Spring clean your finances
Taking advantage of smart strategies to grow your wealth and reduce tax can
make a real difference to your finances.
We’ve identified four strategies to get you thinking about the various options
available. And this is just the tip of the iceberg! Your financial planner can help
you with other strategies that may be suitable to improve your financial
position.
Use debt to grow your wealth
While most of us have some degree of debt, we tend to see this as a burden.
But by harnessing the power of ‘good’ debt, such as borrowed capital used to
invest in assets like shares, you can grow wealth and generate an income.
What’s more, unlike your home loan, the interest on an investment loan is
generally tax deductible.
One example of this is drawing on the equity in your home to establish an
investment loan, and investing this money in shares. By doing this you’re
building an income producing asset apart from your home and you can use
the income from this additional investment (and any tax advantages) to
reduce the outstanding mortgage.
Make your insurance more cost-effective
There are ways of setting up personal insurance so it’s more affordable and
tax-effective. The most common strategy is to purchase life and total and
permanent disability (TPD) insurance through your super fund.
Insurance premiums can be paid from your existing account balance, your
employer contributions (such as superannuation guarantee) or you can salary
sacrifice an amount to super, giving you a cashflow advantage.
In some cases, you may be eligible for a discount if you pay your premiums
annually rather than monthly and holding all your personal insurances in the
one policy can reduce fees. Savings can also be made by consolidating the
insurances held by yourself and family members into one policy.
Reduce your mortgage
One way to do this is by having your salary paid into a 100% offset account
linked to your mortgage. You can still access the money for everyday
transactions. Any money you put in the offset account is deducted from your
loan balance before interest is calculated, meaning you save interest and pay
off the home loan sooner.
Make the most of your super
By putting more money into your super, you can take advantage of tax
benefits that may not be available to you otherwise.
Undoubtedly you would have heard the term salary sacrifice used a number of
times. But it’s not about sacrifice, rather about investing a portion of your pretax salary into your super fund.
The beauty of this strategy is you pay less tax because your super
contribution is taxed at a maximum rate of 15%. This could be much better
than your marginal rate, which may be up to 46.5%1. You can even use this
strategy for any bonuses you receive.
If taken as cash, your bonus will be taxed at your marginal rate. Depending on
your circumstances, a salary sacrifice strategy could reduce the tax rate
payable on your bonus by up to 31.5%.
If you’re self-employed2 or not employed, you may be able to claim your
personal super contributions as a tax deduction. The more you do this, the
less taxable income you receive, which reduces the overall amount of tax you
pay.
Consider the caps
Before you decide to invest more in super, you need to be aware that caps
apply to different contribution types and penalties may be payable if you
exceed the relevant cap. You also need to consider that super contributions
generally can’t be accessed until you retire. So if you are saving for something
else, you’ll need to consider other options.
Next steps
To find out more about these and other strategies, speak to your financial
planner who can help you identify the strategies that best suit your needs.
1
2
Includes a Medicare levy of 1.5%.
To qualify as self-employed, you must earn less than 10% of your assessable income plus
reportable fringe benefits from eligible employment.