1. Pre-pay interest and small asset write-offs
Individuals not in business are able to prepay interest on loans used to purchase income-generating properties or dividend-paying shares. This gives the investor an opportunity to bring forward a sizeable tax deduction to reduce taxable income. This can be particularly useful if one has extra income in the relevant year due to inclusion of a large capital gain. Individuals can also write off expenditure on small asset acquisitions costing less than $300 outright that relate to income-earning activities.
2. Superannuation
Superannuation still represents a wonderful tax planning opportunity for most investors. Whether you are self-employed or an employee, the tax benefits of investing surplus funds into super are hard to ignore. High-income earners will always find the differential between their marginal tax rate and superannuation fund tax rate of 15 per cent hard to pass up. If you are lucky enough to have your own self-managed superannuation fund (SMSF), which is invested predominantly in listed shares paying fully franked dividends, then the super fund may not even be paying any tax or even better, receiving a tax refund. The government intends to reduce concessional contributions for those over 50 years old to $25,000 who have a super balance over $500,000, so it is important for those over 50 to maximise their concessional super before the new rules kicks in. It is disappointing the government is restricting deductible super contributions for those over 50 as $500,000 is not a high threshold. Even low-income earners are encouraged to make an after-tax contribution to super as they may be eligible for a tax-free co-contribution benefit of up to $1000. The only downside for the co-contribution is that the tax-free contribution made on your behalf by the government is locked away until retirement. However, as far as investments go, it can't be beaten. Invest one dollar and receive one extra dollar tax free, which has to be the best risk-free investment available. This strategy works well when you have both a high and low-income earner within the family unit. Along the same lines, there is also the opportunity to claim a spouse rebate for super contributions made on behalf of a low-income spouse. The spouse rebate is worth up to $540 for the wife or husband.
3. Salary packaging
Talk to your employer and see what can be salary sacrificed outside of super. Some employers (not-for-profit sector) receive special fringe benefits tax (FBT) concessions, so it is important to maximise any such opportunities. There are other FBT benefits available to all employers that should be looked into as their inclusion in a salary-sacrificing arrangement can result in significant after-tax improvements in take-home pay. There are benefits that are exempt from FBT and then there ones that receive concessional treatment, such as motor cars. Both these types of benefits should be looked at for inclusion into salary-sacrifice arrangements. Employers can also benefit from salary-packaging opportunities as labour on-cost (work cover/payroll tax) can be lower under such arrangements.
4. CGT discount/investment in LICs
Hold onto investments for more than 12 months before you sell to take advantage of the capital gains tax (CGT) discount. Investors often forget their CGT bill will be halved if they wait a little longer than 12 months before they get the temptation to sell. An often overlooked benefit in holding shares in listed investment companies (LIC) is the ability to claim an extra tax deduction. LICs are not entitled to claim a 50 per cent CGT discount when they sell shares, but can transfer this benefit to shareholders. The entitlement appears as a notation on the investor's dividend distribution statement, which is often overlooked.
5. Entity holding investment assets
The last tip and probably one of the most significant tax planning strategies is to look at which entity within the family group holds the investment assets. This is the tricky one as you need to take into account what is the most important driver for your circumstances - asset protection, income-splitting flexibility, succession and estate planning. It can be as complex as setting up a discretionary trust or as simple as putting assets in the name of a low-income spouse. Each option has its own benefits and disadvantages. Discretionary trusts are particularly useful as they tick most of the boxes when it comes to income splitting, asset protection, access to CGT concessions and succession planning. Advice from a suitably qualified adviser is recommended to help you sort through the maze.
Written by: Tony Greco, National Institute of Accountants senior tax adviser
