Tax Tips - Quick Guide
Tax tip 1: Check your super		Tax tip 6: Mind your Capital Gains Tax (CGT) and allowable deductions
Tax tip 2: Get your insurance through super		Tax tip 7: Agribusiness and other year-end tax schemes
Tax tip 3: Use super to offset CGT		Article:     Confessions of a former tax auditor
Tax tip 4: Consider leverage		Fast Tips: Clever Year End Tax Strategies
Tax tip 5: Package up your salary

New tax rules that only became effective this year should compel investors to plan ahead. Case studies after case studies have shown that the taxman favours the prepared. Savings from good tax strategies can range from as little as a $50 rebate to thousands of dollars during the year. Add the power of compounding to the mix and it becomes clear that tax planning should be at the heart of anyone’s wealth and retirement strategy.

There are two key planks of tax effective strategies: superannuation and non-superannuation related. The option to pile a lot of your savings in superannuation for example can cut a person’s tax bill from the 48.5 per cent level to 15 per cent. A massive saving by anyone's measure.

The question is, what are the key tax strategies to focus on in the lead up to D-day, June 30? 
 
Tip No. 1:  Check your super

Thanks to new regulation around superannuation and additional tax concessions, more and more financial planners and accountants are turning to super funds to store their client’s hard-earned money.  This year, Treasurer Peter Costello's proposed changes to superannuation has made some recent legislation, such as around term allocated pensions (TAPs) and super splitting not quite as effective as before. Check his recommendations. In addition, if you are an employer, avoid the penalty under the Superannuation Guarantee Charge (SGC) regime by ensuring you have made the right superannuation contributions for all of your employees.

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Tip No. 2:  Get your insurance through super
 
Typically, most people would treat life and TPD insurance as a separate issue to their super. Yes there are the lucky ones who have a good insurance cover already embedded in their super fund but there is still a good proportion of the population who are not adequately insured.
 
One way to get life and total and permanent disability cover (TPD) insurance is through a super fund instead of a separate policy.
 
"It's a much better way of funding insurance because you get a tax concession, which you otherwise won't get so it is often a lot cheaper," said Paul Sarkis, MLC Technical Services Manager.

Tip No. 3:  Use super to offset CGT
 
The allure of capital gains is sometimes overshadowed by the pain of parting with a high portion of it on capital gains tax (CGT). However, you can lessen the pain somewhat by putting a portion of your profits from selling an asset or investment into your super and therefore getting tax deductions off that.

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Tip No. 4:  Consider leverage
 
Gearing is one of the most powerful ways to fast-track your retirement savings, if managed properly. Put simply, it is borrowing money to top up your investment capital and ideally, magnify your returns.

The most popular use for negative gearing is in investment property, so-called negative because the rent you receive from the property is less than the interest payments and maintenance costs you spend to service the mortgage. The upside is that investors can claim tax deductions against their ‘losses’ and profit from the future property price rise.

"Negative gearing is definitely a common strategy. You don't have to be a high net worth individual to take full advantage of it,” said Craig Holland, tax partner at Deloitte.

Besides investment property, there's been a flurry of products launched in the market that allows gearing in shares. Practically every major bank and investment management group have an array of margin loans to choose from.

The key advantage is that margin lending allows you to own more shares than you would normally have if you had to pay cash upfront. The more shares you have, the higher the dividend payment.

“And when you do gear [into shares], you should look at the interest cost on the money you borrowed because there’s also a tax deduction there,” said Hugh Elvy, ICAA’s manager for superannuation and financial planning at the Institute of Chartered Accountants in Australia (ICAA).

Macquarie Bank has introduced a new product called 'Self Funding Installments', a fancy way of saying you can buy an 'x' amount of shares, pay for one half of it initially and Macquarie will loan you the capital for the other half.

The 'self funding' bit comes in where your dividends can be used to repay the unpaid half. Otherwise, you can pay for it yourself before the end of the term or roll the money again into another SFI. This product is highly popular because it is one of the few eligible forms of borrowing that can be used within an SMSF.
 
But of course margin lending does not come without the risks. “Without a doubt, anytime you borrow money there’s always the risk that at some point, you can’t afford the repayments. There’s the cash flow issue to consider. But negative gearing is fine as long as you fully understand the risks.”

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Tip No. 5:  Package up your salary
 
The phrase 'salary sacrifice' is not just a negotiating tool in the workplace but a pre-emptive strategy to the endless legislative changes to income tax.
 
In a nutshell, forgoing your salary until the next financial year means you are taxed at a lower marginal rate and secondly, you can then pour that tax saving into more after-tax investments or into super.
 
For example, a worker on $65k per year might choose to get his expected $10k bonus straight into super. Had he chosen to stick it to his salary, then he would be taxed 43.5 per cent or $4,350 out of that $10,000 bonus. By contrast, he would only pay 15 per cent or $1,500 if that $10,000 is parked in a super fund effectively giving him an additional $2,850 to invest.
 
"It's probably best to wait until the 2007 tax year for people now close to higher thresholds (part of the intro)" said George Avramides, technical manager at ING Technical Services.

Tip No. 6:   Mind your Capital Gains Tax (CGT) and allowable deductions
 
Meanwhile, when it comes to capital gains tax, all the tax experts say it all boils down to timing. "It's often a good idea to realize capital losses at the same time you realise capital gains on the same year," said Avramides.
 
Finally, the expertise of the accountant and the financial planner really comes to the fore when it comes to the list of allowable tax deductions that can be made due to expenses incurred in the normal course of work.
 
HLB Mann Judd for example has drawn up a list of the most often overlooked deductions such as interest on infrastructure bonds and expenses relating to income production such as building and contents insurance.
 
Then there are the deductible prepaid expenses of less than $1,000, interest incurred when you borrow money to invest in shares or property and lastly, deductions in investment that have ATO product rulings such as in agribusiness (see Agribusiness: window to China?).
 
In short, there are a million and one reason why comprehensive tax planning should be a mandatory part of anyone's wealth creation and retirement strategy. Bearing in mind that people are living longer, the compound effect of saving tens of thousands here and there on tax could mean the difference between living on the bread line or living it up.

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Tip No. 7:  Agribusiness and other year-end tax schemes

The first thing to ensure before investing in any agribusiness scheme is to check that the product has been rubber stamped by the tax office as 100 per cent tax deductible. Anyone can check the ATO website www.ato.gov.au to see the list of managed investment schemes that have received the nod and those that are awaiting approval.

Admittedly, the sector has attracted heavy criticism in recent years. Some schemes did not deliver on the returns they promised and the ATO has disputed the tax deductions on other schemes.  However, there are legitimate investments to choose from that delivers what they say on the tin.

 “Historically, investors’ concerns about investing in agribusiness have centred around the investment quality of such schemes, price volatility and the taxation environment. We focus on all of these factors when structuring our offerings in order to provide investors with a level of comfort,” said Macquarie Alternative Assets Management Limited (MAAML) director Anthony Abraham.

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Confessions of a former tax auditor
Craig Holland, tax partner, Deloitte Melbourne

Craig Holland previously worked for seven years at the ATO under former tax commissioner Michael Carmody. Call it the seven year itch but Holland has since moved to Deloitte with the added advantage of having been on the other side of the fence.
 
At the top-tier accounting firm, Holland is the expert on tax for high net worth clients where at 48.5 per cent personal tax rates, large superannuation account balances and multi-million share and property portfolios, the incentive to carry out effective tax strategies is doubly higher.
 
Asked what are the key things financial planners and tax accountants should note this year, which would be different from the 2005 tax year, Holland said, "Every year, you have to file your tax return and the first thing you do is to go back to the prior year and see what you can use again from there."
 
Essentially there are three broad strategies. "You have to look at strategies to defer assessable income, strategies around accelerating deductions and strategies around capital gains tax." Stick to those three key categories and you won't stray too far from maximizing what's left in your wallet post-tax.

He explained, "Those three topics would probably cover most whether you're an individual, a trust, a company, a self managed super fund. There might be idiosyncrasies but that's the three things where most of the tax planning occurs."

A common sense but often mishandled tax strategy is the rendering of invoices. "I can speak from my experience as a former ATO auditor that they [the ATO] would look at  whether you've sought to [dramatically] delay the timing of invoices." For example, the goods may have been sent in May but the invoice doesn't come till after July.

Holland says that deferring the rendering of invoices is a valid tax strategy but within reason. "It could be subject to attack if the ATO doesn't see a commercial justification for deferring the invoices," he says.

In the lead up to June 30, Holland says it would be worthwhile for companies to write-off bad debts.  "You might have debtors which you consider doubtful so you should critically review their long standing debtors to assess whether or not they should be treated as bad debts."

He cautions however that the write-off should pass a random tax audit. "The tax office when they do their audits are going to check if the debts were really bad or whether you have recalcitrant payers. The fact that you've rang them a couple of times wouldn't be sufficient to get a tax deduction," he says.

On an individual front, Holland says there's scope to review contracts on employee bonuses, allowable business-related tax deductions and salary sacrifice.

For employee bonuses, he stresses that the bonus shouldn't be contingent on something happening else you can't take a tax deduction for it. "If an employer says we'll give you a $10,000 bonus but only if you stay with us until July then that's contingent on you staying and is not tax deductible."

Finally, there is a little known strategy that Holland says is getting picked up more often in recent months.
 
"With the financial planner groups that I deal with, these guys are starting to click on to this idea where their clients can negative gear investments in such a way that they can also generate tax deferred income."
 
For example, client Joe Bloggs borrows $100,000 to invest in a property that yields 9 per cent or $9,000. That $9,000 distribution per year is tax deferred up until Joe decides to sell his stake or the investment goes up in value that Joe has to pay capital gains tax.
 
"So theoretically, the cost base to that investment is not $100,000 but $91,000," said Holland.
 
Suppose you're paying 7 per cent interest on that $100k or $7,000 then that means you are pocketing $2,000 for that investment. But on top of that, the $7,000 interest is also tax deductible because you took the loan out for an investment.
 
Holland says there are a raft of strategies that people can use from the age-old 'negative gearing' to investing in companies with a favourable tax ruling. He cautions however that investors should ensure they are not intentionally or accidentally stepping outside the bounds of law because he knows that tax auditors can sniff them from a mile away.

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Clever Year End Tax Strategies
 
1)      Boost savings and save tax via salary sacrifice
2)      Top up your super with help from the government
3)      Contribute for your spouse and save tax
4)      Maximize tax-deductible super contributions
5)      Contribute to super and offset capital gains tax
6)      Split super and contributions with your spouse
7)      Purchase life and TPD insurance effectively
8)      Delay withdrawing super benefits to save lump sum tax
9)      Use losses to reduce capital gains tax
10)    Defer asset sales to manage capital gains tax
11)    Pre-pay 12 months interest on an investment loan
12)    Pre-pay 12 months income protection insurance premiums

(Source: MLC)

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