Optimising tax outcomes
It seems to be an Australian sport for people to try to minimise their taxes. But at Your Money Matters, we focus on maximising your tax outcomes. This is slightly, but importantly, different. Further, it is not a sport to us. We maximise your tax outcomes by doing two things:
– ensuring you are not paying any more tax than necessary
– using the difference to drive your financial vision
The common mistake:
The main reason why people don’t maximise their tax outcomes is a lack of knowledge. Either they don’t know how to do it, or they get the information too late, when the deadline has passed.
A case study
It was August when Shaun (not his real name) came to us for the first time. He explained he had sold a house earlier in March. Shaun had originally bought the house for $250,000. He sold it for $500,000.
It looks like $250,000 profit, but that is gross profit, before the taxes he would have to pay. Because Shaun had owned the house for longer than 12 months, he was going to have to pay tax on $125,000 which was $56,250.00* based on his marginal tax rate. Naturally, Shaun was keen to find out how to minimise the amount to be paid.
Had we known about Shaun’s house sale in the same financial year, several strategies could have been employed. However, the financial year was over. There was absolutely nothing that we could do about it. Sadly, due to his lack of knowledge, Shaun had to pay the tax.
To reduce his tax liability, Shaun could have:
Prepaid deductible expenses
Carried out repairs on the investment property
Used charitable deductions
3 Tax Tips
Get a basic understanding of what happens with tax
You don’t need to be an expert in this area. It does help to have some understanding of the difference between capital gains and income. Capital gains and ordinary income are treated differently for tax purposes. Knowing the difference could reduce your tax bill.
Be aware of dates when selling and buying
This can make a huge difference. If you are buying an asset (such as shares and property), be aware of when you sell. It can make a significant difference to your tax outcomes. Try to time your sales so that they correspond with lower income years.
Know the capital value of the asset
With some assets, if you don’t sell them, you never have to pay taxes on them. However, tax on the income earned by all assets has to be paid each year.
Understanding the tax implications…
…when buying an asset means you can plan for maximizing your tax outcomes. This is particularly important as we get older and are involved in estate planning. Tax is linked among and between all of your financial planning components, with estate planning, superannuation, cash flow, insurance and investment strategies. In fact, all of these areas have links among and between them. You cannot really making changes in one area with its having an impact on all of the others. With careful planning you can maximize your outcomes in all of these areas. Good planning will keep you on track to reaching your financial goals.
All information provided on this website is general information only and does not take into account your personal objectives, financial situation or needs. You should consider the appropriateness of any information provided to your objectives, financial situation and/or needs, and obtain financial advice before acting on any information. We are not registered tax agents and cannot give tax advice. You should seek advice from a tax professional to determine the appropriateness of any information provided to your tax profile and situation.