Tax Planning – Start now!
August 2008
So you’ve just got your group certificate, gathered your bank statements and sorted out your receipts. You’re ready to do your tax return for 2007-2008.
Let’s look forward instead!
We now have 12 months to get our deductions in place and increase the size of our return. And there are some simple things we can do to make a bigger return a reality.
1. Income Protection Insurance
This type of insurance pays us at a time when we need it most – if we are too ill or disabled to be able to work. Sure we could rely on disability pension for long term illness if you are prepared to live on what the pension provides. And if you are injured at work WorkCover might cover this, but it won’t cover an illness or something that happens on your own time.
Income Protection makes sure that you get 75% of your pre-disablement income if you are ill or disabled and cannot work. Most contracts also offer a range of benefits for rehabilitation or the like to help you get better sooner.
Most importantly though the premiums are tax deductible. So not only will you cover an important life risk, you’re also saving tax by doing so!
2. Borrowing to invest
While we have seen some ups and downs in investment markets recently, borrowing to invest is still a good idea, particularly in the current market environment.
By borrowing to invest, your interest payable on the loan is a tax deduction for you. Your investment can be structured to provide you with some additional tax credits as well. In addition, any gains on the investment (not the income received) if held for over 12 months will only see half the gain taxed, and then only when you redeem the investment.
Loans can be structured against your own funds or you can use equity in your own home for this purpose – the interest will still be deductible for you. But just be sure that the interest is affordable. While you may be nervous about borrowing, here are a couple of tips that help reduce the chances of a loan being recalled:
- Keep the borrowing at a low portion of the total investment (i.e. if you have $10,000 you might borrow only another $10,000 for a $20,000 investment (a 50% loan to value ratio)
- Structure the investment to reinvest the income payable from the investment back into the investment – this will increase your equity in the investment and lower the loan to value ratio)
3. Tax-effective investment
Some investments have tax office rulings that provide the money invested will be a tax deduction for you. Mostly these investments are in plantation projects.
These investments are given the tax deduction because they are seen to be in markets the government is wishing to promote. Other benefits too are that these projects will provide carbon offset and help to reduce greenhouse emissions.
While the actual investment provides the tax deduction, these investments may be funded with borrowed amounts. If it is funded in this way, not only will you receive the deduction for the investment but for the interest on the funds borrowed to make this investment.
Can’t wait until next July?
A major benefit in considering your tax planning well in advance is that you may apply to your employer for a taxation variation to your take-home pay. If you can plan well, this is a great benefit to your cash flow.
Employers have to take tax from your pay to give to the government on your behalf. If you know in advance what deductions you will have you can ask that your employer take these into account and instead of waiting to receive your tax refund after the financial year you can receive a portion of it with each pay.
Pay off your home faster!
A great strategy in times of uncertain interest rates is to pay that extra amount received each pay off your home loan. This will help reduce the loan principal and therefore reduce your interest. With interest reducing each time, more will be paid off the principal each time, thereby accelerating the repayment process.
If you save to make a tax-effective investment, put these funds off your home loan also and use your redraw or home offset account to hold the funds. Again, this will help reduce the loan principal which reduces the interest and … well, you know the rest.
Do your research.
There are many products in place for income protection, lending and investing and it takes time to look through all of them. Be sure to use the services of a licensed financial adviser to make sure you get the product that is right for you. By the way, their review fee should be tax deductible also!
