October 11, 2019 Pay less tax. Here’s how!
No one likes paying tax. Let’s face it. Actually, I’ll qualify that by saying ‘too’ much tax.
There’s the often bandied about reason for the rich getting richer.
To that I’d argue that anyone with a bit of wealth-driven nous is using the laws of the day – legal tax breaks, tax structure et al – to get their taxable income down and use potential return windfalls to reinvest or form part of their ongoing wealth-building strategy.
If you want to pay less tax, perhaps the biggest piece of advice I could give is to ensure you have a great accountant.
Not one who encourages you to get creative with what you’re claiming with no receipts, no, no, no.
A good accountant knows the legal parameters you can claim within inside out, and simply helps you take advantage of all the tax breaks that are legally available to you.
Know your marginal tax rate
Most people overlook this one. It’s important to know which marginal tax bracket you sit in. Meaning, if you earn more money, you need to know how much extra tax you’ll pay.
If you’re running a business or you’re a sole trader, be sure to put a few extra percent away in tax.
Come tax time, you’re better to have more in the kitty and come away with a bumper compulsory saving than ending up in a situation where you’re hit with a tax bill.
Know what you can legally claim
Speak with your accountant and work out everything you can legally claim against whatever your profession – or business.
A good habit to get into is to keep every receipt you think is remotely claimable for you earning an income, store them away somewhere safe (even if it’s an old shoe box), then sit down come tax time and forensically go through them to see which ones you can legitimately claim.
Any ones that sit in a grey area, just make sure you check with your accountant. It’s better to keep a receipt and not end up claiming it, then the other way around.
Get smarter with shares and property
Dividends or rent from investments in shares and property are typically taxed at your marginal tax rate.
Depending on your tax structure, you may be able to take advantage of franked dividends – yes, these were a big Labor policy talking point at the last Federal election.
Your other massive consideration here is that any investment you make a profit from will generally trigger Capital Gains Tax.
In other words, if you’re not already on top of it all, make sure you get some solid advice from your adviser. Or speak to us!
Start salary sacrificing
Making contributions to your superannuation through salary sacrificing is a well-trodden path in Australia.
Here, you’re basically swapping the income tax rate you’d be paying on your earnings with the lower superannuation contributions tax rate of 15 percent.
Also, if you’re in for a bonus this year, give some serious thought to putting it into your super. Again speak to your adviser or us to get it right!
Set up a discretionary trust
Another contentious one from the last Federal election. If you are a business owner and you and your partner have a reasonably high combined income, you should consider setting up a discretionary family trust.
They’re fairly simple to set up through your accountant (and not that expensive to maintain) and allow you to redistribute some of your income to family members on lower tax brackets.
They’re particularly good for holding investments, namely in terms of Capital Gains Tax and franked dividends, for instance.
Take advantage of a mortgage offset account
Normally, interest on savings accounts is classified as income by the Tax Office. If you have a mortgage, though, popping that money into your offset works the other way.
Not only will reduce the interest you’re paying on your home loan while you have that money offset against your mortgage, but you won’t pay tax on the interest you would’ve otherwise earned.
If you don’t have an offset set up with your home loan, give us a bell. Seriously.
Defer income to the next financial year
Again, if you have a business, during the closing months of the financial year you might be able to defer invoices. If you are in the homestraight of the EOFY, deferring income until after June 30 is a great way to lower your tax for the year.
Just bear in mind that it’ll push up your income for the following year.
This is particularly smart strategy when know you’re going to be taking a decent break or holiday in the next financial year.
Aside from having a good accountant, a tailored, robust financial strategy goes a long way, particularly in helping you take advantage of reinvesting tax return windfalls.
If you don’t have a rock-solid game plan, we’re always happy to bounce around some ideas with you.