As someone who is looking to make a profit through investment, you will often come across these ”get rich quick” schemes. Most of the time these schemes take us for a ride without ever coming close to the intended destination. These options falter and disappear into nothing after a few years of being over-hyped.
Needless to say those are the sort of investment you should steer clear off. Different forms of investments have different boons to their name. They’re the kinds of things that have been established for decades, even centuries in some cases. The kinds of things that may even be taken for granted, like savings, trusts, shares and, of course, investment properties.
The reason investment properties are so great for reducing tax is that they come with a range of tax benefits (in the form of many, many deductions, among other things), and also have the potential to earn you more money in the future. The property market is also relatively stable. Sure, there are fluctuations in prices and demand, but the fact remains that everyone needs to have a roof over their heads. And that simple fact could very well be the key to saving you $7000 in tax (or more).
That begs the question how should you go about it?
THE 3 OMNI-PRESENT TAX BENEFITS
FRANKED INCOME
Basically, as the shareholder of a company you receive a piece of the company’s profit and this is called a dividend. When income tax has already been paid on this dividend, the company can pass on what are called ‘franking credits’ for this tax payment. This system is called ‘imputation’. You are then able to use these franking credits as tax offsets. In a nutshell, this system has been set up to help you avoid double taxation on your dividend. Double taxation is what happens when you get taxed twice on the same income.. It also allows companies to receive tax-free distribution for certain income, again to avoid double taxation.
CGT DISCOUNT
When you sell or otherwise dispose of an asset, you can reduce your capital gain by 50%.For an asset to qualify for the CGT discount you must own it for at least 12 months before the ‘CGT event’ happens. The CGT event is the point at which you make a capital gain or loss. You exclude the day of acquisition and the day of the CGT event when working out if you owned the CGT asset for at least 12 months before the ‘CGT event’ happens.
CAPITAL LOSSES AS AN OFFSET AGAINST CAPITAL GAINS
It is necessary to apply any available capital losses for the current income year first and then any unapplied net capital losses for previous income years. The only choice that you have in relation to applying losses is the ability to select which gains, assuming that a number of investments were disposed of in the same year, are to be offset against the available losses. This is important as losses are best utilized by offsetting (where possible) against gains on investments owned for less than 12 months before using gains on investments owned for more than 12 months.
SUPERANNUATION EFFECT
Super is a tax-effective investment and one of the best ways to save for retirement. This is because the government provides tax incentives to save through super. These include:
- A tax rate of 15% on employer super contributions and salary sacrifice contributions, if they’re below the $27,500 cap.
- A maximum tax rate of 15% on investment earnings in super and 10% for capital gains.
- No tax on withdrawals from super for most people over age 60.
- Tax-free investment earnings when you start a super pension.
It is because of these reasons that Superannuation could be considered as the most rewarding tax arrangement. If you manage a share portfolio in a super fund, capital gains will be taxed at 10% or 15%. Whereas if you held them privately they would be taxed up to 23.5% or 47%.Imputation credits are especially valuable in a super fund because the fund pays a flat 15% tax and the 30% tax credit can be used to offset tax on other income.
NEGATIVE GEARING
One of the benefits that property investors in Australia have is that any money lost in investment property, may be claimed against the tax that have been paid through employment or through other investments. With every dollar earned you get some tax back which means you’re losing less money and therefore you need less growth in the property in order to make a profit.
DEPRECIATION
Depreciation is the lowering in value of your property, as in the building itself, or the things within your property. The reason depreciation is such a good tax advantage is that it’s an on-paper lost, it’s not money that you’re dishing out of your pocket every year. So just as a car goes down in value, you can claim the lowering value of the construction of the building and the items inside of it, against the money that is actually coming into your pocket in that financial year. So the benefits of depreciation can turn a negatively geared property into a positively geared property after you get your tax refund back and it can also make a positively geared property effectively almost tax-free.
There are basically two kinds of property investors in the world. There are those that are the average or novice investors, hoping to earn enough rent to offset the cost of the mortgage and other expenses, without too much of a loss to their own cash flow. Then there are the astute investors, the ones who see the full potential of all the tax breaks available through investing in property, and the long-term wealth it provides. Astute investors won’t have to spend more than $5 a week for their property purchases, and often spend $0 or end up earning money off their investments after as little as 12 months.
Anyone can be this kind of investor and make their money work for them. You don’t even have to know a lot about property. Armed with this knowledge, and a team of experienced people that can guide you through the process, you could become an astute investor and change your whole financial situation over the next year and beyond.
