Minimizing tax is not the same as avoiding tax, let’s get that straight right at the start. Every Australian has a moral obligation to pay their fair share of tax so the infrastructure we all rely on such as schools, hospitals, police, fire services etc. will continue to function. That doesn’t mean you have to pay extra though and there are plenty of legitimate deductions available to keep most people happy. We believe that careful Investment Planning can also play a crucial role in maximising the gains you get by focussing on Structure, ownership and the type of investment. All of these issues can be addressed as part of a Financial Plan.
Let’s look at some of the ways you can minimise your Tax position.
Get a Plan – Serious investors have goals and know what to do to get there. A Financial Plan formalises your goals and puts in place actions that help you to achieve what you set out to accomplish. Co-ordinate your financial position by putting a plan in place and buying assets in the structure that benefits you most.
Seek advice from the experts – Consider using a Tax expert every year. If you want to take advantage of all the deductions you are entitled to, you should ask an expert. Taxation rules can be very confusing and if you have complex structures surrounding your investments and property portfolio then it’s wise to employ someone that knows what they are doing. We would also encourage you to find someone you enjoy working with. Creating wealth is usually a long term plan so your Tax expert or Accountant should be someone you feel comfortable with.
Deductions – Claim all the legitimate tax deductions you are entitled to. Deductions can go a long way to reduce your taxable income and less income means less tax payable. Be aware of what deductions you can claim based on your occupation and make sure you keep receipts for any amount you pay that relates to what you can claim.
Keep good records – One of the obvious things to do is to keep your records in order so you can claim all the deductions you are entitled to. It’s ok to know that you can claim for a certain item but it’s another thing entirely proving you have spent the money in the first place. Keep all your receipts, keep all the documents that you need to get a deduction, gather all your paperwork and keep it in one spot. Keep all of the same documents together in date order, for example Loan statements, Council Rate Notices, Body Corporate Invoices and Rental statements to name just a few. Your accountant will love you for being organised and you’ll save money by saving your accountant time. After all time is money.
Structure – Australia’s taxation system is designed to have individual income earners pay the most tax, that’s why PAYG tax rates go up to 47% while corporate entities generally pay 30%. Given this, it makes sense to think about how you want your investment ownership structured. You could choose to have your investments in the name of a Corporate Trustee for example. There are benefits to having this set up but of course there are ongoing expenses with having a Company, and as a director you have added responsibilities too. These options are best discussed with your Planner.
Buying deductions – If you are faced with the prospect of having to pay tax it’s easy to get into the trap of buying something that will give you a deduction. A Negative Geared investment property provides numerous tax deductions and would fit the bill nicely, but keep in mind that the primary purpose for buying an investment property should be to create wealth. Buying a property means you have to outlay 20% of your own money for starters and that’s a lot of money which you can’t get back. Let’s say you purchased a property for $500k, you might need to contribute $100k of your own money, either cash or equity, not including any purchase costs like Stamp Duty etc. That is a lot of your own money being paid out just to save tax!
Use your partner –One way of minimizing the impact of taxable income is to have income producing investments in the name of your partner if they earn less income than you or are not working at all. That type of thinking could be extended to Superannuation as well. Why not make contributions to your partners Super each Financial year? This could be an opportunity for topping up to the maximum limits available during a time where your partner is either not working or working part time. Obviously Super is a great long term investment that benefits from regular contributions. In fact, why not salary sacrifice extra contributions into your super and reduce your before tax income?
Pay off your Home Loan – Saving money is always a good idea but paying off your Home Loan is a better one. Adding an Offset facility to your Home Loan and use it to start saving can reduce your tax. Offset accounts produce no interest technically as they reduce accrued loan interest rather than earn interest so you pay no tax on it. The reduction in accrued interest from your mortgage and the resultant lower loan balance will be worthwhile.
As you can see there are many ways to maximise the refund from your Taxation Return, far more than we have covered in this article in fact. The bottom line though, should be about keeping your tax minimization in line with your wealth creation strategy. Creating wealth requires as much income as you can but reducing tax invariably means less taxable income. Working with your Financial Planner and Tax professional and finding the happy medium is thoroughly recommended.
Call one of our Financial Planners today and start working on your future now.