Who enjoys filling out tax returns?
Who secretly thinks tax accountants are sexy?
Who thinks that after the climax of tax time madness they all have a big party, take off their beige trousers or knee length skirts and engage in some good clean double entry bookkeeping fun?
Well, umm, no ahh, yeah me neither.
But, there are some benefits to spending the time to work out how the income tax system works, and how you can take advantage of it.
All the content of this post is concerning the Australian Tax system, however I’m sure the same approach can be applied to other countries around the world that have a progressive tax system.
Now a little bit of background. For the international reader, Australia has a progressive tax system that looks a little like this:
We also have a scheme where students can attend University (assuming they get good enough marks during High School) using a low interest loan from the Government. The interest rate on the loan is set at the inflation rate. This used to be called the HECS scheme, now it’s called HELP or some other kind of jargony acronym. You don’t have to start paying back the loan until you earn over a certain threshold. The scheme is supposed to increase social mobility by allowing students from poor socio-economic backgrounds to become highly skilled worker bees such as doctors or lawyers or engineers etc. In my mind a good idea. It looks like this:
So the thing about a progressive tax system is, the more you earn, the bigger share of the tax burden you take on. It makes sense for those who earn more money to pay more tax, but it also encourages people to try to reduce their taxable income.
Being the multifaceted extreme man that I am, I thought deeply about this while the extreme man of leisure inside of me got together with the extreme man of spreadsheets inside of me to come up with a plan….
And after an extreme oyster feast they both worked out that due to the progressive nature of Australia’s tax system:
- If you take time off that is spread between two financial years you will lower your taxable income during both financial years and as tax comes out of your pay as if you are working the entire year you will get larger tax returns for each of the two financial years.
Now, there’s a whole lot of boring maths (or sexy maths, depending on your disposition) to work this out, but this is what it works out to be for different yearly salaries for the following examples:
- 1 year off spread over 2 financial years with no HECS debt,
- 1 year off spread over 2 financial years with a HECS debt,
- 6 months off spread over 2 financial years with no HECS debt,
- 6 months off spread over 2 financial years with a HECS debt.
So say you earn $60,000 a year and have a HECS debt. You could take a year of unpaid leave and you will receive close to $9,000 dollars in tax returns. Half received halfway through your year off, and half 6 months after your year off.
Say you earn $90,000 a year and have a HECS debt. You could take a year of unpaid leave and get a combined tax return over two years of a little over $15,000.
Could you potentially live cheaply enough on your year off that the sum of the two tax returns go close to paying for your entire year off? You bet you could. See my other post on the cost of travel.
For example, using the information in the cost of travel post, above, if you have a $90,000 a year salary and have a HECS debt you could easily live for a year in Bali for free, surfing every day, drinking frosty cold bin tangs and getting those ridiculous hair braids that Australian tourists tend to always get in Bali. I’m also sure that if you were there for a year it would turn out to be a lot cheaper than that. Fast travel is expensive travel. Slow travel is a lot cheaper on an average cost per day basis.
And to people that are no doubt thinking, What about my “Career”? To them I have this to say:
- First of all, a career is not really a thing. You can’t touch it, or feel it, it’s something we’ve been convinced is a thing just to keep the economy running. What is a thing is that we all trade our precious time for money to spend mostly on things we don’t need. That’s a thing, and that thing sucks.
- You’ll find that when you do go back to work you will be very determined and goal orientated. Having that amount of time off allows you to think about your life, what you want from it and how you are going to achieve it.
- You can use the time off work as a great opportunity to study. You’ll then find that when you go back to work you have additional skills that will make your work life easier. I’ve done this every time I’ve taken time off, for example I recently sat an exam while I was in Vancouver. It’s a great way to make your time off work guilt-free.
In my experience generally when you say something that isn’t consistent with people’s understanding of how the world is supposed to work you can get some criticism, so here’s some answers to some common questions people might have:
Question 1: What about the Medicare Levy Surcharge?
Answer: The Medicare Levy kicks in at rates between 1% to 1.5% of your taxable income if your taxable income is above $90,000 a year. You’re exempt from this if you have appropriate health insurance. So you could potentially save more in the case that you earn above the threshold and normally pay the levy by reducing your yearly salary for those two years to below the threshold. It’s not a constant though, so I’ve left it out of the calculations for simplicity.
Question 2: What about Super?
Answer: Employer compulsory super contributions aren’t included in your assessable taxable income. The incomes in the table above are excluding super.
Criticism 3: I don’t believe you.
Answer: That’s fine, you don’t have to believe me, but the thing about maths is it doesn’t lie, and you can look up all the relevant tax rules here:
I encourage you to crunch the numbers yourself, but if you can’t I’m more than happy to exchange spreadsheets for beer..
Criticism 4: Extreme man, you’re an immature idiot who isn’t thinking about his future at all.
Answer: That’s not what your Mum said last night!
Also it needs to be said, that as you get half of whatever your total tax return over 2 years is halfway through your year off, and the other half 6 months after you start working again you will need to have savings to support yourself, but with a bit of thriftiness you can take a year off without smashing your savings.
Oh yeah, this is not financial advice, I’m just a man with a spreadsheet, blah blah blah.
And to any members of the Australian Tax Office (ATO) that just happen to be reading this: