Bankwest Qantas Transaction Account - Beats Paying Tax on Interest.

[Renato1]

Assuming you have one, it will be far better to put the money in an offset account against your mortgage. "Earns" an effective return of 5ish% depending on your tax rate.

Obviously not relevant if you don't have a mortgage.

All my mortgages are paid off.
Regards,
Renato

 

[Renato1]

I find it more beneficial to consider the bigger picture and look at the effective tax rate, rather than fixating on a particular income stream and allocating it to a marginal tax bracket.

For a person with a 200K taxable income, their tax+levy liability is still only about $68K. This gives an effective tax rate of ~34%. (For someone's effective tax rate to be 49%, their taxable income would be something like $1.9 million, in which case they're not going to be farting around with the kinds of low-end financial optimisations that us plebs have to.)

If 1.8% interest income is included in their taxable income, then after tax that becomes about 1.19% net.

It's also possible to get higher interest rates with online high interest transaction account. IIRC Ubank have one with that pays 3.37%, which even for our hypothetical 200k earner ends up being 2.22% after tax. (This is not an endorsement of Ubank, just an example of what's out there.)

Your analysis is incorrect.
One pays tax on income additional to salary at the marginal tax rate.
There is little point in doing calculations such as these using the average tax rate, as they will be wrong.

Anyone earning over $180,000 a year pays tax on income beyond that amount at 47% plus 2%. In your Ubank example, the high income earner has an after tax effective interest rate of 3.37x0.51= 1.7187%
Regards,
Renato

 

[Renato1]

It took an accountant a while to convince me about it.

Change your accountant - quickly.

Regards,
Renato

 

[Renato1]

I have this account and earn about 3000 points per month. I'm very surprised that the ATO allows this to be tax free. I wonder if I can get my employer to pay 50% of my salary in QFF points, tax free of course!

If they started wanting to tax these points - would they not logically also want to tax all other Qantas FF points, Velocity points, Flybuys, MyerOne points etc?

The though "electoral suicide" comes to mind.
Regards,
Renato

 

[Benno]

Your analysis is incorrect.
One pays tax on income additional to salary at the marginal tax rate.

This is only the case if you're doing PAYG witholding, which isn't the case with interest income (unless you don't have a TFN).

Anyone earning over $180,000 a year pays tax on income beyond that amount at 47% plus 2%.

That was never being contested.

In your Ubank example, the high income earner has an after tax effective interest rate of 3.37x0.51= 1.7187%

This is just your preference for deciding to allocate tax to a certain income stream. It's just as valid to for me to decide that, if their interest income is less than $18200, they can claim the tax free threshold on that income. When it comes time to do the tax return, their tax obligation will be the same regardless of which way you stack the pieces.

Change your accountant - quickly.

I used to think exactly like you, until this guy challenged me to actually run the numbers because the concept is counter-intuitive (he's a partner at a big 4 firm, specialising in tax). Lo and behold, in the end it makes no difference to your tax return.


The whole point of my post is not to poo-hoo your idea, as it has merit, but to help calculate the benefits accurately.

 

[froggerADL]

If they started wanting to tax these points - would they not logically also want to tax all other Qantas FF points, Velocity points, Flybuys, MyerOne points etc?

The though "electoral suicide" comes to mind.
Regards,
Renato

I think the difference is that the Bankwest deal is giving points, which are not taxable, in lieu of interest. If the interest is paid in cash then it is taxable. So this arrangement means that the ATO collects less taxes. That's why I used the salary example which would also result in a loss of revenue to the ATO.

On the other hand, if I pay $150 for a flight that earns 800 points, then those points do not result in less revenue for the ATO. That is also the case with every other way of earning points that I'm aware of.

 

[Renato1]

That's very interesting.



It all depends on how much value you place on the points.
According to an AusBT article: What is a Qantas frequent flyer point worth? - Australian Business Traveller

Qantas points are valued at a range of different levels:

You are totally correct.

For certain seat upgrades, the points can be worth 6 cents a point ( because that's how much money they offset if you had to fork out cash for the upgrade).

For store or hotel redemption, they can be worth as low as 0.5 cents per point.

As for me, I'm only interested in domestic economy travel - since we haven't seen much of Australia - and they are worth around one cent a point - based on travelling at off-peak time. The points would be worth two or three times more if I booked flights at peak time, when the flights cost two or three times more. But who needs the hassle of travelling at crowded peak time? I'm a leisurely kind of person.
Regards,
Renato

 

[burmans]

This is just your preference for deciding to allocate tax to a certain income stream.

So you are saying that if you earn an extra $1K on top of your $200K income it wont be taxed at the marginal rate? But happy for you to think you can somehow apply average rates to marginal income.

PS, you aren't interested in buying London Bridge by any chance?

 

[Benno]

So you are saying that if you earn an extra $1K on top of your $200K income it wont be taxed at the marginal rate? But happy for you to think you can somehow apply average rates to marginal income.

I've explained twice now that this is not the point I'm making.

 

[Renato1]

I think the difference is that the Bankwest deal is giving points, which are not taxable, in lieu of interest. If the interest is paid in cash then it is taxable. So this arrangement means that the ATO collects less taxes. That's why I used the salary example which would also result in a loss of revenue to the ATO.

On the other hand, if I pay $150 for a flight that earns 800 points, then those points do not result in less revenue for the ATO. That is also the case with every other way of earning points that I'm aware of.

Yes, but when you eventually use your accumulated points for a flight - the ATO misses out on revenue.

In the last five or six years, I've earned zero/nothing on my ANZ and Westpac savings and cheque accounts. And I earned around 6 or 7 cents per annum on the equivalent CBA account. So, relative to those accounts, this account doesn't cost the ATO any revenue at all. Relative to on-line saver accounts (some of which have all sorts of restrictions - one CBA one only lets you put money in and out of it through one's savings account), yes, the ATO would be losing revenue. But the nature of the Bankwest account is closer to the other banks' savings accounts which pay zilch interest wise.
Regards,
Reanto

 

[Renato1]

This is only the case if you're doing PAYG witholding, which isn't the case with interest income (unless you don't have a TFN).


That was never being contested.



This is just your preference for deciding to allocate tax to a certain income stream. It's just as valid to for me to decide that, if their interest income is less than $18200, they can claim the tax free threshold on that income. When it comes time to do the tax return, their tax obligation will be the same regardless of which way you stack the pieces.



I used to think exactly like you, until this guy challenged me to actually run the numbers because the concept is counter-intuitive (he's a partner at a big 4 firm, specialising in tax). Lo and behold, in the end it makes no difference to your tax return.


The whole point of my post is not to poo-hoo your idea, as it has merit, but to help calculate the benefits accurately.

Run this both ways.

Your wife is upset with the lack of pocket money that you are giving her.

You say, "Yes Dear, I will invest some money in this investment which is guaranteed to pay $10,000 per year. And I will give you what's left after tax for pocket money."

How much money does you wife get after you've paid the tax?
Cheers,
Renato

 

[Benno]

A. We need more information to determine how much tax would be paid.
B. Can you explain how you think that's a good analogy for the main thrust of discussion?
C. Pocket money is for the kids, not my partner (who earns 110% of what I do)

 

[Renato1]

You don't need any extra information - you can use your own average tax rate and your own marginal tax rate if it is not at the highest level, or use the top rate of 49% and your average rate at that level.

As for the analogy - it is exactly analogous. You claim that using average effective tax rates gives the same result as using marginal tax rates. If so, plainly then, one should get exactly the same result in either this example or in the initial interest example (which we didn't). In my example, the money comes directly from you - it might clarify things for you as to whether your accountant's advice can be trusted.

If you want, you can pretend that your wife is giving you pocket money, or that the pocket money is going to the kids. It makes no difference.
Regards,
Renato

 

[Benno]

I would include that interest in my total earnings, and then calculate my tax owed from that amount while including all relevant information such as other income, as PAYG tax already paid, tax deductions and so on.

as risk of derailing this totally, Renato1, have you ever gotten a refund on your tax return?

 

[AustraliaPoochie]

Great if you earn your $ in cash more than Aud$2000 per month, not so good if you earn your keep in things other than cash, or if you don't earn more than Aud$2000.

 

[Renato1]

I would include that interest in my total earnings, and then calculate my tax owed from that amount while including all relevant information such as other income, as PAYG tax already paid, tax deductions and so on.

as risk of derailing this totally, Renato1, have you ever gotten a refund on your tax return?

So, you haven't done it both ways using your average tax`rate and your maginal tax rate - and have instead added irrelevant red herrings.

I always get a tax refund.
Regards,
Renato

 

[Benno]

So, you haven't done it both ways using your average tax`rate and your maginal tax rate - and have instead added irrelevant red herrings.

I always get a tax refund.

Deductions are not red herrings. They are necessary, along with marginal tax bracket information, to help us find what our effective tax rate is. The effective tax rate is necessary to figure out what our tax liability is. Without knowing our liability, we can't tell how much we've got left after deducting our tax obligations from income.

All I've been trying to show you is how, if you don't look at the big picture, you're at risk of over-estimating the tax liability from earned interest. This in turn influences the effectiveness the strategy you've outlined in the first post.

However, as you've gotten a tax refunds, you at least have the necessary experience to see how estimating your tax liability based on a single income source can be misleading.

 

[burmans]

Deductions are not red herrings. They are necessary, along with marginal tax bracket information, to help us find what our effective tax rate is. The effective tax rate is necessary to figure out what our tax liability is. Without knowing our liability, we can't tell how much we've got left after deducting our tax obligations from income.

All I've been trying to show you is how, if you don't look at the big picture, you're at risk of over-estimating the tax liability from earned interest. This in turn influences the effectiveness the strategy you've outlined in the first post.

However, as you've gotten a tax refunds, you at least have the necessary experience to see how estimating your tax liability based on a single income source can be misleading.

OK, I'll bite. The whole principle of using an average rate (the big picture) is on the basis you can't determine the order in which income stream apply. I.e. if I have three jobs of $50K each, it's somewhat arbitrary to say job 1 should be taxed at the 0-50K marginal rates, job 2 at the 50-100K rates and job 3 at the 100-150K rates.

But in the cases which is being canvassed here where the choice is between interest and points its perfectly possible to isolate that income and determine the rate that applies to that income only. I can guarantee that if I am earning 200K and I choose the interest option then (assuming I have no deductions that can be charged against that income) if I earn an extra $1K I will be taxed on that $1K at the top marginal rate.

And to your last point, he's not estimating his tax liability based on a single income source, he's looking at the incremental impact of that single source in an circumstance where the incremental impact of that source can be definitively assessed. General advice is good for general purposes, but this is a specific question, interest or points.

 

[Cynicor]

Benno- while it is true to say that the average tax paid is the actual cost and what goes to the ATO, your average tax will only be calculable once you have taken all income streams into account (I.e. End of financial/tax year).

Up until this point you can't use it to determine anything. You have to use marginal rates.

I can look at the interest in my savings account and say I have paid 35% overall, but if I earn another 15k interest then that will change the average rate paid. I won't just be paying 35%, I will be paying 49% o! the 15, enough to bump the average to 36%...

So whilst you could consider that income stream as part of your threshold, suddenly all tax paid on your PAYG job increased by 1%.

It all works out the same. And that's why you can only consider marginal rates.

 

[Benno]

Benno- while it is true to say that the average tax paid is the actual cost and what goes to the ATO, your average tax will only be calculable once you have taken all income streams into account (I.e. End of financial/tax year).

Up until this point you can't use it to determine anything. You have to use marginal rates.

It's still a completely arbitrary decision to do so. I have to diasgree about when you can calculate taxable income...in the last few years I've been able to forecast my taxable income with <3% variation by mid Feburary (the only thing that makes it tricky is when dividends vary greatly from expectations)