Let me ask you this:
If someone knocked on your door right now and asked you to give them $10,000, would you give it to them?
Even if they gave you a good reason, I seriously doubt you’d see it worthy of parting with that much money. You work hard for it.
But you may be doing exactly that. Giving huge amounts of money away. For nothing.
By paying too much tax.
You’d probably feel better about donating it to charity. At least that way you could enjoy a ‘feel good’ moment.
But tax. There’s no ‘feel good’ moment in paying unnecessary tax. Just that stomach-twisting feeling when you realise your choices could have been different – and afforded you a sun-soaked week in Fiji instead.
With a bit planning, there’s a way to prevent this. And that holiday needn’t be a sigh of regret.
What is tax planning?
Tax planning is about dedicating time and expertise to planning the best tax strategy for you. There’s no one-size-fits-all approach to tax planning. The goal is to reduce your taxable income so you pay less tax. And by doing so, you’ll maximise the money you keep hold of to spend on whatever you choose.
Tax planning gets great results for executives, professionals, sole traders, business owners and even athletes.
There’s no escaping tax. It touches every aspect of your personal finances – from income to investments, superannuation, home loans, assets and the wealth you leave for future generations.
Top tax planning strategies
There are a number of big picture strategies that you should undertake as part of your personal tax plan:
- Consider longer-term investment strategies that include borrowing money to buy residential property, business and shares.
- Restructure your home and investment loans and turn non-tax deductable debt into tax deductable debt so you can pay them off sooner.
- Purchase or transfer assets into family or property trusts, companies and self-managed super funds to reduce your taxable income and capital gains taxes you owe on investments.
- Salary package your car lease, superannuation, laptop and more to increase your take home pay.
Simple (and perfectly legal) tax saving tricks
There are a few things you can get started on immediately to prevent paying unnecessary tax at the end of the financial year.
Remember, consider each of these as part of your overall financial situation, goals and limitations. Discuss them with a tax accountant if you are unsure.
- Prepay deductable expenses. Pay expenses this financial year and reduce your taxable income. Less income equals less tax.
- Cash in on the capital gains tax discount. A capital gain is the profit made when an asset is sold. You’re required to pay tax on any profit as it’s treated as income. Discounts may be applied to individuals, trusts and superannuation funds, but forward planning is key.
- Create a company, as they’re a separate legal entity and are subject to different, and often lower tax rates than for individuals.
- Set up a trust for tax effectiveness and asset protection. There are many types of trusts with differing benefits.
- Start a self-managed super fund (SMSF). Save on fees and minimise contributions and investment income taxes. Take advantage of the unique tax-effective investment strategies that apply exclusively to self-managed super funds.
- Claim car expenses by logging all business related kilometres you travel.
- Use negative gearing. Negative gearing reduces your taxable income. It offsets the losses made when the income received from an investment property is less than the loan repayments and maintenance costs.
- Salary package superannuation contributions. Reduce your taxable income by diverting your salary into a super fund.
- Plan ahead. A well thought out tax strategy will keep you in total control of your end of year tax bill – no surprises. Don’t pay more than you need to.
Tax tricks that will get you into trouble
The ATO is on the lookout for these tax avoidance tricks, so if you’re heading in the direction of any of these, stop now.
- Excessively large deductions or tax offsets when compared to investment income
- Mixing private expenses with business expenses
- Investing now, with no return until later years, if ever
- Complex financing arrangements with no obvious commercial purpose
- Creating a loan that may never need to be repaid
- Claiming deductions that may never be paid for
Tax avoidance schemes to dodge at all costs
Unfortunately, when it comes to matters of finance, there are always a few unsavoury characters lurking in the wings, waiting to lead the unwary astray. Beware of any scheme that sounds too good to be true.
“Tax avoidance schemes range from mass-marketed arrangements (advertised to the public) to boutique arrangements (specialist financial arrangements offered directly to experienced investors). Some are marketed to individuals, and may exploit people's social or environmental conscience and generosity. Others target self-managed super funds.” - Australian Taxation Office
Tax avoidance schemes typically include complex transactions or distort the way funds are used to avoid tax or other tax obligations.
Be on the lookout for structures to arrangements that:
- Incorrectly classify revenue as capital
- Exploit concessional tax rates, such as those available to superannuation funds
- Illegitimately release super funds early
- Inappropriately move funds through several entities (such as a series of trusts) to avoid or minimise tax that would otherwise be payable
Paying more tax than you need to is not something you want to do. It’s giving money away – and you’ve got plans for your money and your future.
Tax planning may sound complex, or you may think you’ve got most things covered. But, it’s the tiny details that matter. And when you’re earning an above average income, tiny details can mean enormous savings.
Many smart professionals and business owners manage to squeeze even more out of their income by paying the absolute minimum tax they’re obligated to.
But forward planning is essential. The longer you put on list of things to do tomorrow, the more money you’ll give away at tax time.
So act now. Review the advice in this post and pick one thing to do this week – reviewing your home and investment loans is a great place to start.
Take a step in the right direction and you’ll be basking on that beach in Fiji before you know it.
