S01_E16 - Understanding the Tax System for Financial Independence

01/15/24 • 11 min

Jellyman Investing - Personal Finance for Australians

https://www.patreon.com/Jellyman_Investing
The history of taxation is as old as civilization itself, originally designed as a means to generate capital, primarily to fund wars. In ancient times, rulers and governments imposed taxes to amass wealth, ensuring they had the resources necessary for military campaigns.

The Australian Tax System: A Progressive Approach

Today, the Australian tax system plays a pivotal role in the country’s development. It is structured to fund public services, infrastructure, healthcare, and education. But why do some individuals pay more tax than others?

The answer lies in the progressive nature of the tax system, which is designed to be equitable rather than equal. This means individuals and entities with higher incomes pay a proportionately larger amount in taxes, reflecting their greater capacity to contribute to society’s needs.

Tax Benefits: Rewarding Beneficial Endeavors

The Government learned long ago that if you want to move the country in a specific direction, they can tax activities that take away from that agenda, and incentivise the ones that align. It’s actually that simply.

When reading the tax code, you’ll actually find that a substantial amount of it, in fact most of it is laws are on how to reduce your tax by pursuing certain activities. These can include but are not limited to:

Superannuation Contributions: Contributions to superannuation funds often receive favorable tax treatment. When the population ages, the costs for services especially retirement funding such as pensions becomes a heavy burden for the Government. When they see people investing and making extra contributions to take care of themselves in retirement, it’s one less person the Government has to support. They like this.
Education and Research: Tax deductions for certain educational expenses and research activities encourage investment in knowledge and innovation, crucial for the country’s growth. This creates new industries and potential jobs.
Charitable Donations: Donations to registered charities are tax-deductible, promoting philanthropy and support for non-profit sectors.
Investment in Renewable Energy: Tax incentives for investing in renewable energy projects align with the government’s commitment to environmental sustainability.

Tax Penalties: Discouraging Unfavored Activities

Conversely, the tax system can impose higher taxes to discourage certain activities or to manage economic disparities:

Luxury Car Tax: This tax is imposed on expensive vehicles, discouraging excessive spending on luxury goods while generating additional revenue.
Capital Gains Tax (CGT): Higher taxes on short-term capital gains discourage speculative investment and encourage long-term, stable investment behavior.
Sin Taxes: Higher taxes on products like tobacco and alcohol serve a dual purpose – reducing consumption of harmful products and generating revenue.
Progressive Income Tax: High-income earners face higher tax rates, a measure to address income inequality and ensure a fair contribution from all economic segments.

A Dynamic and Responsive System

Earning more but not aligning with Government policy simply means you’re swimming upstream. We work so hard in our jobs that climbing that corporate ladder brings more wealth as well as more stress and time away from our family. The more you earn, the more you’re taxed.

The only way to combat this is to start investing, purchasing real estate, starting a business, starting a side gig, investing in renewable energy, investing in index funds and ta

The Australian Tax System: A Progressive Approach

Tax Benefits: Rewarding Beneficial Endeavors

Superannuation Contributions: Contributions to superannuation funds often receive favorable tax treatment. When the population ages, the costs for services especially retirement funding such as pensions becomes a heavy burden for the Government. When they see people investing and making extra contributions to take care of themselves in retirement, it’s one less person the Government has to support. They like this.
Education and Research: Tax deductions for certain educational expenses and research activities encourage investment in knowledge and innovation, crucial for the country’s growth. This creates new industries and potential jobs.
Charitable Donations: Donations to registered charities are tax-deductible, promoting philanthropy and support for non-profit sectors.
Investment in Renewable Energy: Tax incentives for investing in renewable energy projects align with the government’s commitment to environmental sustainability.

Tax Penalties: Discouraging Unfavored Activities

Conversely, the tax system can impose higher taxes to discourage certain activities or to manage economic disparities:

Luxury Car Tax: This tax is imposed on expensive vehicles, discouraging excessive spending on luxury goods while generating additional revenue.
Capital Gains Tax (CGT): Higher taxes on short-term capital gains discourage speculative investment and encourage long-term, stable investment behavior.
Sin Taxes: Higher taxes on products like tobacco and alcohol serve a dual purpose – reducing consumption of harmful products and generating revenue.
Progressive Income Tax: High-income earners face higher tax rates, a measure to address income inequality and ensure a fair contribution from all economic segments.

A Dynamic and Responsive System

The only way to combat this is to start investing, purchasing real estate, starting a business, starting a side gig, investing in renewable energy, investing in index funds and ta

Previous Episode

S01_E15 - The Biggest Money Fears and What to do about them

https://www.patreon.com/Jellyman_Investing
Let's talk fear. There are a lot of things to be scared about financially. Job loss, retirement, your children, etc. The amazing thing about finance is that there's usually something we can do about it. It's rarely terminal. We just need to take the right action as soon as we can and let time do the rest.

Let's face it. The world is scary out there. Especially if we have a family that depends on us financially. Losing a job for example spells disaster and if you have got the right systems in place, you're in for a world of hurt. The great thing about this is that these issues are solvable. You just need to know how.

I'm going to go through 7 of the biggest fears I know people have when it comes to money and then talk briefly about some of the things you can do to put these fears to rest.

Running Out of Money: This is perhaps the most common fear. It encompasses worries about not having enough money to meet daily needs, cover emergencies, or maintain a desired lifestyle, especially during retirement.
Debt: Many people fear being overwhelmed by debt, whether it's from credit cards, student loans, or mortgages. The stress of managing and repaying large debts can be a significant source of anxiety.
Job Loss/Income Instability: The fear of losing a job and the resulting loss of income is a major concern. This fear is heightened in economic downturns or industries prone to layoffs.
Inflation and Rising Costs: People often worry about the decreasing purchasing power of their money due to inflation, especially when it comes to long-term goals like retirement savings.
Investment Losses: For those who invest, the fear of making poor investment choices or experiencing market downturns can be significant. This includes concerns about not knowing enough to invest wisely or losing capital due to market volatility.
Healthcare Costs: The potential for significant healthcare expenses, especially in later life or due to chronic health conditions, is a major financial fear for many.
Not Being Able to Afford Retirement: Many fear that they won't be able to save enough for retirement, or that their retirement savings won't last through their retirement years.

Next Episode

S01_E17 - Building 6-12 Months of Savings and Buying your First Home

https://www.patreon.com/Jellyman_Investing
I want to talk about the journey towards buying your first home. It starts by paying off debt and building your savings. It's really easy to fall off the bandwagon when it comes to getting your finances under control.

Here's the way I found to work TOWARDS a house:

Set up your automation and accounts for everyday expenses.
Build your 6-12 months of emergency savings.
Begin investing in index funds.
Meet with a broker to assess your financial position relative to how much you'd like to borrow.
Readjust your borrowing power based on rising interest rates.
Build an additional buffer for post-home purchase (ensures you have enough left over just in case).
Buy a house.

As you can see, building the buffer is step 2. The buffer ensures that if unexpected expenses occur, we can cover them without becoming mentally derailed. It's hard when you have to move money back and forth between accounts because it feels like progress is being taken away from you.
The automation in step 1 will automatically push money towards your savings account. What some people do is create a whole new bank account with a different bank and have the money transferred there. This account has no associated card, which removes the temptation to spend it.
Let's add time to the equation. What tends to happen when you've automated your accounts is that it just happens in the background. Before you know it, you've built up enough savings. You might think that the next step is to buy a house. But I actually think people should invest first.
Now, before you start telling me it's risky, hear me out. Index funds, which are a basket of stocks that allow you to become automatically diversified, are relatively low risk and have good returns, even in bad economic times. You can even buy index funds specifically tied to property.
Because it now takes much longer to save for a house, while you wait for the best time to strike, the value of your stocks goes up. In fact, in my personal situation, after I had my 6-12 months saved up, I began buying stocks each month. But it took a few years before the timing was right to get a house. In those few years, I ended up accruing an additional $15k in stock value, which I could sell to buy my house.
Luckily for me, during the time I was buying stock, I was still diverting some of my funds towards saving for a house. After meeting with a broker, he told me I actually had enough in my savings to buy a house, which meant I could leave the stocks to keep growing and still buy a house.
This is a win-win situation and gives me a number of options. If I suddenly need cash, I can always liquidate some of my stocks (which I've never had to do). By leaving my stock, it can just grow. Another win for me.
Moving my savings towards property means the money in my home is now growing as well. Any renovations I do also build equity.
Now, I have mentioned a few times that having equity sounds good on paper, but it's not real money until you sell the asset. That is true. But the way I like to think about finances is to try and have a win scenario for every situation.
If the stock market crashes tomorrow, I have cash on standby to purchase stocks at a discount. If the market instead jumps, I already have stocks to ride the wave. If housing prices go down, it's fine because I already have a home to live in. If they go up, my equity increases. If I lose my job, I have several other income streams.
Every which way you look at it, I have some form of protection. That is true security. Just because it says 'full-time' on your job contract, doesn't mean you have security.
So take it