[PureBliss]

Hoping to gain some insight into how I can better manage our finances. We seem to have been caught out this year.

I have been fortunate to have a well earning career prior to having children. During mat leave I registered a business with the view of working part time for myself (consulting.)

My earnings for my first tax year were good. My tax return was further complicated by rental income for an investment property, and dividends from shares in my husbands business.

This was my first year with the dividends - almost 40k worth. Sadly I don't see a penny of it , as it goes straight back on a loan we took out to purchase the shares - the ATO considers it income though.

So in short, between my earnings, the rental income and dividends I am well and truly in the highest tax bracket, with really not that much "take home pay" to show for it. I am not eligible for family tax, childcare benefit etc etc. This year I didn't get a tax refund, but a compulsory debt of $6k (HELP debt) to be paid in one hit, rather than over time, all due to my "high earnings". At this point we are asset rich, but cash poor, mortgaged and taxed to the hilt, living in an unrenovated 70s delight, and with hardly any capacity to save.

On the advice of our accountant, we are planning to sell the investment property this year to give us some breathing space. I guess I am wondering now with the dividends considered "income" is it worth me strategically managing my earnings to within a certain tax threshold? Do many second earners do that to maximise their tax refund?

Or should I just be trying to earn as much money as possible and suck it up being in the highest bracket?

Any advice welcome!

[crayons]

You should be taking yourself down to your accountant and asking them all these questions as this is exactly what there job is. They should be able to provide you with a couple of scenarios about what would happen if you earnt a, b or c and in whose name the income should be. Then you can go from there and see what work you want to do with the knowledge about exactly how much you will get in your pocket. Please remember that your HELP debt won't last forever and that should free up some cash.

[JRA]

As sparkyredfish says.

We have the philosophy that their are huge benefits in earning a decent income, and the downside of more tax. The higher tax bracket only kicks in now at $180K now, so much lower than 15-20 years ago, that makes it seem easier, and in some ways harder, it would have been a hell of a lot nicer back then.

So if you are earning say $250K, you are still only paying just over 33% in tax, pretty bloody low. That is the way we look at it, to help the big bill each quarter.

[Escapin]

I would suggest you see a good financial planner, who has access to some decent modelling software and can model some different options for you to demonstrate the effect of different actions on your cash flow. Or you could have a go at doing it yourself in excel. It sounds like you're mixing up your tax position with your cash flow issues, they are two separate issues.

[JRA]

This was my first year with the dividends - almost 40k worth. Sadly I don't see a penny of it , as it goes straight back on a loan we took out to purchase the shares - the ATO considers it income though.

actually they don't class the money that was used to pay off interest income.

As has been said, if you over-committ it hurts no matter what.

As escapin said, cash flow and income are very different.

[JRA]

This was my first year with the dividends - almost 40k worth. Sadly I don't see a penny of it , as it goes straight back on a loan we took out to purchase the shares - the ATO considers it income though.

actually they don't class the money that was used to pay off interest income. - well they do, but you claim the interest so they nett off.

As has been said, if you over-committ it hurts no matter what.

As escapin said, cash flow and income are very different.

This post has been edited by JRA: 27/11/2012, 08:06 PM

[Julie3Girls]

The highest tax bracket is really very high, so you are obviously earning a lot.

I have no idea how you have your investments set up, but one of the things that we were advised was to make the investment loans interest only. Which you can then claim some of that back at tax time. Don't pay off the principal.

Instead, anything over the interest payments, put into our home mortgage, and pay that off first. So brings our home loan down, saves us interest on the home loan. Once the home loan is pretty much gone, that's when we start throwing money at the investment loans.

So if your dividends are going towards paying off the principal amount of your investment loans, I'd look at possible changing that.

You really need to sit down with a financial planner, give them all the details, and see what they suggest to change things to give you a bit more cash flow.

Oh, and also check on the financial implications for this year if you do go ahead and sell the investment property.

[tothebeach]

I'm in a similar situation to you - I run my own consulting company and have investment income. As someone who is self-employed, my income fluctuates.

I work as much as I want/can - I don't try to limit my earnings based on the prospect of paying tax. Actually, I find that notion very odd.

But I do try to smooth my earnings (some years I earn lots, others not so much). I work under a company structure. At the end of the year, my accountant tells me what to pay myself and we retain the rest in the business (and pay company tax). If I earn less the next year, I pay myself dividends from the company, rather than a salary.

All income from our family trust gets paid to me. If that pushes me into the highest tax bracket, so be it. I'm paying what I'm obliged to. My husband is in the highest tax bracket anyway, so there is no point in investment income going to him.