Finding ways to cut your contribution is an all-year task, writes Anthony Keane
Tax time has finished for another year, but anyone who wants a wealthier future should be looking at minimising their taxation costs all year round. Savers, investors and retirees have access to many tax breaks on the personal finance front that can save thousands of dollars now, and much more once they retire.
Financial strategist Theo Marinis says when it comes to tax breaks, people are “often settling on a she’ll be right mate” attitude and missing out on money-saving opportunities because they just don’t know about them and fail to seek advice. “Ask questions,” is his simple message.
Here are some samples of tax breaks people should be thinking about all the time, not just in the June rush.
Financial advisers say super is the king of all tax breaks, with just 15 per cent tax payable on income within your fund (compared with marginal tax rates outside super of up to 46.5 per cent) and the chance to save thousands of dollars a year through salary sacrifice.
Marinis says super is “not particularly sexy” for young savers, but its appeal increases dramatically the older we get. “It is the biggest legal tax-free arrangement in Australia, the world probably, because when you get to pension age you don’t have to pay any tax at all.”
Salary sacrifice enables employees to pump some of their gross salary into super, paying tax of 15 per cent rather than their marginal tax rate. It works best for people on higher incomes, but remember there are government limits on how much of this type of contribution you can put in each year before being stung by penalty taxes.
Self-employed people can cut their tax bill by making tax-deductible contributions into super every year.
AMP financial planner Mark Haynes says our super system offers generous tax breaks for retirees, or anyone over age 60 who uses a transition to retirement strategy. Retiring super fund members can choose to switch their super from accumulation phase into an account-based pension, which is still commonly known as an allocated pension.
“Investment earnings of any amount from pension income within a super fund are completely tax free,” Haynes says. The catch with these pensions is there are aged-based minimum withdrawal limits, starting at 4 per cent of your account balance for age 55-64 and rising to 14 per cent for those aged over 95.
Golsborough Financial Services director John Oliver says people have no obligation to switch from the accumulation phase – paying 15 per cent tax – to the tax-free pension phase, and some well-off retirees would rather pay the tax than draw down money they don’t need. “I would suggest people consider starting an account-based pension when retired rather than leaving it in super, but first consider your overall tax position,” he says.
More flexible than super but with not quite the bang for your buck, insurance bonds can be a handy tax break for higher income earners because they are tax-paid investments, where earnings are taxed in the bond at 30 per cent and do not affect the investor’s taxable income. “Think of it as the most tax-effective product after super,” says Ian Campbell, managing director of KeyInvest.
“If you are on a higher tax rate than 30 per cent, there’s a tax effectiveness.” Campbell says insurance bonds are good for education savings or leaving money to grandchildren outside of a will, but they are best used over a 10-year time frame so may be unsuitable for some.
Dividends paid by Aussie companies are commonly fully franked, which means the company has already paid 30 per cent tax on its profit so the investor does not have to. The franking credits that come with dividends deliver a bonus to super funds and retirees, who get a refund of any of the 30 per cent company tax paid in excess of their own tax rate.
People saving up to buy a home can consider a First Home Saver Account, where interest is taxed at just 15 per cent. The Federal Government also makes a contribution of up to $1020 each year, but understand the rules before jumping in. Another savings account strategy to cut tax is for couples to structure their accounts correctly, Goldsborough’s Oliver says. “You should have the interested credited to the person who is paying the least amount of tax.”
Controversial, dangerous, but also potentially powerful when asset prices are rising, negative gearing is when you claim a tax deduction for expenses, such as interest paid, that exceed income generated by an investment. This means the investor relies on capital growth to make money, as they only get their tax rate back on the investment losses – not the full amount lost.
“It’s a big tax break, but if you make a loss and get a tax deduction, it has still cost you,” Oliver says.
REBATES FOR SENIORS
AMP’s Haynes says as well as benefiting from a tax-free super income, a retiree also can earn other sources of income that have tax concessions.