Part two of my Pay Less Tax series which focuses on various strategies for lowering the amount of tax you pay here in Australia. You can check out Part One – Buying Assets In A Trust if you missed it. This strategy is pretty straight forward, you buy stuff with pre-taxed dollars lowering your taxable income which results in you paying less tax that year.
What Is Salary Sacrifice?
Salary sacrifice, also know as a salary package is an arrangement between an employer and an employee. The employee sacrifices part of their salary or wages in return for the employer providing them with benefits of similar value.
The key thing to remember here is that you’re using pre-taxed dollars when you sacrifice.
Lets consider someone who is earning $80K and needs to buy a new computer worth $4K. At $80K per year, this person would receive $60,853 dollars after income tax.
They could pay for the new computer out of this post taxed income of $60,853 which would then bring them down to $56,853.
If their employer let them salary sacrifice the computer to bring their taxable income down to $76K per year, they would receive $58,233 dollars after income tax PLUS their computer.
That’s a difference of $1,380 dollars saved. Imagine if you did this or something similar for 30 years. That starts to become a serious amount of saved taxed money that could be invested or spent elsewhere.
You really have to check what you’re company is offering when it comes to salary sacrificing. I’m pretty certain (please comment if I’m wrong) that most companies allow you to salary sacrifice into super. There’s a limit of $30,000 a year for those aged under 50 and $35,000 a year for those aged 50 and over for all before-tax contributions.
Make Sure You Check
There are no restrictions on what your employer can package for you so it’s really best to check with them. I know a place that allows their employees to salary sacrifice their home loan! Yes that’s right, their bloody home loan. I’m not sure of the details but can you imagine if you could pay off your home loan using pre tax dollars every year. Unfortunately my work only lets you salary sacrifice super which is no good to me for now. So go check with your employer. You might have an expense coming up soon that you could potential pay for using pre taxed dollars.
←Pay Less Tax Part 1- Buying Assets In A Trust
History of my properties values since purchase
*sourced from Commonwealth bank valuations/RP Data
Uh Oh… Is it happening? Two of my properties have declined in value since my last update.
Is the property market starting to crash?
Do I panic and rush to sell my properties before it’s too late?
What am I going to do? What happens if I lose ALL my hard earned money? I NEED TO SELL NOW TO MINIMIZE LOSSES!!!
You never lose money unless you actually sell when you’re down. The funny thing is that even though two out of three properties declined within the last month. Rent has actually risen in two out of the three markets. I’ve said it from the start, I’m not too concerned about valuations but rather about cash flow. As long as there is positive to neutral cash flow I’m happy.
One enormous advantage of leveraged investing with real estate is lack of margin calls. With this recent dip from my properties, my LVR has risen above 80% which is not good. If you can recall from my previous net worth updates, as soon as any of my IP’s rise in value and consequently my LVR dips below 80%. I apply to pull out the equity to top it back up to 80% LVR and leave the cash from the equity withdrawal sitting in an offset against the loan. It cost me nothing to do and it’s essentially not changing anything because the offset money will negate any interest repayment increases. It’s there just in case and helps turn the asset to be more liquidable for an asset class notoriously know to be quite illiquid.
If this was shares however, I would most likely be getting a margin call to get my LVR down to 80% or even lower. Property is a slow moving beast and as long as you’re making your repayments the banks are Ok with the value dropping significantly. I have never heard of anyone getting a margin call from a property decreasing in value.
With this in mind, I would like to point out that there is no reason for me to panic with this small decrease. It’s part of investing. There will always be peaks and troughs. Cash flow is your lifeblood that will see you through the troughs and the peaks are just gravy on top of a well established portfolio that is built with a solid foundation.
To conclude, I lost $13K with two of three properties going down in value. One of them actually went up $5K and then dropped $4K within the month so I’m up $1K there. I also contributed a measly $1K to savings after some big purchases during the month for some events later of this year.
PS I haven’t updated my super balance, I will do it next update
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||Started Full-time work late Nov
||Built property and recieved FHOG ($21,000)
||Bought second IP
|| IP’s re-valued
||Paid for holiday
||Withdrew equity from property
||Paid 4K off HECS Debt
|| Car went out of Portfolio, Bought IP 3, Super went up and one IP went up
|| Big bills. Not much saved.
||Super went down slightly
||IP went up in value
|| Some big bills
|| Bills (again)
|| Didn’t save very well
|| Steady month
|| Two IP’s went down.