5 ways you can be strategic about minimising your tax
Whilst we need to fulfil our obligations and pay taxes, no one wants to pay more than they have to when building wealth and investing.
Minimising tax is a valid and important aspect of your financial planning.
At Finwell Group, we aim to provide education for our clients on all aspects of financial planning and money management, and tax is no different.
Of course, we work in partnership with your accountant to ensure any guidance we give is in line with your own personal situation.
This article covers some general advice and strategies that may not apply to you. We recommend you seek specific advice related to your circumstances.
Here are five areas that can help you be strategic about minimising your tax:
1. Use Tax-Advantaged Accounts
One way to minimise taxes is to use tax-advantaged investment accounts.
In Australia, two options are your Superannuation Fund (Super Fund) and a Self-Managed Super Fund (SMSF).
Contributions made to these funds often enjoy favourable tax treatment, allowing you to grow your wealth more efficiently.
Superannuation funds offer tax benefits on contributions, investment earnings, and withdrawals made after reaching the preservation age. SMSFs provide greater control over investment decisions, enabling you to tailor your portfolios to your specific needs.
2. Implement Tax-Loss Harvesting
Tax-loss harvesting is a proactive strategy that involves selling investments at a loss to offset capital gains and reduce taxable income.
In Australia, capital gains tax (CGT) is applicable when you sell an asset for a profit. By selling underperforming assets to offset gains, you can minimise your CGT liability.
It’s important to note that there are specific rules and limitations when applying tax-loss harvesting. You should carefully consider your circumstances, investment goals, and the potential impact on your overall portfolio.
3. Leverage Negative Gearing
Negative gearing is another strategy you can employ. When you borrow money to finance an investment property, you can offset any losses and reduce your tax liability.
If the interest and other deductible expenses exceed the rental income, you can offset the losses against your other taxable income, reducing your overall tax liability.
While negative gearing can be a powerful strategy, it comes with risks and should be approached with caution. You need to carefully analyse the property market, rental yields, and potential capital growth to ensure the long-term viability of your investment.
4. Optimise Deductions and Credits
As an investor and tax payer, you should ensure your accountant is maximising any allowable deductions and tax credits. This is a fundamental aspect of effective tax planning.
Australian investors can claim deductions for various expenses related to their investments, such as interest payments, management fees, and maintenance costs. Additionally, you may be eligible for tax credits, such as the franking credits attached to dividends from Australian companies.
Regularly reviewing and optimising deductions is essential for minimising taxable income.
You should keep detailed records of your investment-related expenses and consult with your tax professionals to ensure they are maximising your eligible deductions and credits.
5. Consider Long-Term Investments
Capital gains on investments held for more than 12 months in Australia are subject to a 50% discount on the capital gains tax. By adopting a long-term investment strategy, you can benefit from reduced tax rates when selling assets that have appreciated over time.
Long-term investing aligns with a buy-and-hold approach, emphasising the importance of patience and discipline.
The Australian tax system can be complex and requires a strategic and informed approach.
Using these five strategies in your financial planning, you can optimise your tax position, retain more of your investment returns, and achieve long-term financial success.
However, it is crucial to seek advice from qualified tax professionals to ensure compliance with current tax laws and regulations.
To get help with your current circumstances and identify what you can achieve, call the Finwell Group team on (03) 9017 3235 for more information or email us at firstname.lastname@example.org for a free, no-obligation initial review.
We also encourage you to attend one of our free education events on a range of financial planning and investment topics including wealth creation.
The information in this article is general in nature and does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.