We’re all known to wonder where our money goes or try to make sure it goes to the right places, but do you really have a clear vision of your expenses? Understanding Tax Freedom Day is a sobering concept, but one that is vital for you to take control over your financial position and ultimately pay less tax in Australia.

Prefer to listen to this information via podcast? Click here.

What is Tax Freedom Day? 

What do you think your biggest expense is? Your mortgage? Private school fees? Your passion for travel? For the majority of people taxes are your number one expense.

If you look at your pay slip, you’ll see that PAYG figure that denotes the sum that the government’s hand has swept in and taken before you’ve even noticed. If you work for yourself or run a business, you might PAYG too – if not, you probably end up paying a lump sum of your earnings out to the ATO at the end of the financial year.

When we look at it, we need to remember that it is actually calculated on the total taxes collected by all three levels of government. We are not just paying tax directly to the ATO – we pay all these other indirect taxes too, including GST and council rates.

With taxes at front of mind as your biggest expense, Tax Freedom Day sounds quite important doesn’t it? Tax Freedom Day is the number of days that we work for the tax man at all three levels of government before we start earning for ourselves.

Over the last 50 years we’ve seen the trend in taxation whereby Tax Freedom Day is moving out later and later in the year, and it’s getting worse.

In Australia in 2016 you had to work until May 9 to pay all your taxes to the Australian Government. This is similar to the US and UK, who have Tax Freedom Day on April 24 and May 8 respectively.

What is particularly sobering for Providence clients to learn is that if you are paying off a mortgage, you spend most of the year working for both the government and the bank. That’s what you spend your time and effort doing for weeks and months of the year. Needless to say, this is far from ideal. It’s no surprise that we all look for ways to pay less tax in Australia.

Pay less tax in Australia

A key part of the work we do at Providence it to help our clients to move Tax Freedom Day back as early as possible in the year for themselves. This certainly isn’t about evading tax, as we all have an amount of tax we need to pay. However, the tax system and the code is written with room for allowable deductions for certain things.

Tax benefits of owning an investment property

Owning an investment property has many benefits and is a way that we guide clients to manipulate Tax Freedom Day for themselves. Through investment property ownership, you can move your Tax Freedom Day and effectively have the tax man become a contributor to your wealth creation strategy.

The best way we know to do that is to find a growth property that the tenant and the tax man pay off for you. And what we are seeing is the longer that you leave this the more money that you are letting slip through your fingers. It’s very important to take action.

When identifying property opportunities to meet our clients’ goals, the key factors that we look at are capital growth, yield, cash flow, depreciation and other allowable deductions. These help contribute to funding a property, so we’re analysing all of these factors and also ensuring that there are three parties paying for the property. That is, the purchaser, the tax man and the tenant. The tenant will usually pay around 60% of the cost, the tax man can pay roughly 30% and the purchaser covers around 5-6%.

Once you own that property for three or four years and the rent starts increasing, the tenant actually starts contributing to more of that. And importantly, in terms of Tax Freedom Day, the tax man is typically contributing about 30% to the cost of that property.

Let’s make that clear – in this wealth creation strategy, the tax man ends up contributing to you paying off that asset and your savings for retirement and you pay less tax in Australia.

While rental yield and capital growth are the most important when it comes to investing in property, there is a lot to be gained from a tax flow perspective too. Whether you’re a first, second or fifth time investor, if you’d like to learn more about the contributional tax benefits that you can generate from owning an investment property, our team has the expertise you need. You can contact us here.

Listen to Simon Harris and Jay Pace talk about Tax Freedom Day in this podcast episode and discover how you can pay less tax in Australia.:




Written by Lynton Stevenson, Managing Director, Providence Property Group.