Tax is most people’s largest lifetime expense! Therefore, it is not difficult to understand how taking proactive steps to minimise your taxes can produce significant financial benefits. Different taxes will impact you at different stages of life depending on the wealth you have accumulated i.e. types of investments, amounts and ownership structures used.
The common mistake that people make is that they are too short-term focused. That is, they focus on reducing taxes immediately, with little regard for the longer-term repercussions. Instead, it is prudent to employ a more balanced approach. There are four main taxes you need to consider.
Income tax
Obviously, whilst you are working, income tax is a significant expense. Therefore, looking for ways to reduce your income tax expense is very important. There are several strategies that we can draw upon such as negative gearing, super contributions, shifting income and deductions between spouses in different tax brackets, tax-effective business income structures and so on.
Future expected changes in employment income also need to be considered.
It is also important to consider what your tax position might be in the future too, particularly in retirement. It might be great for one spouse to own all the investments assets prior to retirement (to enjoy the best negative gearing savings) but that might result in a very uneconomical distribution of taxable income in retirement.
Finally, there is a common theme of income tax brackets flattening around the world with the top rate of tax in both the US and UK being under 40%. Therefore, it doesn’t make sense to be too convoluted with your tax planning/allocations as a small change in rules might eliminate any expected savings.
Capital gains tax (CGT)
You may need to sell investment assets at some point to reduce/repay debt or fund retirement. After all, you can’t take them with you when you die! Assuming you have been an Australian tax resident for the entire time you have owned the investment (and have owned it for more than 12 months), you should be entitled to the 50% CGT discount. This means that your effective CGT tax rate will be a maximum of 23.5% of the total net gain (being 50% of the highest marginal rate of 47%).
If you invest in quality assets and hold them for a long period of time, any capital gain is likely to be considerable (in dollar terms). Therefore, the ability to share such a gain with other taxpayers (e.g. via family trust distribut
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IMPORTANT: This podcast provides general information about finance, taxes, and credit. This means that the content does not consider your specific objectives, financial situation, or needs. It is crucial for you to assess whether the information is suitable for your circumstances before taking any actions based on it. If you find yourself uncertain about the relevance or your specific needs, it is advisable to seek advice from a licensed and trustworthy professional.
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