Strategy: Take a Wage Haircut and Move to a cheaper area

If you moved to a cheaper area to live and took a haircut on your wage, it might not be as bad as you think. This is can speed up financial independence and reduce stress and give you a better quality life.

Example of a $20,000 wage reduction

After tax income on $100,000 would be $73,883 (2018-19 tax year)

After tax income on $80,000 would be $61,383

So, a $20,000 reduction in gross income means only a $12,500 reduction in real terms

Try working it out yourself at https://www.taxcalc.com.au/

But the real benefit may be the savings with home ownership.

An equivalent house costing say $1mil in Sydney v $600,000 in Adelaide (for example)

Repayments on $1mil at 4% pa are          

  • $4,774 per month for 30 years with Total interest payable $718,695

Repayments on $600k at 4% pa are         

  • $2,864 per month for 30 years with Total interest payable $431,217

The repayments on the smaller loan mean a cash flow saving of $22,920 per year – which more than makes up for the lower wage income.

Furthermore, if you consider commuting times – you might be saving 1 or 2 hours per day living outside of Sydney.

Living costs may also be generally cheaper. Consumer prices are supposedly about 12.75% higher in Sydney than Adelaide:

https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Adelaide&city2=Sydney
https://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=Australia&country2=Australia&city1=Adelaide&city2=Sydney

Consider also the quality of life.

Conclusion

It can be worth moving out of Sydney and living elsewhere and this can be the case even if you were to take a substantial haircut on your income.

Tax Tip: The effect of Taking a Year off Work to Save CGT

If someone sells a property and has a large capital gain is it worthwhile taking a whole year off work to save tax? In my view it is always great to take a year off work, but it might not actually save you that much tax.

Example

Richie Rich is about to sell an investment property with a $200,000 capital gain. He is sick of it under performing and draining him with land taxand has a low yield. Richie is toying with the idea of taking a whole year off work to save CGT. Is it worth it?

Let’s assume Richie earns $100,000 in his job, and the sale will happen in the 2018-2019 financial year.

If he sells the $200,000 gain will be reduced to $100,000(due to holding it longer than 12 months) and added to his other income for the tax year. The result is an annual income of $200,000

Tax on $100,000                   $26,117          Net income   $73,883

Tax on $200,000                   $67,097          Net income   $132,903

Difference                              $40,980          Difference      $59,020

The Capital Gain will mean $40,980 in extra tax payable for the year.

This means by giving up a year’s income from work Richie would only earn $100,000 from the capital gain. Therefore, he will save $40,980 in tax by not working.

But not working means he has less income, working the full year in which the sale occurs will net him only $59,020 as opposed to his normal $73,883 (a difference of $14,863).

He would need to determine if the effort of working is worth the pay cut of $14,863 which is about $286 per week.

He should also factor in transport costs to work and other work-related costs – clothing, lunches etc.  and there are also heaps of non-financial things to consider. There would be time to do other things such as:

  • Start a business
  • Travel
  • Study
  • relax

Written by Terry Waugh of www.structuringlawyers.com.au

An Example of the Unfairness of QLD Land Tax to Non-Resident Citizens

There are recent amendments to the laws relating to land tax on properties located in QLD and they can oppressively burden Australian citizens living overseas. Many Aussies have invested in property in QLD and then gone and lived overseas for lifestyle and or living costs hoping to enjoy their retirement by living in their rental incomes. But they are now being taxed so high that many will either need to come back to Australia or sell their properties.

QLD is the only state that taxes Australian Citizens like this.

The issue is that there are different land tax rates for ‘absentees’. Australian citizens who are outside of Australian for more than 6 months canfall into the definition on ‘absentee’. The absentee doesn’t get the $600,000 threshold like non-absentees – their threshold is just $350,000. Plus the rate they pay is higher too. On land worth $1mil the absented rate is 1.7%but the non-absentee individual rate is just 1%.

Now there is also an ‘absentee surcharge’ that goes on top of the absentee rate. For land valued at more than $350,000 the rate is 1.5%.

This means on land worth $1mil the land tax rate would be 3.2% – every year.

Here is an example of how harsh in can be:

John is retired and has a property worth $800,000 with a land value of $500,000 in QLD.

He is getting $500 pw rent, or $400pw after costs. It is fully paid off and this would be John’s only source of income when he quits his job.

John goes and lives in Myanmar where it is cheap to live as he can live like a king on $400 per week.

Poor John didn’t factor in land tax.

Before leaving Australia there was no land tax payable.

Now, since he is living overseas he will be classed as an ‘absentee’ owner as he is not ordinarily residing in Australian.

Section 31 Land Tax Act 2010 QLD.

http://www.austlii.edu.au/cgi-bin/viewdoc/au/legis/qld/consol_act/lta201090/s31.html

Because John is an ‘absentee’ Schedule 3 of the Land Tax Act applies to determine the rate of land tax John will pay.

Part 1 is the general rate and it is charged at $1,450 plus 1.7 cents for each $1 in value more than $350,000.

This equates to $4,000

Ouch!

But it gets worse, because Schedule 3 has a Part 2 which imposes a Surcharge Rate.

Therefore there is an additional 1.5 cents payable for each $1 in value more than $349,999.

In John’s situation this will be $2,250.

John’s total land tax went from $0 to $6,250 per year.

Poor John is now living on $280 per week. His income has been cut in half almost.

And this is before we even consider the Commonwealth tax issues of him living overseas and possibly being a non-resident for income tax. This could leave John was extra income tax of about $4,728 per year.

This would mean his annual post tax income has gone from around $20,000 to $9,821 or $188 per week.

Next year there could be a jump in values which may result in even more land tax (but possibly no increase in rents).

Poor bastard!

Double Dipping with the Pension

Have you ever heard of double dipping with the pension? This is where you spend your assets so that you can get the pension.

Here is a brief example:

A pension age couple who have $1mil in super and own their own home may not be able to get the pension because the super is over the asset threshold of $830,000.

The $1mil may be earning them $30,000 in income per year.

Another couple may have $1mil in super, but they spend $540,000 on a bloody great holiday.

Their assets are thereby reduced and they now qualify for a part pension. For the couple the pension works out to be $982 per fortnight or $25,532 per year. But they still have $500,000 cash which they could invest and get $15,000 per year at 3% return. This would total $40,532 per year.

So by blowing $540,000 on expenses a couple could increase their income by more than $10k pa.

Believe it or not many have this attitude – they think they deserve the pension and they will do almost anything to get the maximum allowable. Including spending say $540,000 to qualify for $10,000 per year extra income.

Modelled on an article from The Tax Institute https://www.taxinstitute.com.au/news/3-november-2017

Written by Terry Waugh, lawyer at Structuring Lawyers, www.structuringlawyers.com.au