How to cut your annual tax bill by $16,349

Most people don’t realise there’s a huge opportunity right under their nose that can give you cash to invest – and some extra dollars to spare.

With all the opportunities in investment markets today, smart investors are cashing in on the disruption.

But at the same time, finding extra cash you can use to get ahead is hard.

Most people don’t realise there’s a huge opportunity right under their nose.

When you’re smart with your approach, this can give you the cash to invest – and even some extra dollars to spare you can spend today. Enter tax saving strategies.

The tax rules can be a little complicated and confusing, but when you use them to your advantage it can create more money without you needing to save more (read: sacrifice more).

Here I cover my top four tax saving strategies you can use to get ahead faster.

1. Franked dividend share investing

Investing will help you grow your money and get ahead, but most people don’t realise that investing can also help you pay less tax.

When you buy shares, you’re effectively buying a tiny slice of a company. Once you own that slice of the company, you’re entitled to the same tiny slice of their profits (dividends) and future growth.

When you’re smart with your approach, this can give you the cash to invest – and even some extra dollars to spare. Picture: iStock

When you invest with Australian companies, they typically generate a profit, pay tax on that

profit, and only then pay out their after tax profit to shareholders through dividends. This is where the tax kicker comes into play, because when you receive a dividend that’s paid from an Australian company’s after tax profit, you receive a tax credit for the tax they’ve paid on that profit.

This tax credit can reduce the tax you pay on your investment income, but it can also reduce the tax you pay on your other income like salary and wages, overtime and bonus income.

2. Debt recycling

Debt recycling is a strategy that can help homeowners convert non-tax deductible mortgage debt to tax deductible investment debt. This strategy is based around the fact that any money that you borrow for investment purposes is tax deductible, whereas money borrowed to buy your own home isn’t tax deductible.

With a debt recycling strategy, you make extra repayments into your non-deductible mortgage and at the same time, withdraw the same amount of money from debt and use it to invest, typically into a share portfolio.

When you draw money out of debt to buy shares, because this is clearly for investment purposes, you are then able to claim the interest costs as a tax deduction.

Based on the average Australian mortgage size of ~$600,000 and today’s average mortgage interest rate of 6 per cent, converting (or recycling) your debt to be deductible will deliver you annual tax deductions of $36,000, which will result in an annual extra tax refund of at least $10,800 if your income is above $45,000 per annum.

If your income and tax rate is higher, your refund will be even higher.

The tax rules can be a little complicated and confusing, but when you use them to your advantage it can create more money without you needing to save more (read: sacrifice more). Picture: iStock

3. Super contributions

I get that superannuation isn’t very exciting, but ultimately it is the single most tax effective place you can invest money.

The tax rates inside supers are a maximum of 15 per cent, and if you’re retired it reduces to zero. But even more importantly, you get a tax deduction for any money you put into your superannuation fund.

The annual limit for tax deductible super contributions is $30,000, including any money put into super by your employer through compulsory super contributions. But for most people, their compulsory super contributions leave a lot of room for some substantial contributions and big tax savings as a result.

For example, someone earning the Australian average income of $100,016 per year based on the compulsory superannuation guarantee (SG) rate of 11.5 per cent receives $11,502 a year in SG contributions.

This means you have room to make further tax deductible contributions of $18,498 a year, and contributing to your super fund at this level would cut your tax bill by a whopping $5549 every year.

4. Investing through structures

Most people invest while they’re working and earning a salary, meaning their income and tax rate is already high. If you own all your investments in your own name, all of the income and any capital gains will be added to your other taxable income and taxed at your marginal tax rate.

But you don’t need to own all of your investments yourself. You can own investments in joint names with your partner, solely in your partner’s name, or through a tax saving structure like a bond, trust, under a company structure, or even in your super fund.

These tax structures typically have lower rates of tax attached to them when compared to personal marginal tax rates, so there are some serious tax savings up for grabs.

If you’re just getting started investing, you might not have a lot of investment income right now

When you receive a dividend that’s paid from an Australian company’s after tax profit, you receive a tax credit for the tax they’ve paid on that profit. Picture: iStock

But if your goal is to become financially independent, then by definition over time you’re aiming to build tens of thousands of dollars of investment income each year. Because your investment income will grow to be significant over time, being smart with how this income is structured will reduce the tax you pay on this income.

Ultimately this means more money to reinvest and grow your investments faster.

It can be difficult and expensive to restructure your investments after you’ve built up a solid portfolio, so being smart with your tax from the start is key.

The wrap

The tax rules give you a huge opportunity to get ahead faster – if you know how to use them to your advantage.

At the same time, they can be complicated and a little bit (maybe more than a little bit) confusing, so it will often take some time and focus to level up your tax knowledge and put yourself in a position to get maximum tax advantage.

But the savings on offer can be huge when you get this right, and saving tax is one of the only financial levers you can use to get ahead faster without just saving or sacrificing more.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.

Ben Nash is a finance expert commentator, podcaster, financial adviser, founder of Pivot Wealth and author of soon-to-be-released book, Virgin Millionaire. He runs regular free online money education events which you can book here

Originally published as How to cut your annual tax bill by $16,349