Only 3% of Australian taxpayers are in the top tax bracket, which starts at $180,000 a year and has a marginal tax rate currently of 49%. And now I'm one of them, I think. IPE just declared a 5.75 cents a share dividend payable next month. I have 100,000 shares and so the dividend is $5,750. And it is a totally unfranked dividend. After this, I'm currently estimating my taxable income for the year at $182k and I'm now expecting to pay $3,000 extra tax at tax time. That also means I'm going to have to pay quarterly tax from now on.
I guess this is a good problem to have, but it feels kind of absurd that I'm now in the top tax bracket. Of course, when I first moved to Australia I wasn't that far from it because it kicked in at $50,000 a year in those days (1996) and my salary was a little higher than that. After "voluntary" super contributions of 7% and some deductions I was out of the zone.
Moominmama's reaction was that I should generate some business expenses to pull my income down. I could buy a nice big computer screen for home use, which I couldn't charge to my employer. It will be half price now I'm in the top tax bracket. I'm already almost maxing out my pre-tax super contributions. But spending money on stuff just to reduce tax is silly.
4 comments:
Personally I'd convert some current income into (hopefully) long-term capital gains (that will eventually get taxed at half your marginal tax rate... For example, you can borrow and invest a couple of hundred thousand dollars via a margin loan, and invest in an index fund that is likely to pay a sufficient dividend to cover part of the loan interest. You can pre-pay interest for next FY this June, so you get to deduct a whole year of margin loan interest off this year's income, saving your 50% of that interest cost via the immediate tax deduction. As long as the total return (dividends + capital gains) is close to the interest rate paid on the margin loan you'll end up considerably ahead due to the immediate tax saving and eventual tax break on the capital gains component of the total return. And if, as is likely in the long term, the total return exceeds the margin loan interest rate you'll end up making a profit.
Of course this depends on your risk tolerance -- there's always the chance that a significant drop in the market will trigger a margin call and could force you to liquidate the margin loan investments at a loss.
The other option would be to salary sacrifice the maximum amount allowed, to reduce your taxable income a bit, but that has to be arranged before the start of the relevant financial year, so it's too late to be of help this financial year.
I already have a $200k margin loan and salary sacrifice the maximum super contributions... So this post is mainly that I feel a bit surprised that I just feel comfortably middle class, but am somehow in the top 3% of taxpayers. So one or some of the following must be true:
1. A lot of other people are living beyond their means or not saving much...
2. A lot of other people have cleverer tax reduction strategies...
3. It's an illusion that so many people have big houses, drive around in BMW's and Mercedes, stay at luxury hotels etc. pay private school fees etc.
As you'll see in upcoming reports on this blog once my wife's salary disappears as it did in the middle of this month as she is on maternity leave, our savings will fall to zero pretty much apart from the super contributions, yet we have a somewhat frugal lifestyle. 12 year old car, house only 30% above the median price for the metro area, not travelling anywhere much this year etc. not paying school fees or for daycare...
There are other options including the black market... I guess having two salaries in the top 20% or so and spending most/all of it can work too.
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