Building
Wealth
Nine Tax - Effective Strategies
Strategy
One - Salary Sacrifice
Salary
sacrifice is an arrangement with your employer that enables you
to forgo part of your pre-tax salary in favour of additional super
contributions.
You can build your retirement savings and save on income tax because
the salary you direct into your super is taxed at 15% (within limits),
not your marginal tax rate, which can be as high as 46.5%. Unlike
other salary sacrificing arrangements, directing your pre-tax income
into your super fund will not attract fringe benefits tax (FBT).
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Strategy
Two - Personal Deductable Contributions
A
personal deductible contribution allows you to reduce your taxable
income. The contribution claimed as a tax deduction is taxed at
a reduced rate of 15% instead of your marginal tax rate.
Employers
and certain individuals are able to claim a full tax deduction for
contributions to superannuation. To be eligible to claim a tax deduction,
employers and individuals must satisfy certain conditions.
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Strategy
Three - Insurance through
Superannuation
Instead
of paying for insurance from your after-tax income, you can hold
your insurance through your super account and use your contributions
or existing balance to pay for the premiums. By holding your insurance
via super, you could save substantially on the cost of insurance.
Tax concessions on contributions can effectively fund insurance
cover.
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Strategy
Four - Government
Co-Contribution
The co-contribution scheme is where
the government makes a payment to your super of up to $1,000 if
you are a low to middle income earner and you make a voluntary after-tax
contribution.
If
your total income is less than $61,920, the government will contribute
up to $1 for every $1 of after-tax money you contribute into your
super. This could mean up to an extra $1,000 into your super account
for those who earn $31,920 or less. Because the money is invested
in super, earnings are taxed at just 15%, instead of your normal
marginal rate.
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Strategy
Five - Spouse Contributions
A
spouse contribution is simply an after-tax contribution to your
spouse’s super fund. If your spouse earns $13,800 or less,
you can claim a tax deduction on your contributions to their super.
You
may receive a tax offset for contributions made on behalf of a lower-income
earning or non-working spouse.
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Strategy
Six -
Contribution Splitting
Contributions
splitting means splitting your employer super contributions (Super
Guarantee and salary sacrifice) and/or your personal deductible
contributions with your spouse.
- May
allow you to reduce your tax liability by receiving a tax offset
on your contributions;
- Earlier
access to super benefits and tax concessions if one spouse reaches
60 years of age;
- Fund
insurance through super for your spouse.
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Strategy
Seven - Transition to Retirement
The
Transition to Retirement (TTR) rules were introduced to allow working
Australians aged 55 and over access to their super while they are
still working. This enables workers approaching retirement to ‘transition’
towards retirement by reducing work hours and supplementing reduced
income with pension income.
Generally,
there are five ways clients can benefit from implementing a TTR
pension:
- Generating
tax-exempt investment earnings in the pension environment that
would generally be taxed at up to 15% if it was in super;
- Reducing
the tax on their income by paying just 15% contributions tax on
pre-tax super contributions (such as via a salary sacrifice arrangement)
as compared to personal marginal income tax rates;
- Before
attaining age 60, receiving tax-free pension payments on the tax-free
component of the pension;
- Having
a 15% tax offset apply on any taxable pension income as compared
to salary and wages which is usually fully taxable;
- Receiving
tax-free pension payments from age 60 as compared to income derived
from salary and wages which is usually fully taxable.
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Strategy
Eight - Gearing
Gearing
is the process where a person borrows money to invest. Negative
gearing is the process where a person borrows money to invest and
the costs of the investment are greater than the income received.
To maximise the benefits of gearing investors should have a high
taxable income so they may write off their losses. Negatively geared
investments are more suitable for investors on a high marginal income
tax rate with surplus disposable income.
- Prepay
interest. Prepaying the interest on your loan may enable you to
claim a tax deduction in the financial year the interest is paid.
This allows you to bring the deduction forward and use the potential
tax refund to help meet other wealth creation goals.
- Delay
capital gains. By using your existing investments as security
for a loan, you can unlock equity, allowing you to invest additional
monies without selling the investments and triggering potential
capital gains tax.
- Boost
franking credits. Gearing to invest can allow you to build a larger
portfolio of shares/managed funds which can offer high yields
and pay fully franked dividends. These investments, such as the
large banks for instance, can then provide you with franking credits
which may increase your tax efficiency.
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Strategy
Nine - Income Protection Insurance
Income
protection insurance is a valuable form of cover that provides up
to 75% of your income if you are sick or injured and cannot work.
If
you select at time of application to receive only monthly benefits
for all claims, then 100% of the premium is tax deductible. However,
if you select to have the choice of monthly benefit or a lump sum,
then 90% of premiums are tax deductible*. The remaining 10% of the
Income Protection premiums are deemed to be cost related to the
tax free lump sum benefit so are not tax deductible.
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