First off let me say I am not against paying tax. Paying tax keeps the economy moving forwards, funds the socialist side of our government and stops us from experiencing the hardship that parts of Europe have recently endured.


As a financial advisor a big part of my job is optimising my clients’ tax structures. I would like to share with you some of the ways I do that using this two part series


Deductible expenses
Purchases that are tax deductible would have to be the most commonly known way to reduce your taxable income. Depending on your occupation these could include work uniforms, safety equipment, stationary or larger purchases such as work vehicles. The general rule of thumb is for it to be a deductible expense the purchase needs to be a requirement of your job so you may produce an income.
I often get asked close to tax time if someone should purchase tax deductible goods to get a larger tax return. My answer is to think of it like it was on sale. If you need it or were going to buy it anyway then it makes sense. If you are buying it simply because it is cheaper then it doesn’t make much sense.

Investment bonds
Investment bonds are can be suitable for investors wishing for a long term investment at a reduced tax rate. Generally speaking bonds held for 10 full years will have investment earnings taxed at the company tax rate of 30%. This can be significantly lower than the investors’ marginal tax rate. There are rules that must be followed for this to happen so it is best to talk to us first before investing in any bond.

Negatively geared investments
If the cash expense on an investment is more than the investment income received in a financial year it is called negative gearing. The best example of this is a negatively geared investment property. The investor may receive $300 a week rent but the cost of the investment loan, rates, body corporate fees etc. may cost $350 a week. As the cash expenses are more than the income produced the investment is negatively geared.
The benefit of a negatively geared investment property is that the investors’ assessable income for tax purposes is reduced. In the example above the investors assessable income would be reduced by $2,600. The saving in tax could be used to pay down debt or buy another investment.
Negative gearing is only beneficial if there is capital growth. In the example above the investment property needs to go up in value and incur a capital gain when it is sold otherwise the investor is losing money. If the investor wished to increase their living expenses they would consider a positively geared investment.

Australian Shares
One of the great benefits of investing in Australian companies is that they are governed by Australian tax laws. Companies that make a profit can nominate to re-invest or pay dividends to shareholders. These dividends can be unfranked, semi-franked or fully franked.
If they are fully franked that means the company has already paid company tax (30%) on the income. Semi-franked means part of the income has tax paid components and unfranked means no tax has been paid. The benefit to tax paid income is that if your marginal tax rate is higher than 30% you have paid less tax on your dividends. If your marginal tax rate is lower than 30% then you will receive a tax refund. This can be optimised even further through use of strategic investment ownership.

Ownership Structuring
Superannuation, Pensions, Trusts, Companies and Individuals are all taxed differently. Superannuation is concessionally taxed at 15% on investment earnings which is why it is ideal for building retirement savings. Pension accounts receive tax free earnings and once the investor has reached age 60 can receive tax free income. Companies are taxed at 30% on their assessable income and can pay fully franked dividends to shareholders. Trusts are more complicated and any earnings can be taxed at the highest Marginal Tax Rate. For obvious reasons this is not ideal but can be beneficial to distribute income, capital gains and tax credits to beneficiaries.
This can be challenging to fully understand how each are assessed and taxed but with challenge always comes opportunity. Your Financial Planner in combination with a preferred Accountant can discuss how the use of different ownership structuring and tailor a package to suit you. The benefit of this is optimised tax structuring, income distribution and asset protection.

Superannuation
Unfortunately what I hear a lot is that people do not trust Superannuation and are not confident it will exist in the future. Superannuation is not an entity. You do not invest in Superannuation and your S.G. contributions are not owned by Superannuation. Superannuation is a tax structure. It is the Australian Government saying we want people to be more self-sufficient in retirement by investing more during their working lives.
The government has put in many incentives to do this with the main one being concessional tax treatment. There are benefits to these tax concessions from the start of your working career and throughout your retirement. If you are a long way from retirement the concesionally taxed investment returns will grow by a significant amount over your working life. If you are close to retirement and still do not have enough savings concessional contributions makes it easier to boost your retirement savings. While you are retired the concessional or tax free environment will ensure your funds last longer.
In return for these tax savings the investment have to be used for the sole purpose of saving for your retirement. No one wants to work forever and everyone working in Australia has Super. For this reason every person in Australia needs to talk to a financial planner about how they can maximise their retirement potential.
 
Estate Planning
They say there are two guarantees in life; Death and Taxes. Unfortunately even after Death taxes still go on. Did you know that after you pass away someone must complete a tax return for that financial year on your behalf? Depending on where the money is coming from, who it goes to, when and how will affect the taxation treatment.
By planning your estate distribution and putting legal contracts in place we can optimise any tax implications maximising how much is left to your family. You can also nominate when your beneficiaries receive funds from your estate and under what conditions. This is ideal for parents of very young children, mixed families and caring for people with special needs.

What to do next?
This blog has a very important purpose which is not to provide you with financial advice. I have not taken into account your personal circumstances, goals, time frame or cash flow situation.
What I want you to take away is that you need to challenge what you already know. Learn how you can do the same thing better leaving more money in your pocket.
Accountants report your tax situation, Financial Advisors plan it. Talk to the experts at Constancy Wealth Management by visiting their website. www.constancywealthmanagement.com.au





What you need to know


Constancy Wealth Management is an Authorised Representative and Credit Representative of AMP Financial Planning Pty Limited ABN 89 051 208 327 AFSL 232706 and Australian Credit Licence 232706. This information does not take your circumstances into account, so read the relevant disclosure documents and consider what’s right for you. If you acquire an AMP product or service, AMP companies and/or their representatives will receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details.


This post contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.