Time to think about the cost of smoking
Do your children smoke? Then ask them to think about two people aged 20. Assume that one chooses to smoke, and the other chooses to invest the price of a large packet of cigarettes a day ($20 a day or $608 a month) into a managed fund that invests her money into a range of blue chip shares. The price of cigarettes rises at least as fast as inflation, so if we assume inflation runs at 4 per cent per annum, the price of cigarettes will rise by 4 per cent per annum.
If the non-smoker increases their investment by 4 per cent per annum too, the amount invested, or spent on cigarettes, by age 65 will be $818,000. If the share trust returns 10 per cent per annum, (a realistic return if inflation is 4%) the sum accumulated by the investor will be $8.2 million at age 65. The smoker’s return on their investment is ongoing health problems, the non-smoker has become seriously wealthy.
You may argue that $8.2 million won’t be a huge sum in 45 years time after inflation is taken into account, but it is equivalent to about $1.6 million in today's dollars.
Put it another way. If a person who is young now wants to retire at age 65 with the equivalent of nearly $2 million in today's dollars, all they have to do is invest the equivalent of a packet of cigarettes a day from the day they start work.
What if you are older and have a mortgage.
You are age 35 and have a home loan of $400,000 over 30 years which you are repaying it at $2661 a month. If you quit smoking and use the $608 a month saved to increase your payments to $3269 a month you will pay off the loan in 18 years. You will be debt free at 53 instead of 65 and save a huge $255,000 in interest. Home loan interest is not tax deductible so saving $255,000 is equivalent to your earning nearly $420,000 from your job. Just giving up smoking gives you the equivalent of $420,000 in extra salary.
If you give up smoking make sure you commit the money that you are going to save, otherwise, it’ll be quickly frittered away like your last pay rise. If you have a home loan immediately increase the repayments by the amount you no longer spend on cigarettes, f you don’t have a loan, talk to an adviser about a regular savings plan. Above all get serious – as my GP says “they all stop after the first heart attack."
Question: It has been my understanding that a person’s tax return is to record income that has been received, during the financial year of that return and after 30 June, any new receipts are part of one’s income for the following financial year.
A number of companies when forwarding dividends, and associated cover notes, after the end of a financial year, state that these earnings were made in the preceding financial year, and should be shown on the recipient’s tax return for that year.
If a person, in early July, has already submitted a tax return, based on the amounts actually received, during the preceding financial year, will the ATO accept that these late received dividends become income for the year in which they are actually received?
Answer: You are correct in your assumption about dividends from direct shares – they should be included as income in the financial year that you receive the payment. But it's a different matter with some managed funds because they have transactions throughout the financial year but the book keeping is not completed until well after June 30th. This is why they forward you a statement which will detail the numbers that are to be included in your tax return for the financial year that is passed.
Question: My wife has earned less than $6,000 per annum for a number of years. We have about $60,000 worth of shares in her name. When we bought them three years ago they were worth $20,000. If we cash them in now how much CGT will she pay?
Answer: The capital gain will be approximately $40,000 but as she has owned the shares for more than a year she will be entitled to the 50% discount. Therefore $20,000 will be added to her taxable income in the year of sale. If she earns no more than $6,000 in addition to this, the total CGT will be about $3,000.
Question: We are in our forties and have small children. We have paid off the mortgage but are now saving and planning on renovating in about a year. In the meantime we are paying tax on interest on our savings. Can we put our savings - $30,000 - in the names of our children to save on tax?
Answer: If you transfer the money to your children and then transfer it back to yourselves the ATO will almost certainly take the view that it was your money at all times and assess the interest to you. While you are waiting to renovate the best option would be to hold this in the name of the lowest income earning spouse.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com.