How to save on tax
There are several ways to reduce the tax you pay. As a general overview, the most beneficial strategies for tax minimisation are:
- Structuring your business and personal assets
- Investing in Early Stage Investment Companies (ESIC)
- Investing in Early Stage Venture Capital Limited partnerships
- Negatively gearing a property or an investment into shares
- Holding tax deductable income protection
At Liston Newton, we have a wealth of knowledge around tax minimisation strategies. We know no two businesses are the same. To find out how you can make the most of your tax return, get in touch with us today, or call us on [phone].
1. Structuring assets
Tax deductions mean that one must spend money, and therefore deduct that expenditure from their tax payable. This often leads to people buying things unnecessarily just to get a tax deduction.
A more beneficial tax saving strategy to focus on building profit and personal wealth, rather than trying to minimise tax via spending. Structuring your business and personal assets is the best place to start when minimising tax.
When considering where to hold your investment assets, you need to consider a number of factors:
- Holding investments under a trust structure would give you access to a 50% capital gains discount.
- A company structure does not receive a CGT discount, has the advantage of having a capped tax rate at 30%, which could be valuable if the investment is generating significant income each year.
The correct structure depends on your personal circumstances, but should be the first conversation you have around tax minimisation. If you'd like to learn more about how to structure your assets for greater effect, contact Liston Newton.
2. Early Stage Investment Companies (ESIC)
Early-stage investment companies are relatively new and can be overlooked as a tax minimisation strategy. In July 2016, concessions were introduced for early-stage investors, otherwise known as ‘Angel Investors’, that included a tax offset and a Capital Gains Tax exemption. These concessions can be generous.
Sophisticated versus non-sophisticated investors
- Sophisticated investors need to have a gross income of at least $250,000 for the last two financial years, and net assets of at least 2.5 million.
- Non-sophisticated investors are anyone that doesn’t qualify for the above. If you are not a sophisticated investor, the maximum amount you can invest in an early stage investment company is $50,000 per year.
A tax offset is a direct reduction on the amount of tax you need to pay.
- If you have $100,000 of assessable income for the year, your tax payable would be approximately $26,000.
- A tax offset of $10,000 would reduce your tax payable down to $16,000.
The ESIC concessions allow an investor to claim a 20% tax offset on the amount they have invested in an early stage investment company.
- A sophisticated investor could make a $1 million investment in an early stage investment company and claim a $200,000 tax offset against their tax payable.
- A non-sophisticated investor could invest $50,000 and claim a $10,000 tax offset against their tax payable.
Investments in ESIC are also free of Capital Gains Tax for a period of 10 years. If the investment is held for under 10 years, you will pay no additional tax when you sell the investment.
3. Early Stage Venture Capital Limited Partnerships
An Early Stage Venture Capital Limited Partnership (ESVGLP) is an investment structure that combines multiple investors into a structure to make investments. It works much the same way as an investment into an early stage investor company.
- All partners have a combined minimum investment of $10 million.
- This type of investment allows a 10% tax offset for the amount of investments made.
If you'd like to learn more about tax minimisation strategies by investing in ESICs or ESVCLP, contact Liston Newton.
4. Negative gearing
Negatively gearing is a common tax saving scenario, and remains an effective strategy, provided the underlying investment experiences ongoing growth in capital value.
- Negative gearing essentially means that the income you receive from your investment is less than the expenses you paid to hold the investment.
Here's an example of how negative gearing works:
- An investment property you hold receives $30,000 in rent per year.
- You have $40,000 in ongoing expenses such as loan interest, council rates and maintenance fees.
- Because you have $10,000 more expenses than income, this would allow you to deduct $10,000 from your taxable income each year.
Negative gearing works the same way when you borrow to invest in shares. If the dividends on your investment income don’t cover the cost to hold those shares, you are able to claim a deduction for that amount.
This strategy only works well when the underlying asset is increasing in value. For example:
- A good negative gearing strategy may cost you $5,000 per year to hold a property
- The property value must increase by more than the $5,000 each year to justify the cost of the loss.
5. Income protection
If you have a plan that provides you with a strategy to build wealth over time, then the only thing that may prohibit you from achieving your goal is illness or injury. This is why we strongly advise our clients to acquire income protection. It’s a great way to provide your family with peace of mind.
- If you hold income protection in your own name, you’re able to claim it as a tax deduction.
- Income protection is relatively affordable and on average costs around about 2% of your annual income.
- It should be treated as an essential expense to protect your most valuable asset.