Tax Tip 383: How to Live Well Without Paying Income Tax

Many people don’t like paying income tax for political or philosophical reasons.

There are a few strategies as to how to do this.

First step is to get your living expenses down.

The next step is to get a main residence and start paying it down asap.

While doing this, if you cam debt recycle into income producing assets and this will speed up the repayment of the loan.

When investing, think ahead so that once the house is paid off the structure of your investments will allow you and the spouse each earn up to the tax free threshold, which works out to be about $22,800 at the moment for most resident tax payers. See

Tax Tip 197: How much can be earned without having to pay tax?
Tax Tip 197: How much can be earned without having to pay tax?


A couple could thereby earn $45,600 per year and pay no income tax. A growth asset base of just $1,140,000 paying 4% would generate $45,600 p.a. in income.

You might think this is low, but the aged pension for a couple is currently $34,034 per year for a couple.

See How much Age Pension you can get - Age Pension - Services Australia


Without paying any rent or loan repayments is $876 per week enough for 2 people?


Dave, and spouse, at Strong Money Australia spends roughly $40k pa, but that includes $20k in rent so it is possible.

Our 2020 Household Spending Revealed - Strong Money Australia


There is also another strategy to double the tax free amount. I have written another tip on this and will post it in 4 days time.

 

Where possible go for high non cash deductions.
My version was staying out of the super system for flexibility.
You can make lots more and only pay 5-10% tax.

 

A cash business would certainly help.

 

Even if you earn to $44k per person, you are only up for ~$4k tax. So that's $40k (or $80k/couple) before the tax bracket jumps to 32.5c.

I reckon I'm comfortable on $40k pa after tax.

 

I would rather stay in and be forced to accept $170,000 (at my age) without having to pay any tax .

 

I'd rather have the money and options before 40 than wait till I'm old.
Happy to pay my 10% tax.

 

I dont know why if make all that loot before 40 why you would not want to take advantage of low tax rates and super between 40 and 70 otherwise you will find yourself with a big pot of loot made small if you want to use it all wisely on things like wine, women, song and things that go fast. Knowing you have another pot of loot means you can invest more aggressively and make more loot, or just be more self indulgent with the loot .

 

There is also the magic of franking credits to consider:

Homer has been reading propertychat and decided that investing in LICs is his thing. He's hooked on the 100% franked dividends - so much so all his income is fully franked dividends from LICs. He invests in the usual suspects, AFI, ARG, WHF, AUI etc.

In 2021-2022 he receives $116145.40 in dividends with 44977.60 in franking credits.

His grossed up income is $116145.40+$44977.60=$165922.

On $165922 he would pay $49776.58 tax including the medicare levy. But his franking credits of $44977.60 cover this - voila! No income tax on the dividend income of $116145.40!

 

55 is not that much older than 40.

Even happier to pay 0% tax.

TBH, it doesn’t matter how you get there as long as you DO get there.

I do like the asset protection of Super, just in case I make a costly bad decision in life.

 

The wonderful tax free income stream from super after retirement.

We live very well in retirement in a low to zero taxed situation.

having paid enough of the stuff in my working life to fund a small country it feels vey good.

 

Totally agree.

I can’t see us ever paying income tax ever again, even as our property portfolio becomes more and more cashflow positive.

Hopefully, we remain in good health long enough as I have a goal of receiving $1M (no tax) per year .

 

Well I'm not 55 yet and I think it is.
And plenty I people I know carked it before 55.

Super being "tax free" is a myth. It almost was, only for a short time.
And how much you pay before it goes in? And how much on the rest?
I'd say it's much more than around 10%.

No it doesn't, yet I'm surprised how people are still locked into the world of "retire at 60".
In my mind I "retired" at 35.

It does have some as do trusts and companies. And like all protection it comes at a cost.

SMSF can't borrow, super is full of regulations. I can borrow, deduct interest, depreciation and decide where, when and how my money is invested. Some call it financial freedom.

And Kerry Packer's annual taxable income in the 90s was 25k. A few others not much much more.
That guy must've been poor too.

 

- There are three broad myths to super being tax free. Some are that the myths are just incorrect.
1. Earnings in super are easily tax free and provided the member is aged 60 and has $1.7m then there is a almost 100% chance it should be tax free earnings. Tax is even a positive thing with tax credits refunded, Once the tax free has been consumed then super remains the second lowest tax rate in the country. In its worst case 10-15% tax. Its as close as you can get to tax free. On $3m of investments the average tax rate is 6.5% or less with refundable credits and lesser rates on some cap gains.
2. Death. Many overlook that if you die and the beneficiary is a adult (even through a estate) then a element of SOME super can then be subject to 17% "death tax" for the beneficiary....the major exception is a spouse. Many dont even try to fix the problem.
3. During life, a member aged 60 can take out a unlimited amount of "taxable super" and there is no tax consequence. The catch its 2, above. With suitable planning eg spouse as beneficiary then there is ZERO tax concern on death.
4. One of the most common problems I see with property investors is they dont sell down some property before age 60 and then when they do retire they dont sell down property (that is taxed) but live off the super which loses the tax concessions. They spend their tax benefits and keep the taxable.

One of the tragedies of the super regime is complexity. Few people know the broad rules and many think they do and dont. Many blame the complexity for why they dont like of use super,. This is like driving on tollways and complaining about the cost. There is a hidden tax embedded in the super system that comes from lack of knowledge and use of strategies available.

 

Exactly.

Our SMSF gets a tax refund every year, thanks to dividend imputation.

 

Based on the limited population of new SMSFs I see approx one out of three eligible "tax free" funds are paying tax. I have a long standing offer to any fund where members are retired or aged 60+ that I will review it and report on possible tax concerns. Just picked up a new one with members totalling $4m and members are aged 63 PLUS and none have pensions and say they didnt know....Nuts. They would also get refund of franking and quick calcs suggest $18K of tax savings but its too late for the 2021 year. Ironically its not a issue they can sue or claim negligence for. Tax advisers cannot legally recommend a pension commence as its financial advice requiring a AFSL. Its a legal defence for the tax adviser.

 

And how much tax do you pay on the way there?
For a proper coomparison you would have to look at lifetime tax %.
And paying it in tax early is much wose than later.
I'd rather pay 10% along the way and have leveraged RE for 20 yrs and cash out any way I want or keep another 20 years.
And how many extra hours per week of work just to pay 46% of it in tax... nah I'll have my siesta thanx.
This also works on the assumption that RE investing starts in the 20s (as everyone should!) and fairly simple lifestyle.
As posted in another thread, even one Sydney house paid off is better way better than most.
Add an IP and it's probly top 5%.

 

One of the misconceptions to property is that you can live off the wealth in retirement. Typically you can only live off the free available income. And land tax tends to affect this too. To utilise the wealth it must be realised. That is a element of retirement strategies and its surprising how often people avoid selling. Investors should always consider their lifecycle which has three stages. 1. Accumulate,. 2 Consolidate and 3. Liquidate down. Shares are easier as you can slowly sell down where property isnt so easy. I often see them with 3, 4 or 5 properties and after land tax their income isnt much. They dont want to sell because of tax...Yet its almost always under 25% of the property value and would release $X00K plus per property. Alas for many its then too late for it to be invested at a concessional tax rate. In such cases it is usually beneficial to sell some property, not all of it.

I recently advised a older couple who had avoided this issue and hold 6 properties. The land tax means their net income is very low. They live a frugal life with repairs and land tax a constant penalty and "wished" they could get a pension. Thats like $30K a year.. Easy to achieve. .The answer was staring at them in the face but they didnt see the solution. They had been accumulating for 20+ years and didnt see any other strategy. They had $5m+ of assets and were wondering if they should EITHER buy a new car or take a rare holiday. Even their super was fully tied up in property so they couldnt choose a pension that was tax free. Selling just one $1.4m property means they now think of themselves as "retired". They had thought about selling the one in super but with the sale of the ONE outside super with just 6 months before they break the age limit on super constributions they can also get good tax benefits . Now they are considering selling one more. Keeping 4. Their annual income will go for $20K to $140K and none of it likley subject to tax.

Most property heavy investors eventually realise the problem too late. They dont seek external advice and fear selling like tax will consume all the sale. Its an irrational idea a bit ike accumulating loads of super but never drawing any of it. Tax is usually less than 1/4. Out of the $1.4m sale the tax is $160K. Yes its a lot all at once but the property was bought in 1996. That was $3200 a year each in tax for a $1.25m profit...13% average tax. .They saw $160,000 as a large tax number and ignored the time and the profit. ... It also saved them $10K a year in land tax for each future year making what they hold even more cashflow beneficial.

I see retirement planning around property sales taking on a higher emphasis as more people have property and also they hold more than one than in the past. But age 60-65 or later isnt when its needed. Its when the people are late 50s the plan should start. Property people tend to shy from financial planners and gravitate to people who favour retention and accumulation which inst always the right call.

 

I had a similar client with 6 properties paid off and low income. She told me she was selling to just invest in index funds and I was initially shocked but she more than doubled her income overnight and prob got more capital growth too. Sadly she died about 1 year into retirement.

 

Couldn't agree more. It's the "never sell" mentality. For some it's ok, others keep living like paupers when tey can be enjoying the fruits of their labor.
They're afraid of paying 10% tax when they spent decades paying over 50% on most of their income. Yes many people pay over fifty % in real terms.

And they got the neg gearing and deprecation along the way. It's like a tax deferment, after using the money for compound growth for 20yrs+.
And if I decide not to work but start a business, then a trust holding can distribute to my new company which btw will incure incidently the expenses of starting a new biz.
And if my main company that incidently had a quiet year, also recieve trust distributions.
Or I decide to take a year off to get some important stuff done such as navel gazing and skylarking.
And all that comes in at about the 10% rate I mention.

FPs are probably much better these days, but I reckon it's still hard a FP that is well versed across different assets. And for whom real estate is more than a reit.

 

See my new post on how to double the income without paying tax.