In the first of three reports on tax planning, Gary Kleyn considers the options available and when they are likely to be most effective.
INTEREST in and utilisation of tax planning and tax minimisation has grown at a corresponding rate to the increase in wealth over recent years.
At the same time a new industry has been created, with firms offering advice on minimising capital gains tax, fringe benefits tax or income tax through measures such as negative gearing.
Still other businesses offer services or products, such as managed investment schemes, which are considered attractive because of perceived tax benefits.
Then there are the choices between investments – shares, property or other capital goods – that have either income maximising, neutral or minimising strategies in order to manipulate the final tax bill.
For many investors, tax planning begins with the salary package. Salary packaging is still seen by many as beneficial despite the introduction of the GST and the introduction of higher fringe benefits tax gross-up rates.
Salary packaging specialist Paradigm Total Salary Management believes that salary packaging is not just for high income earners, considered to be those earning more than $60,000 a year.
“Employees earning under $60,000 per annum can obtain substantial advantages by salary packaging benefits such as their car, even if they only use it for private use with low kilometres, lunches at their desk at work and superannuation,” Paradigm advises.
There were changes to the Western Australian tax system last year when the State Government announced increases to payroll tax, which Paradigm says improved the benefits of salary packaging.
Paradigm Total Salary Management product development manager, Bob Millikin, said benefits flowed to employers by lowering their tax liabilities when packaging was employed, while at the same time employees lowered their taxable income and increased the money in their pockets.
Once steps have been taken to reduce tax on a salary, many investors then aim to minimise the amount of tax paid during the buying selling or holding stages of investing.
For many, negative gearing is seen as the answer to providing capital gains while minimising the tax bill.
Negative gearing reduced the tax an investor needs to pay. If renting out an investment property, the rent received is taxable income. However, it is possible to claim back as a deduction any expenses incurred in receiving the rent. This includes interest paid on any loan taken out to buy the property.
Gearing strategies can also be employed by investors when investing in the share-market by borrowing against their home or taking out a personal loan in order to reduce their tax bill, while maximising capital gains.
Holding on to an asset for an appropriate time to minimise the capital gains tax liabilities is another option that needs to be considered when planning for tax.
p Next week: WA Business News takes a look at the operation of managed investment schemes.
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