How to Slash your Tax

June 28, 2015 Sam Saggers

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shutterstock_40672660(1)







Tax season is upon us… again.

Only this time, with the release of the 2015 budget, taxpayers may have
a shock
when it comes time to file.

If you haven’t heard about the “bracket creep” that Australians will be
facing
this year then you’ve not been paying attention!

This year’s budget predicts that wages will grow at 2.5% for the first
two years (2014-2015) and then at 2.75% in 2016-17.
That’s all well and
good, however, the tax thresholds have not been changed!

As wages increase so too should the tax rate. This means your increase
in wage could push you into a higher tax bracket.

If we only had to worry about taxes on our income then it might not be
so bad but income taxes are just one form of taxation we face!

There are a surprising number of taxes we pay, both seen and hidden:

  • Stamp Duty
  • Land tax – based on property value
  • Capital gains tax – percentage of asset value
  • Fuel taxes – included in cost of petrol
  • Luxury car tax – percentage
  • Customs duties – fee on imported goods (percentage)
  • Payroll taxes – percentage payable by employer
  • Corporate taxes – 30% (minus franking credits)
  • Goods and services – 10%
  • Departure tax – set fee
  • Excise taxes – based on consumer price index (CPI)
  • Fringe benefits tax – included when lodging
    personal income tax
  • Inheritance tax – inherited assets may be subject
    to CGT
  • Personal income tax – percentage of income
  • Profits on partnership or trust – taxed on share
  • Superannuation taxes – may or may not incur a tax
  • State and local taxes

There may be some in there that I missed, but suffice it to say… we
pay taxes in Australia!

Reduce your tax

So then, anyway that we can legally slash our tax bills would be a welcome thing, right?

Here are some ways to slash your taxes:

  1. Cheating on your taxes – not a good move, I don’t recommend it…not to mention it’s illegal!
  2. Making less money – legal, but it’s really counterproductive to becoming financially free.
  3. Legitimate tax deductions combined with the numerous tax benefits of investing in property – a win/win in my opinion as you’re paying less tax while growing your assets!

How property can slash tax

So how, exactly, can investing in property slash your tax bill?

Take a look at the following example. Eve is one smart cookie… she
has slashed her tax bill through investing in property by taking
advantage of the many allowable deductions
the ATO affords property
investors.
Compare the Pair - Tax

Following are just some of the examples of expenses the ATO allow
investors to deduct:

  • Maintenance and repair costs
  • Body corporate fees
  • Property manager fees
  • Agent fees
  • Property purchasing costs
  • Financing costs
  • Depreciation
  • Travel expenses
  • Council, water rates
  • Insurance costs

In addition to these costs, any shortfall you experience between the
mortgage payment and the rent you charge is offset
against your taxable
income (which includes both your salary and rent receipts).

Negative Gearing

Often high capital growth properties can be negatively geared, yet they
can turn a profit at tax time.
Following are a couple of real-life examples of deals that were
negatively geared in the thousands, yet after tax, were geared
positively.

Property One

Located in Tamworth, NSW
6 bedroom, 4 bathroom and 2 car garage, custom build duplex
Purchase Price from: $557,000

Assumed Salary: $100,000 per annum
Tax rate: 37%
Borrowing: 100%
Rate: 5%
3% property and rental growth

YEAR 1 YEAR 2
Gross Rental Income $ 35,700 $ 36,771
Annual expenses $ 36,579 $ 36,811
Depreciation $ 15,000 $ 11,000
Total Deductions $ 51,699 $ 47,931
Net Profit/(Loss) ($ 15,999) ($ 11,160)
Estimated Tax Refund (Payable) $5920 $4130
Pretax cashflow PA ($ 879) ($ 40)
Pretax cashflow PW ($ 17) ($ 1)
After tax cashflow PA $ 5041 $ 4090
After tax cashflow PW $ 97 $ 79

Property Two

Located in Kingston, QLD
3 bedroom, 2 bathroom, 2 car garage townhouse, brand new
Purchase Price: $310,000

Assumed Salary: $100,000 per annum
Tax rate: 37%
Borrowing: 90%
Rate: 5%
3% property and rental growth

YEAR 1 YEAR 2
Gross Rental Income $ 18,720 $ 19,292
Annual expenses $ 22,624 $ 22,794
Depreciation $ 10,000 $ 7,000
Total Deductions $ 33,447 $ 30,617
Net Profit/(Loss) ($ 14,727) ($ 11,325)
Estimated Tax Refund (Payable) $ 1545 $ 689
Pretax cashflow PA ($ 3904) ($ 3502)
Pretax cashflow PW ($ 75) ($ 67)
After tax cashflow PA $ 1545 $ 689
After tax cashflow PW $ 30 $ 13

As you can see, although these properties will cost their owners before
tax, once all of the deductions are done, the property owners come out
ahead.

Mind, these calculations don’t even take capital growth into account,
which is money that you as an investor can put to use to continue
growing your portfolio or paying down the debt on your existing
properties!

Investing as a tax cutting strategy

The deals I’ve shown are real live deals that we’ve put together for
our clients, and they are by no means an anomaly – they’re the norm!

If you’d like to find out more about how property investing can help
you reduce your tax while creating wealth for your future, come along
to our next Property Investor Night
.

We cover timely issues such as tax reduction, outlook of markets across
the country, portfolio building strategies you need to know, and much,
more.

Seats for these FREE monthly events fill up fast, so book yours now!


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