I own a rental property earning approx. $395 a week. My mortgage is $32K and I'm earning a minimum $835 fortnight for employment. I salary sacrifice 90% of my pay to a salary sacrifice credit card to use for general expenses. I'm a disability support worker so earn more depending on available work. I have $150K in an offset account. I want to reduce my tax. What could you recommend? I am thinking of renovating my rental - how much should i spend renovating/or is there a limit? Is this a good option?
Ross from Ballarat
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Hi Ross and thanks for your questions.
First of all, we have to make a lot of assumptions as we don’t have all the information, hopefully we can point you in the right direction, but we would suggest you sit down with an adviser to get specific advice relating to your personal circumstances.
When it comes to goal setting we need to break down what it is you are really trying to achieve, prioritize these goals and then try and allocate time frames in which to achieve them. Unfortunately, most people have the misconception that paying less tax is and should always be the main goal, I would argue that this can be a double-edged sword, would you rather earn $10,000 and pay no tax or earn $40,000 and pay $26,000 in tax? Always consider your net position. Paying tax at certain points is just inevitable, you can reduce it but not avoid it.
Assuming you have some sort of benefit that allows you to Salary sacrifice your income due to the industry or the sector you work in, the money going onto the credit card for general expenses of up to 90% of salary should be reducing your tax bill considerably. You then have the Investment property expenses and depreciation you can claim, again helping you reduce your tax bill. Before making investment decisions know what your taxable and net income is, it’s very important when it comes time to making final good decisions.
When it comes to renovating the house, you want to make sure you are getting bang for your buck and I would be more focused on net returns rather than tax deductions or looking for depreciation. You don’t want to over capitalize on the investment property either, especially in a volatile property market like we are seeing now. Ask yourself “how much I will gain from a rental and/or capital perspective if I invest X dollars into the investment property” This is a hard question to answer because the exact value of the property will only be determined when and if you sell it. I find property investors are usually too optimistic so be careful.
I personally think you should look at alternatives and diversify your assets, look at what other options you have outside the property sector. If you have an Owner-occupied property and an investment property you are heavily weighted to the one asset class, remember “don’t put all your eggs in one basket unless you can control the basket”. Depending on your age, Super may be a great option but just consider your marginal tax rate beforehand, also take into account that money will be locked away for some time. Another option could be investing similar to how Superfunds invest but structuring it in your own personal name or another structure (Trust, Company or Spouses name). You could look at starting with a small amount and build it up or if you want to push the envelope you could look at borrowing to invest, this can be a riskier proposition so make sure you get help. Regardless always make sure you have a healthy emergency bucket of cash left over, I would suggest a minimum of 6 months’ worth of all living expenses.
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