10 Steps you can take to minimise your tax
1. Review Your Structure
Structuring your affairs correctly can significantly reduce the amount of tax you pay. For example, using a discretionary trust structure will allow business and investment income (not personal income) to be split between family members and closely held companies to minimise the average rate of tax you pay. If you are paying more than 30% tax, on average, you are probably paying too much. In addition to paying too much tax, if you operate your business in either your own name or in partnership, not only are you probably paying too much tax, your personal assets (such as your home) are exposed to claims by creditors and aggrieved employees. If you are in this situation, speak to Affluenture to amend your structure.
2. Plan Each Year
We recommend you meet with your accountant before the end of the financial year to ensure you maximise your tax deductions and minimise your ssessable income. Small business owners who account for income and expenditure on a cash-paid basis, can claim deductions for pre-paid expenditure such as interest and rent paid up to 12-months in advance. These businesses can also delay some of their invoicing to the next financial year to defer payment of tax on this income up to 18 months. Depreciable assets that cost less than $1,000 can be immediately written off for tax purposes further reducing your taxable income. For those businesses that account for their income on a non-cash basis, we recommend you review your accounts receivable balances and write off any bad debts before 30 June. Similarly, businesses that hold large inventory balances should review old and slow-moving stock and either write it off or revalue it down to net market selling value. Doing this will provide the business with a larger tax deduction for its stock purchases and reduce taxable income.
3. Defer Investment Sales
Investors who sell assets such as property and shares should consider delaying the contract date to
1 July, hence pushing the taxing point to the next financial year and delaying the payment of tax. Investors should note that it is the contract date and not the settlement date that determines the timing of the sale for capital gains tax purposes.
4. Realise Capital Losses
Let’s face it we all make bad investment decisions every now and then. If you believe the investment is not going to provide you with the long-term return you require, you may consider selling the investment at a loss, which can be used to offset capital gains made on other investments either in the current financial year or future financial years. Knowing the taxman is paying for some of this loss may ease the pain a little.
5. Accelerate Superannuaton Contributions
This strategy may not be for everyone and you should consult with your accountant or licensed financial advisor before making additional superannuation contributions. The rules are quite complex and you can end up paying more tax if you get it wrong. For those business taxpayers or investors who have surplus cash or are reaching their retirement age, additional superannuation contributions are extremely tax effective. The business typically obtains an average tax deduction of 30% and the superannuation fund pays tax of 15% on the contributions, resulting in a net tax saving of 15%. There are limits on what each person can contribute to superannuation and we recommend you consult with your advisor to ensure you comply with the law.
6. Review Owner's Remuneration
In addition to accelerating superannuation contributions, you should consider tax-effective bonuses or other such payments to working owners of the business. These payments must be related to 'market-based' salaries and be commensurate with the work they have performed, otherwise the tax office will deny the tax deduction for what they deem excessive. If you are operating your business through a company structure, the 30% tax rate applies up to $80,000 each without paying additional income tax, rather than leave it as profits to be taxed to the company.
7. Use Commercial Losses
If you are carrying on a business and incur a tax loss, you are required to meet one of four tests before you can offset these losses against other income you earned in that year. Through careful planning and monitoring of your business performance throughout the year, you may be able to use losses accumulated in prior years to offset income in the current year.
8 Utilise Franking Credits
Investing in Australian listed companies that pay franked dividends can be a tax effective source of income. Companies that pay fully franked dividends provide you with a 30% tax credit with each dividend paid. This credit is for tax the company has already paid on this income. For example, consider an investor that has earned $70,000 of fully franked dividends by investing in Australian listed companies throughout the year. Attached to this income will be $30,000 in franking credits, which represents the tax paid by the company paying the dividends. Assuming this taxpayer had no other income during the year, they would actually receive a tax refund of approximately $3,000 for the year!
9. Negative Gear An Investment
Negative gearing refers to a strategy of borrowing funds to invest in income producing assets such as property or shares and, in doing so, generating a tax loss that can be offset against other income earned during the year. For example, lets assume you purchase an investment property for $500,000 and borrow $400,000 from the bank to fund this purchase. Assume the property earns you rent of $20,000 per year ($400 per week) and your interest bill is $24,000 per year. Also assume you have outlays such as repairs, rates and agent fees for managing the property of $6,000 per year and you can claim depreciation on the property of $10,000 per year. Your tax loss for the year will be $20,000, which can be offset against your other income to reduce your annual tax bill. The long-term strategy to make money from this investment assumes the capital growth in the property value will outstrip the annual losses made on the property.
10. Seek Advice
Tax can be a complicated area of the law and the tax office is getting more sophisticated with its compliance activities each year. They do not accept ignorance of the law as a valid reason for non-compliance. We recommend you seek advice from your accountant to ensure you properly manage your tax and look at ways in which you can minimise the amount you pay each year.
While avoiding tax is out of the question, minimising the tax you pay is a legal and financially prudent principle.
Disclaimer
This information is general advice only and you should consult with your financial advisor before implementing any of the strategies described above to ensure they are appropriate to your circumstances. We encourage you to contact professional advisers at Affluenture Pty Ltd for advise concerning specific matters before making any decision.
