It’s no secret that investing in property can help reduce the amount of tax you pay. However, if you’re new to investing and tax-minimising strategies, it can be tricky to know where to start. Keep reading to discover some of our top tips about tax-effective investing and how you can minimise your tax liability.
Tax planning strategies for investments
When you’re getting started on tax planning, knowing what your marginal rates are can help you recognise tax-effective investment strategies. You can then use this information, along with other factors including your financial goals and income, to choose the right investment structure for you.
A tax-effective investment is one where the tax on your investment income is less than your marginal tax rate. Thanks to the government’s tax incentives, superannuation can be a tax-effective investment.
For example, there is a maximum tax rate of 15% on investment earnings in super and 10% on capital gains. As with all investments, however, there are downsides to superannuation. For example, you won’t be able to access the funds until you reach the age of 60 and retire.
Another potentially tax-effective investment are insurance bonds. Insurance bonds refer to investments offered by insurance companies and they can be tax-effective if you’re planning to invest for 10 years. In an investment bond, all earnings are taxed at the corporate rate of 30%. If no withdrawals are made in the first 10 years, no further tax is payable.
Minimising tax liability
As we explored above, super has great potential as a tax-effective investment. Salary sacrifice is one of the most common strategies to help minimise the tax you pay. Put simply, salary sacrifice involves reducing your take-home pay to put aside more money for your retirement. It is an extra payment that you can request your employer makes into your super directly from your salary (this is separate from the superannuation guarantee contribution your employer makes). In addition to boosting your super savings, most people will pay less tax on their salary sacrifice contributions than they do on their income.
You can also take advantage of Transition to Retirement (TTR) arrangements which are available for people over 55. This allows them to withdraw up to 10% of their super balance each year before full retirement. TTR and salary sacrifice arrangements can be combined to boost your super and minimise the tax you pay. Tax withdrawals also become tax-free altogether for people over 60.
Last but not least are self-managed super funds. These give you control over how to invest your money rather than entrusting it to a superannuation company. In addition to the benefits of concessional tax rates, there is no tax payable in the pension phase.
Investment properties are another way of reducing your tax as many of the expenses involved are tax deductible. These include expenses related to borrowing, interest, advertising, maintenance, and agent fees. Another popular tax reduction strategy is negative gearing.
A negatively geared property costs more to own than the income it generates. At first, negative gearing might seem counterintuitive, since it loses you money. However, the reasoning behind this strategy is that you can claim the loss in your tax return and get some of it back.
Despite the potential tax benefits of investment properties, buying one just to save on tax is probably not the best idea. It’s important to focus on the bigger picture and whether property investment is the right decision for your individual financial circumstances.
Tax considerations for property investments
Property investment tax rules and regulations
So, you’ve purchased an investment property. According to the ATO’s rental property guidelines, if you rent out a property, it’s important to keep good records from the beginning. Work out if you need to pay tax instalments throughout the year and declare all rental-related income in your tax return. Don’t forget to identify what expenses you can claim as deductions and consider the capital gains tax implications if you sell.
Tax tips for investors in rental properties
Declare full income
When you lodge your tax return, you’ll need to declare your rent and rent-related income to the ATO. It’s important to ensure that your interest expense claims and depreciation are correctly calculated, and rental income is correctly apportioned between owners. The ATO’s investments and assets section is a good place to start if you’re looking for more information.
Keep evidence of each deduction
As a landlord, you can claim deductions for a range of property-related expenses. You should keep evidence of each deduction that you want to claim – so don’t throw away those receipts! Types of evidence include:
- Bank and credit card statements
- Lease agreements
To keep track of all your rental expenses, it’s a good idea to check your receipts against your bank and credit card statements.
Summarise your records into categories
Once you have all your records, summarising them into categories will make tax returns easier. These categories might include interest, depreciation, fees, and bills. ATO’s myDeductions app helps you stay on top of record keeping. This app allows you to keep all your records in one place, including photos of your receipts and invoices.
Here at Financial Spectrum, we are passionate about providing quality financial advice to help our clients make informed financial decisions. Book an appointment with us to find out how we can help you minimise your tax liability.