Tax | Slack Investor

Tax Issues

The Tax Collector (1883) – Samuel Edmund Waller

OK … the certainties are death and taxes … Right, that’s fine. But, at least there is some discretion over taxes. Who knew that it is quite an interesting subject. The rate which a country levels it’s business tax can have a profound effect on it’s economy.

Slack Investor is in Ireland at the moment and, cant help reflecting on the role of tax incentives and the incredible effect on the Irish economy of the establishment of a Special Economic Zone in Dublin in 1987.

The transformation was accelerated when Ireland’s standard corporate tax rate was reduced from 40% to 12.5% (phased in from 1996 to 2003) _{– wikipedia.org}

It should be noted that Australia’s corporate tax rate is 30% and, in the US, 21%. Because of the Ireland tax changes, this made Ireland a ‘Tax Haven’ and a wave of international companies set up entities in Ireland. These include Apple, Alphabet, Facebook, Microsoft, Oracle & Pfizer.

Multinationals move $16bn from Australia to tax havens each year _– _From_{theguardian.com}

There are all sorts of complicated tax minimization strategies with exotic names such as the Bottom of the Harbour, the Double Irish, the Dutch Sandwich, etc. Tax authorities are always trying to shut these down, but fighting a tough uphill battle.

The simplest way that multinationals minimize tax is to shift profits from a high corporate tax country to a low taxing country. This is usually done by charging the Australian branch exorbitant licensing or management fees from the parent company.

Microsoft, which took $6.3 billion from Australian customers during fiscal 2021-22, told the ATO that 93.6 per cent of that was not taxable _{(due to shifting profits to Ireland!)}– ultimately paying just $120.28 million, for an effective tax rate of 1.9 per cent of gross profits._{– From Information Age}

Australia is attempting to fight back with new Tax Transparency Laws that will make companies disclose their transactions on a country basis. There is also an Australian/OECD push to enforce a 15% global minimum tax in the countries where revenue is earned.

Slack Investor applauds these efforts but, the multinational accountants are cunning bastards!

The Tax Mix

The image below shows, on a country basis, what the percentage of total tax receipts can be attributed to Personal/Individual Income, (Dark Blue), Corporate Income (Green), Social Insurance Taxes (Gold), Property Taxes (Light Blue), Consumption Taxes (Black), and Other (Brown).

Click for better resolution – From Tax Foundation report 2024

It is clear that, if Australia wishes a tax structure closer to the OECD average, it has to reduce Personal and Corporate Tax and increase Social Insurance taxes (these taxes are specific to a future benefit (e,g. Pension, Disability, etc). Also, in order to make our tax system more sustainable, a priority must be to increase consumption taxes from the relatively low rate of 10%.

Both major parties must work together to achieve tax reform. I sincerely hope that this can happen. But, it will take a group of politicians with a long term view. Good luck with that!

Australian Super – Division 296 revisited

While on the subject of tax, Slack Investor will have one last rip on the proposed new superannuation tax. There has been lots of media about the Australian government proposed, seemingly inevitable, new super tax. On the legislative agenda is a Division 296 tax on superannuation balances over $3m. Slack Investor has already had a spray about this. Slack Investor knows that there is a need to tax those with big super balances.

There should be incentives to provide for your own retirement but agrees with the government that, once you have enough money to fund your retirement that, all concessions must taper off. Slack Investor objects to the design of the proposed tax, it is to be applied to unrealized gains and the caps are to be not indexed.

There is already an indexed cap on the tax-free Pension accounts of $2m (2025). In the eyes of Slack Investor, this amount is plenty for a comfortable retirement. If your pension fund earns just 5%, this is an annual income of $100K. Any extra super can go in your Accumulation account which is currently taxed concessionally at 15%.

The problem is, that there are some super accounts with huge balances that are taking advantage of this government generosity.

The 2020-2021 data reveals the number of Australians with super balances over $50 million has increased to 135 people_{– From ABC News.}

A Better Way

How about we forget about this silly unrealized gain business and we keep the current $2m (indexed) restrictions in place for the pension accounts to provide for a good retirement income. To raise revenue, the government should introduce higher taxes on any actual gains in super balances left over in the Accumulation account for super balances over $3m (Indexed). These taxes could be between 15% and 30%.

This would raise some money without the complications of unrealized gains. Everyone should be happy!

Free Australian Tax Gifts

Slack Investor was taught to appreciate gifts and … who doesn’t get a little bit excited when they encounter free stuff. Australia offers many lifestyle advantages to those who live here. The Australian Government also offers a few financial tax gifts … for free!

Capital Gains Tax

A capital gains tax is usually applied to the profit made from selling an asset (usually property or shares). The tax can be seen as a reasonable part of the Australian income tax system (personal earnings + business earnings + capital gains). The tax is applied in the tax year of the capital gain at your marginal tax rate – although there is a 50% concession for assets held more than 12 months.

Your own home – A ‘Partial Tax’ Gift

Slack Investor is across the difficulty of owning your own home these days – yet, it is one of the major financial goals to achieve before retirement.

There is no tax for any capital gains on your principle residence in Australia. As those lucky enough to be in the property market, tend to change houses every 11.3 years (9.6 years for units), there are opportunities to passively increase your property stake without incurring any Commonwealth taxes.

However, the cash strapped state governments have got their hands on this free gift by applying Stamp Duty (Tax) to property purchases. These stamp duties can be substantial, For a $700K dwelling , a non first home buyer will pay around $25K (NSW, Vic, Qld, Tas), and over $30K in some states/territories (SA, NT).

Your Super after 60 – A ‘Solid Gold’ Tax Gift (for now)!

For most people, an income stream from superannuation will be tax-free from age 60 – _{MoneySmart.gov.au}

Contributions and the earnings of your super fund are usually taxed, though this may be at a concessional rate. While saving your superannuation, it sits in an Accumulation account. When you retire, you can transfer some (or all) of that money into Retirement phase – an Account-based Pension. For FY 2025, the ATO have set a transfer balance cap (TBC) (limit) of $1 900 000 that can be transferred into retirement phase and remain tax free.

Up to the TBC limit – all earnings (Dividends, Distributions, Capital Gains) from your retirement phase Account-based pension are not taxable – This is a great gift to retirees!

Using the Super Balance Detective calculator from Superguru, you can see exactly how your super balance is tracking. ABC News have an excellent article How does my super compare to others? where references are made to the ASFA ‘comfortable retirement’ standard. All of these sources were used to make the following chart to measure how your current super balance measures up for retirement.

The Red line was generated as a track towards a $1.9m super balance at retirement. Although the red line super numbers are, admittedly, ‘heroic’. Readers of Slack Investor would always like to aim high for an independent retirement – and try to get at least towards the $1.9m in super at retirement that will maximize this tax-free gift.

A chart to see if you are on track for a ‘Comfortable’ Retirement (Yellow Line), or on a path for maximum allowable tax-free income (Red Line). The Red Line was calculated using an earnings figure of 6% p.a. The Green and Blue Lines are the average amounts of super that Men and Women have (ATO Figures 2021) – Click image to enlarge.

Thanks to compulsory super, people with a solid employment history will be on track to have a super balance for a ‘Comfortable’ retirement (Yellow Line). This comfortable retirement definition assumes that you own your own home and have access to the full (or part) aged pension.

Using the 4% rule, a $1.9m super balance at retirement will generate a $76 000 tax free income each year. This would be a ‘Very Comfortable’ retirement – but there may be a few changes in the wind.

But Wait … Division 296

This all sounds too good to be true … You’re right! The legislators are coming after this gift.

The Australian government is considering a very muddled legislation known as Division 296 – which aims to target large superannuation balances. They reference Total Superannuation Balance (TSB) for this proposal. The sum of any accumulation accounts plus any pension accounts. The legislation is currently held up in the senate.

Division 296 tax is imposed at a rate of 15 per cent on a percentage of earnings equal to the percentage of superannuation balances that exceed $3 million – _{treasury.gov.au}

The concept behind this is very reasonable. Slack Investor doesn’t object to the idea of tax on large super balances. Super should ultimately be all about funding your own retirement – and not be used as a tool to preserve wealth for your estate.

However, in a sensible world, some amendments to the current form of the bill should be made. They include:

The $3 million threshold for the application of Division 296 needs to be indexed
In its current form, Division 296 unusually proposes taxation on unrealised gains – rather than being based on the actual taxable income. This is a first for the Australian tax system – it does not make sense and needs to be rectified.

First Home Super Savers Scheme (FHSSS)

After discussing how hard it is for those trying to buy their first home. Slack Investor is compelled to provide some hope in the desire to own your home before you retire. The numbers are in … and, not owning a house in retirement or, losing your job before you retire, puts you at real risk of not reaching a comfortable financial position.

Whereas very few retired home owners are in poverty, most retired renters are …
Helen Hodgson – Professor, Curtin Business School

From – Retirement Income Review Final Report (2020)

There are very few existing incentives on the dusty twisted road to home ownership. They include Stamp Duty exemptions/concessions that vary from state to state. In Victoria, they are available for homes less than $750K. There is also the First Home Buyers Grant (FHBG), which, again, is dependent on which state you live. In Victoria, that comes in at a measly (but I’ll take it!) $10K.

All of these things are worth considering and applying for when you finally purchase a home, but the First Home Super Saver Scheme (FHSSS) is a lesser known arrangement that seems to make sense – but it requires a bit of “setting up”.

In order to make the most of the FHSSS, you’ll need to start planning well ahead of the time to buying a house/apartment (3 – 4 years?) – But planning ahead is the very trait that Slack Investor loves!

First Home Super Saver Scheme (FHSSS)

I did refer to the First Home Super Saver Scheme (FHSSS) way back in 2017 when it was just a twinkle in ScoMo’s eye – it started as an election promise to get the “young folk” on board as the government felt a need to at least be seen to be doing something to help first homeowners.

Normally, your super is a beautiful one-way savings vehicle where your retirement money is locked away, and compounding, until you meet a condition of release or, when you reach your preservation age. For most people, the big taxation benefits kick in after the age of 60 – but that’s another story.

However, the treasure chest of the FHSSS, is opened when you first start to make some extra super contributions (up to $15K per year).

These voluntary contributions can be withdrawn from your super when you finally ready to purchase a home – by filling out an ATO form for a ‘determination’. The determination will tell you exactly how much you can withdraw – it will be a little more than you have put in (your contributions – up to $50K – plus deemed earnings)- and waiting a month.

Getting the money out usually takes 15–25 business days … once you withdraw money to buy a house, you have one year to use it
Choice – First Home Super Saver Scheme: Can it help you get on the property ladder?

These extra contributions are over and above the compulsory super that your employer makes. The scheme works by making an arrangement with your paymaster to salary sacrifice into your super – up to $15K per tax year. Contributions can also be made by arranging with your super provider to make a personal super contribution.

The tax savings come about as, you only pay 15% tax on these super contributions – rather than your marginal rate of say, 32.5%. Plug in your own details into this calculator to determine your possible tax savings.

There are complexities and limitations that include not exceeding your concessional contribution cap of $27,500 – but your super provider will help here.

I would recommend all prospective home owners to take a look at this scheme. Assessment for eligibility is made on an individual basis … so couples and friends can combine their amounts – but start now – it will take a few years to get a useful house deposit.

Colonial First State outline a case study of a couple that have each started voluntary extra super contributions of $15K – After 15% tax this comes down to $12 750 p.a of contributions into their funds. After 4 years, they each have amassed $55K (4 x $12 750 plus deemed interest). A combined house deposit of $110K was possible using the FHSSS – and, using a favourite Slack Investor way of saving – deductions from your salary before you even see it! All of this with tax advantages.

Homework (get it!): – Potential homeowners – read about it – and get on the FHSSS!

Sacrifice

The Self-sacrifice of a father – Jacques Sablet (French, 1749–1803)

Slack Investor likes a bit of old art – and a picture that tells a story really floats my boat. But firstly, a bit of recognition to the fabulous Artvee site that gathers public domain files of artworks from around the world from galleries and museums.

This Jaques Sablet oil painting depicts a father returning home with a bandaged arm – where he reveals some loaves of bread to his hungry family. He has previously allowed a trainee surgeon to extract his blood in exchange for money.

Not suggesting a blood sacrifice is required these days for a loaf of bread – but a form of sacrifice that could help you on your journey to financial independence is Salary Sacrifice.

Salary Sacrifice

The key to tax-effective salary sacrifice is for the employee to take some of their remuneration in the form of concessionally taxed benefits instead of taking it all as fully assessable salary.
H&R Block

Australia has a progressive tax system that steps up at critical income values. The advantages of salary sacrifice are that you are buying a benefit in pre-tax dollars in an arrangement with your employer – who takes out the money before you see it. For example, if you sacrifice some of your pre-tax salary for superannuation contributions – instead of being taxed at your marginal rate, you are being taxed at the superannuation contributions rate of 15%. There is a tax saving.

Australian Residents Personal Tax Rates 2023-2024

Taxable income	Tax on this income
0 – $18,200	Nil
$18,201 – $45,000	19c for each $1 over $18,200
$45,001 – $120,000	$5,092 plus 32.5c for each $1 over $45,000
$120,001 – $180,000	$29,467 plus 37c for each $1 over $120,000
$180,001 and over	$51,667 plus 45c for each $1 over $180,000

The above rates are from the Australian Tax Office (ATO) and do not include the Medicare levy of 2%. There are defined things that you can “sacrifice” and pay for with pre-tax dollars. They include car expenses (loan, running costs and parking) and superannuation.

Salary Sacrifice For Superannuation

Slack Investor has always been a good saver and would save up and pay cash for a second-hand car rather than getting a car loan. The benefits of sacrificing salary for a car were small without the a car loan element. I did however see the advantages in sacrificing part of my salary for superannuation.

United Global Capital (UGC) provide the case study for worker William aged 45 who plans to retire in 20 years. He was given a pay rise of $5,000, bringing his total salary to $90,000 pa. Rather than pocket the gain, he uses the pay rise to boost his retirement savings and salary sacrifices the extra $5,000 salary into super each year

By using this strategy, he’ll sadly have less take home pay ($3275), but he will save on tax and have an extra $975 in the first year to invest into super, when compared to receiving the $5,000 as after-tax salary (see Table 1).

The real benefits are in the disciplined automatic saving of $5000 per year and the magic of compounding over 20 years. If he continued to salary sacrifice this amount into super, this could lead to William having an additional $228,500 in his super after 20 years (see Table 2).

You can enter your own salary details using the Industry fund salary sacrifice calculator.

There is also another advantage of salary sacrifice – for getting into the property market using the Australian Government First Home Super Saver Scheme. It has some complexity and form filling – but it does allow you to load up your super with salary sacrificing and then withdraw up to $50 000 from your super as a first home deposit.

There are drawbacks to salary sacrifice … the main one being that even though there is an overall benefit to your wealth position – it is not realised till you retire and start using your superannuation – this may be many years away. Your overall take-home pay will immediately reduce – which is a tough ask in these higher prices times.

Slack Investor is no stranger to delayed gratification and loves to automate his savings … so salary sacrificing to super was a good strategy for me and my partner. There was always competition for funds with paying off my home loan – and, I never got to using the maximum amount allowed for salary sacrificing per year (Currently $27 500 per year) … but it was always my aim.

Salary sacrifice was a worthwile element in the Slack Investor path to financial independence.