Discussion – How FIRE benefits corporations?

FIRE movement is tremendously popular these days, especially among specialist workers. The idea of retiring early with an abundance of money is attractive to everyone. The concept is excellent and is real. People have reported retiring early and have enough income for them to live their lifestyles. However, is it all good and beautiful?

Tl; dr;

  • The mainstream way of FIRE is work – buy assets – reach a certain networth – retire happily.
  • FIRE gives back money to corporations and allow them to continue growing.

What is FIRE?

FIRE stands for Financial Independence, Retire Early. It is the concept that first came out from the book Your Money or Your Life. This concept then blossomed and became the most popular way of achieving an independent retirement known to millenials. The FIRE movement is very simple, considering that your annual salary, you should allocate most of that earnings to buy assets like Stock and/or real estate that makes you money; living below your means until your networth is enough for you to retire and live your dream lifestyle.

Most people advise to buy ETFs as the easiest way to buy assets. At the end of the day, most fund managers cannot beat the market index. So, why try to beat the market yourself, send the money to fund managers; while you can just buy into a broad market ETF and benefits from the rise and fall of the market?

How does it benefit corporations?

Assuming you work for a big company X.

You earn $500,000 per annum post tax because you are great at doing your job and ready to work long hours for the company.

You follow FIRE movement and decide to spend 80% of your take home money to buy ETF that track the ASX200, or S&P500 depending on where you live.

Now, let us take a more general look, and assume X is the ASX200. We can see that you put back $400,000 per annum back into X and allow it to grow artificially. The growth does not come from better productivity, but from people buying blindly into the company. In a way, it is a great “scam”, where corporations take your best productive years, paying you top dollar, all that for you to give back most of the money back to them to continue the cycle. It is truly fascinating.

The best thing is that, you benefits from it too. However, I imagine that you get 1, your employer will get at least 100. But everyone is happy right?

How to FIRE the right way?

I strongly believe that beside being good at your job, you need to be fluent in at least one form of investments. It maybe learning how to pick stocks, how to invest in real estate, how to get your way around commodities, gold and silver, etc.; or even starting a company. The possibility is endless.

The question is why people do not do this? And from my experience, it seems to be because they are scared. Why learn how to invest when I am already making $200,000 per year? Why leave my job to start a business? What if I lose everything?

What most people do not experience is that the other side of fear is calmness. Before you jump out of the airplane for skydiving, fear engulfs you. But once you jump, there is a sudden calmness in your mind, and then the joy of experiencing flight.

Summary

FIRE is a great way to achieve financial independence. I am also an advocate of the movement. However, my approach to it may not be the same with other people. I will achieve Financial Independence my own way, and I will share with you the journey over time.

“Only those who go where few have gone can see what few have seen.” ― Buddha Gautama

By Tuan Nguyen

Discussion – Pareto distribution

Recently I came across a lecture from Professor Jordan Peterson. In this lecture, he talks about Pareto distribution and comparing it with the Normal distribution. There are massive distinctions between these two and I think it is interesting to note down some of them.

Tl; dr;

  • Pareto distribution deals with creative domains, or human creativity. Where the majority of work is produced by a small number of people.
  • In a domain, the square root amount of people produces half of the product.
  • Given a randomized trading environment, the trading activity always end with one player holds all the money.

Pareto distribution

In contrast to the normal distribution, where most activities occurs in the norm, Pareto distribution argues that the most activities occurs around a very small set of units.

Galton board
Normal distribution visualized
pareto distribution
Credit: mode.com
Visualize the 80-20 rule with Pareto distribution

One thing that we may have heard before, 80% of the work is produced in 20% of the time. This is the most common example of the Pareto distribution. One thing to note is that this distribution works best in creativity domain, where things are not certain.

There is a formula, called Price’s law, is used to determine the amount of creative work. This formula is derived from Pareto distribution theory. The formula states that given X people working on a creativity project, square root of X people produce half of the progress, while others produce the remaining half.

For example, if 10 people are assigned to do a project, then 3 people will deliver half of the project, and 7 people deliver the other half. This does not make sense when I first read about the theory, but experimental results clarify the point. An amazing thing about this law is that if 10,000 people work on a project, we only need 100 people to deliver half of the project. It becomes ridiculous at a large scale.

Applying Pareto distribution to the Game of Money

With the same understanding of the distribution, and project it to how wealth are concentrated only in a few individuals. We can clearly see the Pareto Distribution at work.

Professor Peterson talks about an example, like Monopoly, we start with 4 players, and at the end, 1 player ends up with all the money and wins. And even if we start again and again, only 1 person is the winner. With Pareto distribution theory, in a randomized environment, and we apply randomized trading rules, the game always end with 1 player having all the money.

I did not believe it.

So, I decided to write a small web app to test the theory, what’s programming is for right?

To my surprise, it always end with one player holding all the money. Which player is not important, the important thing is that we know the end result will take a shape like that.

You can access the game here https://lightbringer1991.github.io/trading-game/

Summary

Knowing about Pareto distribution, I finally have an answer to the question: “Why can’t we distribute wealth evenly to everyone, would the society be better off that way?”. The simple answer to that, is, even if we do the distribution, over time all the wealth will concentrate to a small number of people anyway.

“The more you know, the more you realize you don’t know.” – Aristotle

By Tuan Nguyen

property investment

Discussion – Do you NEED a home?

As someone who is familiar with migrations, I moved from Hanoi to Ho Chi Minh city when I was little. Moving from Vietnam to Australia when I was 18, and moving from Ballarat to Melbourne 5 years later. I feel like I experienced a different way of living, in contrast to how our predecessors have been living.

Tl; dr;

  • We WANT a home and we NEED a place to live.
  • Sense of ownership and jealousy often clouds our judgement when it comes to purchasing our dream house.
  • There is nothing wrong renting for the whole life. It just needs more planning.

Housing is a basic need

According to Maslow’s Hierarchy of Needs, a place to live satisfies the safety needs, and some of the physiological needs.

Having a place to feel safe, to keep ourselves warm, to be able to rest is a must for any human.

Back in the days, we normally stay in the same community throughout our lives. We were born and raised in the same house, even live in the same house when we became adults and gets married. At the end, we probably died on the same bed that we slept as a kid.

With that context, it is no surprise that most people who experienced that lifestyle, including my parents, think that one needs to own his/her own house because it is an absolute necessity.

An alternative aspect

Let us take a look at some statistical facts.

Back in 2012, a social indicated that 43% of Australians moved house in the last 5 years. The number is a staggering indication of how much we move around these days. We do not stay in the same geography for a long time due to various reasons, such as changing life styles, kids, work opportunities, etc.

In the new working environment, the idea of job hopping is becoming the norm. People are encouraged to change employers every 3 to 4 years to increase competitiveness and enhance their skill set. Sometimes changing job means that you need to move to another area, and I do see people renting out their own home, move to a rental property to be close to their new workplace.

The question is, is owning our own house a necessity?

To think about an answer, we must take a step back and look at the reasons why we purchased our home.

  • Is it because our parents told us, “You need to have your own home!!”
  • Or it is because your friends all have their own home?
  • Is it because you feel like owning a piece of real estate satisfy something within you?

There may be other reasons, however the above 3 is what I feel when looking back at my previous home purchase. Those reasons are not about what I need, they are all from external factors. And the one thing that inspire me to purchase is just because I wanted the feeling of ownership.

Therefore, it is never about my needs to buy my own home to live in. It is more about what the society expects from you, what I want to achieve in life.

With that being said, there is nothing wrong in purchasing a house of your dream. However, you need to think about the WHY are you buying as the very first step. If there is no good reason to buy, it is ok to keep renting.

The renting hassles

I used to rent for over 3 years when I arrived in Australia, and have resumed renting for nearly a year now. What did I encounter?

  • I lost all bond because of a dodgy tenant who sublet the room to me.
  • Living in a house infested with mice and I had to arm the traps every day.
  • I lived in a cold room with no heater for an extended period of time. In Ballarat winter, you wouldn’t like it 🙂
  • I lived in a house that had a break-in.

It is fair to say that I have quite a bit of experience as a tenant. Most people fear the stories of renting, and fear the hassles of moving houses, of being kicked out by landlords.

Fortunately, in Australia, if landlords want tenants out, they need to have formal notice and give the tenant a reasonable amount of time to find another place. Rental is a heavily regulated topic, and most of the regulations actually favour tenants.

And the moving, it is much easier nowadays with removalist services. When I last moved, it took me like a week to pack, a weekend to move, and another week to unpack. Yes there were some work to do, but then again, don’t we do the same thing when we move home?

Summary

Owning our own home is not really a necessity, but it is more about what we want, and how do we fit into the society.

Always questioning the reason why you purchase a property, and you will be more aware of your goal.

“We live in this bubble of ignorance. Most people know nothing about history, or the historical context of the traditions they still follow today. People do things without knowing why they’re doing them.” – Oliver Markus Malloy, Inside The Mind of an Introvert

By Tuan Nguyen

Discussion – Superannuation contribution

Recently I have been in discussions about superannuation contributions. And I think some information needs to be spread out to help you in building a stable retirement.

Tl; dr;

  • Employer must contribute super for their employees, minimum of 9.5% of the gross salary per annum.
  • The amount of contribution is taxed inside super account at 15%.
  • You can voluntarily contribute more money into super and take advantage of the low tax break, however it will only be at maximum of $25,000 per annum, including the amount contributed from employer.
  • You can contribute to previous financial years, starting from FY 2019.
  • There are ways to access super to buy assets before reaching 65, mainly via SMSF.

What is super?

superannuation jar
Source: sbs.com.au

Superannuation, or Super in short, is the money put aside by the employer for you to take care of you during your retirement.

The required amount that the employer is required to contribute equals to 9.5% of your ordinary timed earnings per annum, at the minimum.

You cannot access the money inside super account until you are 65 and above, or under certain circumstances.

Why should I contribute more into super?

Since I cannot access it until I am 65, why should I contribute my hard earned money now instead of taking it to buy some investments now?

First off, you are spending money to fund your future retirement, ensuring that you have a better future.

Secondly, most super accounts have investment settings built in, and it is highly encouraged that a young individual as I am, should put all super money into high growth investments. Since I cannot pull the money out in another 30-40 years, it is reasonable that I will see some substantial return thank to compounding effect.

Thirdly, you save tax money when putting more into super.

super contribution comparison

Suppose that the tax is flat out 32.5% for simple calculation. In the case of progressive tax rate, the difference may be lower. But generally, you still save some tax money and increase your net worth better. The tax charged inside super is a flat 15%, and it is substantially lower than our tax bracket. Of course if your tax rate is smaller, this will not make sense.

How do I use my super money before retirement?

The most common way to “access” your super money before retirement is to transfer all of them into a Self-managed Super Fund (SMSF). You will be in charge of this super fund, and therefore has the right to control the money. However there are quite a lot of restrictions that come with the structure. It is best to consult with a financial advisor or an accountant to know more.

Another uncommon way is that some Superannuation company, e.g. AustralianSuper, has an investment product called Member Direct. You can subscribe to this product, and basically it allows you to buy certain shares of your choice within the scope of super. There are also some limitation of doing it this way, and you can only purchase shares.

What I am doing?

It may be best if I try to top up the maximum amount of contribution each year, and later on I may pull them out into an SMSF to purchase a property.

Let’s say I top up maximum of $25,000 per year, after 10 years I theoretically have $250,000 inside super. During that time, if the share market goes the way it has been going in the last 100 years, my investments will compound about 7% per year, leading to the final figure of around $410,829. With this figure, I should be able to purchase a property to sit inside my own SMSF and net me some healthy return.

Summary

There are a lot of interesting things when it comes to Superannuation. I just listed the most common ways to deal with it here. It is crucial to consult professionals who can advise you on the matter. However, it is good to know that there are other solutions out there, all you need to do is ask.

By Tuan Nguyen

Discussion – Cost of home ownership

As someone who used to live in my own house, I gathered a bit of information about the associated cost of home ownership. For this post, I would like to share my experience of the matter.

Tl; dr;

Cost of home ownerships can come in many ways.

  • Closing cost (when purchasing the house)
  • Moving cost
  • Mortgage repayment
  • Insurance
  • Rates (council and water)
  • (Situational) Repair/renovate cost
  • (Situational) Body corporate fee

Assumptions

All figures will be based on the following data (close to what I used to pay, but rounded to make it easier to remember)

  • Purchase price: $400,000
  • Interest rate: 4% pa
  • Rental (in the same area): $350 per week
  • Council rates: $2000 pa
  • Water rates: $800 pa

Starting the journey

To live in one’s home, one needs to buy it first. Here are a quick look at what are the costs to purchase a home.

Total closing cost of buying a house

This, of course, does not include the numerous hours I researched, went to inspections/auctions. But as a rough figure, it is easy to see how much does it take to conventionally take ownership of a house in Melbourne, Victoria (The figure is back in 2016).

Nowadays, there are schemes that help easing the pain when purchasing the first home. For example, you can waive the stamp duty as part of the First Home Buyer scheme; or even be able to borrow up to 95% without triggering Lender’s mortgage insurance. However this is another topic for another time.

For Victoria, there is a way to calculate your expected stamp duty via the government calculator page.

Living in my own house

It is a great feeling of owning a house to live in. Once I moved in, the first cost that I needed to spill out of my pocket is the moving cost. It can vary between $100 to, say a few thousands if you are moving interstate. Luckily, I have a few friends who helped me moving from Ballarat to Melbourne with minimal cost associated. Let’s say it was $600 for hiring movers to do that.

Then, the mortgage repayment kicks in. At $320,000 total mortgage, the P&I repayment each month came down to $1,528. Which means I needed to fork out $18,336 each year from after tax income to satisfy the mortgage repayment. Once in a while you can call the bank to ask for a reduction in rates, which can happen when RBA reduces interest rate, or the bank is running a promotion.

After signing the contract, I was advised to purchase home and content insurance, which came down to about $140 per month. This is because once I sign the contract, all damages (if occur during settlement time) are my responsibility. Since my loan was with ANZ, I had a choice to bundle car insurance with home and content insurance to have a better premium. You can take a look at this to reduce the overall insurance costs.

After a while, local council and water company will start sending you bills regarding the rates. In my case it was $500 per quarter for council rates and $200 per quarter for water rates. These fees you need to pay as part of home owner costs. There is no negotiation on this part.

Situational costs

My house was an old one, so repair and maintenance is kind of compulsory. I normally fork out about 10% of the expected rental in the area, which was $350 per week at the time. Each month the rental income would be $1,516.66, which means I needed to keep about $151 per month, ready for repair. This, should be a part of home ownership 101.

This came in handy when the hot water system failed ($5,000 replacement), and the cooking stove “exploded” ($1,000 replacement). Of course if you live in a brand new house, there is less chance to repair anything. You can ignore this part.

Another cost that can be considered is body corporate fee. This happens when you live in an apartment complex, or a block of units. There is a fixed fee that the body corporate charges each unit, and the owner of those units have to pay for it. The money is used to maintain common areas, such as drive ways, common gardens, etc.

Once thing to note is that you need to read the body corporate paper carefully. Sometimes the body corporate already purchases home insurance. In this case you just need to purchase content insurance. However check with your insurance provider before deciding.

Summary

Ongoing cost of home ownership

The above is a summary of running/maintaining a house for a year. This is not meant to scare you, but to prepare you for what is to come when you decide to settle down and claim home ownership. Figuring out all the numbers before committing is the key of financial stability.

That is all my experience regarding the financial side of owning my own house. These figures of course not accounting for any capital appreciation aspects of owning real estate. However we can go back to it at another time.

By Tuan Nguyen

Discussion – Why am I renting?

Owning a home is the ultimate dream of many people. Some even say it is the biggest investment of one’s life. After almost a year of renting, I now have a better view at renting versus living in my own house.

Tl; dr;

  • Rent when: you are not ready to settle down; you have debts that have high interest rate; you want to speed up your financial state
  • Live in your own home when: you tired of moving around; you can financially support the mortgage; you are aware of costs of owning a house.

Why renting?

I used to live in my own house. It is the Vietnamese way to live in your own house and not paying other people’s mortgage.

However, after a number of years, I came across a concept called rentvesting, which I considered intriguing to understand more. Rentvesting discusses that by renting, you end up saving more money than the cost of owning a home. And by redirecting the difference into purchasing investments, you can get ahead financially comparing to people who are still paying off their home loan.

There are 2 points that needs to be done for this strategy to work:

  • Your rent is cheaper than your would be costs of owning.
  • You redirect all the difference into investments.
home vs rent in the same area

Above is the comparison for my own situation when I tried to figure out whether I should move out of the house or not. The number checked out, netting me $306.89 per month, or $3682.72 per year back in my pocket if I chose to rent somewhere in the same area and rent out the house. Then I can redirect it to the offset account, or saving up for another investment deposit.

home vs rent in the city

But why stop there? I decided that if I rent in the city, it is more suitable for me. Assuming that for each hour commuting I can put into work to just make $10/h, and I waste 3 hours each day commuting at that time.

At my age, settling down is not really a thing to consider. I am happy to move around, exploring different suburbs and enjoy the lifestyle that the city gives.

Benefits when you rent

  • Landlords handle all repairs.
  • Cost of living is fixed, therefore cashflow projections are more reliable.
  • Enjoy lifestyle.
  • Easy to move around.

Why buy a home and settle?

Someone once said: “A man needs a home when his wife says they need a home.” With that in mind, the suitable time for someone to live in their own house is when they want to settle down and ready to live in a particular location for the next 5 years or so.

Why 5 years? Statistics say that Australians tend to move house every 5 years on average. Maybe the kids are grown up and parents have to move to another location closer to schools. Or one person finds a job that are far away and therefore decides to uproot the family.

However, you need to be aware of the costs of holding a house before jumping into the water, which I will discuss in my next blog post.

Summary

Renting versus living in own’s home has been a great discussion over generations. However when we put emotions aside, and focus on what is quantifiable. There are a lot of benefits that can come out of renting, provided that we follow a set of strict rules.

Disclaimer: the information on this website is for general information only.

By Tuan Nguyen

property investment

Investing – my thoughts on comparison rates

So I recently completed a refinance. It took me over 3 months from contacting the broker to the day the account is created. I just want to share some thoughts on the difference between interest rate and comparison rate. And when one is more beneficial than the other.

Tl; dr;

  • Interest rate is the pure rate charged on outstanding loan balance.
  • Comparison rate is interest rate plus certain fees, defined by the banks.
  • If your goal is to smash the loan as fast as possible, high comparison rate is not really an issue.
  • If your goal is to keep the loan for as long as possible, give some thoughts to the comparison rate.

Interest rate vs comparison rate

This is an example of loan package that outline the interest rate and comparison rate, along with the fees associated.

westpac home loan
Westpac investment loan

One thing to note is that when calculating comparison rate, banks like to use these figures: $150,000 loan size, 25 years loan, Principle & Interest payment.

As we can see, the interest rate is 3.84% per annum, which means for a loan of $150,000, you need to pay $779 per month in mortgage.

However, looking at the comparison rate, it is 4.24% per annum, essentially means you need to pay roughly $812 per month in mortgage.

The difference for a year is roughly $395, which equals to the annual fee that they note down in the image above. The fee could be higher if the banks also calculate the account opening fee into the comparison rate.

tables showing the difference between interest rate and comparison rate

When do we need the lowest comparison rate?

This is a bit weird for people like me who just got into property investment. But for investment properties, I want to drag the loan out as long as I can, so I can utilize the borrowed money to keep purchasing. I am willing to pay interest only for as long as I can, because it makes the cash flow better and more predictable.

With that in mind, obviously the higher rate is, the worse the cashflow will be for an investment property. So when I try to find a loan, it is in my interest to find something that has a low comparison rate, only if I intend to hold the loan for a long time.

So when do we want a high comparison rate?

Home loans often have the best interest rate, but sometimes go with a terrible comparison rate because of all the fees associated with it.

However, if my intention is to pay it out in the next, say 10 to 12 years (surprisingly, it is not that impossible to do). I can take the package with low interest rate, but a bit high comparison rate. The reason is that comparison rate is calculated based on a gradual payments for a long time. So by paying extra and/or change the payment period, we can reduce the real rate down to a ridiculous amount.

Example: given the same rates above, let’s say that we want to pay $300 per week into the repayment. With the assistance of moneysmart website, we can calculate the total repayments and how long does it take, as well as guessing the actual comparison rate.

calculations showing early repayments

As we can see, by paying extra into the home loan with the intention to finish it off, the actual rate is even less than the interest rate, since we finish the loan much earlier than expected of 25 years.

Summary

Loans are complicated, and there are a lot more that I cannot cover. It is best to go to a broker and discuss with them your goal. Trust in their expertise to find a perfect loan for you. And if things don’t work out the way you want, a refinance is always an option.

By Tuan Nguyen

2020

Discussion – My goals for 2020

Setting goals is a good way to start the new year. Here are the outline of what I plan for my life in 2020.

Tl; dr;

  • Straighten my finance.
  • Purchase at least 1 more property.
  • Grow emergency fund to 3 months living expense.
  • Write at least 52 blog posts.
  • “Challenge” gather a good deal to present to investors.

First thing’s first….

financial review

Reviewing my current personal financial situation, I think it is in a mess currently, with loans are everywhere and there are no system around them. So for 2020, I want to restructure my finance to have a better interest rate on my loans, better visuals on how the investments are going.

At this moment, my loans are as follow.

LoanInterestNotes
Home loan (now investment)3.85%fixed 2 years, ending 04/12/2020
Investment loan4.16%a bit high at the moment, can be lowered to a considerable amount

I’m aiming to have them lowered, considering there may be further rate cut from the RBA going into mid 2020. I would consider fixing the interest if the RBA lowered the cash rate to 0.25.

The good thing from low interest rate is that my cashflow from the properties will be much better and I can save them up to invest in more properties.

Property purchase

property investment

As some of you may know, I want to be a professional investor, concentrated to properties. So in 2020, I will be active to find a suitable property for me to purchase, and looking to renovate it to make some instant equity, as well as structuring it to at least neutral geared after tax.

I have been reading up a lot about the topic. And it is challenging to not fall into “paralysis by analysis” syndrome. Basically it means that researching too much leads you to the state where you see risks everywhere and do not start taking action.

By leveraging the young age that I have, mistakes can be fixed. I will prepare myself to purchase at least another property, fixing it up, putting it up for rent, and reconsider my financial position to see if I can redo it all over again. If I find problems in any steps, there will always be people who are keen to help.

Emergency fund

emergency fund

This is what I learned from various books like The Barefoot Investor, The Total Money Makeover, etc. I have grown my emergency fund to be sufficient for about 1.5 months now. And the goal for 2020 will be growing it to at least 3 months of my monthly expense.

This way I have a good cushion to fall back on, should any unexpected events show up. I will just park it in a high saving account (I use ING, with their high saving account at 1.95% pa).

Blog posts

Fullstack developer illustration

Of course I will continue writing blogs. It is entertaining and providing me a way to memorize what I learned, as well as sharing my knowledge and perspective to the world.

The goal for 2020 will be writing at least 52 blog posts, or 1 each week. This should be achievable, considering I only spend around 3 hours to create an article.

Upcoming blog posts will focus more on property investments, rather than just technology aspects that I have been posting. I feel like I have absorbed so much knowledge regarding property investment that I should go out and implement, then report my findings to you all.

“Challenge” present a good deal to investors

This is what I would like to try out in 2020. Where I can find an outstanding investment opportunity and gather all information needed. By presenting it to the investors, I hope to raise private funds to buy another property. This is a bonus challenge for myself, and I really hope that I can achieve it.

Summary

Well that is a lot of goals that I set for myself in 2020, and we have already finished the first week of 2020. I better be fast before the year ends.

By Tuan Nguyen

australian finance

Discussion – What is Luxury Car Tax?

Luxury Car Tax or simply LCT is a tax collected by the Australian Taxation Office (ATO) on cars with a GST-inclusive value above the LCT threshold.

The tax is paid by businesses that sell or import luxury cars (dealers), and also by individuals who import luxury cars, imposed at the rate of 33% on the amount above the luxury car threshold.

Last July 1, 2019, the ATO revised the Luxury Car Tax (LCT) threshold.

The new LCT threshold for the 2019-20 financial year is $67,525 (higher from $66,331 that applied for the 2018-19 financial year). For fuel-efficient vehicles, the LCT threshold for the 2019-20 financial year remains the same at $75,526.

See table below:

LCT threshold

Source: ATO

The indexation factor for the 2019–20 financial year for:

  • fuel-efficient vehicles is 0.987
  • other vehicles is 1.018.

LCT was first introduced by the Howard Administration in the year 2000 alongside the GST and has added more than $5 billion to the government’s coffers in the past 10 years.

The reason why the tax was introduced that’s because as the administration introduced GST in 2000, the broad-based consumption tax replaced a range of other taxes and levies, leading to price reductions for new cars right across the board.

Tl; dr;

cash and car

Source: Car sales Australia

With Luxury Car Tax (LCT), if you will a buy a car with a value that is above the threshold, you’ll pay an extra third on the amount that’s above the threshold. This tax isn’t listed anywhere, because it’s already built into the manufacturer’s retail price.

The threshold is indexed, going up a bit every financial year. For financial year 2019-20, it is now $67,525.

Interestingly, while the LCT threshold for gas guzzlers has risen by almost $10,000 since 2010, the threshold for fuel efficient vehicles has only gone up by $526 (about 0.7%) and the value for all others has gone up $10,345 (over 18%).

How LCT is deducted?

luxury cars

Source: 100 all’ora

Cars retailing at a price higher than $67,525 will incur the LCT, charged at a rate of 33% for the component of the price exceeding the threshold.

That means, a car costing at $70,000 retail would incur tax payable for the excess (the difference between the price and the threshold). That excess ($70,000-$67,525) is $2,475.

The big BUT there is that the Goods and Services Tax (GST) charged for that difference has to be deducted from the GST-inclusive price before calculating the LCT. Otherwise, the consumer will be paying tax on a tax.

Deducting the 10% GST from the excess leaves a taxable sum of $2,250. Dividing by three (or multiplying by 33 per cent – it’s the same thing) results in a charge of $742.50.

That takes the total price of the car to $70,742.50, which the buyer pays. The dealer receives the money from the customer in exchange for the car and forwards the tax amount payable on the car to the federal government.

Does it apply to every vehicle sold in Australia?

LCT doesn’t necessarily apply to all vehicles sold in Australia.

As stated by the ATO, cars manufactured or imported more than 2 years ago, for example, and emergency vehicles are exempted.

Motor homes, camper vans and other goods-carrying vehicles that carry more passengers than goods are exempted as well.

“Green” cars using fuel at a rate of 7.0L/100km or less are also free of LCT up to a ceiling figure.

Basically, any car consuming fuel at 7.0L/100km or lower and priced (currently) above $66,331 and below $75,526 will not incur the tax at all.

Summary

Australia is expected to call it quits for the LCT, having negotiations of a free-trade agreement with European Union (EU) to accommodate European prestigious brands such as those from Germany, who insist that the tax actively deters buyers from purchasing their products.

A possible effect to this reform would be the government’s loss of revenue from collecting LCT from each luxury car purchase. That’s why a proposed solution will be promulgated to phase the tax out gradually in order to minimize the impact of lost revenue.

By Tuan Nguyen

australian finance

Discussion – What is GST?

Also known as the “Goods and Services Tax,” GST as Investopedia would define it is a “value-added tax levied on most goods and services sold for domestic consumption.”

The tax is ultimately paid by consumers, which is then remitted to the government by the businesses selling the goods and services.

As a result, GST provides revenue for the government.

In Australia, GST is a broad-based tax of 10% on most goods, services and other items sold or consumed in the country.

GST applies to most businesses in Australia, collecting it for the government whenever they sell products and services and pay this revenue to the Australian Taxation Office (ATO).

In return, the government distributes this money to its states and territories to finance public services and infrastructure, such as hospitals, roads and public schools.

Most basic foods, some education courses, and some medical, health and care products are exempt from GST.

GST was introduced on July 1, 2000, replacing a range of existing state and federal taxes, duties and levies.

Tl; dr;

GST or Goods and Services Tax is an indirect tax payable by the suppliers of certain goods and services.

Business owners registered to pay GST initially need to assess whether their goods and services are taxable, because they cannot charge their consumers this type of tax if their goods and services are GST-free or input-taxed.

They can charge their consumers GST by adding a 10% flat fee on top of the price they charge for their goods and services.

GST: How it works?

how GST works

Source: ATO

The GST system, as how the Commonwealth of Australia executes it, “operates at each step of the manufacturing, wholesale and retail process, with each participant ultimately collecting a portion of the total GST during their specific transaction and remitting it to the ATO. Total GST collected is made available to the Federal Government to apportion amongst the States and Territories in line with specific agreements.”

 Use the GST calculator on the MoneySmart website to work out how much GST to include in your prices.

Who needs to pay this tax?

GST is payable by the suppliers of certain goods and services. You will need to register for GST if:

  • Your business or enterprise has a GST turnover of AU$75,000 or more.
  • You’re a non-profit organization and have a business turnover of at least $150,000 per year or more.
  • You provide taxi travel or limousine travel services (including ride-sourcing) as part of your business, regardless of your GST turnover. (This rule also applies to both taxi owner drivers and people who just rent a taxi.)
  • You want to claim fuel tax credits for your business or enterprise.

Note: It is optional to register for GST if you don’t fit into one of these categories. However, if you choose to register, you must stay registered for at least 12 months.

For those overseas businesses selling imported services or digital products to Australian consumers and make over AU$75,000. Better consider registering for GST.

This includes:

  • Digital products (i.e. streaming or downloading of movies, apps, games and e-books).
  • Imported services such as architectural or legal services.

As of July 1, 2018, there’s a need to register for GST if you’re an overseas business making over AU$75,000 and sell low value imported goods to Australian consumers. This will affect goods valued at AU$1000 or less on items like:

  • Clothing;
  • Cosmetics;
  • Books; and
  • Electrical appliances.

How to register for GST?

If you qualify to one of the above criteria, you are required to register for GST.

 Step 1:

To register for GST, you will need an Australian Business Number (ABN).

Once you have an ABN, you can register for GST:

Step 2: Once your business is registered for GST, you are required to pay GST on all goods and services you provide unless they are GST-free or input-taxed.

You can pass on the cost of GST by:

Note: Businesses that charge GST must send the GST amount to the Australian Taxation Office (ATO). You may be required to transfer the GST amount to the ATO monthly, quarterly or annually depending on your business’s GST turnover.

If you have customer overseas, you do not have to charge your customers GST because export products are generally GST-free. However, you can still claim for a refund for the GST you paid for any input materials purchased.Nonetheless, you will still need to pay for GST in some circumstances.

Step 3: After the end of each business quarter, you need to complete a Business Activity Statement (BAS) and lodge it with the ATO.

In your BAS, you need to report the amount you have collected from your consumers as GST and pay the equivalent amount to the ATO.

Note: You can lodge your BAS online, by mail or over the phone (if you have a nil lodge), and pay online, by mail or in person at an Australia Post outlet.

Summary

For more inquiries regarding GST, you can visit the ATO website about GST and excise concessions for small businesses.

For checklists on assessing your GST compliance and risk management processes, download the ATO’s GST Governance and Risk Management Guide.

Learn more about registering for GST, including helpful videos, on the ATO website.

For more personal advice about your business and tax, consult your accountant.

By Tuan Nguyen