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Minimising Your Tax

“Of course I minimise my tax, any Australian
who doesn’t needs their head read”

– Kerry Packer

Fact: most people spend more money on taxation than they do on their mortgage.

The biggest expense incurred by most Australians is taxation expense and the moment you start thinking about your taxes as an expense, as opposed to accepting it as a fact of life, is the moment you’ll change your approach to tax planning.

The purpose of this fundamental achievement is not only to reduce the amount of tax that you are paying, but to ensure that your financial affairs are structured in a way that takes the tax implications of your investment decisions into consideration.

Paying only the taxes you owe makes perfect sense. Yet many investors essentially miss the opportunity to reduce their tax liabilities by not planning ahead. Minimising the effects of taxation requires year-round planning that should always begin with an in-depth understanding of your financial situation.

That’s where an Equiti financial adviser can help.

Your adviser can assist you to create a financial plan that is sensitive to various taxation issues and can tailor a wealth management solution that uses your tax dollars to assist you achieve your goals and dreams rather than assisting the government achieve theirs!

Tax Planning 101

Here are three basic ways an Equiti adviser can assist you to minimise your taxes:

1. Reducing Your Assessable Income
Your assessable income refers to your gross income from all sources less any pre-tax adjustments that you may be entitled to receive. Since your marginal rate of tax is dependant upon your assessable income, this is a key element in determining your taxes and where your Equiti adviser will quite often begin your tax planning.

The number one way to reduce taxes is to reduce your assessable income. And one of the better ways to reduce your assessable income is to contribute more money to your superannuation via a Salary Sacrifice arrangement.

Salary Sacrifice contributions to superannuation will lower your assessable income, lower your taxes and increase your wealth all at the same time.

Here’s how it works: as an employee, you may nominate a certain amount of your pre-tax salary to be contributed directly into your superannuation. Therefore, you are essentially ‘sacrificing’ some of your salary and contributing that amount directly into superannuation.

Your reduced salary (being your gross salary less the amount that you have sacrificed) becomes your new assessable income for taxation purposes.

Your Equiti adviser can show you how a salary sacrifice arrangement can assist you to minimise your tax (and build your wealth via superannuation at the same time).

2. Increasing Your Tax Deductions
Your taxable income is another key element in your overall tax planning.

Taxable income is what’s left over after you have reduced your assessable income by any allowable tax deductions that you my have. Your taxable income is then used to determine the amount of tax that you pay.

Tax deductions can be broadly categorised into two types:

    1. Work related tax deductions; and
    2. Investment related tax deductions.

Whilst your adviser may not be able to help you increase any specific work related deductions that you may have, they can certainly assist you to identify a myriad of investment related deductions.

The Australian Taxation Office allows you to claim a tax deduction for any expense that you have incurred in generating assessable income. For example, if you have borrowed money to buy shares or an investment property, you would be entitled to claim the interest expense as an allowable tax deduction.

In addition to claiming the interest expense, you are also entitled to claim other costs that are associated with that investment; e.g. rates on property, depreciation of fixtures and fittings and any brokerage costs amongst many other things.

Your Equiti adviser can, through an effective wealth management plan, help you to identify many investment related tax deductions. This will help you to minimise your tax and to then direct those tax savings to a more efficient and productive use.

3. Taking Advantage of Credits and Offsets
Tax credits and offsets do not reduce assessable or taxable income. Instead, they reduce the tax payable on taxable income.

General tax offsets include dependant tax offsets, spouse tax offset, low income tax offset, medical expense offset, private health insurance rebate and child care tax rebates.

Another form of tax credit that specifically relates to sharemarket investors are the dividend imputation credits. The dividend imputation system has been in place for almost 20 years, yet the concept is still poorly understood by many investors.

Investors looking to minimise their tax can benefit greatly from imputation credits. Put simply, imputation credits (also known as franking credits) are a tax offset for Australian residents who receive dividend income from an Australian-based company.

Imputation is designed to avoid ‘double taxation’ of company profits.

Owning shares in ‘blue chip’ companies like BHP, NAB or Woolworths usually pay a dividend to their shareholders each year. These types of dividends, distributed to shareholders from the company profits on which tax has already been paid, are known as ‘franked’ dividends.

As shareholders are part owners of the companies in which they invest, tax paid by the company is considered to be tax paid by the shareholders themselves. As far as the Australian Taxation Office is concerned, this means that if the company has paid tax on its profits at 30% before you receive your dividends, then effectively YOU have paid tax on them at 30%.

Therefore, if you receive dividends on which 30% company tax has already been paid and your own marginal rate of personal income tax is also 30%, then you owe no further tax.

On the other hand, if your marginal tax rate is higher than the rate at which the dividends have been taxed, you will simply need to pay the difference and if your marginal tax rate is lower than the rate already paid by the company, you will receive a tax credit for the difference.

Tax planning is a year-long activity, not simply one that should be addressed immediately before tax time. With the help of your Equiti adviser, as well as the support of our tax and legal professionals, you can create a financial plan that considers taxes as part of your comprehensive wealth management plan.

Investment decision should be made with priority placed on suitability first and on taxation considerations second.