Earn Over $100 000 and Pay No Tax – Really!
You can earn over $100k and pay no tax. In fact you can earn and lot more than that and pay very little tax. You do need to have business earnings to do this though. So if you have business earnings or can create business earnings (eg. by investing through a business structure), here’s how you can drastically reduce your tax bill. Not that paying tax is a bad thing, but lets be honest, if we can avoid it we probably should. Minimising your tax spend is a smart move. You can also maximise other benefits too, like the super co contribution, family tax benefits and low income tax offsets. There’s nothing dodgy here, just wisely navigating tax laws, business structures and family settings to bring about the best return. Note I’ll be applying this to a family setting where you can distribute funds to two adults. So if you are single, you’ll need to divide by 2. So here’s how you can earn over $100 000 and pay no tax.
The Best Business Structure To Minimise Tax
The best business structure to minimise tax is to use a trust. A trust allows you to distribute business profits to all your designated beneficiaries in any amounts you choose. For more info on trusts you can check out my post on trusts, ‘setting up a family trust can save you heaps‘. Using a trust allows you to very carefully distribute profits from your business in any way you like. So you could give exactly $18 200 to someone and enable them to stay under the tax threshold. You can also pay yourself wages if you prefer, along with super. It’s up to you. There’s a lot of freedom a trust affords. You can also give your kids $416/yr tax free as well. In addition you can give to all tax free entities like charities and churches. Lastly, you can also have a company trustee that you can pass on some earnings to as well. But more on this later. So here’s the maths to earn over $100 000 and pay no tax.
Use The Tax Free Threshold and Low Income Tax Offset
The tax free threshold is $18 200 and with the low income tax offset, that effectively increases the tax free threshold to $20 852. So if you have a partner that you can divide the spoils with, that’s $41 704 tax free earnings. Not a bad start.
Utilise Super contributions and Tax Offsets
You can contribute $25 000 to your super and claim a tax deduction against your business earnings/distributions. This is also the maximum you can claim before you hit the concessional contributions cap. But $25k is a lot. So that’s $50 000 you can add to your super accounts if you have a partner. Now we are up to $91 704 and have paid no personal tax. Now the $50 000 going to super will be taxed at the 15% concessional rate, but that’s way less than personal tax, but will cost you $7500. Keep in mind that with average returns of 7%pa that tax contribution will be repaid in earnings over a couple of years. If your spouse earns under $37 000 taxable income you can also contribute $3000 after tax super contributions to your spouses super account for a $540 tax offset. That effectively adds $2842 to your tax free threshold, or another $5684 of tax free earnings for a couple. So we’re up to $97 388 and our super is growing rapidly!
Maximise Your Deductions
Most deductions you can claim directly via your business. But you may have other deductions you claim personally. Like home office expenses, business use of a shared car ($3600 for 5000km), stationery, phones, depreciation of computers, laundry/uniform, travel costs, etc. If theses haven’t been paid directly via the business you can easily claim over $4 000. And for a couple that’s another $8 000 of earnings that is tax free. So now we are at $105 388.
You can also give directly from your trust to a charitable institution or church and turn those business earnings into something that does some good. I like to aim at giving 10% of my earnings. And given we are at $105k, that’s another $10 500. Sure, it’s not going to my bottom line, but it’s doing broader good and reminds me that money isn’t just for my benefit. So that’s $115 888 in business profits, no personal tax and just $7500 in super taxes that will be earn’t back in no time.
Give To Your Kids
With a trust you can give your kids $416 each tax free from the trust. So you might as well give them a leg up. I’ve found CUA have the best interest rate on their youth bank accounts. It used to be 5%, now 3%, but is still way better than a normal account. So set them up with a high interest account and add $416 a year to that. So if you have kids, there’s more tax free earnings. And if your kids are a bit older and independent of you, you can give them a whole lot more as well. Of course, anything you distribute becomes theirs and adds to their taxable income. But if your business is a family affair, you can really benefit from this.
Maximise Other Benefits
Because your taxable income will be around $23 700 or 47 400 as a couple you can quality for the base rate of the family tax benefit part A (note income includes your super contributions for which you claimed a deduction). The base rate sits about $1600 / child/yr. But if you contribute less to super and stay under the $56 000 threshold you can qualify for full family tax A. That comes in at over $7000 per child, again tax free. You can also potentially qualify for a health care card which offers reductions in transport, utilities, car registration, reduced medical costs/prescriptions, free ambulance and more depending which state you live in. These savings can really add up too.
Consider a Bucket Company
Now if your business earns in excess of $100 000 k as a family or $50 000k as an individual, or you want to qualify for other government payments, you can always use a bucket company. This is a company you set up to distribute profits to, instead of to individuals. The company will pay the company tax rate of 30%, but can be paid out to shareholders with franking credits later. In this way you can retain business earnings for a later date. For example, you might park some excess dollars to minimise your personal tax and wait till you enter early retirement. You can then pay out dividends at a rate around the tax threshold as above and also claim back the franking credits to get some or all of your company tax dollars back again. And you get to retire early. In this way you could earn well over $100 000, pay no personal tax, a little super tax and some company tax that you can claim back down the track! So you can well and truly earn over $100 000 and pay no tax. Be wise.
Case Study: How This Works For Our Family
Here’s an example of how this can work for a family of 6 like mine.
Adult one, pay wages of $20 852 + $2842 (put $3000 into spouses super as super spouse contribution, claim tax offset) + $4000 (claimed as tax deductions) + $4 000 (put into super and claimed as a tax deduction) + $4 000 (given away directly to charity/church). Total wages: $31 694 (+ $3011 put into super as required by the super guarantee of 9.5%). Add another $4 000 to each super account and claim a deduction for this.
Take Home Pay: $24 694 + $10 011 super + $4 000 giving.
Adult two, repeat. Take Home Pay: $24 694 + $10 011 super + $4 000 giving.
Give kids $416/each, so $1664.
Total business earnings of $77 410
As our adjustable taxable income is under $56 000 threshold, we can receive full family tax benefit A and part family tax benefit B, $7000 * 4 children = $28 000 tax free. We also qualify for a health care card this is worth over a thousand dollars in savings annually. Any additional business earnings are put into a bucket company and invested for future use when the kids are grown or we retire early.
As a family that comes in at $79 052 take home pay + $20 022 put into super (just $3003 in super contributions tax) + any excess income put away in the bucket company + $8 000 giving. Total income: $110 077. And most importantly $0 personal tax.
For the Frugal Only
Now if you don’t have any kids the maximum take home reduces to $49 388, or just $24 852 for a single if you don’t want any tax bill. So this isn’t for people who want to spend up big. If that’s you, you have to pay a lot more tax for the privilege of all that spending. But if you are happy to earn way more than you spend and save a far larger part of your earnings, then this works perfectly. This is for those who are willing to live frugally for now and save rapidly for later. For our family of 6 total yearly spending typically falls within the $42-47 000 mark. So you can definitely make this work. It also means with the above scenario we have another $30 000 to put into our family trust. We then invest that money and add to our business earnings and the whole thing can grow with time. Of course you need a business that makes profit or enough investments in a family trust to have business earnings for this to work. But if you do, then you really don’t need to be paying any tax, while saving a lot into super, bucket companies and family trusts. So there you go, you can earn over $100 000 and pay no tax!
Is This Right?
I can hear in my mind the naysayers. That’s not right. How can you have a business earning $70 000+ and take another $28 000+ in government benefits, claim a health card and all the while pay not a cent in tax. You’re a leach on our society. So is this right? Does it pass the pub test? It’s certainly legal and falls within the law perfectly. There’s nothing illegal here at all. All we’re doing is maximising earnings within the current legal framework. That could change. But it also means having significant and growing savings coming into retirement. There’s a good chance someone doing this will not require any pension at all. That will save the government $34 000/year for maybe 20-30 years, $674 000-$1 011 000 based on today’s numbers (will be much larger in the future). My guess is that amount saved will match or likely far exceed what is received in benefits and minimal taxes. So in the end this will likely be less costly for the government over a lifetime.