Tax time hardly a big worry

IF you’re that preoccupied with paying tax, you’ll almost certainly attract a spiv with a plan to radically reduce your tax, warns the Barefoot Investor.

Don’t let your tax get you down, plan carefully instead.

IF you’re that preoccupied with paying tax, you’ll almost certainly attract a spiv with a plan to radically reduce your tax, warns the Barefoot Investor.

 

DENNIS WRITES: I am 49 and married with three children. We earn $210,000 a year combined. Our mortgage is $300,000, on a home worth $1.2 million. We have two unencumbered properties (one commercial, owned by my wife and earning $45,000 per year in rent), and have $250,000 in super. We are absolutely beaten down with our tax bill every year, especially my wife (approximately $11,000 every year!). We are completely shattered and gutted, and sick to death of this situation. What do you suggest? We feel as though we are doing everything for the taxman.

BAREFOOT REPLIES: You’ve done really well! You should be proud of yourself, but instead you’re behaving like a three-year-old who won’t share his toys. Little Dennis is throwing a tanty! Let’s look on the bright side: yes, your wife is getting a tax bill — but that’s because her taxable income is being boosted by $45,000 from owning a $900,000 commercial property (based on a 5 per cent yield)! Now, let’s re-read your question. You say: “We are completely shattered and gutted, and sick to death of this situation.” Heavy. Here’s the thing: your words have power ... they control your actions. If you’re that preoccupied with paying tax, you’ll almost certainly attract a spiv with a plan to radically reduce your tax. If you’re not careful you could borrow yourself into oblivion and be so negatively geared you’d be positively screwed. Don’t mistake me as a cheerleader for the taxman. Kerry Packer was right: we should all minimise the tax we pay. But you can (and should) do it by maximising your pre and post-tax super contributions, and by structuring your assets in trusts. Other than that, you need to get a grip, mate. You’re one of the wealthiest people in one the wealthiest countries on earth. Life is good. Enjoy it.

A LITTLE CONFUSED

NATALIE WRITES: Loving the new book, but I am SO confused about income protection, life and TPD insurance. Why, in your book, do you suggest getting a quote for income protection insurance till 65 when most only provide benefit for three or five years (with a 30, 60, or 90 day waiting period)? If you can’t work after this period, wouldn’t the TPD pay out? Also I do not understand the difference between ‘IP’ and ‘Critical Illness/Trauma’ cover, and if it is needed. I need to streamline my multiple accounts but I am too confused. Help!

BAREFOOT REPLIES: I’ll do my best to make the complex, commission-driven world of insurance simple for you. If you’ve got children, and you haven’t increased your life insurance within your super to a level that at the very least will pay out all of your debts on your death — you’re not being a good parent. (Most parents haven’t done this). Similarly, you also want the same level of cover in place for the off-chance that you dance with the grim reaper but he doesn’t quite finish you off. That’s what they call Totally and Permanently Disabled (TPD). In the past TPD has been claimed for lower back pain, and bouts of depression, but the insurance industry is toughening up on its stance. I spoke to one insurer who told me that his definition of TPD is “when I see the body barely twitching”. In other words, life insurance and TPD are last-ditch catastrophe insurance. That explains why I’m a fan of having (relatively) low-cost income protection, with a 90-day wait before you claim, which will significantly lower your premiums. You can choose to purchase this through your super, or in your own name and get a tax deduction. Either way you should call your super fund and see if they can arrange this for you. If they’re a not-for-profit fund they’ll give you a wholesale rate, which will save you thousands of dollars than getting the same insurance through an adviser who will whack on a 120 per cent upfront commission. As for trauma and critical injury cover, I personally don’t bother with either. The Barefoot plan gets you to a point of having three months of living expenses in Mojo. That’s enough of a backstop for me, and I’d rather invest my money and compound it, rather than pay it out to an insurance company. Hope this helps!

TIME TO THINK

RICK WRITES: My husband works a FIFO job and is desperate to come home! He hits seven years in August 2017, so he is going to stick it out till then, before getting into earthmoving. We have over $300,000 in equity on our home and are thinking about buying an investment property. There is a company that assists FIFO employees pay off their home early. Have you heard of them?

BAREFOOT REPLIES: Like most kids, my son doesn’t like eating his vegetables. However, last year I found a workaround: he and I began growing our own in the vegie patch. He’d water them, pick them, and … happily eat them. What has this got to do with your question? Well, the company you’re referring to is flogging brand new investment properties in southeast Queensland (it’s standard fare for these promoters get paid upwards of $30,000 in kickbacks from developers or financiers, for each “investment” they sell). Sometimes they use the “get rich quick” line (“buy this apartment and you’ll be rich, I tell ya”), however that’s unlikely to work at the moment, given that prices in the area are flat or falling. So they’ve planted another idea: if you want to pay off your mortgage, you should buy an investment property (or three!), and it’ll go up in value quick smart, and then you’ll be able to sell it and pay off your mortgage! That strategy reads like my son’s Dr Seuss books: you walk in wanting to get out of debt, and their solution is to get into a lot more debt ... to get out of debt? Stay away from these people, and eat your bloody vegetables!

barefootinvestor.com

The Barefoot Investor holds an Australian Financial Services Licence (302081). This is general advice only. It should not replace individual, independent, personal financial advice

 

The Barefoot Investor: the only money guide you’ll ever need (Wiley $29.95). heraldsun.com.au/shop

Originally published as Tax time hardly a big worry