My Beautiful Little Tax Deduction

Hi Scott,
 
I have just been told of a way I can save more money on taxes as a sole trader that is perfectly legal and above board. Apparently I can employ my 14-year-old son on minimum wage to help me as a personal assistant, thus giving me a deduction of up to $18,500 on my taxes. I know I would still need to pay him super. I would pay that money into his account and deduct things like school fees from those earnings, effectively paying for his education, but he would pay no tax as he would be under the tax-free threshold. He would get some pocket money and I would pay less tax and also help with his school fees. This sounds too good to be true. What am I missing?
 
Natalie
 
Hi Natalie
 
What you’ve described has the whiff of tax evasion to me.

This will be like a game of pong for the ATO’s supercomputers – they’re likely to hit you eventually.
 
So all I can say is be ready: you’ll need the appropriate work contracts, documented hours and specific jobs, plus a payroll system and super payments.
 
The tax office says: “There are heavy penalties for taxpayers that deliberately attempt to gain an advantage of the tax system. This behaviour can lead to criminal prosecution.”
 
Is it worth the risk?

Scott.

You’re Nothing but a Bag of %$#^&, Barefoot

Scott,
 
Many people who earn a lot are miners. We sacrifice our lives without family and friends to make higher wages while giving tax cuts to people who choose to earn less but won’t make a sacrifice to earn more. And then they whinge to get more handouts! I’ve never been given a dollar from all the handouts and I’m over it. Australia is a joke. You think we like getting up at 4am and not getting back to our rooms till 7pm? I normally like your column, but if you think we should keep funding the bludgers you can go eat a bag of (DELETED).

Mark
 
Hi Mark
 
I had to severely edit your question for all the swearing, threats and insults – but I thoroughly enjoyed it. Seriously, getting chewed out by an angry miner was the highlight of my week!
 
You work bloody hard, and you get paid bloody well for it. You’re living the Australian dream.
 
Now look, you sound like a tough, stoic bloke. You don’t depend on anyone, and the Government thanks you for that. In fact, you should do what our politicians do: talk to your accountant and discuss shovelling your money into the last great (legal) tax dodge … super, and, because you’re a high income earner, funnel the rest into a family trust.
 
Don’t get angry, just work the system.

AMEN, Barefoot!

Barefoot,
 
I love your position on the tax cuts! I’m in the highest tax bracket, and you won’t catch me moaning about getting a bit less of a still giant tax cut when we are in a cost of living crisis that I am immune from due to my high income. For all of those complaining about providing a tiny tax cut to low income earners who desperately need it, I wish they would all pack up and move somewhere like Brazil – and sip cocktails while staring at the favelas and feeling better than everyone else. This isn’t the Government breaking promises, it’s the Government responding to an urgent situation affecting the most vulnerable in society.  
 
Linda
 
Hi Linda
 
You have to wonder if it was really that urgent, why did they spend months denying they’d change anything … only to turn around and fold like a cheap Aldi card table when the polls dipped?
 
That’s politics I guess.
 
Speaking of which, let’s spare a thought for poor old Treasurer Jim Chalmers.  He’s like me at 9pm on a school night – all he wants is for everyone to shut up and go to sleep. Yet, after Albo’s tax flip last week, some of his colleagues have gotten a bit hot and hairy and want Jim to put tax reform on the table.
 
Good idea. If the Government had the bolas, they could cut the capital gains discount and ditch negative gearing, which would mean that young first home buyers could finally compete on a level playing field with property investors.
 
Yeah, right. “If I hear another peep out of you lot, there will be no tuck shop tomorrow!”, yells a furious Jim Chalmers (who this week ruled both changes out).
 
Oh, and I agree with you on the favelas in Brazil. I visited one a few years ago, and as we walked up to the gates my guide motioned up to the hills – from the top of the hill I could see a gun was pointing at my head. The favelas are run by a ruthless bunch of overlords … kind of like the Government!
 
Anyway, thanks for the words of support, Linda. And, just for balance, here’s Mark, who thinks I’m a soggy sanger …

Is three grand coming your way?

This week I spoke to the ATO.

Rarely is that an interesting conversation … however, this time, I asked them the one thing that people really care about: how much does the average Aussie get back at tax time?

“We don’t have that figure”, said the ATO.

“Well you better get it, then!”

Two hours later, they sent the response:

“As at the end of 17 June 2021, the ATO has issued more than 10.83 million individual 2019-20 refunds, totalling more than $30.53 billion with an average refund of $2,820.”

Fair enough. Of course, yours will be different.

The ATO also added who they were shaking down (my words) this year: anyone claiming work-related expenses, rental deductions and income, or capital gains from cryptocurrency (or losses, depending on when you bought Dogecoin).

Oh, and YOU. They’re targeting you.

You see, the ATO’s supercomputer collects 650 million separate transactions — cross-referencing bank accounts, share certificates, Centrelink payments and more.

Yet in certain circumstances they also employ a strategy used by jealous exes the world over: they get on Facebook and Instagram and see what you’ve been spending your money on. (They won’t confirm it … but they don’t deny it.)

Maybe that’s why 74% of Aussies use a tax agent or accountant — which typically costs $400, according to the ATO.

Now if you’re a business owner, an accountant can be invaluable. Same if you have complicated tax structures like family trusts. Yet if you’re an average wage earner, it might be time to kick H&R down the block.

Seriously, if you’re a wage earner with a simple set of affairs (i.e. most people), you should get a new accountant. In fact, I have the perfect guy. He’s reliable. He won’t get you in trouble. He’ll come to you. And best of all, he’s free.

It’s called ‘myTax’ — the ATOs supercomputer’s brother from another mother. With myTax you can do your return on your phone in around five minutes, because the system pre-fills your information. So all you need to do is double-check the info, enter any deductions, and hit ‘submit’.

Ah yes, but what about those deductions?

Well, the ATO now has an app for that too … it’s called, well, the ATO app. And it’s actually pretty good.

(And if you’re one of the millions of Aussies who’s worked at home this year, here’s a shortcut for claiming work-related deductions: You can skip all the complex calculations … and just multiply the hours you worked at home by 80 cents per hour. The ATO app can walk you through it.)

Best of all, you’ll get your refund … whatever it is … pretty quick too, within 14 days after you lodge.

Tread Your Own Path!

My ‘Free’ Land Cost Me $140 Grand

Barefoot,

My brother and I — both in our sixties — did a land swap, with no money changing hands. The aim was to facilitate generational change (when we eventually die). Now I have now been hit with a $140,000 capital gains tax bill! Is there anything I can do about it, even though I received no money at all?

Jamie

Hi Jamie,

No, you’re screwed.

Had you spoken to your accountant beforehand, they would have explained that (a) the ATO data-matches everything, (b) capital gains tax (CGT) is triggered when an asset changes hands, and (c) they’ll want their money regardless of whether or not money changed hands.

Yet there is something you can do: talk to your accountant to see if they can arrange a payment plan with the ATO.

Barefoot Budget Will Send Us Broke?

Hi Scott,

I was reading about this week’s budget and there was an article saying that you thought the Treasurer was going to send us all broke. I assume it was referring to all the spending and government debt, but thought I’d go straight to the horse’s mouth and check.

Jim

Hey Jim,

Yes, it was clickbait.

While much of the budget commentary was the predictable ‘yay for a tax cut!’, yet my thinking is that if you’re struggling right now (as many are), then you should squirrel away the (on average) $40/week saving and use it to pay down debt or build up your Mojo, rather than spend it. 

Some headline writers suggested that meant I was sticking it to the government. Not true. All I was saying is that if you follow my lead, and follow a plan that has a bedrock of savings, rather than spending, over the long-term you’ll build up both your resilience, and your financial confidence.

That’s good for you, and good for the economy.  

Too Broke to Go Broke

Dear Scott,

I am one of those ‘bastard bosses’ you talk about — I am still about $40,000 behind on my employees’ super (including mine — I have not paid myself any super, ever). I am also going broke. After six years of trying everything to stay afloat, including selling all my personal assets, my company ceased trading at the end of last month.Now I am trying to work out what the hell to do from here. By the time I liquidate what’s left, there should be enough to pay out the employees’ super, but there will still be about $150,000 in debt, mostly to the ATO. I’ve been advised to hire a liquidator, to do things correctly and end up with more to pay to their super, but I have been told it will cost about $15,000. I know it’s all on me — but do you have any advice on what I should do next?

Simon

Hi Simon,

I don’t think you’re a bastard boss -- you gave it a go and you couldn’t make it work. Fact is, more than 1,000 small businesses go broke each week in Australia, according to data analysts Illion.

One option you have is to pay your employees their super, directly into their funds, with any money you have left.

As for the ATO, there are two ways to go: appoint your own (expensive) liquidator, or wait for the ATO to eventually appoint their own. And if it works out that you’re personally liable, then really your only option is to negotiate a settlement with the ATO, or declare bankruptcy. My take?

The person who told you to see a liquidator was bang on. If you don’t, there’s a risk that you’ll open yourself up to even more trouble. It’s time to let the nightmare play out.

Scott

Taxing Question from a Woolies Worker

Hi Scott,

I am one of the thousands of people Woolworths has underpaid over the past decade, and I am now waiting for them to pay it back. The first payment will supposedly be made before Christmas. I do not know at this stage how much I will get, but it could be quite a bit.

My question is: what can I do so that I do not pay a HUGE amount of it in tax?

I have moved on from the job and just do not want the Government taking everything. Could I get Woolworths to pay the tax perhaps?

Tim

Hi Tim,

I highly doubt that Woolies is going to pay your tax.

However, I spoke to the ATO this week about it. They said you’ll be entitled to a tax offset to ensure you don’t pay more tax than you would have if you’d been paid correctly at the time.

And how is that worked out?

All you need to do is include the lump sum payment (including any amounts of tax withheld from them) in your tax return and the ATO will calculate the amount of any offset.

And what about your super contributions?

Woolies will also have to pay you additional super, which may cause you to go over your contributions cap. If that happens, the ATO will either disregard the excess or allocate it to another year.

Basically, the ATO understands you’ve been sold some broken eggs, and they’ll try and unyolk them for you.

Scott

3 ways to spend your tax refund that’ll change your life

Did you know that the average Aussie gets a tax refund of $2,574?

Even better, this year the ‘Lamington’ (Low And Middle Income Offset) of up to $1,080 kicks in.

(The sweet spot for getting the full amount is earning between $48,000 to $90,000.

So, how will you spend a grand in the hand from the taxman?

It’s enough to buy a cheap TV from Gerry Harvey, but not enough dough to change your life, right?

Wrong!

Today I’ve come up with three ways you can spend your tax refund that will change your life.

Go, Barefoot, Go!

Don’t Pay Off Your Credit Cards

Okay, so this is counterintuitive, but if you have credit card debt don’t use your refund to pay it off.

Wait, what?

Here’s the logic: most people have been trained to see their credit card as their ‘emergency back-up money’.

Yet, if you’re in trouble, high-interest-rate debt won’t help, it’ll just make everything worse.

So here’s what to do instead: save your refund into a savings account (we Barefooters call it ‘Mojo’). Cash is the ultimate emergency back-up. Then, with your Mojo behind you, you can go ahead and confidently cut up your credit card and start paying that sucker (or suckers) off.

Escaping the credit card merry-go-round of misery will change your life.

Get a Lawyer, Son

There are only three certainties in life: death and taxes (and George Colombaris. Actually there’s just two).

So with your tax return why not protect your loved ones from the greedy tax man, after your untimely demise.

Sitting down with an estate planning lawyer and drawing up a will or, preferably a testamentary trust (plus enduring power of attorney and medical power of attorney), will help you navigate the ‘defacto death taxes’: capital gains tax, stamp duty, income tax, and (for adult non-dependent children) a 32% tax slug on your super.

Getting this sorted is the final way you say ‘I love you’ to the people you love the most.

Get a Bit on the Side

If you’ve got an idea of starting a side business, use your tax refund money to kick-start it once and for all.

These days you don’t need to put in much more than a couple of grand to get started: a basic website, some Facebook ads to attract your first paying customers. See if you can earn your money back, quickly.

A final idea, and a plug so blatant that Gerry Harvey would be proud: days ago I released the updated 2019 edition of the Barefoot Investor: The Only Money Guide You’ll Ever Need. It’s in stores now, and to date 1.6 million people have used it to change their financial lives!

Print ebook and audio available where good books are sold.

Tread Your Own Path!

How to Find a Great Accountant

Scott,

I am 51 and newly divorced, and for the first ever I feel the need to get some tax advice from an accountant. But how do I find one who is trustworthy and not just after as much of my money as they can get?

Janelle

Hi Janelle,

The cost for basic compliance work -- like tax returns and SMSF auditing -- has fallen dramatically.

Why?

Because pretty well everything is now data-matched and automated, so there’s honestly very little value they can add.

However, in your case it sounds like you’re looking for an accountant who can act as a money mentor as you start your new life. That’s a very smart idea (even better, unlike many financial advisors, accountants charge by the hour).

So how do you find one?

The same way you find a good hairdresser: ask your friends.

That being said, bad tax advice is worse than a bad haircut, so I’d also suggest you jump on to the Tax Practitioners Board website (www.tpb.gov.au) and search for a few accountants in your area.

When you have a few options, send each of them the following email:

Hi,

I’m looking for a caring, experienced accountant. I’m newly divorced and need help making sure my tax and assets are structured correctly. Moreover, I need you to explain the basics so I can have a better understanding of the financial decisions I make. To make sure we’d be a good fit, I’d really appreciate you replying on the following:

First, could you send me a short bio about yourself.

Second, could you send me an engagement letter explaining your terms and how you charge: is it by the hour or can you provide a fixed-fee quote — and what is and is not included in this fee?

Then you wait.What do you want to see from their response?

That they get back to you quickly (preferably under 24 hours), that they sound polite and professional, and that their expertise lines up with your needs.

Good luck.

Scott

Help! I Don’t Want a Tax Bill!

Hi Barefoot,

I am 27 and work as a carpenter with a small construction company. The accountant I have always used (who always got me a good refund) retired at the end of last year, and I am worried I will have to pay tax this year. What can I do to get around it? What deductions can I claim? I just want to break even and not have to pay anything!

Ben

Hi Ben,

Your old accountant was probably a very nice chap, but he didn’t have wizard-like ‘tax deduction’ powers.

He either fibbed on your behalf (highly unlikely) or you simply got what you were entitled to.

So here’s a hack for you:

Download the ATO’s myTax app, via your myGov account.

The myTax app will pre-fill all your information (though you’ll have to wait till August for this). Then you’ll be able to click ‘Calculate’ and see whether you’re due a refund or up for a tax bill.

On past experience, you might well get a refund.

However, if you are up for a bill you can at least extend the time you have to pay it until May next year, simply by lodging your tax return with an accountant. This’ll give you plenty of time to save your backside off.

Yet what can you do to actually lower your tax this year?

Well, there’s not much wizardry on offer now that we’re in the new financial year, I’m afraid.

And it’s not advisable to fudge your tax return. It’s possible to do, since the ATO operates under a self-reporting system, which means it’s totally up to you what you put on your tax return.

It’s a bit like lying to your mother … you’ll be caught out. That’s because the ATO data-matches 640 million separate transactions ‒ cross-referencing bank accounts, share certificates, Centrelink payments and more (which is how they get all your data to prefill the myTax app).

They have the computing power to check the legitimacy of every single tax return.

And they will.

Go to the ATO website and check out their work deduction guide (building and construction employees), and then go through your bank statements to see if there are any purchases you can claim.

Having said that, you can claim up to $299 in work-related deductions without having any evidence or receipts, however you do need to be able to show how you worked out your claims.

Anything over that, however, needs to follow three rules: it must be related to your job, you must have receipts, and it can’t have been reimbursed by your boss.

OK, now it’s time to think ahead — what can you do during the coming year to really save some cash?

The best tip is to get a 100% tax deduction by having your boss pay for some work-related expenses.

You should be able to negotiate extras, like having your employer pay for your phone calls (or cover part of your monthly plan), getting an allowance for work-related travel, or having them pay for a course that will make you a more profitable employee.

This 100% deduction can’t be claimed on your tax. But it’s a much sweeter deal overall than those ‘fully tax-deductible’ purchases you can claim, which really just mean you’re spending one dollar to get 45 cents back (and that’s only if you’re paying the highest rate of tax).

A final tip for the coming year:

The ATO now has an app (called Australian Taxation Office), and it’s pretty good. It allows you to take photos of receipts and enter work-related deductions on the fly. If you’re claiming a car expense, it has a built-in GPS tracker to record car trips. And it feeds directly into myTax.

Download it and get on the front foot for tax time next year.

Scott

The Big Budget Changes You Missed

Far as I can tell, we’re the only country that goes a little ‘Hollywood’ for the Budget. Other nations just read theirs out on a Tuesday afternoon in parliament, and no one gives a toss. Not us. We lock all the journalists up, and give the Treasurer the prime-time razzle-dazzle.

And last week’s Budget was a little … Family Feud. A bit, er, boring.

So what did we learn?

My first takeout is that Australia is the Jay-Z of the world economy … we’re swimming in cash. That’s largely because there’s been an uptick in the global economy, which is boosting the price of our resources. It’s also because unemployment is low. Oh, and also because we’re running a fairly aggressive immigration policy.

This pile of cash is what’s funding the centrepiece of the Budget ‒ a $10-a-week tax cut for low- and middle-income earners. It’s also what ScoMo hopes will fund what is effectively a ‘flat tax’, where 94% of the population pays 32.5% or less.*

*In seven years’ time.

Look, in seven years’ time I plan on living on a Tuscan vineyard so I can drink vino and wear slacks without socks … but I’ll have three kids in primary school by then, so the closest I’ll get to bellissimo is my local, La Porchetta.

Bottom line?

I’m not getting my holiday, and you’re not getting your flat tax.

Anyway, while the tax cuts stole the limelight, the real story ‒ which was largely ignored ‒ was the changes to super.

So here are three things that really deserve prime-time attention:

First, if you’ve been shocked by what you’ve seen at the Royal Commission (and you should be), you can now teach these bozos a lesson, switch your super fund, and not get whacked with an exit fee.

(Still, anyone who’s tried to roll over their super knows it’s harder than breaking up with your high school sweetheart. There’s so much back and forth, so many itty-bitty details and forms … it’s almost like they want you to give up and keep your money there!).

Second, a campaign that I’ve been banging on about for years is the rort of compulsory life insurance through super. Young people collectively pay nearly $200 million a year in life insurance they don’t need. The Government will now force super funds to stop automatically charging young people under the age of 25. That’ll add thousands of dollars to young people’s end balances.

Third, the government is finally moving to protect one of the biggest cash cows of the super industry: the 6 million inactive (read: forgotten) accounts that super funds feast on. The Government has put a fee cap on these low-balance funds and is making it easier to consolidate them.

All in all, it was a terrible night for the super fund lobbyists, which means it was a great night for you and me. In fact, I think the super changes will potentially have a bigger long-term impact than the short-term tax cuts. Just don’t expect to read too much about it. After all, super isn’t very Hollywood, is it?

Tread Your Own Path!

Do I Have to Pay Tax on Bitcoin?

Hi Scott,

I have just bitten the bullet and invested in Bitcoin (and it has been a wild ride over the past week!).

Judging from what the experts suggest, the price could hit $60,000.This got me thinking -- what tax will I pay on my gains?

Lloyd

Hi Lloyd,

If your purchase of Bitcoin was under $10,000, and you’re only using it to pay for goods or services, any capital gain you make will be tax free because the Tax Office considers it a ‘personal use asset’.

However, you’re speculating (i.e. hoping to ‘get rich or die tryin’, as Fiddy Cent says), so you’ll pay tax on any capital gain at your marginal tax rate. Having said that, if you hold on for at least 12 months, you’ll be able to claim a 50% capital gains tax discount.

Even though the Tax Office can’t track Bitcoin, they still want their share of any capital gain you make. So make sure you keep good records (transaction dates, how much you invested, the price you bought and sold for) in case you get audited.

Finally, if you cop a loss on your Bitcoin, you can use it to offset capital gains made that year, or you can carry it forward to offset against gains made in the future. (Losing money on Bitcoin? That’s never going to happen, right?)

Scott

Million Dollar Payday

Dear Scott,

I am 24 years old and I earn $40,000 a year working part time. Today I received a lump sum of $1,000,000 (after costs) due to being run over by a car seven years ago. I need to pay around $5,000 a year in ongoing medical costs. How should I invest this money, and is it worth setting up a trust and a ‘bucket company’ that reinvests in itself?

Max

Hi Max,

First up, you won’t have to pay tax on the payout itself, but you will pay tax on any investment earnings you earn on it. Now, would I invest the money in a trust and then distribute the investment income to a company?

Possibly. The trust will give you asset protection benefits, and the company acts as a ‘bucket’ to theoretically cap your tax rate at the company tax rate of 30 per cent. But know this: it’ll also gobble up a few thousand dollars a year in fees to your accountant.

However, let’s not put the cart before the horse.I

f I were in your shoes, I’d keep it simple:

I’d buy a nice little unit for cash (say $500,000).I’d put $15,000 into Mojo (high-interest online saver account).

I’d put $25,000 into term deposits with different maturities to cover any medical costs within the next five years.

I’d also kick $25,000 into your super.

Then I’d invest the rest ($435,000 or thereabouts) into good-quality Aussie shares (either via a trust, or in your own name), tick the ‘Dividend Reinvestment Plan’ option (so your dividend earnings are automatically reinvested rather into more shares), and let your money compound.

Scott

The Present I Gave Malcolm Turnbull

Last week I sat down one on one with the Prime Minister.

A journo from a rival rag snivelled, “He’ll answer questions from hosts who aren’t wearing shoes” … which, unless Malcolm has been doing vox-pops with homeless people, is a swipe at yours truly. (And for the record, I not only wore shoes, I even donned my wedding suit jacket for the occasion.)

Anyway, I found him to be a good bloke — though maybe that’s because we’ve got a lot in common (like me, in his line of work he tends to upset people, and, like me, he’s even been known to cop it in the neck from his own … err … kitchen cabinet).

The video is on the Barefoot Investor Facebook page … but here are some of the highlights from our chat:

(note the shoes)

Power to the PM

Barefoot: You’ve recently given the energy retailers a slap. I’ve saved $540 on my power bill by going to energymadeeasy.gov.au. Have you run the numbers on The Lodge?

PM: (laughs) Well, I’m pretty sure my son-in-law has …  but I must say your savings are representative of what a lot of people are making by switching.

Financial Education in Schools

Barefoot: Something close to my heart is financial education. The Commonwealth Bank is one of the biggest providers of financial education in schools. Do you think there’s a conflict of interest in having the banks teaching kids about money and then getting them on a database to sign up as customers?

PM: Well, um, I can understand that argument but I think the important thing is getting plenty of people in schools giving that financial education. I mean financial literacy is critically important as you say, so it’s a fair point, Scott.

Barefoot Community Q&A with the PM

Barefoot: Now to some questions from our Barefoot Investor community. Laurie asks, “Why does our government continually reduce the amount we can salary-sacrifice into super?”

PM: I don’t think it’s fair to say we continually reduce. We made some changes in the last budget to make the super system fairer and more flexible, but we don’t have any plans to make any other changes.

Barefoot: Elle asks, “Why is so little being done to help housing affordability? There are so many tax deductions for property investors, like negative gearing, but those of us trying to buy just one home get jack!”

PM: You’ve got to recognise that there’s nothing special about negative gearing … It’s been part of the income tax system since the Income Tax Act was passed in 1911.

(Barefoot aside: Though in 2005 he agreed with you, Elle, labelling it ‘tax avoidance’.)

Barefoot: Finally, I’d like to give you a copy of my bestselling book. I think you’ve got your money sorted, but you might want to give that to ScoMo — it could help him balance the budget.

PM: (laughs) Thanks very much, Scott.

Tread Your Own Path!

I’m a Single Woman Earning $210,000 … How Do I Pay Less Tax?

Hi Scott,

I am a 40-year-old, single, professional woman with no dependants (other than my pets). I have recently increased my income to $210,000 and so have moved into the top tax bracket -- a double-edged sword. I am following your steps, claiming deductions where I can, and saving for a home. The trouble is, most of my income disappears through tax! I have seen you recommend family trusts, splitting income, etc, as ways to reduce tax. What options are available for employees like me who do not have a traditional family?

Jessica

Hi Jessica,

I don’t think earning $210,000 is a double-edged sword … it’s more of a diamond-encrusted poker.

So let me poke you a bit.It’s not true that most of your income disappears through tax. The Australian tax system is based on marginal rates, so you are only paying the top rate of tax of 45 cents in the dollar, excluding Medicare, on each dollar you earn over $180k. The total tax payable on your $210,000 is around $71,932 per year, roughly one-third of your income.

My advice?

Put away your violin, and start swinging from the chandeliers!

You still have $11,503 after-tax income is hitting your bank account each month. and you have no debt and no dependants to share it with. Life is good! However, the truth is that you’re working a very demanding job, so my advice would be to keep your financial affairs simple and build up your financial security.

Here’s what I’d do over the next decade:

First, save up a 20 per cent deposit and buy yourself a nice home. You deserve it, and you can afford it.

Second, add to your employer’s pre-tax super contributions so that you round it up to $25,000 per year.

Third, build up a Mojo account of three months of living expenses.

Fourth, focus on paying down your mortgage as quickly as you can.Fifth, then start building up your investments, inside and outside of super.

Disclaimer: I understand that none of this is as sexy as taking out a whopping big loan, investing in something exotic, and then running a spreadsheet of how much tax you’ll save each year.

But my plan is simple, and it works.

And if you continue earning big bucks, you’ll retire a very wealthy woman, no doubt about it.

Scott

Airbnb Trap

Hi Barefoot,

I have had a friend of my brother’s flatting with me for the past seven months, for which I have been charging him $150 a week cash. Now he has moved on, I am thinking of renting out his room on Airbnb. Question: would I need to declare that money on my tax return?

Lisa

Hi Lisa,

Yes, you would certainly have to declare it.

Unlike with your mate’s brother, who presumably paid you in cash, Airbnb is all electronic payments.

And therefore the ATO will be able to track the income that comes electronically to you from Airbnb, and they’ll send you a ‘please explain’ letter in the mail.

Given the ATO has the computing power to check these things, it’s also a fair bet they have the ability to send you another letter if you sell your home without factoring in any potential capital gains tax (CGT) ramifications. Talk to your accountant.

Scott

Pay the Tax, Not the Tip

Last week Bill Shorten told us he thinks there are two types of taxpayers:

“Those that fly economy, and those that fly first class” (i.e. who can minimise their tax).

(Hats off to the speech writer who came up with this analogy … who doesn’t hate those wankers that fly up the nose of the plane with their reclining beds, and champagne, while the rest of us squeeze in next to a big Tongan bloke and eat warmed-up dogfood with plastic knives and forks.)

So where do you sit on Bill’s, errr, tax jumbo jet?

Well, let’s defer to former flight captain Kerry Packer, who told a parliamentary enquiry in 1991:

“I am not evading tax … of course I’m minimising my tax, and if anybody in this country doesn’t minimise their tax they want their heads read, because as a government I can tell you you’re not spending it that well that we should be donating extra.”

Problem is, since Kerry said that, governments have systematically clamped down on ways to minimise tax:

The Libs stopped kids being used as a tax deduction and put caps on how much you can put in, and have in, super.

And this week Labor announced they’ll crack down on income-splitting via trusts, as well as increasing the top tax rate to 49.5% and hitting negative gearing.

My view?

Both sides are guilty of fingering the economic pie … instead of working out ways to actually grow it.

Seriously, we’ve lived through a once-in-a-lifetime mining boom and all we’ve got to show for it is a tin-can internet plan (NBN) and half a trillion ($500 billion) on the government credit card? And they need more of our money!?

Truth is, even with these proposed changes, you can avoid paying the top rate of tax (see my answer here).

Yet let’s be pragmatic. There’s a price for living in the greatest country on earth. So pay the tax.

Just don’t tip ’em.

Tread Your Own Path!

Are Family Trusts Dead?

Hi Scott,

I own a small business (cleaning), and for the first time in years I have the mortgage paid off and a bit to invest. Last week my accountant had me set up a family trust, costing me just over $2,000. So you can imagine how shocked I was this week when I heard Bill Shorten talking about killing trusts! Should I take my money out again, or leave it in, or what?

Craig

Hi Craig,

You’re a bit early aren’t you, cobber?

I mean (Tony Abbott) hasn’t even called the next election and you’re acting like it’s a done deal!

Now, Bill Shorten’s argument is that it’s unfair that people who use trusts can split their income to lower their tax, whereas everyday workers can’t.

Fair enough. It’s actually pretty hard to argue with that.

Yet the ability to split the trust income with unemployed members of your (adult) family is really only a small side benefit to having a trust. (How many of these family members do you have?!)

The main reason you would have a trust is to protect your assets. The second is to avoid getting whacked with the top marginal tax rate. See, even with these proposed changes you still have the ability to cap your tax rate below 30% (versus the top marginal tax rate of 47%) by distributing income from the trust to what’s known as a ‘bucket company’ and then using the franking credits to eventually lower your income.

Anyway, back to your question. The bottom line is, trusts have been around since King Henry VIII … they’re not going anywhere!

Scott

The Tony Robbins Tax

Hi Barefoot,

I’m 26 and work in advertising and I earn $82,000 a year so I pay a lot of tax! Last year I went to a Tony Robbins seminar called Date With Destiny. It cost me $8,995 (and it was worth every cent!). Am I able to claim part of this expense as self education against my tax this year? It’s really helped me with my job …

Desi

Hi Desi,

You may have survived a fire walk over hot coals, but the ATO will not allow you to claim a motivational seminar as a work related expense -- no matter how much positive vibes you throw out into the universe. In order for you to claim a self education expense it has to relate specifically to your job at hand.

Scott