Don’t leave it to the last minute
Earnings from investments contribute to the overall income for many Australian households. Since such income is subject to government taxes, it is sensible to structure investments in tax effective manners.
Here are some basic ways in which you could reduce your tax liability.
- Reallocate profits or salary package proceeds into superannuation which reduces your tax liability while planning for a dignified retirement
- Start a wealth creation portfolio now, using a tax effective investment with a Tax Office Product ruling
- Revisit your current financial arrangements to bring forward interest
- Salary package to minimise your overall tax position
Case study: John and Karen
Both John and Karen decide they each want to put a total of $5,000 away each year towards their retirement.
They calculate how much they could save by sacrificing some of their salary into their super account. They also analyse and compare how much they could save by investing outside super.
For the purposes of this example, the assumptions are the same for both super and non-super, using an investment return of 7 per cent pa.
John earns $75,000 p.a. and pays tax at the marginal rate of 31.5 per cent. After twenty years
John’s savings could be:
- Inside super: $108,123
- Outside super: $78,369
That’s a difference of $29,754 if John salary sacrifices into super.
Karen earns $95,000p.a. and pays tax at the marginal rate of 41.5 per cent. After twenty years, Karen’s savings could be:
- Inside super: $108,123
- Outside super: $62,484
That’s a difference of $45,639 if Karen salary sacrifices into super.
Case study: Matthew
Matthew wants to save for a home deposit. Finding a way to make his money work harder now, without restricting his financial freedom and accumulating capital over the medium to long term is his priority. Matthew’s Strategy Adviser recommends that he takes out a margin loan to borrow an additional $40,000, giving him a total of $80,000 in investment capital. That’s considered more than enough to establish a sizeable and well-diversified growth – oriented Australian and global managed fund portfolio.
By investing in managed funds, Matthew can combine potential returns with flexibility.
Outcomes and benefits:
If he needs to access some of his capital in case of an emergency, Matthew can simply sell a portion of his account. Investing via a reputable margin lending provider means that he will have a wide choice of investments to choose from and simple, consolidated reporting. This means he doesn’t have to waste his time doing paperwork, leaving him more time to enjoy the things he loves in life.
It is important to remember there are high risks associated with all margin lending facilities such as the potential to lose your entire investment. So, as with Matthew, it is important to speak to a Financial Adviser to determine whether a margin lending facility is appropriate for you. The interest is only deductible to the extent the borrowed funds are used for investment purposes.
The potential result:
Based on an annual return of 9 per cent, Matthew’s Adviser predicts that at the end of seven years his initial $40,000 investment could be valued at $74,195 (after the loan, tax and interest payments have been paid for).
On the other hand, without gearing his account, the amount accumulated at the end of seven years could have been worth $64,166. Matthew’s strategy is also easy and tax effective. Because he is borrowing for investment purposes, he can most likely claim the interest paid on his loan as a tax deduction to offset against his income.
If you would like to know more about how Chan & Naylor may be able to help you plan for your future, call on 1300 99 77 34 or email your inquiry to firstname.lastname@example.org for a complementary initial consultation.
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