Apart from your mortgage, paying income tax is your biggest yearly expense. The financially savvy know that best way to save is to reduce your expenses, and just like cancelling old subscriptions to save a pretty penny, the tax you pay can also be (legally) reduced.
Discretionary Family Trust / Testamentary Trust
A discretionary trust is a type of trust account where the trustees are allowed to distribute monies to the trust fund’s beneficiaries. Tax benefits, protection of assets against creditors and succession planning are ideal outcomes for a discretionary trust. Monies can be paid to lower tax bracket beneficiaries and tax paid at a lower rate. This is particularly useful if you’re a high income earner and plan to reduce the tax you pay by dropping your tax bracket.
Capital gains that are made can be distributed amongst beneficiaries. Beneficiaries are entitled to a 50% discount on capital gains if the assets are disposed of after one year.
A testamentary trust is a form of discretionary trust and it established under a valid will. The trustee can stream or split income amongst beneficiaries in a way that minimises the overall tax paid on the trust’s income. Income paid to each beneficiary is then taxed at the individual’s tax rate. Beneficiaries over 18 years typically, can receive up to $18,200 without incurring any tax payable.
A prepaid expense is an expense that can incur costs for products or services that come later on in the financial year, both whole or in part. A prepaid expense is tax deductible over the ‘eligible service period’ (not exceeding 10 years). Pre paid expenses move your deductions forward and reduce your taxable income, giving you a higher tax refund.
Pro Tax Tip: You can pre pay up to 12 months of a tax deductible expense, but not exceed 12 months. Types of pre-paid expenses include rent on a commercial space, small business insurance policies, equipment, salaries, estimated taxes, some utility bills and interest expenses.
An insurance bond, or investment bond is a managed fund and are taxed at 30%, which is lower than most marginal tax rates. They are considered pre paid investments. The life insurance company pays tax on the earnings and after 10 years you can withdraw the value of the bond with no further tax payable. There is no requirement to declare interest or capital gains when you lodge you tax return.
Pro Tax Tip: Withdrawals can be made at any time however, you may be liable to pay some tax if the withdrawal is made within 10 years from the start of the bond period.
With one out of three Australian’s owning shares, it’s common to receive dividends. In Australia, dividends can be tax-friendly, especially with franking credits. A franked dividend is profit paid to shareholders after a company has paid company tax on their profits. The dividend notice a shareholder receives includes the term ‘franking credits, which is the amount of company tax related to the dividend.
When you lodge your tax return, you’ll need to include the dividend received plus the franking credit. You’ll receive a tax credit for the value of the franking credit, which can be offset against other income. If your franking credits are larger than tax payable, you’ll get a refund of the excess credits.
The tax year runs from 1 July to 30 June. Timing is a critical part of reducing taxes. As well as pre paying expenses, income can be delayed into the next financial year to reduce taxable income. Any expenses and income before or after those dates can control how much tax you’ll be obligated to pay. Delay projects, buying and signing on the sale of a property, or purchasing shares or cryptocurrency in the next financial year if feasible.
Pro Tax Tip: Be aware that this might only delay tax being paid. It’s best to seek professional accounting advice when considering delaying income for tax purposes.
Delaying the sale of an asset can also reveal Capital Gains Tax (CGT) benefits. If a sale is going to result in a capital gains event, you can ensure the sale takes advantage of CGT concessions. A 50% discount is available on CGT assets held for more than 12 months. Small business owners who are aged 55 year or older and have owned business assets for at least 15 years and retire are exempt from CGT on the disposal of assets.
Pro Tax Tip: If your income fluctuates, choose to sell an asset in a year you expect to earn a lower income as your CGT will lessen your overall tax liability. Losses can be carried forward and taxes reduced if prepaid deducible interest is paid.
A ‘death tax’ might be unintended, but it’s there none-the-less. Superannuation benefits paid on the death of a member are tax-free for a deceased member’s dependents, however if a member survives their adult children they are subject to pay a 15% tax on lump-sum payments.
A recontribution strategy using a separate pension or drawing down super before a member’s death will minimise tax obligations.
Pro Tax Tip: Clear instructions should be included in a will for any Power of Attorney in the event of incapacity.
There are some clear tips to reducing tax, but other means of tax reduction require planning and advice for your personal circumstances. An experienced tax accountant will advise immediate and long-term strategies for reducing tax legally. Multiple factors need to be analysed to determine what strategy is right for you. The cost of managing your tax affairs is a tax deductible expense. Book your appointment online or phone 1800 378 487 and chat with a professional today.