11 February 2020
If you’re like most Australians, then you probably put off thinking about doing your tax until the end of the financial year as you start to receive reminders from the ATO. At AR Advisors, we know that being proactive will only benefit your personal tax planning journey, paying off to think ahead.
Here we’ll look at what personal tax planning is and how it can benefit you. We’ll also explain some of the tax planning strategies that you can put in place.
Tax Planning vs Tax Evasion
While both tax planning and tax evasion refer to methods of minimising the amount of tax you end up paying, there is a very important distinction between the two. Tax evasion, as the term suggests, involves the use of illegal schemes to avoid paying. Engaging in such activity exposes you to the risk of severe financial and legal penalties, which as financial consultants, we do not encourage.
Tax planning, on the other hand, makes up of a range of existing concessions, exemptions and rebates to minimise your tax liabilities. At AR Advisors, we instill that being properly informed and looking at your taxes as part of your overall yearly financial plans, will make it possible to reduce your tax burden and stay on top of your personal finances.
Tax Planning Strategies
The tax planning strategies available to you will vary greatly depending on your individual circumstances. The following are some commonly used methods of reducing personal tax liabilities.
Incorporating Investment Strategies
All income from investments form part of your assessable income, though determining which mix of assets to leverage is a very personal one. At AR Advisors, we work closely with our clients to select assets that are tax-effective or use gearing strategies to assist in evening out expenses and income (or even generate a loss).
As an example, some property investors use negative gearing strategies to generate a capital loss to reduce their tax burden.
Income Deferral
Depending on your employment situation, it may be possible to defer the receipt of your income until after the financial year closes so that it will be included in the next financial year. As consultants, we help to determine if a deferred compensation plan is viable for our clients, ensuring assets and liabilities are accurately reported.
Maximising Your Superannuation
A lot of people don’t realise that it’s possible - and in many cases advisable - to make additional contributions to your superannuation fund. Concessional and non-concessional super contributions and spouse contributions are tax-deductible (providing that they fall within the contributions cap).
By paying extra into your super fund, it allows you to deduct that amount of money from your assessable income. For example, if your annual gross income was $100,000, you could choose to pay an additional $25,000 into your super account (which is the maximum concessional cap amount). This would mean that your assessable income would now be only $75,000, which would bring the marginal tax rate you pay down from 37% to 32.5%.
The ATO have recently introduced the unused concessional cap carry forward. From 1 July 2018 if you have a total superannuation balance of less than $500,000 on 30 June of the previous financial year, you may be entitled to contribute more than the general concessional contributions cap and make additional concessional contributions for any unused amounts. If previous years concessional contributions have not been used this strategy could reduce your marginal tax rate even further.
Work Smart & Think Ahead
While it might take a bit of extra planning (and a solid knowledge of the Australian Tax Code), personal tax planning can deliver some outstanding benefits and help to greatly reduce the amount of income tax that you pay.
If you make it part of your yearly financial planning regime, these benefits will really add up over the course of your lifetime (and can help to contribute to a much more comfortable retirement).
At AR Advisors, we love to put our outstanding of personal tax knowledge to good use by helping our clients implement personalised tax planning strategies. Get in touch with us today to find out more about how we can help you get ahead of the game and get on top of your taxes.