Unless you’re rich and famous, it would seem there are few ways to shield your hard-earned cash from hefty taxes. This may just be the best tax haven on earth though. And best of all it’s not impossible for you to use — and you don’t have to go offshore because tax-minimisation strategies are legal in Australia.
You need only look to superannuation and property to find some of the best tax haven benefits on earth.
Take superannuation. It’s as simple as understanding how it is taxed to take advantage of concessions that can reduce your liability. Super is taxed in three strategies: when money goes in the fund (contributions); while it sits in the fund (investment earnings) and when it leaves the fund (super benefits).
Some tax-effective strategies not only reduce the liability at all these stages, they can create a zero tax environment. And you don’t have to be on a high income to benefit.
For those earning $50,454 or less per year (before tax) who make after-tax contributions to their super under the co-contribution scheme are eligible to receive matching contributions from the government. Something for almost nothing.
On earnings less than $35,500, for example, the maximum co-contribution is $500 based on $0.50 from the government for every $1 contributed. In effect, you make a 50 per cent return. Try getting that from a term deposit.
Low and high-income earners can reduce tax using pre-tax dollars through salary sacrificing. This is when your employer redirects a portion of your pay as a contribution to super. By sacrificing some of your before-tax salary and putting it into your fund, you’re taxed at only 15 per cent.
There are caps on the amount you can contribute to super in any one year but the tax savings from making pre-tax contributions through salary sacrifice is one of the easiest strategies to decrease the tax you pay while increasing your super returns.
The more you put in super the less you pay in tax because income earned in super attracts a maximum rate of 15 per cent. The amount of tax a fund pays depends on whether it has any tax deductions or credits. For example, a growth fund may only pay 7 per cent tax because its dividend income entitles it to tax credits. So it is also good to know in most cases there are no additional tax payable when transferring from one super fund to another to consolidate or switch funds.
There are tax benefits when you become eligible to access your super. Whether you opt to take a super income stream to provide a regular income, or withdraw all or part of your benefit as a lump-sum, in most cases the money incurs no tax.
If you’re eligible to transition to retirement, once the fund starts paying a pension the earnings on the investments become tax-free, along with any money taken out of the fund. In effect, it creates a zero tax environment because the contribution forms part of the “non-taxable component” within super. If you transition before age 60, this portion of income is also tax-free.
Power of property
One of the most popular methods to reduce tax is to buy an investment property. Under the right circumstance, the strategy of negative gearing not only can help cut your annual tax bill but it may also attract a capital gain. This often works best for high-income earners as gearing involves funding a purchase with debt. The loss is deducted from your annual income, which reduces the amount of income tax you’ll pay.
The success of gearing an investment property also depends on making the most of depreciation and expenses. Therefore, it’s important to know what is deductible, what’s not and when to claim or pay for it. For instance, you can prepay interest on an investment loan up to 12 months in advance, then claim the deductions against your salary in the current financial year.
Another way to maximise spare cash is through an offset account on your investment mortgage. Not only can it reduce the interest you pay, it can also shorten the loan term and you won’t have to declare the interest savings as income.
If you are looking to preserve your hard-earned dollars via tax-minimisation strategies you should seek expert advice. Allied Investment Group can put you on the right path to make the most of your earnings. Call 1300 886 149 to find out how.