Are you ready for June 30? – Part #2
Tags: Super, tax, June 30, investment loans
Only one week to go to the end of the financial year!
In the last blog, we talked about how salary sacrificing into your super can help you reduce your tax and increase your super. This week, we have a couple more tips that can help you reduce your taxable income in the future, whilst building wealth over the medium to long term.
Prepay Interest on an investment loan
Margin lenders and various financial institutions offer the ability to prepay interest in advance on share investments and some property investments.
Under tax law, if the interest expense (up to an allowable reference rate – i.e. 7%) is greater than the income earned on the investment, the difference may be used to reduce the investor’s taxable income.
The decision whether to prepay or not depends on the investor’s total tax position. It is a way of bringing forward a tax saving that would have been claimed in the next financial year.
Generally speaking, the benefits of prepaying are, at best, marginal for the average person. However, someone who has an unusually high taxable income (i.e. large income bonus, realisation of capital gains) may benefit from exploring this option.
The downside is, in order to prepay, the investor has to come up with the cash to make the prepayment. Also, by investing with debt you are committing to paying back a liability at some time in the future and the returns you generate are not guaranteed to cover your expenses. The returns may even be negative, therefore resulting in a capital loss and a liability to pay back, in full, with interest.
The money used to prepay, may instead be used to pay down a mortgage (non-deductible debt) or salary sacrifice additional funds into super (if your concessional cap limits allow).
Focus on paying down your mortgage
Paying some tax is unavoidable. Therefore, rather than spending time trying to minimise every last dollar of tax, focus on paying down your home mortgage as fast as possible (non- deductible debt).
Make the sacrifice, shop a little less, spend a little less, and enjoy the benefits of being debt free sooner.
The sooner you can distance yourself from the banks, the earlier you can employ other wealth accumulation strategies (i.e. salary sacrificing) without the worry of covering your next repayment.
Please note - the above example is not to be considered tax advice. Rather, it is provided to stimulate your thinking in the lead up to the end of financial year and how you may better your long term financial position. Please contact us if you would like to talk to one of The Super Fund Co.’s experienced financial advisers to understand how the above strategies could help you.
