Are you paying as much tax as possible?

Are you paying as much tax as possible?

Being complacent with tax in your life is exactly what the Government and the Australian Taxation Office want you to be, to minimise your wealth and to work as long as possible.

We see examples all the time.  Sometimes we can ‘reverse’ the impact, but the best thing you can do is to make decisions today, next year, and each year, to smartly position yourself to minimise cumulative taxation on your accumulation of wealth.

There are anomalies and complexities across Australia’s tax legislation that you can legally use to your advantage to pay less tax, or which can catch you out.

 Australian doing their tax return - to see if they are paying too much tax

We often hear that a business that fails to plan is planning to fail.  As a taxpayer, are you failing to plan your future of tax exposure and so planning to pay as much tax as possible?

Is this what the Government and the ATO want you to do – to be unable to be so knowledgeable of Australia’s amazingly complex tax laws that you pay more tax than you should?

You can:

  • claim legitimate deductions against your income.  For example, the ATO regularly make a lot of noise about ‘over claiming’ deductions. Claiming a deduction is your legislated right, as a deduction is an amount expended that can be claimed in the pursuit of income.  Claiming amounts that are not deductions (non-deductible expenses) is a criminal offence.  Not only do we find people are scared of claiming the deductions to which they are entitled, but we find people often claim amounts that are illegal to deduct – and many do not realise they are breaking the law;

  • plan to sell investments that produce a capital gain, and minimise or even eliminate the effective tax exposure by (1) correctly applying the 50% CGT discount (2) disposing of other assets that provide offsetting capital losses (3) use income tax losses to reduce the taxable income arising from the capital gains (4) make elections for tax purposes to make some or all of the capital gain exempt from tax (5) undertake expenditure which reduces your taxable income such as making deductible prepayments of expenditure for investments you already hold or buy in the same year or making deductible superannuation contributions.  With so many opportunities to legitimately ‘manage’ your tax results, only bad luck or bad planning should mean you pay the top rate of tax on a big capital gain;

  • invest in the right vehicle to produce the most desirable tax result. Over time, the compound results can be incredible.  Tax Services Australia has prepared a simple spreadsheet that almost anyone with simple Excel skills could achieve, to compare the financial results over 40 years of a $10,000 investment earning 8% a year (reinvested, with this return being income and capital growth).  Taxed at an average of say 40%, the $10,000 investment grows to $65,000 after tax.  But in the superannuation environment and taxed at a concessional 15% tax rate, the increased value is a much better $138,000 after tax.  The difference is the tax – and which amount do you think the ATO prefers to collect from you?  So make you choice;

  • make what might seem to be odd choices.  Do you know, that you do not need to claim the ‘main residence exemption’ for the property that you are living in as your home?  For example, if a retiring couple keep their $2 million Sydney home (and even rent it out) and spend $300,000 on a regional property in Tasmania, they might find over 5 years that their Sydney home increases in value to $2.4 million – while their regional ‘home’ may not have increased in value at all.   Many taxpayers – who are not across our complex tax system – would pay CGT on selling their $2.4 million property.  But Tax Services Australia clients would legitimately elect under taxation law to nominate their former home as their main residence for CGT purposes, and have absolutely no exposure to tax on the capital gain upon selling it even though it has increased in value more than the total value of their current home and despite receiving a good rental income from renting it out.  What would you prefer?

  • earn a high income overseas while you accumulate tax losses in Australia – which can be extremely valuable in Australia when you either have a capital gain in future or if you return to Australia and start earning income here again;

  • ·choose not to participate in the ‘sharing’ economy and protect your tax position.  How many people have unwittingly participated in the ‘sharing’ economy and rented out part of their home and forfeited (in a most complex way) part of their main residence exemption to the ATO?  The ATO can see Airbnb listings too.  We have seen many properties advertised for sale, which promote their established rental income streams yet many of these people think they are selling their home tax free – but publicly promoting the fact that they have been renting our part of their home, compromising their own main residence exemption.  Some people just cannot be protected from themselves;

  • include the loss on your motor vehicle sale or trade-in to the extent it has been appropriately claimed for tax purposes.  How many Uber drivers out there missed this tax benefit?

What choices have you been making, to keep the returns from the investments you make?  Are the ATO taking the wealth you could have accumulated and requiring you to work longer?  Are you publicly advertising that you have given away a valuable part of your prized main residence exemption?

Let’s continue the commentary about the sharing economy and the retiring couple mentioned above, to demonstrate an anomaly.

If the Sydney couple with the $2 million home are ‘asset rich and cash poor’ and instead of buying a new home they rent out part of their home via Airbnb.  They have just compromised their main residence exemption, on the property that may have been their home for 20 years for the short-term ‘sugar hit’ of cash flow and the fun of participating in the sharing economy.

The tax exposure on the compromised main residence exemption could exceed the rental income they receive!  The tax could be more than the rent, quite apart from the direct tax on the rental income. 

However, if they take the ‘regional Tasmania’ option and fully rent out their Sydney home (and continue to nominate it as their main residence for CGT purposes), and they also rent out a part of their new Tasmanian home via Airbnb, within 6 years they could sell both properties and (1) still pay no tax on any part of the capital gain for their Sydney property and (2) pay the same amount of tax – or none at all if the value has not increased – on their Tasmanian property.

The anomaly, is they can avoid tax on the higher value Sydney property if they have 2 properties despite collecting income on both, but if they have only the one property they lose part of their main residence exemption on their long term home.

Tax Services Australia can help you with your tax opportunities and decision making today and over the long term, to optimise your tax results.  Access to professional taxation advice, having the tax law on your side and having the support to make smart decisions can make a big difference to the outcomes you are seeking to achieve on your road to accumulating wealth.

Franking Credit Smoke and Mirrors

Franking Credit Smoke and Mirrors

My financial planning ‘experience’

My financial planning ‘experience’