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
Repayments on $600k at 4% pa are
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:
Consider also the quality of life.
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.
What is the point, you might ask, in setting up a discretionary trust to hold investment assets when you have no family?
A discretionary trust needs at least one beneficiary with the trustee having the option to retain income, or at least 2 beneficiaries where it doesn’t. However, most discretionary trusts will have hundreds of potential beneficiaries as they will be set up with one or two named persons as the primary beneficiary and then there will be secondary and, possibly, tertiary beneficiaries who are relations of the primary beneficiary.
So even though you are on your own now, you might have cousins or distant relatives who could be beneficiaries – this doesn’t mean they need to be recipients of trust income, but just that they could be. You never know when one of your cousins might invest in shares and lose the money and have carried forward income or capital losses.
There is also the issue that even though you may not have any family now, you may get a spouse at a future date. There may even be children and then grandchildren. All these people could and probably would be beneficiaries of the trust. This is generally the case even if they do not ‘exist’ at the time the trust was created.
Perhaps most importantly, a company could also be a beneficiary of the trust. This may allow for use of the bucket company strategy of diverting income to the company to cap the tax rate at 30%. Later on, the retained earnings in the company could be distributed to future family members (providing the shares of the bucket company are held by a different trust).
There are also the asset protection aspects to consider. Not having a spouse may mean holding all assets yourself and taking a risk of not ending up bankrupt. Where the assets are held on trust, the assets are generally much safer from attack should the controller of the trust become bankrupt at some point.
In 2019 the land tax threshold in NSW has been increased to $692,000. A person can own NSW land, other than their principal place of residence, with a value up to the threshold and not have to pay land tax.
On various internet forums where family law issues are discussed, it is interesting to see how the non-law trained persons become the instant experts in Family Law. They will know more than lawyers instantly, often citing the experience of friends or friend’s friends or media reports.
The non-expert opinions that I have heard recently are:
It seems to me that the area of family law brings out more armchair experts than any other area of law and I am not sure what, but it could be because it is an emotional area of law.
My suggestion is if you want to know about family law issues disregard absolutely everything anyone says unless they are a practicing lawyer with a family law focus.
There are 2 major issues when taxpayers want to claim the interest on a loan relating to a former main residence:
Redrawn amounts and Mixed Loans
Interest is only deductible if the loan it is incurred on was used to purchase the property, or for improvements etc. Where any amounts have ever been redrawn from a loan the interest would need to be apportioned.
Tyrell borrowed $500,000 to buy a main residence. Along the way she paid it down to $450,000 and then redrew $50,000 to buy a yacht (which is actually a small boat, but sounds better if he calls it a yatch).
This loan no longer relates solely to the property but is a mixed purpose loan so only 450/500 or 90% of any interest on the loan could be deductible once the property is available for rent.
David used a LOC for his loan to purchase his main residence and borrowed $500,000 initially. Every week he deposited his salary and then redrew amounts to live on. The amount of the loan relating to the property will decrease each week and at the end of 5 years the loan would be extremely mixed.
He would have to spend hours to work out the portion of the loan relating to the property and might find that this might only be 10% of the loan amount.
(this is why you should never use a LOC as the main loan, but only to ‘access’ equity)
The other issue is timing. A person cannot start claiming interest until the property is available for rent. This is generally only after you have moved out and have advertised the property for rent at market rates. While you are living in the property and advertising it the property wouldn’t be available for rent, so you could not claim interest during this period.
There are also timing issues on when interest is incurred and debited to an account because interest is generally incurred daily but added monthly to the loan.
Example 3Let’s say someone moves out on the 30th and immediately advertises the property for rent and on 1st of the following month they are charged $1,000 in interest. Can they claim that interest? No, well not in full because interest is charged in arrears and added to the account monthly. So, 29 days of that interest related to the period you would living in the property. So, in the first month only 1/30th of that $1,000 should be claimed.
Some people have carried forward capital losses. These losses can usually be carried forward until the taxpayer has a capital gain which can ‘soak up’ the capital loss.
I think it is a good idea to use up these losses as soon as possible.
The main reason being that losses are ‘lost’ at death. If the taxpayer dies their loss cannot be passed on to any other person who could utilise it. Don’t lose a loss!
Bart bought a property in a mining town for $1,200,000. He ended up selling it for $700,000 and has a carried forward capital loss of $500,000.
Bart dies and leaves a rental property that he owns to his sister Lisa. The property has a $500,000 capital gain.
Unfortunately, Bart’s loss will not benefit anyone. Lisa will inherit the investment property pregnant with a $500,000 gain, yet she cannot benefit from the loss.
Had Bart sold the investment property before his death he might have made $500,000 tax free and this money could have been passed onto Lisa. He might have even sold the property to Lisa – perhaps with vendor finance if she couldn’t have afforded a loan. Also, if Bart had a flexible will his estate could have sold the property and possibly used up the gain.
Another reason to use up capital losses is their benefits with debt recycling. Making capital gains without needing to pay tax will mean there is more money with which the non-deductible debt can be reduced.
Example of Debt Recycling
Lisa has a $100,000 capital loss from some bad share investments many years ago. Because of this she has a large amount of debt still outstanding on her main residence. But this has not stopped her investing in shares again. She has learnt from her mistakes and is now making some good capital gains.
If Lisa’s shares increased in value by, say $20,000 in the first year, she could sell these shares, pay no tax, and use the proceeds to pay down the non-deductible debt, and then invest in more shares and repeat.
Doing this has 2 advantages
Speak to your tax lawyer or tax agent.