The announcement of another tax review may not excite you but paying tax is still a fact of life for most Australians. But it needn’t be a negative.
If you’re trying to create financial security, always remember that the tax system can often be on your side, as long as you are properly informed and understand how to comply.
In the first instance, you should always see an expert adviser if you make financial decisions that hinge on tax. But if you don’t have an adviser you should at least understand these basic ideas that can boost your tax efficiency:
- Salary sacrifice to super When you get your employer to make extra contributions above the superannuation guarantee, the amount sacrificed (up to your cap) each year reduces your assessable income by the same amount, saving you a lot of income tax and increasing your retirement savings.
- Super contribution concessions When you put your own salary sacrifice contributions into superannuation, they are not taxed at your marginal income tax rate, but at just 15 per cent within the superannuation fund (up to your cap).
- Tax on super fund earnings If you put your money into a term deposit for example, the earnings are taxed at your income tax rate. But same money in a super fund is taxed at just 15 per cent on earnings, allowing your retirement savings to grow faster.
- Investment property expenses When you buy an investment property, most of the expenses associated with maintaining and managing the property as an investment, are deductible. Including asset depreciation. That means you reduce your assessable income from the property by the amount of your expenses, reducing your tax bill and making the property more affordable.
- Negative gearing If your investment property’s costs are greater than the rental income, you can take this annual loss and use it to reduce your other income by the same amount, thereby reducing the amount of tax you pay and making the property more affordable.
- Interest only loans Your investment property could be more tax efficient depending the type of loan you use. The only part of an investment loan that is a tax deductible expense is the interest. So property investors using interest-only loans (no principal is re-paid) could make their investment property more affordable from a cash flow perspective whilst maximising tax deductions.
- Franking credits When you own shares in a company that issues ‘franked’ dividends, the Tax Office acknowledges that the company has already paid corporate tax, and attached to the dividend is a franking credit for you. Most investors reduce their tax liability with franked dividends.
- Your family home In most circumstances you are not charged Capital Gains Tax (CGT) when you sell your ‘primary place of residence’. This is a great tax concession and is one of the foundations of retirement finances.
- Your business There are several CGT concessions for business owners who sell their business and use the proceeds for retirement savings.
So, the tax system can work to your advantage as you create financial security and build wealth, but you first have to know the tax rules and then you have to comply. I think it’s always beneficial to talk to an adviser. Good luck.