Retirement Plan for the Average Australian PAYG Tax Payer
Author │Yohan Soza – MAS Tax Accountants Dingley Village
What’s the best retirement plan option? Most pundits will recommend investment properties inter alia, and you have thought about it many times, but did not follow through? Then read on. Usually, these ‘investment gurus’ are in most cases friends and family who hear many ‘got rich’ stories from their mates and of course from social media like Facebook, YouTube clips and articles in your local newspaper among others.
Most conclude with “you must buy an investment property now! or lose out” , based on the steady growth experienced in historic property prices in Australia. They usually talk of the perceived retirement benefit once the expected property appreciates in value in the future. Which is the expected return in the long run. So before you jump on this band wagon, let me try to explain how investment properties can benefit you in the short term as well and strategically map out a solid retirement plan for you. That is if you are an average tax payer with an average salary.
Let’s use an example of an average Australian drawing a salary of $ 60,000 p.a . This salary based on current tax rates will attract a tax just over $ 11,000, sans any tax deductible expenses. We also need to assume he/she is privy to or have access to around $ 50,000 in cash through savings etc. In year one this person invests in a property valued at say $ 300,000. The borrowings for this investment property will be $250,000.
Based on this, the new tax payable calculation should be,
Annual salary $ 60,000
Plus rental income from property $ 14,300
Less borrowing cost for $ 250,000 $ 11,250
Less Depreciation and other deductibles on the property (est) $ 6,500
New taxable income $ 56,550
The new tax bill for this individual is just under $ 10,000 p.a which is close to $ 1,000 tax savings p.a. With around $ 1,000 p.a and with the expected property growth say 100% over the next 20 to 25 years the tax payer can enjoy a $ 300,000 retirement fund along with his super. (NB: If your super fund is fully exposed to the existing share market and its current appalling performance I cannot really say if your super balance will survive till retirement, but that’s another article!)
Should the retiree be happy? Ofcourse not, how long can one survive with $ 300,000 and what’s left of your super fund in today’s cost of living?, and its anyone’s guess what consumer prices will be then.
This is why the smart investor continues on this heady journey of re investing in properties every three to four years without any additional capital than what he/she spent on the first investment. Are your still reading?, then let me explain.
Based on the property market performance in the recent past, let assume the initial market price on the investment property grew by 10% p.a By the fourth year the property is now $ over $ 400,000, giving this individual an additional equity of over $ 100,000. Most banks will be happy to re finance this borrower, and he/she can use this additional equity as advance or key money for the next property, and you guessed it, his/her annual tax bill further reduces p.a.
Using this method the individual should have a cool portfolio of investment properties (say around 7 to 8 in the next 30 years) at the time of retirement with the added bonus of minimal tax payouts to the Tax Office. I don’t think you need any more explanation on this.
A mate once told me that an investment property is paid for by three parties,
- The Tennent
- The Tax Office
- You
The amount you have to cough up can be as low as $30 per week for an investment property. That’s just $ 30,000 for 20 years, assuming all other factors like borrowing rates, tenant income etc. remain constant at today’s prices. Now this is a very small price to pay for a gain of over $ 300,000 for one property. ( 20 years for a worst case scenario, property prices in Australia have doubled by around 10 years in the past)
So why wait? Plan on your retirement now! Call us on how we can strategically plan your future tax cost and explore avenues to increase your wealth for a happy, content and enjoyable retirement. It’s a free consultation hence you have only to gain.
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