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Tax Strategies - Big Sky Financial Solutions

Tax Strategies



Minimise your tax liability

When it comes to paying tax, your responsibility is to pay as much as you are legally required to pay – certainly no less, but definitely no more! So while avoiding tax is an absolute no-no, minimising the amount of your taxable income and ultimately, the amount of tax you pay is a legal and financially prudent principle.

And you don’t need to be on the rich list to implement sensible tax planning actions. Here are several ideas just sitting within your existing situation that you may not have thought about:

Married couples
Take advantage of the tax-free threshold
It makes sense to transfer any substantial cash reserves into the name of the spouse with the lower earnings.

Here’s an example. Mary is a company executive. Husband George has taken time out of his career to write a book and is currently not earning an income. The couple have $100,000 in a bank term deposit in joint names paying 6.5% pa, which results in assessable income of $6,500.

Mary’s salary puts her in the tax bracket of 40%. So any additional income earned, such as her half share of the bank interest ($3,250), will also be taxed at that rate. Simply by transferring their joint money in the bank into George’s name, the couple can save $1,300 in tax (not taking Medicare Levy into consideration).

Contribution to spouse’s super rewards with rebate
Here’s a top way to provide more financial security for your spouse and slice a chunk off your own tax bill.

If your spouse earns less than the Government set limits and you make a contribution to his or her Super fund, you’ll be in line for a tax rebate. Certainly well worthwhile for both reasons! (By the way, there is no limit to the amount you can contribute to your spouse’s super. However, the rebate is limited by the Government each year.)

Individuals and families
Keep count of medical costs
The tax law provides for a tax offset (rebate) where net medical costs (i.e. the cost to you less any refund from Medicare and your private health insurer) exceed the government set limit over the financial year.

These costs include hospital charges, fees for doctors, physios and chiros, and a host of other therapeutic practitioners and pharmaceutical costs. There are some restrictions and limitations on what falls within the rules for this rebate, so it’s well worthwhile talking to your adviser, but if you’ve spent the money on medical costs, you’re certainly entitled to get the benefit of the tax concession.

Protect your income
You’ve heard it before. Your ability to earn an income is your most important asset. But are you protecting this asset like you do your home, your car or your personal possessions? If you’re like most Australians the answer is ‘probably not’, which means you leave yourself and your family open to potentially disastrous financial disruption if, because of accident or illness, you can’t claim your regular pay packet.

Most money experts agree that having income protection insurance, which generally pays up to 75% of your usual income, is a must. And the premiums are tax deductible.

All the reasons in the world to have the protection and a tax incentive to boot!

Employees
Even little costs can add up to good tax savings

1. Home office use
Taking work home is often unavoidable, so make sure your tax return reflects the additional cost of having a home office. The Australian Tax Office (ATO) sets a guide to reasonable home office costs each year. Might not sound much, but every little bit helps whittle down your tax bill.

2. Salary sacrifice
Here the principle is to reshuffle the way you are paid to gain longer term benefits and reduce your taxable income in the short term. Many people opt to move a bigger chunk of their salary package into super, boosting their retirement income earnings and reducing tax at the same time by moving to a lower tax bracket. Your adviser will be able to help you work out whether this is an appropriate strategy in your particular circumstances.

Talk to your adviser about some of the other items your Employer may be prepared to fold into a salary sacrifice/salary packaging arrangement. A “laptop” or a "car" are some possibilities you may want to consider.

3. Employee share option plans
Here’s another one to discuss with your tax adviser. If you’re entitled to participate in an employee share option plan (“ESOP”), which can be a very sound way to build up your long term investment portfolio, you may be eligible for a tax concession under Section 139E of the Tax Act.

Foreign pension recipients
Make sure you’re only including what you must
Australian residents receiving a pension or annuity from another country must include that income in their Australian tax return. However, the deductible amount relating to that pension is excluded from assessable income. In a nutshell, if you’re getting a pension or annuity from overseas, talk to your adviser to make sure you’re only being taxed on the assessable part.

Property investors
Dig a little deeper for all the deductions you’re entitled to
It’s usually well worth the cost of a quantity surveyor’s report on your investment property. Not only will the cost of the report be tax deductible, but chances are it will unearth deductions which are sitting there ready to be used to reduce your taxable income.

Investors
Take advantage of franking credits
There are a variety of reasons to choose one share over another. The payment of franked dividends is likely to be one. Where all else is equal, if company A pays fully franked dividends, which means 30% of the tax on that income is already paid, and company B doesn’t, company A will provide you a better tax outcome.

Hang in there to reduce Capital Gains Tax
Certain assets, including investment property and shares, attract Capital Gains Tax (CGT) when you sell them. However, if you hold them for at least a year before you sell, you will be entitled to a 50% discount on the capital gain.

Therefore, if you make a $100,000 capital gain on the sale of an investment property, you will only be assessed on a net capital gain of $50,000. This could translate into lower CGT than would have been the case if you’d sold before the year was up.

Remember to claim borrowing costs
The cost of borrowing, which may include establishment fees, lender’s mortgage insurance, search and valuation fees and the like, to finance an investment are deductible. However, unless these expenses are less than $100, which is pretty unlikely these days, you have to spread the total cost over the term of the loan or 5 years, whichever is the shorter.

All taxpayers
Seek professional advice to make sure you’re claiming every tax benefit and concession you’re entitled to. To contact a Big Sky Financial Solutions Financial Planner call 1300 700 189 or email us.