Saving you dollars and spending those dollars at tax time! What could be better.
There’s two things you can count on in life they say; death and taxes. Death I can’t help you with, but I’ll try my best to give you a few easy (legal) ways to try and take the wind out of the tax mans sails and keep more $$$ in your pocket.
Let’s mix things up a bit, some tips are to help you out right now as you are eagerly awaiting your tax return and considering all the goodies you are going to buy with it and some are going to help save your dollars going to that pesky tax man next year. I must be real here though, my tips aren’t going to be as exciting as a shopping spree or a holiday, but bear with me…. What’s that saying, they are the gift that keeps on giving. I promise you’ll thank me next year.
TIP 1- START USING THE LOWEST TAX INVESTMENT THE GOVERNMENT STILL LETS US DO.
How many times have I heard from someone “I went to a Financial Planner and all they told me was to salary sacrifice”, Boring!!! Right?
I get it, when you go in wanting to make millions and learn about all these sexy investments and walk out with the advice of salary sacrifice its pretty underwhelming.
Thinking about super and salary sacrifice, especially when you are young, is like going to the footy and spending half your time in line waiting for mid strength beer in plastic cups only to drink it warm. Like, you were at the game, but it wasn’t the fun you were anticipating.
However, this one is easy money. When you look at it simply, your super is just an investment, it’s invested in shares or managed funds which are making you money for your retirement. The good thing about this investment though and why Financial Planners preach on about it like it’s the Holy Grail is because of the TAX SAVINGS for you now AND in the future.
For every dollar you put into super you pay 15% tax. If you earn over $50,000 gross you are paying now more than 15% tax for every dollar you earn, so it makes sense if you can cut that percentage down that you’d do it.
The trade off of course is that if you are a sprightly young 30 year old (I have to say sprightly here to make me feel better about the years passing on by for me..) you won’t see this money for 30 odd years… it’s like watching your favourite ice-cream melt in front of your face and you can’t do anything about it right? Wrong.
Remember where I said the gift that keeps on giving.
Not only do you save tax personally for the financial year you put the money into super. You also continue to save tax within your superfund.
I mentioned above we pay 15% tax for every dollar we put into our super, that is also the amount you will pay on the earnings those investments make, if you invested the same money out of super you would be losing more of those hard earned, or well residually earned dollars to tax.
Here’s an example of investing $10,000 pre tax in and out of super, both examples earning 9% (this is keeping the calculation really simple guys, don’t get butt hurt over what if’s):
EXAMPLE 1- Out of Super
You are earning $70,000, you pay $14,297 tax from this, or 20.42%.
If you went to invest $10,000 out of super you would first pay tax on it, so say good bye to 20.42% of it, you now have $7,958 to invest.
In the first year your earn 9% which is $716.22. Your investment balance is $8,674.22 pre-tax.
Any earnings you make off investments then get added to your taxable income, the $70k. This means you now pay $14,530 in tax, an extra $233 tax.
EXAMPLE 2- Investing in super through salary sacrifice
You are still earning $70,000, but salary sacrifice $10,000 into super, therefore paying tax on $60,000 meaning you pay $11,047 in tax, or 18.41%.
This has already saved you $3,250 in income tax for the year.
Now, that $10,000 is invested in your super, you pay 15% tax for contributions to super so now this is $8,500.
In the first year you earn 9% which is $765. Your investment balance is now $9,265 pre-tax.
You pay 15% tax on earnings in super, so $127.50 is gone to tax.
Looking at these 2 examples; example 1 gives you $8,674 after the first year invested and $14,530 tax paid, and example 2 gives you $9,265 in the first year invested, and $12,674 tax paid.
Therefore, by investing in super verse personally you have saved $1,856 in tax which means you can have that extra money working for YOU, and earn an extra $591.
Add in the power of compounding interest to this and super just got a whole lot more exciting! Well I think so…
Why not save a bit of tax now to make your retirement years something out of The Wolf of Wall Street (pre-craziness) compared to a scene from Oliver; “Please sir, can I have some more?.”
Tip 2- HARASS YOUR ACCOUNTANT PRE TAX APPOINTMENT
Find all those receipts and claim like a boss!
Now this tip is for those that aren’t as crazy excited about tax time as me and aren’t already organised. I get it, it’s not everyone’s cup of tea.
Accountants will cringe reading this, but HARASS YOUR ACCOUNTANT!!! Before you go in to your accounting appointment, get your money’s worth and give your accountant a call to find out what you could/should be claiming. Each industry is different, so get the tips straight from the horse’s mouth on what you can specifically claim for your job rather than listening to old Bob down the road that has an opinion on everything and tells you all the facts with no idea.
Check if you can claim workwear for your industry, trips away for work related training/events, car expenses, a portion of your bills, god knows, I’m not an accountant so I don’t plan on listing every expense for you… but you know who loves figures and lists? Accountants, so get on their back.
It’s general practice as a business to sit down with an accountant before the end of financial year to look at ways to save tax, doesn’t it make sense to do the same personally?
The next tip is to not be so lazy that you don’t hunt down receipts or things to claim, I know it is boring as sin. But find any and all receipts you can to claim. Every dollar back in your pocket is a win. Take a quick trawl through your bank account transactions for the year and make sure there’s nothing you have missed in your shoe box pile of receipts (I say shoe box as a joke because I didn’t think people actually did this until I did my partners tax this year and he pulled out a trusty old shoe box, so I guess the saying really does ring true.)
However it is that you keep your receipts, find them, record them, claim them. If you don’t have a shoebox pile of receipts you’ve been keeping for the year, now is the perfect time to steal the box from your suit shoes, write all over it in permanent marker tax receipts for 2018/2019 and get yourself prepared for next years.
TIP 3- SAVE AND SPLURGE!
From now on, tax refunds will be trickling back into our bank accounts. Thanks very much tax man. When I think of this money coming into our accounts it reminds me of the good old stimulus package we got a few years ago which saw MASSIVE sales in widescreen TV’s. Let’s try and be a bit more productive than that with this year’s dollars. But what is the best way to spend those forced savings?
Well I’m a big fan of what I’m naming the ‘save and splurge’ method.
Most people already have plans for what to spend their tax dollars on, such as paying off debt, renovating the house, a holiday, and the list goes on. But what I want to put to you is whatever you are doing with your dollars, work in the save and splurge percentage of 80/20%.
I’m all for making you feel good and enjoying life, but only with up to 20% of your tax return….
For 20% do whatever you want; buy something nice for yourself, book a holiday, go shopping. I don’t mind, be selfish and do something for YOU! You deserve it right? Well I think you do.
BUT the other 80% you are going to be strict with, for this portion you are doing something to help you in the future.
These are the options in order of what you should do first.
- Make sure you have at least $2,000 in your buffer or emergency account, if you don’t use this to top it up to stop you from relying on credit.
- Pay off any bad debt- credit card mainly, but also consider car and personal loans
- Invest- This could be in shares, property, super, business, or whatever you want. You can start investing with as little as $1,000. If you aren’t sure how to go about this, it is where we come in so give us a buzz and we can run through a few options with you.
TIP 4- TO MAXIMISE TAX BACK and build wealth for the experienced investor.
Using your home to make you money!
For this tip I’m going to start with a disclaimer, it is not for everyone, what we are talking about here is using borrowed funds to invest in property or shares. Investing is a risk in itself and this heightens that risk, so absolutely book an appointment to talk about your circumstances and use this for what it is, to spark an idea and introduce you to other ways to use your money.
Alright, all seriousness out of the way, let’s get into the fun stuff, learning how to make more money AND save tax, double win!
If you are on a pretty good wicket with your income, find you are paying a fair bit of tax, have a bit of spare cash each week, and have paid off a bit on your house, this strategy could be for you.
Let’s say you have a $450,000 house and a mortgage of $300k, $90,000 of the house value or 20% we can’t use to invest because that’s the banks security, but the remaining $60,000 is what we call your available equity. You can release this in a line of credit or term loan to use for investments. But the reason this is so handy is because once invested, the repayments on this loan are tax-deductible. You are using money which would be otherwise just sitting there to it’s full advantage, that $60k is now invested therefore the value of your $60k is increasing from the growth of your investment, but you can also use the income from the investment to pay off the loan, so it costs you nothing at all to have this extra investment, get extra tax savings, and maximise your wealth.
If you want to read more about using your equity in your home to invest in property, then check out this oldie but a goodie of an article I’ve previously written. The above example is more explaining how it works for shares, however the principles are the same for property.
For the last few tips here is some punchy ideas to get the brain thinking about any last ditch attempts to claw your money back from the tax mans hands.
TIP 5- Make sure you have a depreciation schedule for your investment property
If you are my client and you don’t have a depreciation schedule for your investment property I’m definitely doing something wrong because I harp on about this constantly. Although the rules have changed there’s still tax savings to be had. Contact our friends at BMT for a free estimate on the depreciation you could be claiming
TIP 6- Catch up on any overdue tax returns from past years
My OCD has a mini freak out when tax returns aren’t up to date, I’m one of those people that do them ASAP. Hearing that people have 2, 3, 4 or more years of tax returns to lodge makes my heart hurt, for 2 reasons; how annoying it must be to keep all those receipts and not know if you are sorted, and for the potential dollars you could be missing out on.
If you have outstanding taxes, book an appointment with an accountant NOW and sort them out, I promise it will make your heart feel better.
TIP 7- Make sure you are claiming the tax-free threshold from your main employer
When you get a new job and fill out the tax form there’s a little tick box asking whether you want to claim the tax-free threshold, you should do this for your first job. You aren’t going to be penalised if you don’t do it, but your employer will put more money aside for tax over what you need too, you do get it back at tax time, but why not have those dollars in your bank account throughout the year rather than theirs.
TIP 8- Don’t forget to claim the cost of last year’s tax.
As I’m writing, this popped into my head and I realised I don’t think I included this in my deductions so I’m off to dig my receipt up and send it through. Don’t forget to claim what it costs you to lodge your tax.
TIP 9- Pre-plan investment sales with your Accountant and Financial Adviser to save on Capital Gains Tax
When you sell shares or an investment property you will likely pay capital gains tax, this can be significantly reduced with a bit of pre-planning. If you are going to sell an investment in the financial year, have a chat with your accountant and financial planner first to see what the capital gains tax implications are for you and if there’s anything that can be done about it.
That’s all for this year, keep posted at this time next year for some new fresh tips.Share