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Home > Other Stuff > Free Property Investing Articles > A Taxing Time
A Taxing Time
 By Paul Tooze
Contents thanks to EquityResource.com.au Financial Planners and Strategists
Protect Yourself!
Like many, you may not have noticed there’s only two months left to the end of the financial year. So, if you’ve been meaning to do something about all the tax you pay, well there’s really no time to lose in starting to plan your financial year end strategies. Otherwise you run the risk of another tax saving opportunity slipping by.
What Are The Three Most Effective Ways To Save On Tax?
You’ll probably be pleased to know the purpose of this presentation is to cut through the maze of financial products and solutions that claim to be tax-efficient. In principle, when taking the structure of these products apart we’ll end up with the bare strategies behind them. It then becomes an issue which strategy will work best for you as opposed to blindly picking a product.
Strategy 1: Negative Geared Investments To Build Wealth
This is probably the single most effective way to save on tax across many securitised and direct investment classes. There is negative gearing with property, property trusts, shares, managed funds, derivatives .etc. In short, you get a loan for which you can generally claim an interest deduction. The first year’s interest can be paid in advance and the full amount is deducted in your tax return for the current tax year.
Great, problem solved. Or, is it? - You’re fine for this financial year until in 12 months’ time when you’d have to make the decision to prepay interest again.
Example:
Joe borrows $100,000 to invest in shares at current interest rates of about 10% and then claims $10,000 for the interest as a tax deduction. Assuming he had an income of $95,000 this has now just dropped to $85,000 and therefore he will pay less tax. Provided he paid tax throughout the year he’ll also get a refund from the ATO of $4,000. This is 40% (his marginal tax rate) times the deduction of $10,000 that he is claiming.
Pros:
- Investment returns are magnified
- Some loans can be protected so that you don’t have any negative returns but keep all the positive ones
- Tax deduction is incentive to invest
Cons:
- Negative investment returns can also be magnified
- Higher interest rates on borrowings
- Big loan needed to save big on tax
Some possible products and solutions:
- Investment Property Loan and direct residential property investment
- Non-recourse lending for Self-Managed Super Funds (per the new super legislation)
- Macquarie GEI Plus geared share investments with protected loan at maturity
- Macquarie Fusion Funds with protected loan and managed investments
- HFA Octane Five - Global Long/Short Absolute Return fund
- Alpha Power Shares with loan protection and derivative overlay to provide absolute returns in any market
Strategy 2: Salary-Sacrifice Into Super And Build Your Retirement Nest Egg
Salary sacrifice extra money into your superannuation fund and you’ll be saving money and taxes simultaneously. The amount you put into super will be deducted from your salary before tax and hence you’ll be paying less tax with respect to that contribution you make.
Example:
Joe arranges for extra salary to be sacrificed (contributed) into super before it is paid to him. Until the end of the year he has made $10,000 additional super contributions pre tax. His salary now is again $85,000 and he saved himself $4,000 in tax based on his marginal tax rate of 40%.
Pros:
- Opportunity to increase wealth in super
- Extra cash flow from tax savings
- Tax deduction is incentive to grow super
Cons:
- The amount of salary-sacrifice is limited because it also reduces the net disposable income.
- All assets in super are locked up until retirement.
- There is still contributions tax of 15% within the super fund
Strategy 3: Agribusiness Investments
In years gone by they were despised. Then the government stepped in and regulated them heavily and last year they were trimmed down to a few compliant programs that now receive concessional tax treatment. The remaining selection, provide soundly managed investment schemes that enjoy great tax effectiveness.
Typically, these Agribusiness investments are in the main, investments in timber plantations. However, there are also walnut growers and abalone farmers that get preferential tax treatment by way of product rulings.
You can invest dollars into one of these managed investment schemes and get a FULL deduction for the amount you invest. Yes, that’s correct, for the full amount!
Example:
Joe puts $10,000 into a radiata pine timber plantation project for which he will get a full tax deduction of $10,000. If he doesn’t have the amount available in cash he can even borrow this amount and the interest on the loan is potentially tax deductible too.
Pros:
- Agribusiness investments have their own steady returns and do not follow the stock market cycles.
- Products can be purchase with borrowed funds without using a penny of your own
- Full tax deduction for the full investment amount.
Cons:
- Project terms can be up to 25 years
- Natural products need to grow first before yielding any income.
- Income that is coming back from harvests is taxable
Some great products available:
- FEA Hardwood Plantation Project 2008
- Gunns Walnut Project No. 2, 2008
- Gunns Timberlot Option 1 or 2, 2008
- ITC Diversified Forestry Investment 2008
- Willmott Forests Project 2008
- Australian Bight Abalone Project 2008
Comparison Of The Three Ways To Save On Tax And Create Wealth
Below we have illustrated a comparison of Joe’s situation based on him choosing any one of the presented options for his year end strategy 2008. Note; there may be additional factors that could influence the outcome of any given strategy, e.g. registration status for GST etc. The given illustration is a generalization only.
| Strategies: |
Do Nothing |
Negative gearing |
Salary Sacrifice $10,000 pre tax |
Agribusiness |
| Income |
$95,000 |
$95,000 |
$85,000 |
$95,000 |
| Tax Deduction |
$0 |
$10,000 |
$0 |
$11,000* |
| Taxable Income |
$95,000 |
$85,000 |
$85,000 |
$84,000 |
| Tax incl. ML |
$26,525 |
$22,375 |
$22,375 |
$21,960 |
| Net Income |
$68,475 |
$62,625 |
$62,625 |
$62,040 |
| Total initial tax saving |
$0 |
$4,000 |
$4,000 |
$11,000 |
| Total ongoing tax savings |
$0 |
$4,000 |
$0 |
$1,000 |
| Total Investment Portfolio after strategy |
$0 |
$100,000 |
$8,500^ |
$10,000 |
ML – Medicare levy of 1.5%
* includes $1,000 of pre-paid interest
^ after contributions tax of 15% held in super
The above table shows that with each strategy there are initial and ongoing tax savings to be had as well as what your investment position will be after using a particular strategy. It is not a matter of which strategy is better than another in this table. Rather all of them work, but each one has different goals and objectives.
- Negative gearing is one of the most powerful strategies to build wealth and also for ongoing tax effectiveness
- Agribusiness is the most powerful strategy to save on tax in the short term. Especially considering that it can all be done without a penny out of your own pocket.
- Salary sacrifice is most effective to move investment assets into super where they enjoy even more tax benefits.
Okay - Which Strategy Is Going To Work The Best For You?
Each person’s situation is different and their financial profile needs to be considered individually in the light of desired objectives. This is the area where professional Financial Planners can assist by putting strategies in place that meet your objectives and then provide access to great tax-effective products and solutions that are customized for you.
If you’d like to find out more about the presented strategies and/or products and solutions, drop us a note or get in touch with our office where we’ll be happy to discuss your potential options.
A Word Of Warning
Note that the listed strategies, products and solutions are not a recommendation to you and might not be suitable for your personal situation. No personal advice has been provided to you. This article only illustrates strategies, products and solutions on a general level. We strongly recommend that you seek the assistance of a financial planner and/or accountant if you are considering any of the information contained in this article.
Paul Tooze
PropertyBooks.com.au
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