Retire On $95K and Pay No Tax




Hi folks

You might think the title of today's post is click bait.  You would be wrong.

In Australia, it is 100% possible and legal to earn approx $95,000 each and effectively pay no tax once retired.  I lie not.

Here is the basic math:

  • Dividend income from fully franked Australian shares (think boring, old, safe LIC's) of $95,000.
  • Because these dividends are fully franked (30% company tax already paid) they come with $40,714 worth of tax already paid on them.
  • That gives a gross income per person of $135,714.
  • Submit our tax return for the year and  the ATO will calculate a tax bill of approx $37,847
  • But wait, we already have a tax credit from franking of $40, 714 !! 
  • Tax is therefore totally covered and maybe even a refund.
  • Walk away with your $95, 000 whistling
  • If you are a couple, then walk away with $190,000 whistling a duet.
This is NOT a joke or a hoax or a tax loophole or a dodgy/swifty move.  It's real. 

Nevertheless, as always, I insist you do your own research and seek independent advice as I am not a financial adviser.

I have purposely inserted this post in the middle of other retirement and investing posts as many folk just glaze over when I start talking about fully franked dividend shares - hopefully this will snap some eyes open and help the penny drop real fast. 

Now, back to making my cup of tea and hanging out the towels to sun-dry on the line.

Take care folks and stay nice

Mr HM (Phil)

Comments

  1. I think politicians are well-aware of this and are planning to stop it. Hasn't there been talk about removing imputation credits (not only for the rich who exploit the system but also for more responsible retirees)? They help us, as a couple of self-funded retirees, but I wonder how long this will last. We are certainly not in the league you are describing, but they do keep us from claiming a pension which gives us a sense of pride. I would appreciate your comments. We are proud to be supporting ourselves in retirement but it has taken a lot of discipline and foresight and the willingness to live frugally in order to be self-sufficient. I am wary of changes in the future. PS I enjoy your refreshing insights.

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    1. The is no talk of abolishing imputation credits . What has been proposed by Labour's leader is to abolish the refund component which only applies if the tax credit of the franking exceeds the tax liability of the individual. It is only talk and it would have to pass as legislation and it would only be raised id Labour where to get into government. I think it would be a hard battle for Labour to win if they ever got power .

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    2. Thank you for the clarification, Mr Home Maker. I expressed myself badly. We would certainly miss the refund from the tax department every year. Do any of your readers feel the same way?

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    3. Any dividend investor would be displeased, however I would be very surprised if this suggested imputation law ever saw the light of day as every pensioner in Australia would vote against Labor as it would affect every pension, SMSF and superannuation account nationwide. It would be political suicide.

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  2. Mr HM, our heads are now spinning with this great information! Do you think the rules could be changed with a change of government? That is always my worry with the whole retirement funding issue - what will things be like in 10 or 20 years, or even 5?

    If you had a choice of paying off your mortgage in the next two years (by making lots of extra payments) or investing more heavily in your future, which would you choose? I think we are of a similar vintage! We have been powering down the mortgage as I just want it done so that our home is ours forever no matter what the future holds. But, there's a good chance I will live to be very old (clean living!) and I don't have a load of super at this stage...

    Madeleine :-)

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    Replies
    1. There will ALWAYS be change - count on it. However, there are good people with great advice out there too steering willing listeners to calmer waters. Every situation has its benefits.

      Personally - I would invest rather than pay off the mortgage, but that is a personal choice based on the future value of an investment bought right now against a relative short term gain of paying off an mortgage early. Salary sacrificing into your Super might be a way to reduce the impact of investing on your take-home pay.

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  3. How much would you have to have invested to earn $95,000 in dividends?

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    1. How long is a piece of string? The earlier you start, the LESS you will have to buy. The worst case scenario is having to buy a lump sum to pay sufficient income just prior to retirement (a foolish strategy unless you have no choice). The best case scenario is buying frequently over many years and taking full advantage of DSSP's, DRP's, market crashes (to buy up big) and the huge power of compounding and rising dividends over time - this way you only have to physically buy a fraction of what is required and the other factors create the rest.

      Moral of the story - stop dilly dallying and just start buying. Time is the most powerful factor in dividend growth investing .... the later you leave it, the more you'll have to buy.

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    2. Thanks for the excellent response!

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    3. My next post was pretty much fueled by your question. Several peopled asked me the exact same thing actually.

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