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Six tips for paying less tax

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Six tips for paying less tax

Bina Brown

Published 28 January 2014 09:30

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Theyre widely available, legal and can make a significant difference to your overall wealth creation: tax-minimising
strategies are right under your nose.

While the taxman is targeting investors hiding assets overseas, there are much less
complicated ways to cut your tax bill. Keeping savings in a mortgage offset account can
save thousands of dollars of tax youd otherwise pay on a savings account. And a family
trust can shave big dollars off a household tax bill, thanks to distributions going to lowerearning family members including children over 18.
Taking a careful look at where youre keeping your assets means you dont have to put
your money into dodgy shelf companies in a Caribbean tax haven to keep more of your
income in the family coffers.
These tax-minimising strategies are right under your nose theyre widely available, legal
and can make a significant difference to your overall wealth creation.

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One of the simplest everyday strategies is setting up an offset account against a

mortgage to harbour any extra cash. Superannuation, too, offers great tax benefits to

7 Gold has further to fall (/p/specialistinvestments

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boost retirement savings, particularly if you are close to finishing work. Once a super fund
starts paying a pension, the earnings on the investments within the fund are tax-free,
along with any money taken out of the fund.

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But there are caps on the amount that can be contributed to super each year, and not
everyone wants to wait until retirement to access their savings. There are plenty of major
expenses to consider along the way.

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This is where investment options outside super, including insurance or education bonds
and investing in the name of family members on lower tax brackets, can also help reduce
the amount of income tax payable.

Market Summary

Mortgage offset account

Movers

Commodities

Currency

Price

This is more often viewed as a strategy to cut interest costs and the length of the loan on
a mortgage. The other side of the equation is a tax saving on money that would otherwise
have been parked in a savings account and earning interest, on which you would be taxed
at your marginal tax rate.
Say youve accumulated some cash or sold some assets and youre not sure what to do

%
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$
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$
8.000 6.43%

MONADEL

IGO (http://tools.afr.com IND

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news/?code=IGO)

$
3.560 5.82%

stop you paying tax on the interest you would otherwise have earned.

BPT (http://tools.afr.com BEACH

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$
0.920 5.64%

After-tax super contributions

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$
7.310 5.31%

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0.195 4.88%

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says Kate McCallum of Multiforte Financial Services.

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The thing to focus on is the environment that your money is invested within, she

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with the proceeds. If youve got a home loan, putting this extra cash into an offset
account can not only reduce the amount of interest payable on the loan but it will also

Much of the focus with super is on the tax savings from making pre-tax contributions
through salary sacrifice. This is because of the 15 per cent concessional tax rate paid on
super contributions up to the age-based caps.
But there are also potential tax savings from non-concessional or after-tax contributions,

explains.
Compared with investing post-tax money into an investment in your own name, investing
via super is taxed at a maximum of 15 per cent on earnings and 10 per cent on capital
gains; and for those eligible for transition to retirement, their money grows in a zero tax
environment.
Whats more, she says, the contribution forms part of your non-taxable component

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within super which for people starting transition to retirement pensions before age 60
means that this portion of their income is tax-free.
There are also caps on after-tax contributions. This year it is $150,000, increasing with
indexation to $180,000 from July 1.
Where we have clients with significant funds to move into super or a pension, we are
doing a $150,000 contribution this year and then using the bring forward rule to make a
further contribution of up to $540,000 in the next financial year. This means we are able to
contribute $690,000 a person into super, McCallum says.

Discretionary family trust

An effective way to hold investments, a trust is a separate investment structure where

2 of 7

assets are controlled by one or more persons (the trustee/s) on behalf of a group of other
persons (the beneficiaries).

4/08/15 1:05 PM

discretionary
trust allows the trustee to decide who gets the income and capital
the
Six tips forApaying
less tax
http://www.afrsmartinvestor.com.au/p/market-intelligence/six...
trust owns. These can suit someone on the highest tax bracket with family members listed
as beneficiaries who are on lower rates, BFG Financial Services adviser Suzanne Haddan
says.
For example, rental income from an investment property owned by the trust could go to
members of the trust on lower incomes.
The trust does not pay tax, but the beneficiary does, with income and capital gains
derived by a trust generally assessed at the tax rates of the beneficiary.
Centric Wealths Natasha Panagis says that by using a properly drafted discretionary trust,
MY TOOLS

distributions can be made to the most appropriate members of the trust in terms of their
tax status or other criterion.
For example, more income may be distributed to beneficiaries ion lower tax brackets or
those with no other income to utilise their $18,200 tax-free threshold, and potentially the
low income tax offset (LITO).
Capital gains may be distributed to a beneficiary who has capital losses available or who
can make use of the 50 per cent general discount. And franked dividends may be paid to
a beneficiary who can use the imputation credits to eliminate or reduce tax on other
income, Panagis says.
She says trusts can use the 50 per cent discount on capital gains tax on the sale of an
asset if it has been held for a minimum of 12 months.
Panagis says that like company ownership, trusts are more complicated to set up and
maintain, so there are higher set-up and compliance costs. Set-up costs will include fees
payable to the specialists who advise on setting up the trust, government stamp duty,
registration fees and establishing a corporate trustee.
There will be ongoing costs for specialist advice on completing the trust tax return and
other records that must be lodged annually.
A trust is a separate entity to the trustee and the requirement is that personal affairs and
those of the trust are kept quite separate. As well as a separate bank account and some
form of accounting records for the trust, all decisions made by the trustee for example
payments to beneficiaries must be properly documented.
As far as the distribution of income goes, all taxable income earned during the trusts
financial year should be distributed to beneficiaries and included in the beneficiaries
taxable income in the same tax year. Any undistributed income is taxed within the trust at
the top personal tax rate of 46.5 per cent including the Medicare levy.
Further, trust losses cannot be distributed to beneficiaries. Where a discretionary trust has
a nil net income or a net loss, it will not be entitled to a refund of excess imputation
credits.

Transition to retirement
If you are over 55, the combination of salary sacrificing pre-tax income into super and
drawing an income from super benefits can be very tax effective.
Not only does it get more into your super fund but your cash flow remains the same. You
first have to start a transition to retirement (TTR) income stream funded from your super
fund. A minimum income of 4 per cent and a maximum of 10 per cent must be drawn
from the account balance each year.
You then also start a salary sacrifice arrangement with your employer so part of your
pre-tax salary is redirected into super. Centric Wealths Panagis says replacing salary with

3 of 7

superannuation income and redirecting salary to super will improve net income, reduce
taxation and increase the end retirement benefit.

4/08/15 1:05 PM

income
taxtax
reduction comes about thanks to receiving less salary income
(and
Six tips forThe
paying
less
http://www.afrsmartinvestor.com.au/p/market-intelligence/six...
therefore paying less tax) and more concessionally taxed pension income.

On top of that, salary sacrifice super contributions are subject to 15 per cent tax, which
means much more goes into super than if you contributed after-tax income.
Once you turn 60, you receive the whole income stream tax-free.
But for those under 60, in typically complicated super rules, the tax treatment depends on
the underlying components of the income stream. The money put in after tax which forms
part of the income stream is received tax-free. The taxable component is included in
assessable income and taxed at marginal tax rates.
MY TOOLS

Someone over the preservation age (currently 55) and younger than 60 will receive a 15
per cent tax offset on the taxable component.
Another benefit of the TTR strategy is no tax is payable on the investment earnings
accruing in the fund while it is supporting the TTR income stream. So a big benefit of
transferring your super benefit from the accumulation phase to the pension phase is the
tax differential i.e, there is 15 per cent earnings tax in accumulation phase but no tax in
the pension phase.

Investment bonds
Long dismissed because there was little choice in what your money was invested in,
investment or insurance bonds are back in favour because earnings dont need to appear
on your tax return and theres now far greater choice in underlying assets from bonds to
Australian and international shares.
They suit younger people on marginal tax rates above 30 per cent who are already
contributing to super, and who want the money for purposes other than retirement.
They also suit executives under 60 whove already contributed the maximum
concessional (or pre-tax) $25,000 to super, older investors who can no longer contribute
to super and those saving for their childrens education.
Earnings from the underlying investments in the bond are excluded from personal income
because the bond provider pays the tax at 30 per cent internally less any deductions
and franking credits leaving nothing to declare on your tax return. To get the full tax
benefits, you have to leave your money in the bond for 10 years. After this, there is no tax
to pay.
It is possible to get access to the money before 10 years but there will be some tax
payable, says BFGs Haddan.
The bonds can be added to under what is known as the 125 rule, which means investors
can contribute up to 125 per cent of their previous years contribution without re-starting
the 10-year rule period. This is a big bonus for those with large amounts of money earning
returns they want to keep off their tax return.
This is why they also work for retirees who cant contribute any more to super and are
entitled to government benefits such as a part pension or healthcare card.
Money such as an inheritance or the proceeds of a house can be invested in an
insurance bond to minimise tax, Haddan says. Because it doesnt get counted as
income, it doesnt impact on government assistance.
For those making the decision to invest in insurance bonds, the next step is to think about
their risk profile and how they want the money invested.
How well the investment does depends on the underlying asset allocation.

4 of 7

Haddan prefers providers with a masterfund approach, where a number of fund managers
are selected to look after the investment.

4/08/15 1:05 PM

are less
several
the sole
Six tips forThere
paying
taxeducation bonds that carry the same tax advantages, withhttp://www.afrsmartinvestor.com.au/p/market-intelligence/six...
purpose being to save for a childs education.

An investment company
Setting up a company through which investments are bought is one way of ensuring the
tax paid is never more than 30 per cent.
McCallum says an investment company can assist in keeping funds accessible and
outside super, or in cases where after-tax super contributions have already been used.
But because a company does not have access to the 50 per cent capital gains tax
discount, she generally recommends keeping income type assets in a company rather
MY TOOLS

than growth assets. Gains are taxed at the full 30 per cent, she says.
It works when a company is established and assets are bought in its name.
This can include any type of investment managed funds, shares, direct property, cash
depending on your portfolio needs and overall risk profile, McCallum says.
We tend to keep a clients company portfolio defensive [bonds, high interest cash, term
deposits] and tilt their super/pension portfolio to more growth to match their overall risk
profile. In super, the capital gains tax is no more than 10 per cent.
When income is distributed, the person receiving it pays tax at their marginal tax rate less
30 per cent company tax. So it makes sense to try to distribute to someone on a lower tax
rate at a given point in time, McCallum says. An example could be someone who has
worked only part-time over the year.
McCallum says as well as the 30 per cent tax rate, other advantages of an investment
company include the ability to choose the timing of a distribution from the company to a
suitable individual to minimise personal tax payable. A company can also be discontinued
at any time. On the downside, investors should expect some additional costs with setting
up and maintaining a company.
Read the full story, including case studies, at afr.com.au (http://www.afr.com
/p/personal_finance/smart_money
/six_ways_to_beat_the_taxman_xThej8ypoBvTTu7FOT5wsI)
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4/08/15 1:05 PM

Six tips for paying less tax

http://www.afrsmartinvestor.com.au/p/market-intelligence/six...
(/p/market-intelligence

(/p/market-intelligence

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Like Reply 3 August 2015 10:49

Jefferson Sydney
We are a Certified Financial Institution approving funds for all kinds of project. Our
loan/financial offer is given at a low interest rate and it's repayment duration is very
friendly and customer convenient.
Repayment period is within 12 to 120 months with an initial 6-12 months grace period
with no pre-payment penalty.
We approve a funding for up to $100 Million and above depending on the nature of
business.
We are currently funding for Existing businesses with existing management team, with
major work on Energy, Contract Execution, Commercial Real Estate Purchase, Business
Expansion, Trans... See More
Like Reply 12 hrs

Jefferson Sydney
We are a Certified Financial Institution approving funds for all kinds of project. Our
loan/financial offer is given at a low interest rate and it's repayment duration is very
friendly and customer convenient.
Repayment period is within 12 to 120 months with an initial 6-12 months grace period
with no pre-payment penalty.
We approve a funding for up to $100 Million and above depending on the nature of
business.
We are currently funding for Existing businesses with existing management team, with
major work on Energy, Contract Execution, Commercial Real Estate Purchase, Business
Expansion, Trans... See More
Like Reply 12 hrs

Claudio Daniel Augusto

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