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a Tax Math problem

Discussion in 'Accounting, Tax & Legal' started by mumeco, 28th May, 2008.

  1. mumeco

    mumeco Active Member

    Joined:
    2nd Apr, 2008
    Posts:
    31
    Location:
    NSW
    my husband is on highest marginal tax rate. Needs to put aside 46.5% earnings for tax bill and also BAS.

    Me - on 30% tax rate, perhaps less this year.

    I have an IP (don't ask), and have a variable offset loan.

    Is it better to:
    1. Put hubby's tax money into a high interest savings account (e.g.BankWest) under my name to earn interest

    OR
    2. Plant the savings into the offset account to reduce the interest payments. The interest is tax deductible for me, but I am paying a lot less tax than I used to, and this might help with the strata fees etc as when those things are taken into account I am not really gaining much from having the IP. (I do plan to sell it when the time is right)

    I need a financial advisor or an accountant. But until then, could somebody clever help with this issue?

    :confused:
     
  2. AsxBroker

    AsxBroker Well-Known Member

    Joined:
    8th Sep, 2007
    Posts:
    1,448
    Location:
    Sydney, NSW
    Hi Mumeco,

    The equation you are looking for looks something like:

    Interest Before Tax Needed to be Earnt = Interest Rate on Loan ( 1 - Tax Rate)

    Most Australians are on a 31.5% tax rate.
    Your loan might be say 10% (obviously depending on what sort of loan it is.

    x = 10% / ( 1 - 0.315)
    x = 10% / ( 0.685)
    x = 14.6% (1 dp)

    Having a loan at 10% and being on a Marginal Tax Rate of 30% (plus medicare levy), a person would have to earn 14.6% before tax to break even.

    Cheers,

    Dan
     
  3. Simon Hampel

    Simon Hampel Co-founder Staff Member

    Joined:
    9th Jun, 2005
    Posts:
    4,619
    Location:
    Sydney, Australia
    It's quite simple really - and you pretty much already have it worked out.

    There are two things you haven't told us - the interest rate you can earn on the saving account and the interest you are paying on the loan. I'll assume 7.5% for savings and 9% for the loan - doesn't really make any difference what the numbers actually are unless you have a fixed interest loan which is still at a lower rate than you can earn from the savings account.

    If the money is in your husband's name in a savings account, he will earn 7.5% interest, but then pay 46.5% of that in tax, a net return of 4.01%

    If the money is in your name in an offset account, you will save 9% interest, but lose 30% of your tax benefit, a net saving of 6.3%

    So based on these numbers, you still save 6.3% of your interest costs with money in the offset account - which is a better net return than the 4.01% you'd get with the high interest savings account. Go with the offset.
     
  4. mumeco

    mumeco Active Member

    Joined:
    2nd Apr, 2008
    Posts:
    31
    Location:
    NSW
    Luuuuuv!!!!

    I love you.
    You guys are legends.