How to Save a Deposit & Buy Your First Home

How to Save a Deposit & Buy Your First Home

There is not much online specifically for Australian doctors buying their first home, especially outside banks or mortgage brokers trying to sell you their products.  There are some specific differences to others buying a home, including the fact that doctors often move frequently for training and can get lenders mortgage insurance (LMI) waived.  If you are saving (or have saved) for that elusive deposit, add your tips for other savers at the bottom of this post!  For those saving to buy in Melbourne or Sydney, the challenge can be daunting, but after the recent correction, these markets are more affordable than they have been for many years.

Before we start, are you absolutely sure you want to buy a home?  This is a huge financial commitment which can build wealth or slow your journey to financial freedom.  Read this article (including a buy vs rent calculator) to check you’re making a well informed decision to buy.

How Much Can I Borrow to Buy a Home?

Most of us want more house than we can or should afford, it’s human nature. Some doctors buy so much house they are cash poor and suffer financial stress despite their generous pays.  I personally hate the idea of financial stress, and highly value the ability to take time off at half pay, and plenty of cash left over for holidays and fun. I understand this is extremely challenging in the bigger cities, and is also a personal value decision.

Committing to a huge mortgage can pay off if you buy an excellently located property. It paid off for many of our parents 30+ years ago, but the return is not guaranteed.  Most home buyers feel they have to make compromises to buy a home they can love with a manageable mortgage.

When considering how much house you can afford, think about:

  • Are you planning to have children and reduce to one wage for a period?
  • Do you plan to have children and want to be in a good public school district?
  • Are you going to have to move for training in the next 5 years?
  • Do you plan on a fellowship or time working or traveling overseas
  • Look at the picture for the next 5+ years to work out what are your priorities

With the above in mind work out how much of your monthly pay you are willing to pay towards your mortgage.  There is a great mortgage calculator for this on the Money Smart website.

If the area you are buying in is a great capital growth area, then you could perhaps consider your principal place of residence an asset.  You can find historical 10 year average capital growth and also demand to supply ratio (an indicator of likely near term growth) at  Your Investment Property.

Extra Costs of Owning vs Renting

Rates are based on the value of the property, and differ according to which state and council you’re property is in.  The average home owner will pay $2000-$3000 per year in rates.  You can look on the local council website to get a rough idea of rates in your area.

Maintenance costs are unpredictable.  1.5% of the property value per year is often quoted for maintenance, but repair costs come in unexpected lumps.  Your hot water heater may die the day you move in, so it’s important to have some cash saved just for emergency repairs.

Home insurance, life and Total permanent disability and income protection insurance become more important when you take on lots of debt, consider how much you need and whether the premiums will need to increase when you buy your home.

Where to Keep Your Home Deposit Savings

Online High Interest Savings Account

The easiest, simplest and lowest risk choice is to find an account with $0 fees, and a reasonable interest rate.  At the time of writing ME Bank offered 2.2%.

If you can be bothered opening multiple accounts, its possible to get a slightly higher interest rate (2.6% currently) for an introductory period – and move your savings from one bonus introductory account to another every few months.

Check the conditions and assess whether they are suitable.  Some accounts require a number of EFTPOS payments, others require an amount deposited monthly, without withdrawals, in order to achieve the advertised interest rate.

One other thing to watch for, the banks can change your interest rate, and in my experience don’t let you know.

Term Deposits

If you already have a lump sum saved (at least $1000), a term deposit will give you a fixed interest rate (which may be advantageous if rates drop further), but lock your money away for a specified amount of time.  At the moment, a brief search for term deposits indicates they pay less than the above interest accounts, presumably because interest rates are expected to drop further. These can become more attractive when interest rates rise.

First Home Savers Scheme

You can contribute voluntary payments (up to $15000 per year and $30000 total) to your super account through salary sacrifice or a tax-deductible contribution.

You will pay 15% tax on contributions as long as the total contributed per year is less than $25,000 and you earn less than $250,000 per annum.

The ATO will tax contributions and (artificially calculated) earnings at marginal rate minus 30% at withdrawal. If you are in the 37% tax bracket, this will mean ~$6200 saved in tax that can go towards your deposit instead.

The best resources I have found on this are Super Guide and the ATO website. It can take up to a month to withdraw your money, you must purchase within 12 months of withdrawing the money, and you must live in the property for at least 6 of the first 12 months you own it.  I think the FHSSS ideal for those with plans to buy their first home within the next 2-5 years.

Investing

Investing outside the above options, for example in the stock market is only really an option if you don’t have your heart set on buying your home within a specific time frame.  If you were to invest in index funds, for example, you may get a much better return than from a high interest bank account or term deposit, but with much higher volatility.  If the stock market were to drop by 50% it could take months or years to recover.

Peer to Peer Lending

Money can be lent directly to individuals via a platform such as Ratesetter.  Rates of interest are higher (currently 3.5-7.7%) but there is no guarantee you will get your money back.  So far all loans have been repaid by borrower or the platform but if a large number of borrowers were to default on the loan investors would lose their money.  This is too risky to be recommended, especially when you are saving for a home.

Brick X – Fractional property investing

What to Do While Your Saving – Optimise Borrowing Capacity

Since the Royal Commission, when assessing borrowing potential, banks scrutinize your spending in detail.  You will be cleaning this up to save, but especially in the 6 months leading up to mortgage application it is helpful to make financial records as self-controlled as possible!

Credit card limits (even if you don’t use them or pay them off every month) can reduce the amount banks will lend you, so consider reducing limits or closing credit cards you don’t use.

With some time up your sleeve, it’s worth applying for your credit score.  You can obtain a free annual credit score from Equifax.com.au and keep track of your score monthly on creditsavvy.com.au.

Make sure all your bills and credit cards have direct debits set up so you never miss a payment and reduce or clear existing debts if possible.

HECS debt can reduce your borrowing power, due to repayments but it is the cheapest available debt and I would only consider paying this off if it is stopping you from being able to buy.

How to Save a Home Deposit Faster

Parental guarantee

This is how I got into my first property, still in medical school.  If parents are willing to help out, this is a MASSIVE step up.  If mum or dad have equity in their home, they can offer that as extra security for the kid’s loan.

Going guarantor is not risk free and requires a lot of trust between parents and offspring.  If the child defaults on the loan, the bank will sell the home, but if there is a shortfall the parents will be liable.  The guarantee can be limited to the 20% deposit amount to reduce liability for parents, but will save paying LMI if your unable to get out of it any other way.

First home buyers scheme

This is another way to get onto the property ladder with a minimal deposit.  Singles earning less than $125,000 or couples earning up to $200000 can apply for one of 10,000 places on the first home buyers’ scheme.  The remaining 15% deposit is covered by a government guarantee, meaning no LMI.  The scheme starts January 1st 2020

How To Buy Your First Home

See a Mortgage Broker for a Pre-Approval

Start this process before the house hunt begins.  You will want to know realistically how much you can borrow, and be able to submit offers fast when you find the perfect home.

Do you want fixed or variable rates?  With rates at an all time low, it seems reasonable to lock in, especially if you will be stretched by an increase in rates.

Over the long term the banks tend to win this game, and price their fixed rates to ensure they profit despite future changes.  If you can afford a 3 % increase in rates you are probably better off with variable.

Compare set up and ongoing costs between loan alternatives, as well as interest rate (watch out for the “introductory rate” which jumps after a certain amount of time ).

House hunt!

Now comes the fun bit! Good luck!  Try to think ahead a few years, as needing to upgrade your home will cost lots in fees (6% buying + 2% buying).

When you have found the house you love, paid a deposit (often 10%) and signed a contract, remember to get insurance for your new home immediately. If the house burns down between signing the contract and exchange, you want to be fully insured!

Income protection, life and TPD insurance become more important with a large amount of debt.  Look at some of the terrible luck your patients have had.  Severe accidents, life threatening illness and untimely death can all happen to healthy young people.

Consider the needs of your family if you were to die, become permanently disabled or no longer able to provide an income.  Same for your partner if you have one.  Then organize insurance.  Income protection is tax deductible, and all insurances will be cheaper if organized younger before collecting any co-morbidities.

I hope this step by step-guide of saving for and buying your first home has been helpful.  What tips can you share on how to save more cash for your deposit?  Comment below to help out other Aussie docs with your great ideas!
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3 Reasons Not to Buy Your First Home

3 Reasons NOT to Buy Your First Home

“Physician Sense” is a US physician finance blog that outlined the three common errors doctors make when buying their home:

    • Too much house.
    • Buying too soon
    • Wrong form of financing           Johnathon Ford Hughes, Physician Sense Sept 18

I think I made all three!

I was taught, like many of you, that “Rent money is dead money” and that getting on the real estate ladder as quickly as possible was smart.  Now I understand the decision to buy a house should be carefully, and mathematically considered.

Properties all over Australia grow at different rates at different times.  It is tempting to believe your property value will double in the infamous 7-10 year window.  But there is huge variation in property performance over the long-term.

Data from Domain.com.au states the best performing suburb in Australia between 2014-2019 was Byron Bay, rising an impressive 117% to a pricey $1.3M median house price. Congratulations to whomever purchased in Byron Bay a few years ago!

The worst performing suburb was Newman in WA, falling a devastating 74.9% over 5 years to a median house price of just $195000.

Bob was as a recently qualified rural GP specialist who purchased a home in Newman for a bargain $260,000, at a very reasonable interest rate of 4.3% back in 2014.

Five years into mortgage payments, Bob owes $240000, but is only be able to sell for $195000. If Bob has to sell in 2019, he will need to find $45000 plus fees ($20000) to discharge the mortgage! Bob certainly hasn’t made any money, but has he lost out in comparison to renting?

Year House Value Buying costs + cumulative mortgage repayments Combined cumulative losses from buying Rent per annum Cumulative losses from Rental payments
2014 260000 14300 14300 18200 18200
2015 247000 30044 43044 17290 35490
2016 234000 45788 71788 16380 51870
2017 221000 61672 100672 15470 67340
2018 208000 77306 129306 14560 81900
2019 195000 93080 158080 13650 95550

From the first year, Bob would have been better off renting – and the losses from buying just keep getting bigger every year.  No wonder Bob doesn’t look very happy, even on the beach 🙁

Find out more out opportunity cost.

My Experience

I brought a house in a regional area in 2008, close to where I was working.  I recognized (In hindsight, correctly) the local market was not primed for a boom.  I brought less house than I could afford in a relatively cheap suburb.

Growth has only kept pace with inflation.  It is a suburb 20km from the CBD, with large amounts of land surrounding, that has been progressively developed, providing plenty of competing housing stock to keep house prices low.

I sat down and worked out whether buying was the right decision in retrospect, and in the process developed a simple rent vs buy calculator to help decision making in the future.

To consider a property of your choice, fill in the orange boxes below and scroll down to see the net outcome rent vs mortgage.  For annual rent you can add a formula =weekly rent*52 as you would in excel to easily calculate annual rent.  Council rates and property maintenance are not included as they are so variable, but another mark against buying to be considered as well as the calculator.

It has taken me around 9 years to come out better than renting for the same period!

If I had rentvested into a great capital growth suburb earning 7% per annum over the past 10 years I would be over $400K better off.  I hope the reader appreciates working this out has been a painful realization! Ouch!

There are, however, less mathematical factors involved in the decision to buy a house.  Like feeling more secure (no more 6-12 month contracts), absence of inspections and ability to paint and personalize as desired.

However, I remember feeling very wealthy as a PGY 3, paying a measly $220/week – I’m only just getting that feeling of abundance back now, eleven years into paying down the mortgage!  Property maintenance (est 1.5% of property value per annum PLUS time) and council rates are other negatives associated with home ownership.

I wouldn’t have known how to choose a property with good capital growth prospects in 2008, so the argument that I should have rentvested is academic.

What are the conclusions from my ramblings and calculations?

There are three big financial reasons why you should choose NOT to buy your home

  1. You don’t plan to stay in the home long enough (5-10 years) to make the outlay worthwhile
  2. The home is not expected to return capital growth more than inflation
  3. Interest rates are high than expected capital growth

Where do you find expected capital growth estimates?  Look at past average capital growth for as long as possible – you can get 10 year averages listed in Your Investment Property magazine (lists all suburbs every issue), online at Core Logic (with a paid subscription). High transaction costs (6% to buy, 2% to sell) mean Australian real estate must be a long-term investment.

If you end up renting, consider investing the extra money (that would have gone to mortgage repayments) in better performing real estate, or shares.

Use the calculator to work out whether you are better off buying or renting for your next job, and subscribe to ensure you don’t miss out on the next post – How to save up that elusive first home deposit.


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How to Break Free from Debt: An Aussie Doc Guide

How to Break Free from Debt: An Aussie Doc Guide

Doctors are wealthy, right?  Well, that is the expectation.  Australian doctors are well compensated in arguably the country with the highest standard of living country on Earth.  But the truth is, income does not make you wealthy. Doctors sometimes also need to break free from debt.

Doctors are graduating from medical school with between $60,000 and $150,000 debt.  On top of that come mortgages, a car and yet more debt.  Doctors often feel pressure to keep up with societal expectations of wealth and status.  In order to build financial security, doctors (like everyone else), need to spend less than they earn, actively pay down debt and invest for the future.  Financial freedom and a comfortable retirement are not automatic.

It’s time to face the truth.  Although it is very tempting to hide your head in the sand, facing up to your debt is without a doubt the fastest way to get on top of it, so you can start building financial security.

Give yourself an hour to look through your debts and work out the following:

Debt Amount Interest Rate Minimum Payment Necessary
Bad debts…
Tolerable Debts…
Good Debts…

I think its important to reflect on which debts are “good” – helping you build wealth, and those that are “Bad” – so that you are less likely to make the same mistakes again.  Most of us have had bad debts at some point.  There’s no point in beating yourself up, no judgement!  Just mark which debts were Good, Bad or Tolerable after reading the explanation below.

Bad Debts

These arise from periods when expenses were unable to be met by income – either from lack of willpower, inability to earn income, or unanticipated expenses.

If you have found yourself in plenty of bad debt, it’s good to understand the factors contributing.  This article on DINKS touches on the incredible effort marketing departments put behind convincing you to buy things you don’t need.

They are often avoidable with forward planning and an Emergency Fund. These debts will keep you poor, especially if you are unable to pay them off quickly – the interest compounds and you are literally throwing your money away instead of using it to develop a financial base.

Once your out of “bad debt” and have an emergency fund, life gets cheaper.  You don’t pay interest if your car blows up and needs an expensive repair, credit gets cheaper when you need it for better debt too.

When I graduated from medical school I had a few “F*!% it, I’m almost finished and then I’ll have loads of money” moments, resulting in a the debts below

Debt Amount Interest
Store Card $500 29.9% (!)
Credit Card $2000 17%

Included in the bad debt category

  • Afterpay/Zip pay or equivalent
  • Personal loans
  • Car loans
  • Credit cards
  • Store cards
  • Harvey Norman (I’ve done this too! They may be interest free, but they add fees and charges to your account each month!)

And any other debt that hasn’t helped you financially.

A special note about cars.  It’s often seen as sensible to borrow from the mortgage to buy a car, after all interest rates are at a record low.  But if this is not paid off quickly, the compounding effect of paying the car off over 30 years is astonishing!  I am of the belief cars should be paid for with cash if at all possible – it stops you getting carried away and upgrading too much!


And that’s at record low interest rates! At 6% your $40,000 car will cost $53,290 over 10 years, or a whopping $86,335 over 30 years.

Bad debt will keep you living pay check to pay check

Tolerable Debt

This is your mortgage for your principle place of residence (PPOR) UNLESS your choice of residence meets criteria to be a good debt.  Most houses are tolerable debt – they give you accommodation and so are necessary, but aren’t really helping you build wealth. Alas my own PPOR is in this category.

Good Debt

HELP Student Loans

To find out your up to date HELP debt including inflation adjustments, you need to create (if you haven’t already) and log in to your My Gov Account.

When you sign your employment paperwork you need to let them know you have HELP debt.  Repayments will be taken out of your wage by the tax office as soon as you hit the income threshold ($45881 this year).  You have to make repayments, based on your income as long as your working here, or overseas and the debt does not go away if you declare bankruptcy. The ATO website outlines how much is to be repaid based on income

For those about to start their intern year, this probably means you will have a few months pay (6-9 months) before having to start paying HECS back.

There is no rush to break from debt from low interest student loans, unless it’s bugging you.  As I say, it’s the cheapest debt you will ever have so while you have any other debt, prioritize that.

If you’re just graduating from university, check out our 7 steps to financial freedom.

Private Student Loans

These may be charging you 10-15% interest and so are obviously a priority to get paid off over HELP.  Break free from debt with high interest asap.

Mortgage on Carefully Chosen Principal Place of Residence

If you are clever enough to have brought a great quality property in an area destined for significant and sustained capital growth, your mortgage can also be considered a good debt. 

Although it won’t provide an income while you’re living in it, the value will grow and can be used to build wealth through other investments.  Do not make the mistake of assuming any house you have brought is likely to have good capital growth.  Look up the capital growth of your suburb over the past 10 years – if it’s been growing consistently over the interest rate over a long time, this is a promising sign.

Tax Deductible Investment of Business Loans

Are used to build wealth.  But they have to be used to buy strong investments.  If you borrow to buy an investment that does not appreciate in value it is not growing wealth so is probably a bad debt.

The Strategy

Now if you haven’t done so already, check in to those accounts and document all your debts.  It is critical to TAKE ACTION if you want to get ahead.

Next, you need to work out how much income you can spare to pay off bad or high interest debt.  For interns to be, your net pay is likely to be $4300-$4900 per month and I recommend saving 20% – (~$860/mo) this can be used to pay off bad and/or high interest debts, build an emergency fund and then invest.  If you stick to this and increase the amount saved every year when your pay goes up, you will be in a strong financial position very soon. Perhaps you already have financial commitments, and 20% is really not realistic?  Start with what you can – 5 or 10% but make sure to increase every pay rise and you will be on the right track

The first few months before you have to start making repayments are a great opportunity to pay off any naughty debts off fast.  At $70,000 you will be expected to to pay back 4.5% – around $233 per month.  Prior to repayments starting, this can also be directed towards debt repayment.

You need to prioritize debt repayment.  You will need to make the minimum repayments on all debts, but will want to pay more to get rid of one debt at a time, in order from highest to lowest interest rate makes the most financial sense, although some people like to pay off a smaller debt first for the psychological encouragement.

If you would like a more detailed guide to paying off debt, managing your finances and building financial security Scott Pape’s “The Barefoot Investor” is the most loved among doctors, for good reason.

By now you should have

  • Researched and documented all your debts
  • Decided which are good, bad or tolerable
  • Worked out a plan of attack
  • Be able to identify bad debt opportunities and be able to avoid making these mistakes again and again!
  • Remember, once bad debt is paid off, to divert the cash flow freed up to wealthy building -mortgage pay off, additional superannuation payments or investments

Good Luck!  Break free from debt and moving on to a more secure future.  If you’re feeling overwhelmed by competing demands for your savings check out how to get over money challenges.

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How to Save on Tax: Salary Sacrifice for Doctors

How to Save on Tax: Salary Sacrifice for Doctors

Salary sacrifice aka salary packaging means you save on tax.  Employers pay for specified employee expenses (eg rent or mortgage) from TAX FREE pay.  It is generally advantageous to those earning over $45,000.  Salary packaging is particularly generous to health care workers, and even more so to public benevolent institution employees.

Savings vary depend on which health service you work for, fees charged by the salary packaging company and according to some special circumstances discussed below.  You should only salary sacrifice expenses you would have paid for anyway.

Many health care professionals are put off by the complexities, and as a result miss out on significant tax savings

Four Ways to Save on Tax

1. Superannuation

One important thing to check is that your employer won’t decrease their 9.5% payments in to your account as a result of salary sacrificing.  As long as this is not the case, you are likely to benefit from salary sacrificing into superannuation.

Another consideration is that the money you “Sacrifice” will be locked into your super potentially until your preservation age (60 years+).  You will probably never miss this small amount of money going from your pay check each cycle.  If you are forced to leave it, through the miracle of compound interest over 35 years or so, it will grow incredibly.

The first home super savers scheme allows eligible individuals who have made voluntary contributions to super withdraw up to $30,000 of those voluntary contributions for their first home deposit.

Those on higher incomes (fully qualified specialists) need to keep within the super caps – a total of $25000 (from July 2021 $27,500) can be contributed to super in total.  If you contribute more than this, you will get taxed at the top marginal rate anyway, and have fees added as well.

2. Sacrifice “Fringe Benefit Items”

Certain items can be sacrificed up to a value known as the “FBT Cap”. This is depending on your employer but often include:

  • Mortgage or rent payments
  • General living expenses
  • Childcare expenses
  • Credit card repayments
  • Health insurance premiums

Because you are theoretically being renumerated with services/goods instead of cash, the employer has to pay fringe benefits tax on these.  As a result,  employers put a limit on how much you can package under this category – Known as the “FBT Cap”.  For health services, this is generally around $9010.  This is a limit imposed by your employer, not the ATO, meaning that if you have more than one employer you can salary package up to the FBT cap with each employer!

You can salary package up to the FBT package with each employer if you have more than one job!  This could be very handy for those with large mortgages

Sally is an intern hoping to pay her rent from tax free money with a gross income of $70000?

In the table below I have calculated the difference in tax paid by Sally when the $9000 FBT allowance is packaged.  Fees have not been included, as each health service uses a different salary packaging company.

No Salary Sacrifice $9000 FBT Cap packaged NSW $9000 FBT cap packaged
Gross Pay $70,000 $70,000 $70,000
Tax paid $14,297 $11,372 $11,372
Benefit 0 $2,925 $1,462.50

The benefit in NSW is not as generous, as NSW health “Shares” the tax benefit 50% with the employee.

Of course, it’s not that simple.  Sally’s total reportable taxable income increases from $70,000 to a “Grossed up” amount of $78000 (Including tax saved at highest tax rate).  This higher income is used to assess:

  • Medicare levy surcharge (1-1.5% of your income after you start earning $90000, unless you pay for private health insurance instead)
  • Super co-contribution – Maximum benefit of $500 if you earn less than $53564 in 2019-20
  • Private health insurance rebate
  • Required student loan repayments
  • Child support obligations
  • Your entitlement to certain income-tested government benefits.

The medicare levy surcharge is not relevant to Sally, as her grossed up income is still under the $90000 MLS threshold. Yay!

Sally would have to pay an extra $1140 HECS repayments if she chooses to salary sacrifice but will still end up with $1785 cash in their pocket.

If Sally was working for NSW health, she will only have an extra $322.50 in your pocket (excluding fees).

Remember, the extra $1140 in HECS payments isn’t really lost – it’s paying down Sally’s debt instead of going to the tax man.

Lets look at another case

Tom is PGY 3 hoping to pay his mortgage from tax free pay.  He earns $83000 per annum

In the table below I have calculated the difference in tax paid by Sally when the $9000 FBT allowance is packaged.  Fees have not been included, as each health service uses a different salary packaging company.

No salary Packaging $9000 FBT Cap sacrificed $9000 FBT cap sacrificed in NSW
Gross pay $83,000 $83,000 $83,000.00
Tax paid $17,872 $20,797 $20,797.00
Benefit $0 $2,925 $1,462.50
“Grossed up Pay” $83,000 $91,000 $91,000.00

.

Medicare Levy Surcharge

Looks good, but Tom is close to the Medicare levy surcharge threshold ($90,000) and the salary packaging pushes his “Grossed up” pay over.

He will have to pay $910 extra towards a medicare levy surcharge, which reduces his overall benefit to $2015 per annum, or just $552.50 if he is working in NSW health.

If Tom has private health insurance hospital cover, he will not have to pay the MLS, and benefits will return to the original table.

Tom will have to pay MLS if his wage increases to over $90,000 next year, so it’s time to start considering private health insurance.

Student Loan Debt

Tom is still paying off his student loan (there’s no hurry!) but salary packaging will mean he will have to make additional HECS repayments – $1350 per year above his usual payments.  This money goes to paying off debt rather than being lost to tax, so I don’t consider it lost.  But it will mean that Tom’s net pay packet will now be only $665 larger by salary packaging.  If Tom works for NSW, he will be paid $797.50 LESS net pay by salary packaging, but is still better off when debt pay off is considered.

As you can see, if your employer has a “Benefit sharing” scheme, or make the employer pay the fringe benefits tax themselves, it becomes borderline whether there is a benefit to the employee.  For most employers that allow the employee to enjoy their tax savings benefits there is clear cut benefit even despite extra HECS repayments.

If Tom or Sally have child support payments, it will be even more complex. Personal professional advice is recommended.

Benefits of salary packaging increase as your wage increases, with a potential benefit of $4050 per year to a specialist earning $200000 who has private health insurance, has paid off student loans and hasn’t gained child support payments

3. Salary package other Items Unlimited by a FBT Cap

Again, benefits are depending on your employer, but include:

    • Entertainment Cards

Alas not all employers offer this (but NSW health does!)  Up to $2650 can be spent, usually on meals out and entertainment venues tax free!

    • Otherwise Tax Deductible Items

Professional fees, a stethoscope, specific branded work clothes (eg scrubs), laptops or mobile phones used more than 51% for work can be packaged. These are all tax deductible anyway, so salary sacrifice just means you get that tax benefit spread through the year rather than after you do your tax return.  Never seemed worth the effort to me.

However, equipment (including laptops and mobile phones) brought for more than $300 cannot be immediately tax deducted in the same year, but undergo a depreciation schedule. This means you get the tax back spread out over three years for laptops or mobiles – annoying.  This might be worth the effort of filling in a form – through salary sacrifice you will reap the tax benefit back spread over the first year instead.

4. A Tax Free Car and Car Running Costs?

Sounds too good to be true, and it maybe is.  This is a complex arrangement between yourself, a car company that is “leased” by you for a predetermined period of time.  At the end of the lease, you give the car back or pay the book price the car leasing company have listed.

Lots of doctors have regretted entering into these arrangements, the complexities can make it really difficult to work out whether there is a real benefit or not.  The tax savings are often eaten up by excessive interest rates and charges from the car leasing company.

At least a second hand car is now an option through leasing, which may make the strategy more financially sensible

A detailed assessment and independent financial advice is necessary to know whether the benefits go to the employee or car leasing company.  Buyer beware!

Detailed assessment to follow!

Summary

  • Salary sacrificing into super is as close to a no brainer as you can get.  Sign up now if:
    • Your employer will still contribute at least 9.5%
    • You earn more than $45000 and less than $289,000
  • Salary packaging ~$9000 “FBT cap items” (usually mortgage or rent) will result in money saved on tax and you will pay any student loan debt off faster.
    • You will end up with more money in your pocket UNLESS you work for an employer that “Shares the tax benefit” eg NSW and are earning between $80,000 to $90,000 and don’t have health insurance, or multiple student debts.
  • An entertainment card means you can pay for meals out and venue hire from tax free money, but is not offered by all employers.
  • You will save money as long as you don’t package more than you would have spent anyway.
  • Other Non-FBT items are those that are tax deductible anyway- you may want to salary package your laptop or mobile phone to get the tax back in 1 year rather than spread over 3
  • Novated Lease – Buyer beware! Get a professional to assess whether you will really get any benefit

For more information check out making doctors’ income more efficient and the ATO website.

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