Tax time is approaching! For some of you, this will bring a sense of dread. A reminder of your income you have foregone over the last 12 months to keep our society functioning. For our clients, we’ve implemented numerous strategies to legally minimise their tax so they have more money available to invest as they see fit:
Investment bonds have returned to favour of late and their earnings don’t need to appear on your tax return.
Earnings from the investments in the bond are excluded from personal income because the bond providers pay tax at 30% internally – meaning there is nothing for you to declare on your tax return. However, to receive the full tax benefit, you must leave your money in the bond for a decade.
Bonds can be suitable for; younger investors on tax rates above 30%, executives under the age of 60 who may have maxed out their super contributions or retired investors who can no longer contribute to superannuation.
Discretionary Family Trust
A trust is an investment structure that allows assets to be controlled by one or more people on behalf of the beneficiaries. A discretionary trust means that the trustee can nominate which of the beneficiaries receives the income and capital from the trust. This can be a good technique for high-income earners in the top tax bracket, as they can distribute trust income to family members on lower tax rates. You can even distribute income to beneficiaries with no other income and utilise their tax-free threshold.
There are some compliance costs you will encounter along the way and all decisions made by the trustee need to be properly documented, but these costs may be deductible depending on your situation.
An Investment Company
An investment company can serve to keep funds accessible and “liquid” outside of superannuation. However, you will not be able to access the 50% capital gains tax discount so it is may be more suitable for income producing assets to be held in a company rather than capital growth assets.
Assets such as managed funds, shares, direct property can be purchased in the name of the investment company (as opposed to personal names) depending on your risk profile and portfolio needs. When income is distributed, the recipient pays tax at their marginal tax rate less 30% company tax. This works in similarly to a discretionary trust in that you may wish to distribute income to shareholders on lower income tax rates – for example, someone that has only worked part-time over the year.
Whilst there are additional costs with setting up and maintaining a company, the benefits are the ability to choose the timing of the distribution to suit the individual and minimise tax payable.
Mortgage Offset Account
Placing your savings in a mortgage offset account has two major benefits for your wealth management. Say you have sold an asset and wish to hold cash for a short period of time; you may be tempted to place the proceeds into a high-interest savings account with returns between 1-2.5% currently. You will of course pay tax on the interest in this account.
Instead, you could invest the money in your mortgage offset account to reduce the amount of interest payable on your home loan. With variable base rates between 3.5-5% currently, you would save this amount in interest and also not need to pay any tax for the benefit!
After-Tax Superannuation Contributions
Most people may still benefit from pre-tax (concessional) contributions, also known as salary sacrifice despite recent cap changes. Given these contributions are subject to a maximum tax of 15% inside super as opposed to post-tax contributions which are subject to tax at your marginal rates prior to contribution; which can be above 47% for high income earners.
The key contrast remains for those investment assets held within your own name for more than 12 months. Inside super capital gains are assessed at 10% and earnings taxed at 15%; whereas outside super, capital gains are assessed at up to 50% (capital growth) and investment earnings (income) are again assessed at your marginal tax rate.
How We Can Help
The information, concepts and ideas used in this article are provided for general information only and should not be taken as constituting professional advice from Endorphin Wealth Management or Lifespan Financial Planning.
You should consider seeking independent legal, financial, taxation or other advice to check how this information relates to your unique circumstances. We cannot be held liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on, the information provided directly or indirectly or by use of this article.