Though the end of the tax year passed already, I thought that I would begin my series with a run through of some of the tax planning opportunities that you can go through to legally reduce the amount of tax that you have to pay. There is no use waiting to next June - do it now.
Tax is inevitable - if you are earning money - so even though we all have to pay it there is no reason why you should pay more than your fair share.
Investments should be in the name of the family member who pays the least amount of tax.
We are very limited with the amount of income splitting that we are legally able to achieve, however we can at times reduce the amount of income that we pay as a family.
If you have a share portfolio, or a positively geared rental property then these should be held in the name of the lowest earning person in your family - excluding children under the age of 18. The income that is earned from these investments then incurs tax at the marginal rate of the lowest income earner - thus reducing the amount that the family will pay.
This is an excellent strategy, however even the strongest marriages sometimes hit hurdles, so to continue to maintain control over these assets, but still enjoy the benefits of the income splitting, then you may want to consider setting up a family trust. If you set it up correctly - your accountant can help here - then you will still be able to control what happens with the investment - sell or buy more shares for example, but you will be able to legally split the income with the lower earning family members and enjoy the best of both worlds!
It does throw a little more complexity into the mix however it is an excellent strategy to legally minimize the amount of tax paid by the family unit.
Try to salary sacrifice some of your salary into tax free benefits.
Salary sacrifice works whereby you enter into an agreement with your employer to allow you to get a non-cash benefit by giving back some of your salary.
Salary sacrifice has traditionally been limited to high income earners in senior management, or for superannuation, however there are great benefits to be had for many people, at all income levels.
Anything which would be a tax deduction for you personally can be salary sacrificed. The effect of this is that you pay no tax at all on the income. A list of items that can effectively be salary sacrificed include: laptop computers, PDA's and electronic diaries, interest on a rental property, seminars and courses related to your employment, car operating expenses and the list goes on.
As an added benefit, if your employer is registered for GST then the amount that you sacrifice is reduced by the GST in the price of the benefit. As the employer is able to claim the GST back from the ATO, there is no need for you to repay that amount- what a great bonus!
There are a great deal of options for many people to pay no tax on items that they genuinely need and are already spending money on - so talk to an accountant or your HR department and see what options you have.
Capital Gains Tax (CGT)
I personally hate CGT - with a passion. Basically, CGT is payable when you make a profit on an asset that you own. There are some concessions in the Income Tax Assessment Act to allow you to reduce the amount that is payable, but basically if you make a profit then you will pay.
The most common question that I get asked is: How much will I pay? The answer is simply not that easy - are there any easy Tax answers?
Let's work through an example to highlight how it is calculated.
Let's assume that Bob sells some Rio Tinto shares for $10,000 which he paid $2000 for, 3 years ago. He currently earns $60,000 a year from his employment.
Bob has made a capital gain of $8,000 (10,000 - 2,000).
As he has held the shares for more than 12 months, Bob is entitled to a rebate of 50% of the tax payable. So we then take the $8,000 multiply this by 50% to get $4,000 and add this to his income of $60,000 to get a total taxable income of $64,000. Bob is then taxed on the $64,000 and will pay tax according to the marginal tax rate that he currently on (in Bob's case 30% - so $1,200 would be payable on the gain.)
To illustrate how it changes, let's assume now that Bob actually earned $180,000. He would then be charged CGT at 45%, meaning that he would pay $1,800 on his capital gain.
So how do we reduce it?
This is not easy but there are some strategies. Let's say that Bob had some ABC Learning shares where he was $8,000 down on his investment - he could sell those shares prior to the end of the year which would create an actual loss, and then buy them back - say the next day. This would allow him to claim the $8,000 loss against his $8,000 gain to produce a net result of zero - thus meaning that for the simple cost of two share brokerage fees, he has reduced the amount of tax payable - all legally.
Certainly a family trust would help ease the issue - to a degree. The gain could be sent to the family member with the lowest tax rate to minimize the amount of CGT paid.
In all cases it is imperative that you keep proper records of every transaction that you make, and any improvements that you make to the asset. Having the correct records will ensure that you have the best chance of giving your accountant as much information as possible to limit the tax that you have to pay.
Don't prepare you own tax return - you WILL miss opportunities to claim deductions.
Unless your tax return involves simple salary and little else then I would strongly suggest that you get a good tax agent to help you complete your tax return. For as little as $80 you will get someone to run through a checklist of the normal items for the tax payer that you are, that at the very least will highlight some of the deductions available to you - which you had not thought of and would not have claimed if not for their advice.
Make sure that the agent that you select is the right one for you. As a minimum I would suggest the following criteria:
* All Tax Agents must be registered by the Tax Agents Board so ask to see their registration certificate.
* Make sure that you feel comfortable with them. They should take time to explain things to you and should not try to rush you out of their office.
* You pay for what you get so don't select on price alone.
* Get a referral from family or friends - these are the best source of information.
* Complex tax questions may need to involve more than just your tax agent. If they need to refer to a colleague or to a specialist then this shows that they have a network that they can rely on - and you will get the best result.
* A good tax agent will point out to you that unfortunately when we make money we have to pay tax. Every deduction that is claimed should have substance behind it and they should not be allowing "iffy" claims through.
* Not all accountants are tax agents - I have personal friend who is an accountant of 25 years standing - and he does not prepare his own tax return! The point is: make sure that the agent that you select is the right one for the job.
A word of warning - Tax Agents are not responsible for the correctness of the Tax return lodged. As the taxpayer you sign a declaration that says that you have provided the information and that it is correct. You are responsible for what you sign - so make sure you are happy with every aspect BEFORE you sign!
We all have to pay our fair share of tax - but this does not mean that you have to pay more than what is fair. Your own morals and value system will determine what you are prepared to do to minimize the amount of tax that you pay - however nothing will replace good planning and good advice.