Financial adviser on five legal ways to pay a lot less tax

If you want your tax bill to be hundreds or even thousands of dollars less, then financial adviser Ben Nash reveals some easy ways to pay less.

It’s funny how every June we start thinking about the looming EOFY deadline and what we can do to reduce our annual donation to the ATO.

But the reality is that what you can do in the last days of the financial year won’t have a heap of lasting impact. The best time to start being smart with your tax is the first day of the new financial year, and there are some strategies that can seriously improve your tax position for the 12 months ahead.

Here, I unpack my top five tax-saving strategies and the key things you should focus on to get the best possible outcomes at tax time.

Franked dividend share investing

Buying shares gives you a small piece of ownership in a company, and through this ownership you benefit from the growth in value of the company and receive part of any profits paid through dividends.

In Australia, the majority of companies pay tax on their profits before paying dividends, and as a shareholder you receive tax credits for the tax already paid before paying your dividends. These tax credits are referred to as ‘franking credits’.

Franking credits have a big impact on the after tax return on your investments, and can save you thousands of dollars every year – ultimately helping you save tax and grow your investments faster.

Before you invest, take the time to understand franking credits and how they can improve your tax outcomes.

Negative gearing

Investing in property in Australia comes with some serious tax perks, where you can claim a tax deduction for the costs of holding your investment property.

There is a lot of confusion out there around the jargon in this space, but it’s actually pretty simple. ‘Gearing’ simply means borrowing to invest, so any time you’re borrowing money to invest into anything it would fall under the banner of ‘gearing’.

The ‘negative’ or ‘positive’ gearing refers to the cashflow of your investment, so if the cashflow from an investment is negative you’ve got ‘negative gearing’ and if the cashflow is positive it’s ‘positive gearing’.

You get tax perks on any negatively geared investment properties. Picture: iStock

When you’ve got a negatively geared investment, you can claim a tax deduction for the cost, giving you some additional tax deductions, reducing your tax liability, and all while the value of your investment is growing in the background.

It’s worth noting my view that you should never invest for tax purposes alone, and if an investment doesn’t stack up without the tax benefits it’s probably not a good investment to begin with.

Superannuation contributions

Under the current super rules, you can add up to $27,500 to your superannuation every year and claim a tax deduction. This amount includes the money put in by your employer, but for most people this still leaves room for a pretty chunky tax deduction.

Once money is invested through super it’s subject to concessional tax rates of no more than 15 per cent which is generally much lower than your marginal tax rates, further helping your investments grow faster.

But remember, when you put money into super it’s essentially stuck there until you reach retirement age, so this shouldn’t necessarily be your only wealth-building strategy. But the tax benefits are compelling so it’s worth taking the time to see where superannuation contributions fit for you.

Borrowing to buy shares

This one isn’t for everyone and definitely comes with some risk that’s important to manage, but it can be an effective way to get some tax deductions and grow your wealth at the same time.

According to the ASX, the long-term (20-year) expected return on Australian shares is 8.7 per cent. Because borrowing interest rates are generally lower than this figure, it means that borrowing money and investing into shares should provide you with a net benefit after paying your borrowing costs.

And it gets better.

Because interest costs on debt used for the sole purpose of investing is tax deductible, the after-tax cost of your borrowing is actually lower than the headline interest rate you pay.

I will say though that I’m not a fan of margin loans which I think come with a considerable amount of risk and a high interest rate, along with the risk of margin calls. Where I see this strategy work well is where you own property that has solid equity – this way you can borrow at close to standard mortgage interest rates.

Borrowing to invest can be fruitful – but there are risks. Picture: iStock

Borrowing to invest can seriously accelerate your returns, but it can also amplify your losses – if you’re thinking about going down this path it’s critical you have a solid plan and risk management strategy in place, and think about getting some good professional advice before you jump in.

Debt recycling

This is probably my top go-to strategy for homeowners looking to pay down their mortgage and build wealth tax effectively at the same time.

There is some complexity here, but essentially debt recycling involves paying down your non tax deductible home loan debt while drawing from an investment loan and directing the funds to build a share/ETF/managed fund portfolio.

The end result is your home loan going down, investment portfolio growing, and your tax deductions increasing. The idea is that your share portfolio grows at a rate faster than your investment debt, and eventually you can sell down your shares, clear the debt, and end up being mortgage free and essentially being left with a ‘free’ investment portfolio.

This strategy also has some complexities to look out for and risks to manage, so once again if you’re going down this path you should take the time to set up a solid game plan.

The wrap

In Australia we pay a lot of tax, and every tax dollar you can save is another extra dollar that can be used for growing your wealth faster. Tax planning and strategy can be complicated and confusing, but getting this right comes with some serious benefits so take the time to get your strategy right.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and author of the Amazon best-selling book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

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.