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With the end of the financial year fast approaching, now’s the time to review your investment and tax strategies. The seven ideas here will help you to grow and preserve your wealth.
It’s hard not to use the word unprecedented these days. But that’s what springs to mind for NAB Private Client Executive Tony Hocking when he considers the level of activity he’s seen in the past 18 months. “We’re experiencing considerable activity and demand, across property transactions, margin lending and investment trades.”
All the more reason to review your investment and tax strategies now, Hocking says, well before the end of the financial year. That way, you’ll have the time to put a strategic plan in place, and to execute it.
For some individuals, that may mean setting up a favourable investment vehicle to lower their tax liability. For others, it could be about pre-paying interest on a margin loan. There are many ways to prepare for success in the new financial year. Here are seven of the best.
1.Choosing the right structure
If you’re looking for tax effective ways to invest, consider the advantages and drawbacks of different investment vehicles. Many individuals managing a significant portfolio of assets use discretionary family trusts as they enable you to distribute the earnings of the trust to a number of family members, some of whom may be on a lower marginal rate.
In some instances, a company makes even better sense. “Distributions can be made to a private company where tax is at the company rate of 30 per cent,” explains JBWere Director Private Wealth Management Ben McGrath. “That might be lower than the marginal tax rate for individuals in a family group.”
However, you’ll have to act early to avoid paying the maximum tax rate on your trust income or capital gains. “You need to do your income estimates and prepare an annual trust distribution minute before 30 June each year,” McGrath cautions.
2. Super strategies for the long haul
Super remains the most tax-effective investment vehicle, with a maximum tax rate of just 15 per cent – 10 per cent for capital gains where assets have been held for at least 12 months. There are several ways to boost your savings here:
Maximise your concessional super contributions – You might want to claim a personal tax deduction for concessional contributions up to the new limit of $27,500 (including both employer and personal concessional contributions). “For example, some employees may not have adjusted their salary sacrifice arrangements for the increase in the concessional cap from $25,000 to $27,500,” McGrath says.
Consider catching up – If you have less than $500,000 in super and haven’t fully used the concessional cap in previous years from 1 July 2018, you may be eligible for a ‘catch-up concessional contribution’.
Make a non-concessional contribution – The annual limit for non-concessional contributions has been indexed from $100,000 to $110,000 for FY22. You can also make a larger contribution up to $330,000 over three years under the ‘bring forward’ rule (up to age 67). “It’s really an opportunity to get additional dollars in superannuation,” McGrath says.
Consider a downsizer contribution – Another opportunity which may be available for some individuals is a downsizer contribution. If you meet the eligibility requirements (including owning your home in Australia for at least 10 years), you can contribute $300,000 into your super following the sale of your home.
Boost your spouse’s super – If your spouse is on a lower income than you, contributing to their super will boost it while minimising your tax liabilities.
3. Borrowing to get ahead
There are a range of gearing strategies you might want to consider if you’re keen to start the new financial year on the front foot. For instance, margin lending allows you to borrow, to invest in a broad range of listed and unlisted securities. While Protected Equity Loans (PELs) enable you to borrow up to 100 per cent of your investment into ASX-listed shares with no margin calls.
Both margin lending and PELs have the option to pre-pay 12 months of interest, which could benefit someone likely to face a higher tax rate in the current financial year compared to future years.
Whatever you choose to do though, you’ll want to make sure it’s part of a long-term, diversified investment strategy, McGrath says.
4. Reviewing investment gains and losses
As EOFY approaches, it’s a good idea to review your investment portfolio with a market specialist, crystalising losses to offset any gains made throughout the year.
However, your decision should be a considered one. “Realised capital losses only provide an immediate tax benefit to the extent that you have realised capital gains in the current financial year,” McGrath says. “So you need to review your overall position and consider the sale of underperforming investments which no longer fit in the investment strategy.”
5. Giving thoughtfully
EOFY can be a great time to set up a more structured form of giving – particularly if you’ve just sold a major asset and are facing a sizeable capital gain. In years where you are subject to a large tax bill, it may be worth reviewing:
Similar to a self-managed super fund, PAFs allow you to actively manage your investments and think more strategically about the way in which you want to support charities. There are significant tax benefits when a PAF is established. “For example, if you put a million dollars into a PAF and claim a tax deduction straight way, essentially it’s only costing you 53 cents in the dollar if you are offsetting income which is subject to the top marginal tax rate of 47 per cent, including the Medicare Levy,” McGrath points out.
6. Putting your business on the front foot
Many of the pandemic’s government support measures have been wound up. However, the Instant Asset Write-Off for small business continues until June 2023, allowing companies earning under $5 billion to deduct the full cost of any eligible depreciable assets in the year they’re bought. This is a good way to bolster your business for the new financial year.
7. Powering your professional partnership
If you have recently transitioned from a salaried role to a professional partnership, you’ll need to consider the optimal way of structuring your financial affairs, including cash flow management and the importance of having access to lines of credit.
How NAB Private Wealth can help
Adopting any of these strategies requires forethought – and time, something not all of us have. It’s why NAB Private Wealth offers a tailored service that can bring together a team of specialists from NAB and JBWere to work with you.
NAB specialists can work with your accountant as well. “Our clients really appreciate this approach, as it brings all the specialists together around the table at the one time,” Hocking says.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. NAB recommends that you seek independent legal, property, financial and taxation advice before acting on any information in this article. You should consider the relevant Product Disclosure Statement and Financial Services Guide (available on request) before deciding whether to acquire, or to continue to hold, any of our products. Fees and charges are payable. Terms and conditions apply and are available on request from NAB. All products and services mentioned on this website are issued by National Australia Bank Limited ABN 12 004 044 937, Australian Credit Licence and AFSL No. 230686 (NAB), except wealth advice services, which are provided by JBWere Limited ABN 68 137 978 360 AFSL No. 341162 (JBWere). JBWere is a wholly owned subsidiary of NAB. JBWere’s obligations do not represent deposits or other liabilities of NAB. NAB does not guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer. You may be exposed to investment risk, including loss of income and principal invested. Credit products are subject to eligibility and lending criteria. ©2022 NAB Private Wealth is a division of National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686.
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