We’re on track to increase our wealth by $100,000 dollars over the next 20 years by strategically changing the use of our home loan.
Not by taking on more debt.
Not by changing our asset allocation.
Not by increasing our risk tolerance.
2 transactions were all it took for us to start deducting interest repayments on part of our home loan.
This is a strategy known as ‘Debt Recycling’ (DR).
This article has been on my mind for a while but I really wanted to go through the process firsthand before writing about it. There are a few different ways to do DR but I’ll just be covering how we did it because I don’t know all the nuances with the other methods.
So let’s break it down!
What Defines Debt Recycling
DR = Turning non-deductible debt into deductible debt.
In our case, we wanted to be able to claim our PPoR (Principal Place of Residence) home loan interest as a tax deduction.
Without DR you can’t claim interest from your PPoR loan like you would with an investment property (IP) loan.
How We Did It
*Please note that all the examples in this article will be simplified. Things like rate changes throughout the year, loan repayments and when we officially started DR will remain constant to make it easier to explain.
For simplicity purposes, I’m going to explain our method of DR without our Family trust. I’ll add in the family trust later so everyone who does have a trust can see how we did it but I want to make it simple to start with.
IMO, DR works best when you have a lump sum that you’re planning to invest anyway. That was the position we found ourselves in after we sold IP2 and had over $200K in cash.
We also bought our PPoR last year and I was planning to DR part of our home loan so I made sure that we split it into two parts.
Here is how our situation looked before DR.
As you can see in the above picture, Mrs Firebug (Ladybug in the picture 😂) and I have to pay ~$10K of interest a year for both our home loans (which are secured against our PPoR). These are real numbers (sorry Melbourne and Sydney folk 🙈) when we first settled on our home.
We can’t claim that ~$10K as a deduction because the use of the borrowed funds were for our PPoR and not an income-producing asset.
We also have a lump sum of $211,000 from the sale of our investment property that we would like to invest.
For illustrative purposes, below is how it would have looked if we skipped DR and just invested our cash in shares.
Investing without DR
There’s nothing wrong with the above picture but the Firebug Family doesn’t save any tax on their PPoR home loans.
The point of DR is to change the use of the borrowed money for deductions.
We were able to change the use of loan 2 by completely paying it down and then redrawing it out to invest in shares.
This is how it looked after DR Loan2.
¹ Loan2 was paid down and redrawn to purchase shares. Loan2’s interest payments are now tax-deductible ² The Firebug family received $6,330 in dividends but can deduct $6,077 in expenses from Loan2 and thus only need to declare $253 in additional income.
As you can see in picture 2 we were able to change the use of Loan2 to become an investment loan.
We then used this new loan to buy income-producing assets (shares) and are now able to claim a deduction on the accrued interest saving a total of $1,975 on tax.
But how exactly did we repurpose the loan?
In one word… redraw.
Once we sold IP2 and had the large lump sum, I simply paid down Loan2 completely and then redrew it back out.
The above picture shows the balance for Loan2 to originally be $209,508.90 on the 9th of November 2021. I paid it down to $0 on the 29th and then used the redraw facility to pull the $209,508.90 back out straight away. Redrawing from a loan is considered new borrowings by the ATO.
I was very worried that the loan would automatically close so I went down to an actual branch to ensure that it didn’t. The girl that helped me actually knew what DR was which helped a lot.
And that’s basically it.
We essentially are in the exact same position we would have been without DR but now Loan2’s debt is tax-deductible.
How We Did It (With The Trust)
The concept of DR remains the same, it’s just more complicated with a trust. (like a lot of things 😅)
Here’s how we did it.
DR with a Trust
¹ You need to make sure that the terms of the loan allow for changes in interest rate to be the same as what the bank is charging you. In this example, it’s constant at 2.88% when in reality the interest rate would fluctuate. The loan agreement between the Firebugs and the trustee needs to be in writing and on arm’s length terms too. ² The Firebug Family pay and receive the same amount ($6,077) so their tax position is nill.
³ The distribution is only $253 because the trust had to pay $6,077 in interest to the Firebug Family. The distribution will be taxed at the marginal rate of the beneficiary.
There’s a lot going on in the above picture but I hope it makes sense. Leave me a comment below if you need something explained in more detail.
What If I Don’t Have A Lump Sum?
Not everyone will have a large sum of money to completely pay down a split of their loan. We implement a dollar-cost averaging strategy which means we don’t save up large amounts to drop in at once. The sale of IP2 presented a rare opportunity for us to execute our DR strategy but I understand that won’t be the case for most people.
Annoyingly, I actually had some examples and financial products that are suitable for people who want to do DR whilst DCA’ing. But since ASIC doesn’t let people like me talk about those sorts of things without paying them money, I unfortunately had to delete this part out of the article :(.
Terry W Tips and Future Podcast
I reached out to one of if not the best SMEs (subject matter expert) for DR in Australia for his top tips. I’m also teeing up another podcast with him to do a DR specific episode. Please let me know in the comment section what you want us to cover and I’ll try to add it in 🙂
If you want to know more about Terry, check out the first podcast we did together here. He also has his own podcast which you can check out here.
Terry’s top tips 👇
You can only claim interest if borrowing to buy income-producing assets
You need to avoid mixing loans as this will reduce tax savings
Split loans first before repaying
Repayment needs to be done once in full
Redraws can be done in stages
If borrowing to buy non-dividend paying shares the interest could be a cost base expense so it would still be worth splitting and recording the interest as it will reduce CGT.
Written loan agreements on arm’s length terms are needed if the borrower and the investor are different
Never redraw into a savings account with cash as it will cause a mixed loan
Avoid paying into a share trading account with cash in there as this will cause a mixed loan.
It is possible to debt recycle with any loan that has redraw, but some loan products are better than others, so see your broker about this.
Debt recycling is a tax strategy so only registered tax agents or tax lawyers can advise on it.
Advice on what to invest in would be financial advice if it involves shares or super as these are financial products so only an AFSL holder or authorized representative could advise on this.
It is possible to debt recycle with investment properties too.
It’s important to note that DR didn’t change our investments, amount of debt, asset allocation or anything else really. We simply changed the use of the borrowed money.
I used the 32.5% tax bracket but this strategy would save you even more money if you have a higher marginal tax rate (I forgot to include the medicare levy too which would have made the tax savings even more impressive).
There’s also a pretty good chance that interest rates are going to rise in the next couple of years.
More interest = more deductions for us.
Oh, and if you’re wondering how I came to that $100,000 number in the intro. I simply punched in $1,975 into a compound interest calculator for 20 years at 8 interest. There are a bunch of assumptions right there but it’s impossible to know how the interest rate will move over that time period and we plan to redraw equity out of Loan1 and Loan2 which will mean more deductions. Essentially, we don’t ever plan to pay off our PPoR loan. I eventually want to DR Loan1 and then continuously redraw equity for the foreseeable future (Thornhill style!).
This strategy is something that took less than a week to sort out but will be saving us money for as long as we have debt against our PPoR.
Pretty cool if you ask me 🙂
Are you doing DR? I’d love to know why or why not in the comments section below.
I’m writing today’s article as if I could somehow post it back in time, two years prior would have been perfect.
You see, Mrs Firebug and I were packing up our life in Australia, about to jet off to the other side of the globe with a strong desire to see all the wonderful and interesting places that Europe offers. But quitting your job and moving to London can be scary shit yo! I’m a pretty confident person normally but you do second guess yourself when you’re out of your comfort zone.
But you know what? Working hard and investing during our early/mid 20’s left us in a really good spot financially and we avoided a lot of potential worry and stress had we made this trip beforehand.
Still, I really had no idea what to expect and wasted a lot of time and money simply because I didn’t know what I’m going to share with you in today’s piece.
I’m writing this guide to help ya out. If you fall into one of these categories:
You want to move to London
You already live in London
You want to move overseas but continue to invest in Australia as we have done
Then this is the guide for you!
Are you sure you want to live in London?
Before we dive into the article, I want to warn any would-be Londoners of one unavoidable fact.
You really need to ask yourself what’s important. We predominately moved to the UK to be close to Europe for travelling. Mrs. FB is a school teacher and she basically earns the same amount of money in London as she would in just about any other city or town in the UK. But most of the high paying contract jobs in tech were in London which is the reason we decided to move there.
Had I been in an industry that didn’t attract a premium in The Big Smoke, there’s a very good chance we would have ended up somewhere else like Liverpool, Edinburgh or Belfast.
IMO, you really should heavily consider living somewhere else if your salary is < £35K or you can get paid a similar wage somewhere else in the UK.
I know a lot of people who moved to London straight after uni that worked minimum wage jobs at a bar and couch-surfed through Europe. London would be one of the last places on earth I would choose to live if I had a minimum-wage gig (Cafe work in Thailand/Mylasia comes to mind). Don’t get me wrong, it’s an amazing city, but there’s an array of other really good cities in the UK where you can do lower-paid work and not have to pay the outrageous rental costs of The Big Smoke.
But if you’re still keen on London, please do read on.
Setting up life in London
Find a home
We lived in two apartments during our tenure, the first being in Norbury (Zone 3) before succumbing to the classic Aussie stereotype and set up shop in Melbourne 2.0 aka Clapham (Zone 2). We were paying £900/m (bills included) in Norbury for our room that had a private ensuite in a brand new apartment right next to the overground station. In Clapham North we paid £900 + bills (£60) per month for a classic Edwardian style flat that was a lot older but actually had more character which grew on me.
The Zones dictate how central the location is to the city (Zone 1 being the most central location) and they actually make a difference in the cost of public transport too.
Zone 1 is too expensive IMO (you may be able to find a cracking deal) and we found the sweet spot in terms of location and price was in Zone 2. Zone 3 was ok but if you’re planning to commute via bike, you could be looking at a 45-60 minute trip each way which is a little bit offputting for most. IMO it is so worth paying a bit extra to be closer to the city so you can cut down your riding time to be 20-30 minutes to the CBD. Check out this zone map for more info.
One of the best resources I can recommend is the Aussies in London Facebook groups. There are a few of them getting about and sometimes the groups that are a bit smaller (<15,000) are actually better. These groups are not only fantastic to find spare rooms, but they also act as a market place for second-hand bikes, clothes plus tips and tricks. You can usually get some killer deals on there when people move back to Australia and sell a lot of their stuff. If you post a pic of yourself with a bit of a write-up, there is a great chance that you’ll get some messages from people looking for a flatmate. I’m not on Facebook anymore but I’m sure there are a few people in those groups who’d benefit from this guide so feel free to share this around.
We personally found this way of finding a place much better than going through websites like Spareroom which was the website we used for our first place. Those other websites will charge you a premium to be able to access newly listed rooms/properties plus dealing directly with the flatmates was always a better experience even when we didn’t want to live in the flat.
It depends on what you’re looking for too. A lot of people will say that you should live with people from other cultures/countries to get the proper experience which probably won’t happen if you’re looking for rooms on an Australian Facebook page.
Here are my general recommendations based on our experiences for finding a home in London.
Flat sharing is fun and is a key part of the experience (way cheaper too)
Couples have it much cheaper than singles even factoring in the extra price couples sometimes have to pay for
Having our own ensuite was worth it (for us)
London has great public transport but there are some black spots. Try to get as close to a tube station/overground as you can. If you can get near a big hub (like Clapham Junction), even better
Biking is the best way to get around the city (more on this below)! Bike superhighways are a recent edition (I believe old Bojo had something to do with them actually) to London but they are superb and something I would try to live near to make my commute into the city a hell of a lot easier. There is a world of difference riding in a dedicated lane vs weaving in and out of traffic
Thank your lucky stars that you didn’t move to London ~ pre-2016. Setting up a bank account used to be one of the most bothersome tasks before the digital banking shakeup in 2014 that changed everything. Horror stories used to be common where people would move to London and get stuck in a shit sandwich loop. They couldn’t sign up for a flat because the rental agency wanted to see payslips/bank statements but the old school banks wouldn’t let someone open up an account that didn’t have a place of residency in the UK, but they couldn’t get a place without… yeah, you get it.
What a nightmare!
From what I heard, the 2008 financial crisis introduced extremely strict banking rules which meant a whole bunch of red tape and general pain for ex-pats trying to start a new life. Fast forward 6 years and the government started to ease the barrier of entry for banking licences and reduce the restrictions which gave rise to a new concept in baking… the challenger banks.
You might have heard of 86 400, Volt and Up. These are called Neo banks in Australia but they’re really just copy cats based off a concept that was started here in London.
I bank with both Monzo and Starling and can recommend both. They are seriously epic. The apps for both are extremely well developed and do everything you need. You can’t get a better interest rate for international travel either and there are no fees associated with the account.
But the best feature of all, hands down, is how effortlessly you set up your account. It’s 100% done through the app. No branches or dealing with people at all. You fill out a bunch of questions, record a selfie video saying who you are, take a photo of your passport and a few other documents and you’re done. The card gets mail out to your location and that’s it!
If I had to choose, I’d probably go with Monzo purely because it’s more popular and they’re cool features you can do if you share a meal with a group and everyone uses Monzo.
Boy oh boy is it ganna be hard going back to Australian phone plans after you see what kind of deals you can get in the UK.
Mrs. FB and I are both with Voxi (a subsidiary of Vodaphone) and their plans are very good. Going from country Victoria where I was paying something like $40 for a gig of data which wouldn’t even bloody work half the time, to deals like these was unreal.
Unbelievable! £12 quid (~$24 AUD) for unlimited video streaming/social media. And the connection was never a problem for us here in the south of London.
It’s cheap and it works but the best feature bar none was definitely not having to get a new sim card when we were hopping around Europe to all the other countries. I love technology 🙏.
We can only vouch for Voxi because it’s the plan we used but I have seen other similar ones that were just as good.
This is a big topic and one that can potentially save you £1,000’s of pounds each year.
First things first. Download City Mapper right now! It’s hands down the best navigation app for getting around London. I’m a massive Google Maps fanboy and it took me a while to migrate over to City Mapper but man, once I did, I was well and truly converted. It is really designed for cities (there’s one for NYC, Paris, Hong Kong) and I found it to be a lot more accurate than Google Maps was when it came to service disruptions.
IMO, biking is the most superior form of transport in London and it’s not even close! You might be rolling your eyes because this is such a FIRE thing to say but trust me with this one, London is a really bike-friendly city with the additions of the Bike Superhighways that were added in the last few years.
I’m not even saying this because of how much money you save and the added benefit of the extra exercise, it’s generally a mood booster to cycle around this gorgeous city each morning when I was commuting to the office. It’s also the quickest form of transport (I consistently flew past cars commuting up High street on my way to the city) and you are never rushing to catch a train or bus. How many of you guys out there look forward to your commute in the mornings? If the sun was shining, my morning rides were more often than not one of the best parts of my day. Now granted I have been told that 2020 did have particularly good spring/summer/autumn and the weather does play a big part. But boy oh boy when the sun does come out, riding through Battersea park, over London Bridge and around the cute streets of Notting Hill are memories I’m going to cherish forever and I know I’ll miss those rides when we’re back in Australia.
Handy tip: Check if your employer participates in the Cycle to Work scheme. You get a bike for free at the start, then the amount is deducted from your pay every month until it’s paid off. Because the amount is deducted before tax, you end paying less tax, and therefore you pay less than the bike actually cost.
The London Underground AKA “The Tube” is a feat of engineering the likes of which I’ve never seen before. It boggles the mind how I can miss a train and wait no more than 90 seconds before another one rocks up. The efficiency for a network to run like this is mindblowing for my simple noggin 🤯 and I have to admit, when I first started catching the tube, there is a little bit of novelty it.
I have fond memories of landing my first contract and catching the tube to work in central London. I really felt like a Londoner power walking through the endless crowds of white-collar city slickers in my new chinos and overcoat… and theeeeeeeeeeeeeen the novelty wore off three weeks later 😂.
I really only caught the tube (pre-covid) when I had to after I bought a bike. It’s bloody handy to have it up your sleeve though.
One of the best features of ‘Transport For London’ (tfl) is being able to use your cards tap and go technology straight off the plane. You know how travellers have to buy a Miki card when they get to Melbourne and want to use public transport? You don’t need to do that in London which is fantastic. You as long as you have a VISA/Master Card with tap and go tech you’re good to start using the public transport system. You can even use your Apple watch to tap on and off. Pretty sweet!
Handy tip:If you’re under 30, the number 1 thing I would recommend is buying a railcard as soon as you get here and pair it to your Oyster card which is the equivalent of a Myki/Oapl (city transport card).
Unfortunately, you need an Oyster card to have the railcard discount apply to your fares (there was talk about linking the railcard to your bank card but not sure how far along that is). The card costs £30 and you can seriously make that back within 2 trips out of the city if you’re using the national rail for a big trip. The card typically saves you 1/3 of the fair for both buses and trains during non-peak times and you’d be hard-pressed to find anyone who wouldn’t save money buying this card.
It’s a digital card too which is cool. You download an app and when you buy national rail tickets, you just select that you own a railcard and you’ll get a discount (you’ll have to show the app if an inspector comes by of course, however, we never got asked to show our railcards).
Buses cost £1.5 per trip (or £1 if you use your railcard during off-peak) and get the job done. They aren’t as quick as the tube usually, but unless you’re in a rush, the buses are great and it can save you a lot of £££ during your stay.
We had memberships at PureGym and TheGym which are budget gyms (around £19.99/m) and had everything we needed. You can keep fit just by running and doing bodyweight exercises tbh. I’ve just always prioritised a gym and those two above were the best value for money that I could find.
Tips and Tricks
Sky scanner is pretty much the go-to website for searching and comparing flights. However, I would recommend to book directly with the airlines especially with so many cancellations due to covid and the third party websites can be a nightmare to get refunds from.
The Euro-star was a fabulous option for us to travel directly to Paris and Brussels. It can be quite expensive but if you book in advance you can get some really good deals and avoid the dreaded airport. It leaves from St Pancras International Station which is attached to Kings Cross Station.
Sending Money Back Home
I have sent over $60K AUD back home (to continue investing of course) using a company called Transferwise. They have the best rates for sending money back and the process is really simple. You can get a free £500 transfer by using my affiliate link* which means you won’t have to pay any fees.
I’ve also sent money from Australia to my Monzo bank account too.
* This link is an affiliate link and I may earn some commission from it. Please see my affiliate page for more info.
Finding a job
We only have experience in two areas which I’ll cover below. But there’s just so many different pathways to finding a job in London that it would impossible to cover them all.
I will say that for white-collar workers, LinkedIn is utilized heavily. Make sure that’s up to date and looking good.
By Mrs. FB
Being a teacher is a great job to have when moving to London or any UK city for that matter. I am a Primary school teacher and was able to take care of a lot of the admin side of things before I left Australia. I chose to sign up with anzuk Education as I had a friend who had used them as her agency. They took care of a lot of the paperwork before my arrival and organised my DBS and International Police Check which you will need to work in schools. They will give you copies of these at your registration appointment. I found them to be organised and professional.
When we arrived in London I went to my registration appointment at the agency and spoke to them about what type of work I was looking for and they asked if I wanted to use an Umbrella company or PAYE. I chose PAYE because I was only using one agency and this would be a higher day rate in the end as the umbrella company take a chunk for their fees. I started with day to day supply work so I could become more familiar with the school system. This was okay but requires you to be flexible and move around to a lot of different schools which I didn’t always love especially when you get a tough class! I also felt quite overwhelmed trying to find different schools especially being new to London and using the tube and overground for the first time. I ended up only saying yes to work that had a reasonable commute time as some days it would take an hour to travel to the school.
I started at £135 a day (PAYE) and just accepted that rate initially. This was probably my biggest regret as I should have negotiated my pay from the get-go and would encourage you to do so. At the time I had 5 years teaching experience and my friend who was working with the same agency and only had 1-year experience started at the same rate. I learnt pretty quickly that all agencies are the same in that respect and will try to pay you as little as they can get away with unless you challenge them.
After a month of supply work, I ended up taking a long term contract for the summer term teaching a Grade 3 class at a Catholic school in Vauxhall. I was lucky that the class were lovely and I got along really well with some of the teachers at the school. We would go for Friday night drinks at the pub to debrief about the week. I preferred working at the same school each day and being able to make better connections with the staff and students but with this comes more responsibility and planning. I made sure to ask for a higher day rate from the agency and was earning £160 (PAYE). After the summer break, I was called by the agency to once again work at this school and cover a Year 4 class which I was very excited about, especially not having to find another school. I taught there until the pandemic hit and was then able to go on furlough pay through the agency which I was super grateful for.
Overall, my experience of teaching in London was really positive. My top tips would be:
Negotiate your pay: don’t be too scared to ask for a higher rate. I am a people pleaser and it was very difficult for me to do this but with a little pep talk from Mr FB I was a pro in no time 😉. You will hear the same spiel from the agency each time about them only taking a small cut for their fees etc (don’t believe them lol). You can even speak to other agencies to get an idea of how much they offer as a day rate and use this as leverage.
It’s okay to be picky: If you didn’t like the school or the class you were teaching for the day and the agency want you to continue working there, say no. I did a number of trial lessons/days at different schools before I accepted my long term position.
Find a contact at the school: If you like a particular school, make sure to talk to the deputy headteacher or whoever is in charge of finding supply teachers at the school. Tell them you had a great day and would love to come back, that way they can request you again through the agency.
Hope this was helpful 🙂
Contracting (in tech)
Okie Dokie, this part below is probably what I would have liked to have known the most when I got to London at the start of 2019.
A lot of people are attracted to contracting predominately due to the below three reasons
Contractors charge more than their PAYG counterparts
Contractors pay a lot less tax
Contractors can deduct a lot of expenses
I had always heard how lucrative contracts were in Australia and you could reasonably expect to double your hourly wage in sacrifice of job security, Super, holiday pay, sick leave etc. etc.
This suited me down to a tee! We didn’t come to London to build a career or to try and save money, we wanted a job that would allow us to make enough money to live and travel basically.
And after 8 years in the public sector, I wanted to see if I had the chops to handle the private industry in one of the most competitive job markets in the world.
To say I was unsure is putting it lightly… and I’ve always been a confident/optimistic type of guy but quitting your job and moving to the other side of the world can strike fear into even the most bullish of people.
The below guide is everything you’ll need to know to land a high paying contract gig in London and something that would have saved me a lot of headaches and wasted time. It won’t cover all the administration tasks for running a company (too much to cover) but I’ll link to some great resources that go over everything in detail.
Limited, Umbrella or PAYE?
The structure in which you contract in is probably the first piece of this puzzle you need to figure out.
Almost all contractors I met in London were operating under a Limited company structure due to the major tax advantages. But that doesn’t mean it’s the best option for everybody so it’s good to know what the options are.
I know it can be a bit boring but you really need to know about a piece of legislation called IR35 because it has major implications for contractors and is more often than not, the deciding factor for what structure you choose.
In a nutshell, IR35 was introduced to stop contractors working as ‘disguised employees’ whilst receiving all the tax benefits on being a contractor. The lack of job security and employee benefits are the reason why contractors have tax advantages in the first place. Therefore if you’re working as a ‘disguised employee’, HMRC (UK’s ATO) will argue the point that you’re not accepting the increased risks and you will not be entitled to the tax advantages.
You can read up on their definition of a ‘disguised employee’ but I think we all known who they’re talking about. You know the guys that work a job for years and then decide to start a company and contract back to their employer at double the rate without skipping a beat. I’ve meant a few people who have done that within government over the years and it’s a smart thing to do really. The UK government see this as a tax loophole and I can understand why they want to plug it.
The definition of what is considered outside of IR35 (you’re not a ‘disguised employee’) vs what’s inside IR35 (you’re a ‘disguised employee’ and will not receive any tax benefit) is a grey area and will be assessed case by case if you ever get audited. Usually, the contracts are advertised as either inside or outside IR35 online which helps.
Generally, if the gig falls outside of IR35 and you’re going to be making > £30K then you’ll most likely be better off using a Limited Company (otherwise an Umbrella Company is the way to go).
Ther’s a lot more administration overheads Limited Companies though so be aware that you’ll have to do a lot more work. Raising invoices (and following them up 🙄), paying for insurances, registering your company and submitting a separate tax return etc.
The UK’s government website is a fantastic resource with a lot of really great written articles. If you’re convinced that setting up your own company is the right move, I’d strongly recommend this starting guide.
The major advantage here is everything is done for you. You save yourselves a lot of time and stress by going through an Umbrella as the contract is actually held by the umbrella company and the employer. You don’t get paid by the employer, they pay your umbrella company and then the umbrella company pays you.
The IR35 ruling is less important here because as far as I’m aware if you’re going through an umbrella, you’re going to be paying the full amount of national insurance (NI) tax so it’s pretty much irrelevant. This does open your options up a lot more though as almost all public sector contracts fall within IR35.
The main reason a lot of people start contracting in the first place is to make as much money as possible. It’s for this reason that most choose to go through a Limited Company vs Umbrella.
It’s possible to become PAYE through an agencies payroll (if they offer it).
This option is the most inefficient (in terms of tax minimisation) of the three because you will have to pay full tax and NI contributions on all your earns and you won’t be able to claim valid business expenses.
There’s a lot of different ways to skin a cat but I’ll cover what worked for me.
I used a website called Job Serve to find contracts but there are soooooooooo many places to find jobs it can be overwhelming. I wouldn’t recommend signing up to a whole bunch of alerts on various sites because the same job gets advertised across many platforms and your inbox will become unmanageable really quick.
There are a few niche websites that you need to pay to see ‘private listings’ but I never used them so I can’t comment.
I’m not sure if Melbourne or Sydney are the same but be prepared to deal with recruitment companies in London. It’s almost unheard of that a company will advertise a contract directly. 99% of the time it will go through a recruitment company and I have no idea why. The amount of people that are in recruitment in London is insane. Really high turn over rate too but I have heard you can make bank if you hustle hard without any quals or experience so it’s appealing to a lot of young people. It can be really frustrating dealing with a middle man that doesn’t know the requirements half the time and they never call you back to say if you didn’t get the gig 🙄. If you don’t hear from them within a week, it’s safe to assume that you weren’t shortlisted.
Here’s how the game is played:
A company decides they need a contractor for X amount of time and are willing to pay £Y per day
More often than not, a specific skill is required in a project that the company either doesn’t have in-house, or they need more of ASAP. It’s partly because of this urgency that contractors are paid as much as they are
The job description with requirements and nice to haves are prepared (half the time by just copying a template or another listing). Handy tip: don’t be discouraged by how much experience and skills are in these job descriptions. They are so over the top and don’t reflect what you’ll be doing 90% of the time. I once came across a listing that said you needed 3 years experience in a technology called Dataflows which would have been fine… except Dataflows was invented in 2018 😂
The new contract hits the recruitment market like a fresh shipment of crack to LA in the ’80s. An ungodly amount of recruitment agencies all rush out to and try to find a suitable candidate as they take a cut from your daily rate for however long the contract goes for. They will usually advertise the day rate with their cut already factored in (but always ask!). So if you see a contract for £450/d, the company that needs a contractor is probably actually paying something like £650/d but £200 of that goes to the recruitment company
If it’s at a good rate within the city, the candidates are usually shortlisted within a few hours (that’s been my experience anyway). Handy tip: When I was ready to land a new contract I would basically refresh the Job Serve page (with my keywords) every 15 minutes. As soon as a contract pops up that you’re interested in, call the recruiter to touch base with them which will do three things:
1. It shows that you’re really interested in this contract. Recruiters want candidates to be able to go to interviews that same day sometimes (happen to me once). Make sure you get their actual email address so you can send your resume to them directly
2. You have a chance to ask a bit more about the contract that may not have been in the listing. You can confirm that it’s outside of IR35, open to someone on a tier 5 visa, located within London etc. Sometimes you can get a bit more out of them in terms of what the project is about and this will help you decide on whether you do in fact have the skills to perform what’s required.
3. You will prioritise your resume over others and the recruiter will actively look out for yours in their inbox if the phone call has been successful
If you’re still keen to get the gig, tweak your resume to make sure you cover all the key requirements (don’t stress if you’re not proficient in everything, just say you have some skills and back yourself to learn on the fly if needed. The goal here is to make it to the interview) and update your LinkedIn page to make sure it matches (yes, some people do check to make sure it matches your resume). This was one of my resume’s I used when I was applying for contracts last year.
If everything has gone right, you should be getting a call from a recruiter pretty soon (within a week) to set up your interview. Go in with confidence and crush it to secure the contract 👊
Once you win the gig, you’ll be sent a formal contract that lists a whole bunch of crap but you’re probably only really interested in making sure that the day rate is what was agreed upon and the details for your first day.
Rock up on the first day and go from there… your boss for the engagement will tell you who you need to send the invoice to and how accounts payable works etc. etc.
And there you have it, you’re officially a contractor in the big city 😊
The above is my experience but it may be different for you. I’d love to hear from an actual London recruiter in the comment section and get their take on the whole situation.
The two biggest mistakes I made when I was first looking for contracts were:
Applying for contracts that were over a week old. Recruiters will always tell you that the contract hasn’t been filled yet but what they’re really doing is just hedging their bets if something happens to their current candidate. There’s no harm in applying for old contracts but all three of my gigs in London came from freshies and after speaking to a few recruiters at the pub, it’s really a game of first in best dressed with this type of work. I mean think about it, if the company really wanted to take the time and invest in finding the right person, they would probably just create a permanent position. Contractors are hired guns!
Not jazzing up my LinkedIn for the first two weeks 😅. I cannot stress this enough, LinkedIn is really, really important in London for some reason. I did have a LinkedIn profile before I came to London but I hadn’t updated it in years. A big reason my phone was dead quiet during the first few weeks was because of how bad my LinkedIn profile was. No previous experience, no updated profile pic, no quals or skills.
I used a company called SJD as my accountant for both my personal and companies tax returns. If I could do it again, I’d just create an account with Free Agent and pay to use that product. It’s the cheaper option but it’s also the easier one IMO. My accountant didn’t do a whole lot TBH and it sort of annoyed my every time I saw the £110 go out of my business account each month. Their software was crap too. I would hire an accountant to help with the closure of the company and that’s about it.
It doesn’t take much to learn the ins and outs of using HMRC website and the Free Agent software really covers everything you need to run a small Limited Company used for contracting. The hardest part of contracting is raising invoices and chasing them for payment. But if you work for a good company that pays on time, it’s super easy.
You’ll also need to pay for public liability and indemnity insurance to cover your ass in case something goes horribly wrong. This usually costs < £1,000 depending on how much coverage you get.
What many contractors do is pay themselves a small salary and then pay the rest of the money they made through dividends which have a much lower tax rate. This does depend on a number of things, IR35 being on the most important ones.
The best resource I can recommend hands down has to be Contractor UK. It’s predominately a forum board but it also has some really well-written articles that cover everything you’ll need to know about contracting in the UK.
It covers the entire UK but the community seems to be heavily London based and leans towards Tech jobs. I asked many questions on that forum and it helped me out a lot.
Tax/Investing whilst overseas
I’ve had a tonne of questions over the last two years about these two topics.
They usually go something like…
“AFB, how do you invest back in Australia when you’re in London” & “How does it affect your tax return”?
This is such a hard area to get good solid info on because of how different the rules can be for different circumstances.
Take our situation for example. We have been able to continually invest without much hassle whilst being overseas because all of our wealth is held in a discretionary trust fund with a corporate trustee. What I did before we left Australia was cease control of the company that was the corporate trustee of the trust and have my mum step in to run it while we were away. That meant that she had 100% control of our assets and technically could have gone on a YOLO trip of her own (plz no mum). The advantages of being able to distribute income from the trust to other people worked perfectly for our situation even though I had no intention of utilising the trust this way when I first set it up. When we return in a few weeks, I will retake ownership of the company and be back in control.
In hindsight, would I set up a trust just to make it easier if/when I moved overseas? No, I wouldn’t. Investing through a trust overcomplicates things and you can FIRE without one.
There are different strategies for utilising retirement accounts in the UK but it’s just so circumstantial with too much to cover. I never went on a deep dive into these strategies either because I was a contractor. Mrs. FB opted out of her pension scheme so she receives more £££ but paid more tax. This works for us because Super isn’t a part of our financial independence strategy.
International tax law is an insanely complicated and circumstantial topic and I’ve got no hope in hell trying to explain 1% of it in a blog post. So what I’ve done is invite Evan Beissel, a Tax Partner at Mazars to create a guest post (below) that will cover the basics.
Please let me know in the comment section below what specific questions you want answered. I’m going to get Evan on the podcast in 2021 to flesh out other topics we no doubt missed in this brief overview.
*FYI this isn’t a paid guest post. Evan reads the blog and offered his services and expertise for this article for free and AFB gets no kickbacks. I’m sure Mazars will get some traffic but the content below is of mutual benefit to both the AFB audience and Mazars.
Moving overseas and Tax, A short guide for Firebug’s
By Evan Beissel, Tax Partner, Mazars
Whilst tax law is an immensely complex topic, many of us can get away with only interacting with a small number of rules that are relatively easy to understand. For example, most working Australians
would know that when they prepare their tax return that their salary is included in their income and that certain work-related expenses and charitable donations may be deducted from their income to
calculate their taxable income.
However, one way that you can make your tax affairs substantially more complex is to move
overseas. Not only do you need to now understand the tax rules of another country where you are
living and earning income, but you may also still be subject Australian tax to some extent. You have
now entered the mysterious and wonderful world of international tax.
Whilst there is no one-size-fits-all playbook to these tax rules, there are some key concepts and topics that are common to many, which I will try and explore here and hopefully leave you with a bit more knowledge than you started with.
Tax residency 101
Tax residency is a huge topic and too big a topic to cover in detail here, but it is well worth covering
Firstly, tax residency is a concept that exists separate from residency for immigration purposes. For
simplicity, for the rest of this article, I will simply refer to residents and non-residents as meaning in
relation to tax residency. Most developed countries (Australia included) tax their residents on
worldwide income whilst non-residents are generally only taxed on income sourced in that country.
Source is another topic that can get quite complicated, but as a simple example, salary
income from working in an overseas country would generally be sourced in that country, and
investment income such as dividends received from a foreign company is generally sourced where the company is based.
Another key issue to understand is that tax residency is not exclusive, and every country has different rules. So you can, for example, remain a tax resident of Australia whilst living in the UK, but also be a tax resident of the UK. In this case, double taxation agreements become critical – these are agreements between two countries on which country has priority of taxing rights in various
circumstances. Not all countries have a DTA with Australia, however, these are in place for most
developed countries including the UK.
In Australia, there are a number of residency tests that can cause you to be a resident for tax
purposes. The most relevant of these is the ‘ordinary resides test’ and the ‘domicile test’.
Under the ordinary resides test, you are a resident of Australia if you ordinarily reside in Australia.
Generally, this is not difficult to establish –for example, if you are living permanently in Australian do
not have a home in any other country. However, it can get difficult to establish where someone
ordinarily resides if they spend time in multiple countries and have multiple residences where they
regularly reside. There is a body of legal precedent to assist in these greyer areas, but for most
people, this is not an issue and it doesn’t warrant further discussion here. Suffice to say, if you move
overseas for an extended period and don’t retain a home in Australia usually you would be considered to no longer ordinarily reside in Australia.
The domicile test relies on the legal concept of domicile which in broad terms refers to a person’s
legal ‘home country’. Without going down a rabbit hole on domicile rules, as a starting point if you and your parents live permanently in Australia then it is likely you have an Australian domicile. However, if you or your parents immigrated to Australia, then it is possible you may not have an Australian domicile. This distinction is critical as someone with an Australian domicile is much more likely to remain an Australian resident when they move overseas.
Under the domicile test, someone who has Australian domicile is a resident of Australia unless they have established a permanent place of abode outside Australia. A permanent place of abode refers to a locality rather than a dwelling (e.g. you might establish London as your permanent place of abode, rather than a particular house or flat that you live in whilst you are residing there). Permanent does not mean indefinite but does require an intention to reside on a ‘permanent’ basis. There is no minimum time period that is considered to indicate permanency and this is an area of residency rules that can be quite difficult to establish with certainty.
Whilst the ATO have sometimes used a two year period as a rule-of-thumb, this is not based in legal precedent. Ultimately, whether you have established a permanent place of abode outside Australia will depend on the specifics of your own circumstances.
Tax issues for Aussies moving to London
So you’ve decided you want to move to London for a couple of years. What does this mean tax-wise?
Firstly, tax residence becomes important here:
Depending on your individual circumstances you may or may not cease to be an Australian
tax resident. If you do remain an Australian tax resident, you would be liable for tax in
Australia on income earnt in the UK
If you are living in the UK for an extended period you are likely to become a UK tax resident
during your stay, and so will also be taxed in the UK.
To illustrate, let’s consider a couple of examples. For both examples, let’s assume you have the following income sources whilst living in the UK:
Salary income from a job in the UK
Rental income from an Australian property
Dividend income from Australian shares
Retaining Australian residency
In this case, it is likely you would also be treated as a UK tax resident whilst living there so you would be a dual resident for tax purposes. In broad terms, both countries will therefore tax all your worldwide income (note this is a simplistic summary but should be the case for most ordinary salary-earners with modest investment income). However, the country where the income arises (i.e. where it is sourced) would have priority of taxing rights, and the other country should provide a credit for tax paid in the other country subject to rules in each country which may limit the tax credit allowed. The tax paid on each type of income is summarised below.
First taxing rights
Australian rental income Australian dividend income
Second taxing rights (with credit for tax paid in first country)
Australian rental income Australian dividend income
Ceasing Australian residency If you cease to be an Australian resident when you move overseas, then Australia would only tax income sourced in Australia whilst overseas. However, for a non-resident of Australia, the mechanism for paying tax changes for certain types of income. Dividends, interest, and royalties (usually payments for use of intangible property) are no longer included in taxable income and taxed at marginal rates but are instead subject to withholding tax at a flat rate (subject to reduced rates under some DTAs).The common rates for interest and dividends are shown in the table below:
30% (default rate) / 15% (treaty rate)
In the UK, as a UK resident, you would be taxed on your worldwide income with credits for Australian tax paid on your Australian income.
Investing whilst living overseas
So, can you continue to invest whilst living overseas? The short answer is a definite yes, but the tax
can certainly get more complicated than simply investing as an Australian resident. This applies both if you invest in Australia, of if you invest overseas.
One important example is franked dividends. Our franking credit system is almost unique to Australia and does not operate well across borders. From an Australian perspective, both resident and non-resident investors receive favourable tax treatment of dividends that have been ‘franked’ with credits generated from tax paid by the company. Australian residents receive this benefit in the form of a tax credit that reduces the tax they pay (and may even be refunded if their marginal rate is less than the company rate), whilst non-residents do not pay withholding tax on franked dividends. However, foreign tax rules (including the UK) generally do not recognise franking credits and therefore the dividends are taxed without regard to the franking credit, this can produce a high effective rate of tax on the underlying company profits that have been paid out to shareholders.
Investing in overseas shares may not produce a much better outcome – dividends paid by these
companies would also be subject to tax without credit for company tax paid. Further, once you return to Australia, you do not have access to the franking credits you would have had if you had purchased Australian shares. The one possible advantage here is that foreign companies on average may pay less of their profits in dividends and therefore reduce the component of dividends in their long-term returns.
Ultimately, in many cases, it is necessary to accept some increase in tax paid on dividends whilst
Capital gains is another area where moving overseas can add significant complexity to your tax
If you retain Australian residency whilst living overseas, then all your worldwide assets remain subject to Australian CGT under the same rules as if you remained in Australia. However, you may also be subject to capital gains taxes in the country you are living in.
Foreign residents are generally only subject to Australian CGT on Australian real property and certain similar assets. However, if you cease to be an Australian resident, you are faced with a choice for your non-Australian real property assets. You can choose to either:
Have a deemed disposal of all these assets for their market value, such that any capital gains
or losses would be realised for Australian tax purposes; or
Elect to keep these assets as subject to Australia CGT until they are sold.
The best choice will depend on your particular assets and circumstances. However, if you choose the second option, that you will lose the 50% CGT discount in proportion to the number of days you are a non-resident of Australia. This reduction in the CGT discount also applies to real property that
remains subject to Australian CGT.
Any of these assets you hold when your resume Australian residency in the future (except assets that have remained subject to Australian CGT such as Australian real property and assets elected as described above) are deemed to be acquired for their market value at that time. This becomes the cost base that is used to calculate a capital gain or loss when you sell these assets.
If you sell assets that are subject to CGT in both a foreign country and in Australia, you should be
able to claim a tax credit in Australia for the foreign tax paid. However, to the extent you can claim the 50% CGT discount in Australia, you may only get a 50% credit for tax paid overseas which can result in a higher overall tax rate than if you were only subject to CGT in either country. Also, when you cease to be a resident of the country where you have been living you may have a deemed disposal under the local tax rules. In this case, you would usually not get any credit in Australia, as you do not realise a capital gain in Australia at that time.
At this point, you will hopefully have gained some understanding, whilst also understanding that this is a complex topic that can’t be addressed in full in one blog post. Unless your circumstances are very straightforward, I would strongly recommend obtaining professional advice that is specific to your own circumstances.
This publication is intended to provide a general summary and should not be relied upon as a substitute for personal advice.
London… what a city!
It’s almost a right of passage these days for young Aussies to make the pilgrimage across the Indian ocean and explore all the wonders of Europe. Now given you’re reading a FIRE blog, it may not come as a shock to you that there was a brief moment before we embarked on our YOLO trip two years ago where I considered not going because of the financial consequences. Nothing is truly free and this trip of a lifetime was not an exception. Quitting my job to travel the globe meant that we would have to delay our freedom, hopefully in exchange for some lifetime memories. And with the power of hindsight, I can honestly say that…
This trip has been one of the best things I’ve ever done in my life!
Do I still want financial freedom and only do meaningful work (FIRE)?
(Stone Cold voice) OH HELL YEAH!
But holy mackerel, I’m telling ya guys, the levels I’ve climbed on the life experience ladder over the past 24 months has just about eclipsed the previous 10 years.
And it’s not just about the travel. The work-related opportunities in London were one of the biggest surprises I had and it was almost better than the sightseeing. It’s so different from where I’m from and the city is just brimming with an entrepreneur spirit and outside the box mentality. Contracting can be tough but there’s nothing better than being apart of a really bright and diverse team and working together to build a solution.
London has not only broadened my horizons but the experiences I’ve had whilst being there has altered what I want to do once I reach financial independence (but that’s for another article). It’s an incredible city that will always be our second home.
Wrapping up now I’ll leave you with this…
I wish I did this trip earlier in life and really want to send a message of caution to any aspiring young Firebug’s reading this. Getting your shit together financially is really important and reaching financial independence is the ultimate money destination. But do not let an obsession with reaching this goal rob you of something you can never, ever get back… exploring this big beautiful planet when you’re young and growing. There’s a world of difference between travelling in your 20’s vs coming to see Europe later in life at 50…
The thing is, I actually really don’t like talking about politicians and what they say and plan to do at all. That piece was never meant to be political but after reflecting for some time now, it was always going to be that way due to the nature of the subject matter.
So why the hell would I ever go near it again?
Because even though I don’t like those 🤡, politicians do affect us in the journey to FIRE and I need to set the scene first in order to talk about how we come to the conclusion at the end and where we’re heading moving forward.
And the beauty of having your own blog is you get to write and publish whatever you want. I create content from my point of view and never claimed my writing was balanced. This site isn’t the ABC or some neutral FIRE outlet. I presented facts in that article with my opinion which I understand everyone isn’t going to agree with.
However, that topic was interesting to me (and a bunch of others) so if I’m offending you or you don’t like what I’m writing, maybe you should follow another FIRE blogger ✌
Franking Refunds Survived…For Now
Like Steven Bradbury before him, ScoMo and the Coalition skated past the ALP for a come from behind victory and with it, the franking credit refunds will remain for the foreseeable future.
This was a hot topic amongst the FIRE community and now that the election has passed, it seems like things should proceed as per normal right?
I mean, franking credit refunds didn’t get the chop so fully franked dividends are safe to retire on yeah…?
Well… about that
Whilst I think that the result of the election speaks volumes to where the majority of Australians priorities lie, I strongly believe that a lot of the policies the ALP were trying to win votes on will not be touched for a very, very long time. They were aggressive with their tax reforms, franking credit refunds being one of the smaller changes (CGT and trust distributions being a lot bigger).
This was supposedly the unlosable election for the ALP. Every poll in the country had them winning by a landslide. Sportbet even paid out on them winning two days early to the tune of 1.3M 😮
For them to lose in the fashion they did, especially after all the shit the Coalition has done during its previous term tells me that the majority of Australians did not agree with the policies they were proposing.
And it’s my opinion that aggressive tax reforms played a huge part!
Now I’m definitely not an expert on this subject and don’t know for sure (no one really does) but I doubt we will see such aggressive policies proposed by any party for some time. I’d almost bank on it that scraping franking credit refunds will not even be thought about in the next election. They’ll go after something else, that’s a given. But it won’t be the same policies that contributed to them losing the election this year.
Sidebar: I’m not here to talk about the policies or politics so for the love of God don’t @ me in the comments about it.
But that’s enough about the election.
Again, I really don’t like politicians in general and try to avoid talking about them as much as possible. I only bring them up because it’s important to set the scene for the decisions we’re making in regards to investing for financial independence which is what this blog is all about.
Which brings me back to the point about the franking credit refunds.
Whilst I truly don’t think any political party will go near them for a very long time. I also learnt something very valuable from that campaign policy.
The legislation risk associated with franking credits in general.
I was completely naive in thinking the government would not pull the rug out from underneath us and the refunds would be here to stay.
What a fool I am!
I’m just thankful we’re still in the accumulation phase and have a chance to mitigate this risk a bit moving forward (more on this below).
But wouldn’t it have absolutely sucked if you’d worked your whole life and built up a retirement fund utilizing franking credit refunds only for the government to turn around and change the rules on you!
The refunds are safe for now. But I plan to be retired for 50+ years. That’s a long time for people to forget what happened in 2019 and if I were a betting man, I’d wager that sooner or later, franking credit refunds will be back on the chopping block!
Are Aussie Shares Worth It Without Franking Credits?
The thing about franking credits for those who are chasing FIRE in Australia is that without the refund, they are worth a hell of a lot less and in some cases, will mean that you don’t receive any benefit from the franking credits at all.
Let me give you an example.
Mrs FB and I know that to fund our current lifestyle in Australia, we spend around $48K over the course of 12 months.
We plan to own a house one day, so if we remove our rent and add on a bit to cover rates, maintenance on the property, insurance etc, we get to around ~$42K at a guess.
The plan before the election was for us to split our dividend income 50-50 and pay ourselves the $18,200 (tax-free income threshold) each from Aussie franked dividends. Let’s assume that the dividends are fully franked.
We each would receive $18,200 in cash throughout the year plus $7,800 in franking credits each. This means that the ATO would look at us having a taxable income of $26,000 for that year (dividend plus the FC).
Here’s the math behind the grossed-up dividend.
Tax Before FC
Tax After FC
Grossed up dividend
The franking credits soaked up the owed tax of $1,482. This will still happen if the refunds were ever removed.
But more importantly, the franking credits refunded us $6,318!
Because we, as the shareholder, have already pre-paid tax @ 30% that was removed from the dividend before it hit our accounts. It’s only fair that this is recorded (the franking credit) and the ATO is aware of us pre-paying the tax so we can be refunded later if we paid too much tax for that year which in this example, we did.
This was always the intention of imputation credits. Not to only stop double taxation (which consequently it also does), but to ensure that income is taxed once by those obliged to pay it.
So the end result is around $24.5K each to fund our life after retirement.
That’s almost $50K! More than enough for us to live comfortably forever whilst factoring in inflation.
But if we remove the refund. We only end up with $36K between us.
That’s a whopping $13,036 dollars difference and means we need to head back to work.
Or let me put it to you another way. You’re losing 28% of your return 💸
I was on the fence for a long time before moving towards an Aussie dividend approach with Strategy 3.
A lot of people out there don’t realise that a major part of the dividend approach for me was not about total return. In fact, I even mentioned it in Strategy 3 that if I were to guess, I’d wager that Strategy 3 would slightly delay my FIRE date because of the less efficient tax method of income (dividends are less efficient vs capital gains) and less diversification.
We moved to Strategy 3 predominately because of the psychological aspect of receiving income that was not affected as greatly by human emotion (share prices) and is more anchored to business fundamentals (income of a profitable business that is passed to the shareholder via a dividend).
There have been great Australian based articles written that objectively looks at retiring on dividends vs capital growth and I constantly receive messages that link to studies showing superior returns for an internationally diversified low-cost ETF portfolio.
Guys, I’m a die-hard FIRE fanatic,
I’ve come across most of these theories and articles before! What’s missing here is the human element. We’re not investing robots. I’m not too fussed between minor differences in returns and place great value in simplicity and sleep at night factor.
I thought the trade-off of less international diversification and a slightly delayed FIRE date was worth retiring on dividends vs dividends + capital gains.
But everyone has their tipping point.
Without the franking credit refund, Aussie shares just don’t cut the mustard IMO.
The difference is just not worth it for us. But everyone’s circumstances are different.
For instance, those looking to retire on FATFIRE will not be as greatly affected by this change since they will have more of an income to soak up those credits.
And many people have rightly suggested to me that there are a lot of alternative strategies to generate unfranked income such as REITs, Bonds, P2P lending etc.
These are viable alternatives for some, but we want to continue investing in companies for now.
Let me be quite clear.
I’m still a massive fan of the dividend approach.
But placing such an enormous amount of faith that politicians won’t change the rules around franking credits over the next 50 years just doesn’t seem logical to me.
I want to mitigate the legislation risk of a potential franking credit refund axing as much as possible but at the same time, continue our overarching investment philosophy of investing in great companies.
We want to reduce our portfolios franked dividends and take advantage of a more diversified portfolio again. Which means…
I kept the international part of our portfolio when we decided to focus on Aussie shares. And when the very real news of potential changes in franking refunds was mentioned, I felt such a huge sigh of relief knowing we still had some international exposure. I guess this just goes to show the power of international diversification. If one country stuffs something up, there’s plenty more out there so you’re covered… doesn’t really work if you’re all in on the one country though 😅
Given that I don’t think franking credits refunds will be there over the next 50 years (no refund for us basically means no credits at all). I would like to receive some income from international companies along the way. It’s not going to be as good as the Aussie yield, but it helps the situation and my sleep at night factor.
Also, with the help of capital gains, an internationally diversified portfolio according to almost every major study done of the subject, will reduce risk, volatility and increase safer withdrawal rates!
To LIC or Not To LIC?
This one’s quite straightforward. A LIC has to pay a fully franked dividend. An ETF does not. VAS, for example, has a franking % of around 70-80 % which means that part of the income is not franked.
As I detailed in my ETFs vs LICS article, they are so similar that we are basically splitting hairs when comparing the two. As such, the greater legislation risk associated with LICs to me has shifted my favour towards ETFs.
I want to make myself clear again. I’m still a fan of LICs. I love the dividends they produce and the two companies I’m invested in (Milton and AFIC) have goals that align with my own (to grow their income over time).
It’s just that A200/VAS are so incredibly similar but have the key difference in utilizing a trust structure and not a company. The legislation risk has tipped the scales in favour of ETFs for me moving forward.
This is purely a tax minimisation decision. It has nothing to do with changing the overarching investment principles (investing in great companies) or a shift away from Aussie dividends.
The FI Explorer wrote a great piece on a sceptical view of LICs which some of you out there have emailed me about. I agree with what is written in that article, always have. I never invested in LICs expecting a superior return. What I go back to is the mental aspect of investing. A lot of people who retiree will feel more comfortable living on a relatively stable smooth flow of dividends vs more volatility but a slightly higher return.
So here she is. The new…ish strategy moving forward.
It’s called 2.5 because it’s extremely similar to strategy 2 just with a few tweaks. It’s almost like we’re going back to strategy 2 and I didn’t think enough has changed to honour it with strategy 4.
Firstly, with the addition of buying more international shares back in the plan, we will move back to a ‘split’ approach.
Our splits have changed slightly from strategy 2 with more of an emphasis on Aussie shares as the dividends are still attractive regardless of franking credits refunds.
We will be looking to maintain a split of
60% A200/VAS/LICs (Aussie)
20% IVV/VTS (US)
20% VEU (world ex US)
We’ll keep our two LICs in the portfolio but won’t buy any more units moving forward.
The plan when buying new shares is a lot easier than looking at when LICs are trading at a premium or not.
Before we buy each month, we will look at the current splits in the portfolio and purchase the shares which have the lowest targeted weighting.
For example, this is what our portfolio currently looks like.
So next time we buy, it will be to ‘top-up’ the lowest split, which in this case will be World ex US or VEU. The splits are all out of wack because we focussed on Aussie equities during the last 12 months. Ideally, you want to be as close to your splits as much as possible. When your portfolio reaches a certain point however, the market movements will be so great that you might find it hard to maintain your splits even by buying the lowest weighting split. But this will be a good problem to have since your portfolio at that stage will be in the 7 figures.
Something really cool about this strategy is that you’re always buying the split that is down. If one split booms but the others don’t, you won’t be purchasing more of that booming split.
The second change we will be making is switching from VTS to IVV.
iShares Core S&P 500 ETF is extremely similar to VTS with a few differences but no major ones we’re concerned about. VTS is more diversified and 0.01% cheaper but is not domiciled in Australia and does not offer DRP. This means that we need to fill in the W-8BEN-E form every three years or so.
The W-8BEN-E form is literally 10 minutes of your time every 3 years and is often overblown in terms of effort, but nonetheless, the two funds are so similar that it’s worth saving the extra admin plus having the DRP option available which I’ve been looking to use as of late.
Here are their 10-year returns to just show how similar they are.
The third part of the plan is a hybrid approach between relying only on dividends vs dividends and selling parts of the portfolio. IVV and VEU don’t pay a lot of dividends, but they still pay them.
IVV has returned 3.27% over the last decade and VEU has done 2.85%. Not great, but still cash flowing into the account. And more importantly, those dividends are unfranked income!
We will aim to not touch the portfolio and use the dividends from both Aussie and international shares to live on. If it’s a bad year, however, we will look to sell-off some units to cover the shortfall.
I’ve already gone into why selling parts of the portfolio is perfectly ok if you allow for it to recover in strategy 2. In fact, from a rational market point of view, there’s really little difference between selling units for income and having the company pay you via a dividend. In theory, both should have the exact same consequences. But markets are not rational so they vary to some degree and is a prime reason why we like the dividend approach more.
How It Works
Let’s look at how the newly allocated portfolio would have done during the last 12 months. Here, I have created a dummy portfolio with all trades done exactly one year ago with the total of the portfolio’s value being a cool $1M which is what we’re aiming for.
Aussie equities (I had to use VAS to go back far enough) @ 60%
US (IVV) @ 20%
World ex US (VEU) @ 20%
$46,809 worth of dividends ain’t bad and is more than of FI number of ~$42K!
Bumping up the weighting of Aussie shares to 60% (it was 40% for strategy 2), plus the lower dividend payments of our international shares have actually generated enough income for us to live off during the last 12 months.
But this was a particularly good year for Aussie shares and it won’t be this good all the time. We will save any extra income during those good years to create a cash buffer in preparation for the bad ones that will no doubt come.
If it’s a particularly bad year for dividends, we will look at selling off some units to cover our expenses.
The other thing is that the likelihood of us not earning any money in retirement is extremely low. I’ve covered this in what retire early means to us in the context of FIRE.
I’m extremely confident that the dividends from a $1M portfolio that is weighted to 60% Aussie shares plus any additional income will be more than enough for us.
Selling off units is there as an option but I don’t think we’ll need it tbh!
Time will tell.
To summarise strategy 2.5
An internationally diversified portfolio consisting of 60% Aussie shares and 40% international
Buying IVV instead of VTS moving forward for DRP and Australian domiciled.
Buying Aussie ETFs and not LICs due to risks associated with franking credits. ETFs don’t pay fully franked dividends and are impacted slightly less in the event of legislation passing.
Stop Changing Strategies Dude!
This is you
“Man, you flip flop more than my thongs! Stick to one strategy mate and stay the course. If the axing of the franking credit refund caused you to change strategies, you were never in it for the right reasons.”
And this is me
“Yo! The overarching strategy of investing in great companies has never changed. There was definitely a major difference between strategy 1 and strategy 2. But the fundamentals from strategy 2 to 3 and now to 2.5 are exactly the same”
The thing is, investing in great companies should always be the number 1 goal. All this other shit comes later.
The issue with picking the good companies from the duds is that it’s really hard to do. Which is why index investing is so cool.
The tweaks between our strategies are really fine-tuning our portfolio to meet our specific needs in the following areas:
Mindset/sleep at night factor
Mitigating legislation risk (something I hadn’t considered before)
I think everyone should be a bit flexible with how they invest to a certain degree. Picking one strategy and literally not changing anything during your whole life seems unlikely. Franking credit refunds are a great example of this.
And what’s to say the government won’t impose some stupid tax on other asset classes or something else within our life?
It would be ridiculous to suggest that if the government turned around and started taxing Aussie shares an additional 30% that everyone should just ‘stay the course’ and not look at alternative methods.
Everyone has their tipping point when enough is enough. And even though the refund remains, for now, I’m looking at protecting against this potential rule change without drastically upheaving everything.
I think strategy 2.5 is a nice balance between everything that’s important to us in an investing strategy.
I’m still learning as I go.
Judging by some of the emails I get, you’d think that I’m some sort of investing guru which couldn’t be further from the truth.
This years election taught me a valuable lesson that I hadn’t considered as much as I should have before.
The legislation risks for investing in general but particularly the very real possibility of no more franking credit refunds one day.
For us and I assume a lot of people chasing FIRE, franking credits without the refund in retirement won’t be worth the concentration risk or the ~4% yield (still pretty good) when you consider that you’re losing up to 30% of your return due to the additional tax that you otherwise wouldn’t be paying had you invested in something other than franked dividends.
Although not completely, Strategy 2.5 mitigates this potential change by re-introducing international shares back in the portfolio which reduces our reliance on Aussie dividends. It also makes other small changes as mentioned above.
When we made the shift away from property to focus on shares, the number 1 goal was to invest in great companies. None of this other stuff is as important as that. Index investing means we don’t have to research which companies are going to be good or bad. It filters that stuff out for us.
Because we don’t have to worry about choosing the good companies from the bad, we can instead spend our time to tweak our strategies so they align with what’s most important to us.
Mrs FB and I optimise the portfolio to improve these areas:
Mindset/sleep at night factor
Mitigating legislation risk (new)
Strategy 2.5 improves on all of these areas whilst not uprooting our investing fundamentals which is what any good tweak should do!
That’s it for now.
Let me know what you think in the comment section below 🤙
This article is not going to go into whether the changes are good or bad, or even a technical breakdown of the franking system and how it works. In fact, the target audience for today’s article are people who understand the franking system and what the changes propose to do.
What I’m going to cover is the strange phenomenon I’m seeing more and more of as we inch closer and closer to the election.
Let me introduce you to ‘The Curious Case of Franking Credits and The FIRE Community’
What’s Being Said
Assuming that you’re up to speed with the debate at hand, I’m going to go over the most common arguments I’m seeing online and give my take.
“Franking was introduced to stop double taxation not to give refunds. Howard–Costello changed it in 2000. It was never meant to have refunds”
The reason that the franking system came about in the first place was from an independent review into the Financial System in the 1979 commission by the Fraser Government. This resulted in the ‘The Campbell Report’.
The fundamental principle behind dividend imputation is to ensure that income is taxed once by those obliged to pay it.
If someone does not receive the franking credit when their tax obligation is zero, they have paid additional tax when they should not have. This means that they have paid more tax than others who earn the same amount but through other means of incomes such as rental, PAYG, sole trader business, bonds etc.
Person A works part-time and grosses $16,000 a year. They are under the tax-free threshold and don’t pay any tax.
Person B operates a small sole trader business that nets $16,000 a year. They have no tax obligation.
Person C is retired and owns part of an Australian company through shares that bring in $16,000 a year. Person C receives a fully franked dividend of $11,200. Person C at this point has effectively paid $4,800 in tax on their $16,000 income. Under the current law, the ATO refund the $4,800 to keep things at an even playing field and treat all income fairly no matter how it was earnt.
If you remove the refund, Person C has to pay $4,800 in taxes when they are only receiving an income of $16,000.
Now back to the point.
The Campell Report did, in fact, have refunds included in it!
Cambell Review – 14.40
“Lower income shareholders would not be disadvantaged compared to present arrangements. Assuming company distribution policy remained unchanged, they could expect to receive the same distributed ‘income’ as at present; moreover, additional after-tax ‘income’ would be forthcoming where the tax withheld at the company level exceeded the tax applicable to the individual.”
AKA a refund!
What actually happened was the Hawke-Keating Government in 1987 implemented the ‘interim’ recommendation of the Campbell Review. This was not the original recommendation and ended in 1999 following the Ralph Review which introduced the refund of excess franking credits under the Howard Government.
The current system we have (which includes franking credit refunds) was designed by an independent body and was implemented with the support of both houses!
“A company and an individual are separate legal entities. A profitable company should always have to pay some tax. The franking credit refund is a loophole where the share payers can potentially pay no tax”
This is very clearly addressed in the Campbell Review.
Cambell Review – 14.6
“The fact that companies and their shareholders are separate legal entities is sometimes held to justify treating them as separate taxation entities as well. The Committee is not disposed to accept this view. It is not convinced that those who own or operate enterprises conducted under limited liability should pay extra tax for that privilege. Ultimately all taxes fall on individuals and, in the words of the Asprey Committee, it is ‘necessary to go behind the veil of separate legal personality which the company enjoys and translate the tax formally imposed on company income into a set of individual tax ‘burdens'”
Pretty straight forward. They might be separate legal entities but all tax eventually falls on individuals!
The company is simply prepaying tax for the shareholders.
If you accept that franking credits can offset an individuals income to $0, you must accept the refund as the shareholder has prepaid more tax than they should have.
If you want to still argue this point. I’m assuming that you’re in favour of completely eliminating imputation credits altogether right…? Tax will be paid twice, once for the company and once for the individual. They are separate after all, right???
“These refunds are costing taxpayers billions each year. That money could be spent on schools, hospitals and roads. Why should the rich get a refund from the taxpayers?”
This is one of the first arguments from people who don’t understand how franking works. To be fair, most of the FIRE community-related arguments on this matter don’t raise this point. Because we fully know that the refund has absolutely nothing to do with other taxpayers and is simply returning money that is rightfully owed to the shareholders from which the money was earnt in the first place through the company!
I’ve yet to see anything that specifically stipulates that the ALP will use any revenue received by these changes on schools/roads/hospitals etc. What most likely will happen is any extra revenue will be added to the Federal government’s coffers where god knows what it will be allocated to.
Let’s take a little look at the fiscal management of the Government, shall we?
$4 Billion Victorian desalination plant that’s hardly been used – To add insult to injury, it’s costing the taxpayers $649 million a year to keep this plant open even if it’s not producing water! I personally had a lot of friends work on this project and let me tell you, taking the piss doesn’t even begin to describe how much money was being thrown about on that job site. I’m all for unions fighting for their worker’s rights but c’mon… some of my apprentice mates were clearing $2,500 a week after tax whilst also getting $800 a week travel allowance and living away from home pay plus god knows what other EBA entitlements. Four or so of my mates were renting out a beach house in Inverloch and getting $800 a week each for travel pay… Inverloch to Wonthaggi (site of desal) takes 13 minutes 😐 I’m all for tradies earning as much as they can but when taxpayers dollars are used we need to look at the fiscal management of these projects… some of what was happening was a complete waste of money. This was one desal project, Sydney also have one that cost $1.8 Billion and is currently costing taxpayers $535 million a year to keep it in a state of hibernation. Other states have them too but you get the idea.
So what are we at now… around $20+ billion of wasted taxpayers money without even really trying (I’m allowing for some actual value of these projects to be returned).
These projects were off the top of my head and I did a bit of Googling to fact find. I’m sure there’s plenty of others out there that cost even more.
I have worked for the government for over 7 years and trust me when I tell you, we are not good at managing money/projects.
The late Kerry Packer summed it up best in 1991:
‘I am not evading tax in any way, shape or form. Now, of course, I am 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.’
“Australia is the only country in the world that have franking credit refunds”
My response to this one has always been… so what?
I actually think it shows a sign of weakness from that side of the argument. I mean, what has that got to do with anything? There’s plenty of things unique to Australia.
Does that make us wrong?
In fact, I’d wager that Australia must be doing a lot of things right as we are consistently ranked as one of the best countries to live in on the planet and our citizens are some of the richest in the world. There’s plenty of factors to attribute to these claims but it just strikes me as odd when people bring this point up as if it’s a bad thing 😕
The Propaganda Machine In Full Swing
The ALP are clearly trying to win votes from the working class by exploiting on their lack of knowledge around a policy they want to change (franking credits this time around) which is how politics have worked since the beginning of time.
They are spinning this debate into:
‘The rich aren’t paying their fair share’
Check out some of their propaganda.
I have no idea who ‘The Australian Institute’ is but they call themselves a ‘think tank’ but are clearly a propaganda machine.
I really enjoy the play on words with the poster insinuating that the taxpayers are somehow ‘spending’ $5B to refund franking credits whereas we know perfectly well that the taxpayers don’t have to pay for anything. The refund is simply returning the tax paid by the shareholder if they paid too much tax that year…like … you know… how it works with every other form of income.
But hey, good job PR team! Nothing is more likely to get votes than if you pretend you’re fighting for the working class and trying to get the rich to pay more tax so you can fund more public services.
So Robin Hood of you. In fact, Robin Hood is almost a perfect analogy because this policy is indeed stealing from the rich but I’m not sure about giving to the poor. As I’ve covered above, the government sorta sucks with money and to quote Mr Packer again, if you think that the money that is retained by this policy (assuming they are able to retain any money, which is highly debatable) will be going to these public services … ‘You’d want your head read‘
There are also other countless articles written by prominent financial figures with large followings that also raises eyebrows about the sincerity or purpose of some of the content that’s published.
The real issue with this whole debate is the tax-free pension with Super. When you start to receive an income from your Super (pension mode) you don’t have to pay a single cent of tax on that income up to $1.6M. This means that because your taxable income is $0 if you receive Aussie dividends with franking credits attached… you guessed it, you will receive a refund!
The unsustainable tax-free pension mode of Super has been debated countless times and I’m not going to go into it.
But make no mistake about it, the ALP are targetting this and the FIRE community is getting caught in the crossfire.
‘But why wouldn’t they just change the law so there’s not a tax-free pension mode’
Because that’s not smart politics!
Does anyone honestly think that this move to axe franking credit refunds wasn’t strategic? Hell, half of the FIRE community doesn’t understand it well, how are we to expect that the general public will get it? The answer is they probably won’t. And I don’t blame them, it’s complicated and confusing. They are sold the dream that the wealthy will have to pay more tax (which will be 100% true) and that money will be used to fund public services (lol).
That’s a great PR campaign if you ask me. And incredibly hard to argue against because it’s so confusing.
Everything I’ve covered so far is pretty stock standard on the battlefield of the political juggernaut trying their best to win all of our precious votes.
But there’s something else afoot that I can’t figure out…
Where It’s Getting Weird
To summarise everything I’ve covered so far:
Franking credit refunds make perfect fiscal sense. They were designed by an independent body and implemented with bipartisan support
ALP want more revenue
They won’t directly tax Super pensions because that would be political suicide so instead, they have gone after Franking credit refunds and are exploiting the general publics lack of knowledge about how they work
Here’s my beef.
The entire reason this article exists is that I’m noticing a trend amongst the FIRE community where an uncomfortable number of members are not only in support of this change but are actively campaigning for it to go through.
This change directly affects the FIRE community!
If you are planning on retiring from Aussie dividends, you could be set back years until you reach freedom if this goes through.
Yeah yeah yeah I know you can tweak your investments to get around it and people did just fine without franking and all that but that’s not the point I’m making here.
My point is that a lot of the community is not taking an IDGAF approach. They are trying to argue for the changes that will directly disadvantage them and it’s doing my head in.
Here is what I’m talking about and I want to preface this by acknowledging that every single one of the screenshots below is from a FIRE or financial independence community group (Facebook, Reddit, forums etc). I have not included the whole quote or comment in some of the screenshots FYI.
The first comment pretty much sums up view spot on. I’m glad to see it sitting on 10 points (basically an agreement for those who don’t use Reddit). But the response has nearly the same number of upvotes which would indicate that a significant amount of the sub (which was small when this was posted) would disagree.
*(this edited screenshot is not the whole post, just the part I’m highlighting)
Same sub as above. 27 upvotes for a post that clearly states that they won’t benefit financially from these changes but will be voting for them anyway. This was posted on a financial independent specific forum. When another member replies with what I would consider a pretty reasonable response, they get downvoted and are currently sitting on -7 points.
Another forum member glad that these changes will go through. But the community is really getting behind this comment with 22 points.
Some ALP propaganda posted on the ‘Mustachians Australia’ group.
19 Likes and 3 Loves.
The first comment is even a clapping hands emoji.
PEOPLE ARE CLAPPING ABOUT THESE CHANGES IN A FIRE GROUP.
Australian Facebook group specifically geared towards reaching financial independence has the ALP propaganda we seen posted above… And wouldn’t believe it… It has 10 Likes and 2 Love reactions. People who are trying to reach FI are loving the fact that they will have to pay more tax… 🤔
But what the actual fuck is going on?
I fully expect to see these sort of posts and more importantly, responses from any other group in Australia. I think it’s unrealistic for the general public or anyone who these potential changes won’t affect to give two shits. But a good percentage of the FIRE community actively promoting and wanting these changes to go through is… confusing me.
Why Is This Happening?
I don’t really know but I have four theories.
The most likely theory I have is that there is still a decent amount of people in the FIRE community that still don’t quite know how franking works. The refund can be confusing to understand. Combine this with a slightly naive attitude towards how tax dollars are spent and what you have is a genuinely good-hearted person who just wants to spread the wealth around. All I would say to anyone who falls in this category is please consider direct donations to good charitable organisations. I have worked for the government for over 7 years. Trust me when I say that you are 100% better off directly helping out the less fortunate than you are by paying more taxes in hopes that it will be put to good use.
The FIRE community was once a smallish niche group that all had aspirations of escaping a lifetime of working a job they didn’t particularly enjoy. And then the word got out, and what started off as a relatively small group has grown exponentially. I suspect that there are a lot of people out there that are apart of FIRE groups, forums and pages that have no intention of doing what’s necessary in order to FIRE. Maybe the influx of FIRE phonies are delighted with this speed bump in our road to FIRE. This can best be described as Tall poppy syndrome.
Some out there have been drinking the ALP ‘Kool-Aid’ and actually think that franking credit refunds don’t make for a good fiscal policy.
And now it’s time to put your tin foil hats on…Although highly unlikely, is it possible that members of the ALP have infiltrated the FIRE community? I honestly don’t think we’re big enough for any political party to really care about, but maybe there are a few interns out there pushing their parties’ agenda… Stranger things have happened!
Guys, I get it.
You should never base your strategy around tax laws. The most important rule for investing should always be to invest in great assets (whether that’s locally or internationally). Tax strategies should come later down the track and we shouldn’t get too upset when they change or are abolished. This is to be expected at some point after all.
I’m not saying we need to band together to fight this (I’ve got better things to do), but for the love of God, we don’t need to be actively campaigning to disadvantage ourselves.
Maybe I’m missing something here, but I can’t work out why so many of us are happy to pay more tax to a government who has consistently shown its incompetency to spend money wisely.
I’m really interested to know what the community thinks.
Are you picking up what I’m putting down? Or maybe I’m just out of touch and need more faith in the government?
Please let me know what you think down below 👇.
Spark that 🔥
*Credit to these two Cuffelinks articles for most of my research around the history of franking. Article 1, article 2.
*Please consult a professional if you’re confused or not sure about anything when filling out a W-8BEN-E form
Do you own a US domiciled ETF or share? I own 2. VTS and VEU.
If an investment derives its income from the US, it has to pay tax to Uncle Sam. But What happens when I get the dividend from my US ETF or share? The company has already paid tax to the US and now I’m expected to pay full tax on the dividend?
Oh Hell Naw!
This is the purpose of the W-8BEN-E form. It stops double taxation so you don’t pay tax twice in two countries. You need to fill this form out for every ETF (or investment) that is domiciled in the US. If you don’t fill it out, you will get tax twice!
Here is a video of me recently filling out my W-8BEN-E form. I had to fill it out again because I switched my broker account from Commsec to Selfwealth and created a new HIN.
I’m sometimes asked why I own these two instead of just buying VGS (or VDHG but that will be covered in an upcoming post).
In a nutshell, I go with VTS+VEU because it offers:
– Lower management fees
– Greater diversification
– Exposure to emerging markets
– Unhedged against the Australia dollar (I think the AUD is high at the moment)
Don’t be put off investments because you need to fill out a very simple form every 3 years! I understand that it’s a little bit of extra work but seriously, we are trying to reach financial independence here! What’s a couple hour extra filling out a form and doing a little more come tax time for a superior investment.
The FIRE community is constantly recommending putting in a little bit of extra work and taking things to the extreme where others won’t, to enjoy a life other can’t!
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.
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.