Six ways to tone down your tax bill

 

The right amount of tax should be paid all the time… no more, no less. You wouldn’t pay $500 for advice you never received, so why give the tax man a tip he didn’t earn?

Planning ahead is the key to paying only what you owe, but too often it takes a back seat in the investment approach of private investors.

If you’re in that boat, here are six investing tips to tone down your tax bill.

Also read: Govt eyes big revenue from tax dodgers

Split your income

Put all the bank accounts and other income producing investments in the name of the spouse on the lower income tax bracket.

Interest on savings accounts, fixed interest and government bonds are taxed at the same marginal rate as the investor.

With joint accounts the Tax Office splits the interest earned and applies the tax rate of each individual partner to their share.

Also read: These are the 579 companies which pay no taxThe partner on the highest tax bracket pays the most tax on their interest. So do something about it.

Income splitting is very attractive in a family where there is one primary income earner because the other spouse can earn up to $18,200 tax free.

Warning: after they are transferred the accounts are legally owned by the spouse named, so make sure the marriage is sound.

Look at self education expenses

As a rule of thumb, you can claim a tax deduction for the costs of self-education, provided it’s related to your income earning activities.

Generally self education is associated with courses run by schools, colleges and universities which end up in you gaining an award like a degree or a diploma.

Also read: Treasury counters Turnbull tax comment

But you don’t necessarily have to come out with a bit of paper to claim a deduction.

You’ve just got to be able to prove the skills or knowledge you gained are sufficiently related to your job, the idea being the completion of the course will help you earn more. It does not apply for expenses for unrelated education.

This means you may be able to claim the cost of purchasing specialist investment journals and other publications, subscriptions or share market information services which you use to manage your share portfolio.

Also read: Govt unleashes firepower on tax avoidance

Deduct borrowing expenses

If you borrow money to invest, you may be able to claim the expenses you incurred taking out the loan.

These expenses may include establishment fees, legal expenses and stamp duty on the loan.

The approach extends to prepaying the interest on any investment loan for the next 12 months and claiming a tax deduction in the current financial year.

However the amount of interest payable must be known now, so this can’t be done for variable rate loans.

Make sure you communicate with your lender before pre-paying any interest.

Delay income

Every dollar of income we earn, whether from wages or investments, is taxed at our marginal rate.

But if you expect to earn less income next financial year and therefore be in a lower tax bracket, delay receiving the interest on savings or investments until then.

There are a number of finance company debentures and bank accounts which delay interest payments to the next financial year.

Also read: Negative gearing not part of tax reform

Offset capital gains with losses

Profits on selling shares, property or unit trusts purchased after 1985 are charged capital gains tax. But any losses made on these types of investments can be offset against profits.

So if you have made a big profit on one investment, sell some of your disasters.

The losses made on the "dogs" will be offset against the profits on the winners and the capital gains tax bill is cut.

Also, remember to look at the timing of your sales as capital gains on any assets held for over 12 months receive a 50% tax discount.

Also read: The 55 Australian millionaires who paid no tax

Capitalise on dividend imputation

This is a big winner particularly for investors who depend on income from their investments to live on.

A lot of big companies listed on our stock market pay dividends to their shareholders.

Because many of these companies pay tax at the full corporate rate, the dividends are paid to shareholders along with a 30 percent tax credit.

So if your personal tax rate is 30 cents in the dollar or less, the dividend income from these shares is tax free. Check with a share broker for recommendations.