Monday, May 14, 2012

Tax free threshold allows tax free golden retirement

Note: I’m not a licensed financial advisor, taxation specialist or an accountant, so this information should be considered as an FYI only (NOT FINANCIAL ADVICE).

It’s been known for sometime that significant changes are coming to the tax free threshold for Australians in 2012 and it was confirmed again the other night in Swan’s budget.

From July 1st 2012 the tax free threshold will be increased to $18,200 (up from $6000 for the financial year 2011/2012) and will be bumped up to $19,400 by 2015-2016.

One of the biggest concerns for those saving for retirement in physical Gold is the potential for large amounts of capital gains tax to be payable in the likely event they sell at much higher nominal prices than today, even if the real value has simply kept pace with rising costs.

A high tax free threshold (coupled with the existing 50% capital gains tax discount for assets held longer than 12 months) opens up the potential for those saving for retirement using Gold to deplete their Gold savings during retirement sans tax.

Take the example of someone (let’s call him John) who has been saving in Gold for retirement since 1990 and has purchased Gold every month in equal quantities since that point in time. John’s dollar cost average is around $690 (AUD). With Gold currently trading around AUD $1600 each of John's ounces of Gold are sitting on $910 profit (average).

How does he avoid paying tax on the profit during retirement while keeping within the bounds of the law?

To calculate the maximum which John could liquidate in 2012/2013 for retirement we take his profit per ounce ($910) divide it into the tax free threshold ($18,200) which equals 20 ounces, we then double the ounces as tax is only paid on half of the capital gain (due to 50% CGT discount), so John could potentially liquidate 40 ounces for $64,000 and pay no tax on the proceeds.

Further explanation: Of the $64,000 funded by the sale of 20oz of Gold, $36,400 is profit, but he only needs to pay tax on half the profit ($18,200) and because this is below the tax free threshold he pays no tax.

It wouldn’t matter if he’d purchased the Gold at $1 an ounce and sold it at $1600 for $1599 profit…. as long as John:

- Holds the Gold longer than 12 months allowing 50% CGT discount
- Is comfortable retiring on double the tax free threshold (max)

Based on a $1 purchase price for Gold and $1600 liquidation price John could sell up to $36,400 worth of Gold and avoid tax using the same method. So for those worried about how high Gold might get in the future and the tax payable, as long as you can live comfortably from double the tax free threshold (whatever it is at the time of Gold liquidation) then you can avoid paying tax.

Warren Buffet once said “If you own one ounce of gold for an eternity, you will still own one ounce at its end”. Funnily enough this was in an argument to suggest reasons not to hold Gold, but those who save in Gold are often doing so for this very reason, to preserve purchasing power, with the expectation that over the long term Gold will be able to fulfill this need.

How much Gold would you need to save in order to retire? A little while ago I looked at the average weekly wage (before tax) priced in Gold ounces, here is the chart:
Average Weekly Wage Priced in Gold Ounces (Click Image to Enlarge)
Basically an average weeks wage has fluctuated between ½ and 2 ounces of Gold even dating back over 100 years. This example from the previous article, showing the ratio was .51 (number of Gold ounces the average weekly wage would buy) in 1901:
In 1901, the average weekly wage for an adult male was about $4.35 for a working week of almost 50 hours, which after inflation equates to $217.50. However, wages have grown much faster than inflation, with the average weekly ordinary time earnings for adult males in May 2000 being about $830.00 for around 37 hours work, in far better conditions.
The price of gold has often been used as a measure of inflation. At Federation, the price of gold was $8.50 an ounce, or $425.00 in today's money. The actual price of gold in 1999-2000 averaged about $460.00 an ounce, showing that it has generally maintained pace with inflation. ABS
If we take the midpoint (1.25oz), minus tax we would have paid on the equivalent income (-30%) and multiply it by .7 (as we will assume John has a freehold home resulting in lower living expenses) and we get around .6125oz per week required x 52 (31.85oz Gold per annum) x 15 years of retirement = 477.75oz Gold required to fund John's retirement. Your figures may vary depending on inputs.

I wouldn’t advocate relying on a single asset class to fund retirement. Personally I will be looking to build a portfolio of income producing assets (which also rise in value), but it’s an interesting exercise nonetheless.

Of course there are any number of risks that could void tax free retirement working in this way such as Gold confiscation, a windfall tax being applied to Gold, changes to the tax free threshold, changes to the 50% CGT discount. Or perhaps Gold doesn't retain a similar value against Australian wages/goods/services as it has over the last 100 years. Anything is possible and the turbulent times we have ahead are likely to result in significant changes to the way we live today...

This above post was inspired by the following from projack on Silver Stackers:
If you buy gold for retirement you do not have to worry much about CGT as an average person. Selling $40,000 value gold a year for your lifestyle for example even if the original purchase price was only $10,000 means $30,000 "profit" and only half of that amount is counted as CGT and used as assessable income, and that is 15,000. With the new $18,200 tax fee limit from the 2012/2013 financial year (and will go up further) this is no problem and you do not have to pay any CGT.
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18 comments:

  1. And if you are married - you can double those numbers!!

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    Replies
    1. however, the gold has to be under "joint-names" for that to happen.right?

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    2. Anon, I don't see how it would matter if the Gold was purchased in joint names or an equal amount was held in individual names and liquidated together...?

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    3. what if it is under one person? would the tax-free threshold double just because the person is married?

      on another note, is it easy to transfer gold holdings from one person to another. for example if the husband has 40 ounces under his name, how easy/difficult is it to transfer 20 ounces to his spouse?

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    4. Probably something to check with an accountant, but my understanding is if you had all the Gold owned under a single name you wouldn't be able to claim twice the tax free threshold even if married and transferring the Gold would be considered a sale/CGT event.

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  2. I thought that one paid CGT no matter where one stayed in the income tax threshold ... no?

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    1. My understanding of CGT is that the profit is added to your income tax and then your tax is calculated at the tier that the profit falls in.

      So if you earned no regular income, as long as the CGT applicable profit from asset sales comes in lower than the tax free threshold then you shouldn't have to pay any.

      That is my understanding and there is a chance I am wrong.

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    2. perhaps a lesser chance that you are wrong than me :-)

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  3. another point which I feel is often neglected in determining the amounts required for 'lifestyle' is that its often assumed that people need the same amounts in retirement as they needed in their child raising years.

    Also there is the fact that Australia is insane. My wife and I lived on MUCH less in Finland than we do here (and here we outright own our house while in Finland we rented) even with heating requiring more energy (you know, when its -20C) and fuel costs being nearly 50% higher. Food is cheaper in Finland (figure that out) and rent (even in Helsinki) about double that here.

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    1. hear hear!

      Most people don't have that "overseas" experience. In Adelaide, in a particular PUB, a meal (schintzel+chips) was costing me $28 odd (no it was not cooked by Heston or Jamie Oliver!). I commented that it was its atrocious pricing and overseas it was lot more cheaper! I answer I got was "mate, you are in Australia, we don't serve crap quality, it's all top grade, unlike overseas". (as I was born in India,I figured that they assumed I was comparing with India!)... I told them on their face.."dude, you should get out sometime and see the world.. i was refering to London, Frankfurt, San fran!... it appears like you live a sheltered life".. not to mention I have not met them afterwards!
      Long story short, "people" believe "it is worth it" and "it is NORMAL"...which is VERY WEIRD!

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    2. Good point obakesan, I did multiple the result by .7 to show reduced living expenses based on the expectation that "John" had a freehold home, but possibly that could be reduced further again.

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    3. Adelaide schnitzels can vary a lot in price, I agree $28 is too much. The best in Adelaide I have had are at Coopers Alehouse and Earl of Leicester. $20 for a plate sized schnitzel.

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    4. hang on ... I meant rent here is double that in Helsinki.

      Only one thing shits me more than an ignorant ozzie going off about how we have the best of everything here ... and that's the crowd who's reply to critical analysis is "if you don't love it leave it"

      Those a55ho135 are the reason why its dearer here for stuff and why noone does anything to fix it.

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  4. @anonymous: most Australians overseas experience is a holiday or other insulated "life in a bubble" experience. While more ozzies than Hay-Mericans have gone OS, few have actually lived there, you know: paid rent / sorted out phone connections / tennancy / bought and sold vehicles / paid tax / dealt with bureaucracy.

    Thus I discount most of the "yeah, I've been to bali on holidays" bogan accounts of live outside Australia

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  5. Ladies, things are expensive in Australia because there a number of measures in place to prevent a class gap emerging. This drives the cost of labour and all other items up. Whilst living abroad, did you notice that the minimum wage in the UK is circa £5.50 an hour or that staff can work on a tips only basis in the US? And before Obakesan gets on his high horse, 'yes' I've lived in London for many years and 'no' I have never been to Bali. I hope immigration catches up with you buddy, because we certainly don't need ungrateful people like you in the lucky country.

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  6. Good thoughts, but how would the government know how long you kept it if all of the gold was bought from private transactions?

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  7. Dear All Member, can you help me to answer my question..??
    how
    to avoid capital gains tax
    ?? Actually, I research on google and find a few website like that, But I am not sure that information is correct, Please, I am Jenifar and Thank you all...

    ReplyDelete