tax on capital gains by realising such gains during retirement.

Text is Enough Wealth and Link is
Enough Wealth

Tax and the Joy of Franking Credits

April 8th, 2007 at 06:50 am

I've started working through the last ten years of my tax returns to collate all the DRP and BSP stock issues, so I can get my stock transaction records up to date and estimate how much capital gains tax I'd have to pay if I liquidated my stock holdings to contribute the money into my SMSF next financial year. I took the opportunity to entry all the dividend information I've received so far this financial year. It was interesting to note how the total dividends received each year has slowly increased (this is partly due to buying some extra stocks as the bull market has reduced my margin loan gearing, and allowed me to purchase some additional stocks and retain a LVR of around 50%-60%). My records also show how more companies have paid fully franked shares in recent years - the % tax paid on dividends has slowly increased towards the 30% company tax rate:

Tax Year Dividends Franking Grossed Up Dividends Taxable Avg Income
Received Credit Dividends % Tax Paid Income Tax Rate

2003/2004 $10,039.90 $3,364.34 $13,404.24 25.1 % $60,396 25.3 %

2004/2005 $11,202.95 $4,000.30 $15,203.25 26.3 % $47,996 22.0 %

2005/2006 $12,954.82 $4,864.30 $17,819.12 27.3 % $56,078 27.3 %

2006/2007 $10,745.22 $4,017.47 $14,762.69 27.2 % $??,??? 2?.? %

This also shows how my taxable income has stayed the same or decreased slightly while my salary has actually been going up. This is mainly due to the size of my margin loans (and hence tax deductible interest) increasing in relation to my salary.

I don't know what my taxable income will be for this year - I usually pre-pay 12 months worth of my margin loan interest in June to bring forward the tax deduction. I may not prepay as large an amount this year, in case I wish to sell of most of my geared stock portfolio to reinvest the funds into my SMSF.

* The figures for the current tax year, ending 30 June, are not yet complete

Enough Wealth

How to Pay $0 Income Tax on an Income of $100,000

April 6th, 2007 at 02:10 pm

One of the catchiest phrases I ever heard at an "investment seminar"* was "tax is optional". Despite the common confusion between legal tax minimization, and illegal tax evasion, there are some relatively straight forward methods to protect one's hard earned income from the ravages of taxation. Now, the following is simply a couple of scenarios I've been thinking about, it is not professional tax advice as a) I'm not qualified to give any, and b) you'd be an idiot to base your investment planning purely on something you read on a blog - always check it out yourself against reliable reference material, or get professional advice. Having got past all the disclaimers, let's look at a few rough examples.

a) The obvious one - if you're over 60, come 1 July this year the new "simple super" legislation will make all income coming to you from your superannuation fund tax exempt - it doesn't even have to be included on any tax return you fill in. Hence retirees with adequate retirement savings will easily be able to pay no tax on a $100,000 annual income if it's coming to them from their taxed super fund.

b) If you're earning $100,000 salary in Australia the 2006/2007 tax rate for a resident single person would mean you normally would pay $27,850 in income tax (not counting the medicare levy), leaving $72,150 after tax income. This could be reduced to zero by arranging a salary sacrifice of %92,500 into superannuation. This would reduce your taxable income to $7,500. The tax rate on the first $6,000 of income is 0%, and the $235 low income tax offset would mean you could earn at least $7,500 taxable income without actually paying any income tax. Of course you'd probably need some other way to finance your living expenses if you reduced your taxable income to only $7,500! There is also the superannuation contribution tax of 15% on salary sacrificed contributions, so to some extent you'd simply be replacing $27,850 income tax with $13,875 contribution tax. This makes salary sacrifice of taxable income below $25,000 (the threshold for the 30% income tax rate) generally not worthwhile.

BTW This option would not longer be available after the new "simple super" rules come into force on 1 July - the max. salary sacrifice + SGL contribution total will be $50,000. And under the current rules, there is an age-based maximum that would make this option only work for older employees.

c) Have large tax deductions from investment interest expenses to reduce your taxable income to the extent that it entirely offset by franking credits from your stock dividends. This is theoretically possible, but would only be possible for some investors with large existing investment portfolios. For example,
Person X has a $1,000,000 stock portfolio yielding 3% ($30K) in fully franked dividends and earns $70,000 in salary. The stock portfolio averaging 6% capital growth.
If this person borrowed $2,000,000 via a margin loan at 8% interest and used it to expand the existing stock portfolio. The new situation would be:
$70K salary + $90K dividends.
Dividend franking credit $38,571.
Gross income = $198,571
Tax deductible interest = $160,000, paid for by salary and dividends.
Taxable income = 198,571 - 160,000 = 38,571
Tax on 38,571 = 6,921.30
Refund due = franking credit - tax liability = 38,571 - 6,921.30 = $31,649.70

The extra capital gain from the $2m extra invested is worth an average of $120,000. As it is eventually only taxed at half the applicable marginal income tax rate, the eventual after tax gain would be more than the decrease in current income.

Of course this would only work if you could live on $31K of after tax income, ie. you were going to invest $40,500 (56%!) of your after tax income anyhow. Otherwise you'd be short of income for living expenses.

Now, none of these options are practical or advisable for most people. And the ethics of paying nil tax is very personal - after all, someone has to pay for roads, schools, hospitals etc. And the use of gearing, especially using margin loans, increases risk - you may end up with investments that perform way below "average" during your holding period. But some combination of the above can be used to reduce the amount of income tax paid, provided you are currently spending less than you earn and are investing some "after tax" dollars.

There also some further benefits possible by lowering your taxable income - for example, reducing the amount of medicare levy payable, qualifying for the government superannuation co-contribution, and so forth. You have to be a bit careful if you are married with kids and getting some "family tax benefit" payments (A or B) - the rules for calculating income differ between the ATO and centrelink.

It's probably best to end with another catchy quotation - "tax reduction should not be the key factor behind any investment decision." After all, it's no good getting a big tax break on an investment that ends up worthless.

* ie. high pressure sales talk for an investment scheme

Enough Wealth

Applying for Our New Retirement Account (SMSF)

April 5th, 2007 at 03:20 pm

The paperwork from for setting up our new Self-Managed Superannuation Fund (SMSF) arrived in the post yesterday. A very thick envelope of "personalized" boiler-plate, with sixteen(!) little yellow tags showing where DW and I have to sign our names. I'll take a stab at wading through the details of the more relevant parts (the Trust Deed and the Investment Strategy) this weekend, between doing my university assignments and hiding Easter eggs* for DS1 to find, and hopefully we can get it all signed and sent back next week. Transferring DW and my super from BT super into the SMSF will save at least $1,670 in annual admin fees as far as I can tell**. I'll invest in the same asset mix within the SMSF as I had selected in the BT super scheme, just via Index funds instead of actively managed funds in some cases. If the capital gains tax liability caused by liquidating my stock portfolios isn't too high I'll also look at shifting my direct share investments into the SMSF as well, as there will be considerable tax savings over time within the super environment (especially NIL capital gains tax on super assets sold when the SMSF is in pension mode). You can't use gearing within a super fund (they're not allowed to borrow, except for very limited cases, such as when settling share trades) but, apparently it is OK to buy CFDs.

* They're actually lots of little packets of Trolli "bunny surprise" sweets (a bit like gummi bears), as DS1 is allergic to both milk and soy, so chocolate eggs are a no-no, even the "lactose free" ones. Just as well that he loves gummi bears Wink

** The SMSF admin fee is AUD$599 pa. The BT fund charges a $53 pa member fee, plus an admin fee of around 1.5% pa. Our employer has arranged for a "member fee rebate" of about 0.9% pa but this still means that on the combined balances of DW and myself (around $370K) we're currently paying a net admin fee of around $2,270 pa to BT.

Enough Wealth

Medical Costs Outpace Inflation!

March 20th, 2007 at 10:34 am

Yes, I know, that isn't news to anyone. But my annual notice from my health fund arrived today letting me know exactly how much my premium is rising this year. After announcing that they paid a record amount in claims last year (up 8.5%) they got down to the nitty gritty and let me know that my monthly premium for basic family hospital cover is going up to $151.45 per month (including the 30% Federal Government Rebate). This is only an increase of 2.0% from last years $148.40 a month. BUT, there's also a change in how the 'excess bonus feature' works. Instead of getting a $100 cash refund at the end of each year if you haven't made any claims, this is now being replaced by up to two excess free same-day or overnight admissions per year. Although the benefit seems similar, it's actually not much of a benefit to us as we've any made one claim in the past five years. Instead of getting $500 worth of refunds, under the new rules we'd have just saved $100 for one excess payment. Adding in the loss of the $100 refund each year, the actual "out of pocket" increase in premium is 8.1%.

If we didn't have private hospital cover we would have to pay a 1% medicare levy surcharge when our combined taxable income (with 2 dependants) iss above the $101,500 threshold for any year. We would probably have been under the threshold this year as DW spent a large part of the financial year on unpaid maternity leave, but most years our combined income would be over the threshold, so we'd end up paying at least $1000 in extra tax. The net cost of having the private hospital cover is therefore only around $68 a month, so it's probably still worth it in case any of us ever need 'elective' surgery - which is available in the public system, but can have very long waiting lists.

Enough Wealth

BHP and FGL Off-Market Share Buy-Backs

March 15th, 2007 at 02:21 pm

Both BHP-Billiton and Foster's Group have sent out the paperwork for an off-market share buy-back. It's a bit hard to calculate the exact benefit of taking up these offers as
* the number of shares accepted may be scaled back, leaving me with a smaller parcel of shares in the company
* the final buy-back price will be determined in the tender proces, and will be at a discount to the market price of between 10%-14% (BHP) and 5%-14% (FGL)
* the amount of the buy-back price subject to capital gains tax will depend on the final buy-back price, as the "capital component" PLUS an "excess tax value" equal to the difference between the "tax value" of the shares at the time of the buy-back (as determined by the ATO) and the final buy-back price
* the amount of the buy-back price assessed as a fully franked dividend will be the difference between the final buy-back price and the "capital component"

As I'll probably have a marginal tax rate of 30% this year (it depends what tax deductions I arrange through pre-payment of 12 months of my margin loan interest) the franking credit of 30% with offset the tax due on the "franked dividend component" of the buy-back. This will mean that I only have to pay 15% CGT on the amount by which the capital component and excess tax value exceeds the orginal purchase price of my shares. As I haven't got all the old paperwork sorted for my BHP and FGL share purchases I don't really know if I'll likely make a net capital gain or capital loss on these buy-backs, but in any case it will be a much lower CGT liability than if I sold these shares for full market price. Exactly how beneficial the buy-back is compared to selling the shares for full market price will depend on the popularity of the buy-back, and hence what the final tender price discount is.

I'll have to sort out the cost base my BHP and FGL shares this weekend so I can decide whether or not to accept the buy-back offers before the tender period closes (23 March for BHP, 5 April for FGL).

If the after tax proceeds of the buy-back look better than selling the shares on market I'll probably take up the offer for all my shares (3,751 FGL and 748 BHP) as I was planning on liquidating my stock portfolio of the next few years and reinvesting the funds in a DIY retirement fund (SMSF). I also have to do some estimates of how beneficial it will be to sell and reinvest the after CGT funds in stocks within a SMSF compared to retaining my current geared portfolio outside super and selling it off during my retirement when I should be able to restrict capital gains tax rate to around 10% anyhow.

Long Term Tax Planning

February 18th, 2007 at 04:09 am

Although it's always risky to make long term plans based on the assumption of status quo - especially where tax laws are concerned - the recent changes to the Australian Superannuation rules bring some interesting long term tax planning ideas to mind.

Basically the new Superannuation rules are that any withdrawals (lumpsum or pension payments) from a "tax paid" superannuation fund will be tax free after age 60. One possible side effect of this change will be to make it more tax-efficient to realise capital gains on investments held outside of super once you are retired, over 60, and getting most of your income as an untaxed superannuation pension. The ATO information about the new rules states that "Individuals will not need to include lump sum superannuation benefits and superannuation pensions from a taxed fund made after 30 June 2007 in their tax returns. Superannuation funds will not need to report benefit payments made after 30 June 2007 to the ATO for RBL purposes." Presumably this would mean that such amounts are not taken into consideration when calculating capital gains tax for your personal tax return during retirement.

I'm thinking that I'll be able to live off my tax-free superannuation benefits during retirement, make use of margin lending to offset any non-superannuation investment dividends with tax-deductible margin loan interest, and thus have almost no taxable income during retirement.

This should mean that I could sell off, say, $100,000 worth of my non-superannuation portfolio each year during my retirement and have a fairly low capital gains tax liability each year (as the CGT calculation is based on the normal personal marginal tax rates applied to 50% of the realised gain for assets held more than 12 months).

For example, selling $100,000 worth of my portfolio during a retirement tax year, with say 75% of the amount being a "capital gain" would result in a CGT bill of:
75% realised capital gain = $75,000
50% discount applied = $37,500 taxable CG
tax on $37,500 = $6,600 (using 2007 tax rates)

I'm trying to do a spreadsheet comparison of holding my current non-superannuation geared stock portfolio until retirement and liquidating it during retirement using this technique, vs. liquidating the geared stock portfolio now (and paying considerable capital gains tax due to my taxable salary income) and contributing the after-tax amount into my superannuation account where concessional tax rates would apply to the investments. Regardless of what the modelling tells me is the more tax-efficient plan, putting all my investments inside superannuation may not be a wise choice due to the restrictions on accessing any superannuation investments prior to "retirement age". Although I do have an adequate undeducted, non-preserved amount within my superannuation account that could be withdrawn in an emergency.

I'll let you know if my spreadsheet modelling comes up with any useful insights.

Tax time blues - Part 2

November 27th, 2006 at 12:21 pm

Well, the Australian tax year runs from 1st July - 30th June, and the deadline for returns is 31st October. Way back on 14th August I wrote "Hopefully now that I've started using Quicken 2006 I'll be able to add in all the info for my current holdings over the next few months." - well, it never happened. What, with the birth of our second child in September, some uni assignments and doing too much blogging (!) I've never spent the time needed to enter all my expenses since 1 July as planned. What's worse is that I haven't brought my old share records in Quicken up to date, so I'm left with wading through my margin loan account statements to see what has been sold during the financial year, and then going through old records to work out the cost base.

Hopefully I'll get it all sorted out tonight and fill in the electronic eTax forms tomorrow so I can lodge it on time. As I'm owed a refund (I think) there probably wouldn't be a penalty for late lodgement, but I really want to get it over and done with. My new financial year's resolution is still to enter all my expenses into Quicken this year, and get my share records in Quicken up to date... we'll see how it goes.


Boosting your savings painlessly (for wage slaves)

November 19th, 2006 at 11:38 am

Vanguard Australia had an interesting article last week describing a savings technique that I've been using myself for several years to painlessly boost retirement savings. The basic idea is to increase your savings by a tiny percentage each year - doing it so gradually that you never notice the extra amount you're putting away. That way you don't miss what you've never had (in terms of disposable cash flow), so it's entirely "painless".
I increase my savings rate each June by a fraction of what I expect my pay rise to be for the coming year - arranging to increase my payroll deduction into Superannuation via Salary Sacrifice before the pay rise comes into effect.

Incidentally, savings via a superannuation (retirement) account will get an even bigger tax concession from 1 July 2007 with the move to reduce the rate of tax on end benefits to 0%. So, if you're taxable income is more than $25,000 pa contributing via salary sacrifice means paying 15% contribution tax rather than 30%, and from next July there'll be no tax on your retirement income stream from superannuation. The savings are of course even more worthwhile for higher income earners on a higher marginal tax rate.

A couple of things to watch out for:
* maximum pre-tax contributions from 1/7/2007 are expected to be $50,000 per annum, and this includes the 9% Superannuation Guarantee Levy amount your employer already contributes. But this would only affect very high income earners!
* another $150,000 per year can also be contributed as an undeducted contribution. So it may be worthwhile moving some existing savings into your superannuation account. However, this strategy wouldn't be suitable for your "emergency" fund, as super can't normally be withdrawn until you reach retirement age. There's also a risk that the rules could change again before you withdraw the funds during retirement!
* check that your employer won't reduce the SGL amount they contribute if you salary sacrifice - the SGL amount should be based on your nominal salary, rather than the reduced amount left after deducting the salary sacrifice. Most employers are fine with this (they should be - salary sacrifice actually saves them money by cutting the amount of payroll tax they have to pay!) but technically they only have to pay SGL based on your wage.

Marginal Tax rates 2006-07

Taxable Marginal Tax Saved by using
Income Tax rate Salary Sacrifice
$0 – $6,000 Nil not a good idea!
$6,001 – $25,000 15% nothing up front, but the savings in super are tax sheltered.
$25,001 - $75,000 30% 15%
$75,001 –- $150,000 40% 25%
Over $150,000 45% 30%

(nb. these rates don't include the 1.5% medicare levy)

I was sacrificing 9.8% of my salary last year, and this year used my pay rise to increase it to 12.7%. Due to getting a small (3%) pay rise and the cut in income tax rates, I still ended up with a few dollars a week more in my pay packet - enough to cover the increased petrol prices at least. From now until I retire (approx. 20 years) this will mean around $50,000 extra going into my super account. This should add around $75,000 to my superannuation balance at retirement!

ps. For lower income earners (<$30,000) it's important to still make a $1000 "after tax" contribution so that you get the free money (co-contribution) on offer from the government. You can probably do this via B-Pay straight from your bank into your superannuation account, and the tax office will automatically determine your eligibility and arrange for the co-contribution when you lodge your tax return. For those earning between $30,000-$50,000 the co-contribution phases out. You still get $1.50 from the government for every $1 you contribute, but the maximum amount reduces, so you should contribute less than $1,000 if you earn >$30,000. eg. If you earn $40,000 you'd get the maximum $900 co-contribution if you made a $600 "after tax" (undeducted) contribution. The ATO has a simple
calculator available on their website. It's funny to note that a lot of the financial press regularly gets this wrong - suggesting that you still have to make a $1,000 contribution to get the maximum available co-contribution, even if you earn over $40,000!

Tax time blues

November 16th, 2006 at 02:09 pm

Well, it's that time of the year again. I did my wife's tax return last weekend (using eTax) and she got her refund deposited into her account on Friday! I've now started the annual grind of doing my taxes. Once you've done your own return a few times, it's fairly straight forward, just need to check on any relevant changes and spend the time to add up all dividends, deductible expenses etc. Well worth a couple of hours effort to save the cost of a tax preparer.

As a wage slave my return is fairly simple, but having some direct share investments can be a headache when you sell them and have to report for the Capital Gains Tax item - especially if you've acquired them in odd lots via DRPs and maybe sold some of your holding previously. I used to enter all trades and dividends into Quicken, and it was great for being able to select which lots of a share to deem as being sold. However, I haven't had time to keep Quicken updated since I married in '99, so I've had to manually track through all trades for shares I've sold to calculate capital gains info the last few tax returns.

Hopefully now that I've started using Quicken 2006 I'll be able to add in all the info for my current holdings over the next few months.