With the end of the tax year looming, now's the time to implement strategies to reduce this year's taxation bills. While higher income taxpayers don't know whether the budget proposal to lower tax bills on those earning $80,000 or more annually will be legislated, claiming tax deductions this tax year could result in larger tax savings.
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The two most attractive ways of reducing year-end tax bills have for many years been prepaying up to 13 months' interest on tax deductible investment debt and making large deductible unsupported super contributions. The budget proposals to reduce the maximum deductible annual super contribution from $35,000 (50 and over) and $30,000 (under 50) to $25,000 won't apply until 1 July 2017.
To claim this super deduction, taxpayers can't earn 10 per cent or more of their assessable income from sources providing them with compulsory super and between the ages of 65 and 75 must work for at least 40 hours in a 30 day period. The uncertainty of future taxation rules is reducing the attractions of super savings. But this tax year and next can still provide large one-off tax benefits for self-employed and other taxpayers not receiving compulsory employer super benefits.
Because super is tied up untouchable until at least age 56 or later retirement, the unsupported super tax benefits are of much greater appeal to older taxpayers. Tax savings between 17 per cent and 34 per cent of the money invested are readily available for those with annual incomes above $37,000 after allowing for the contributions tax payable in the super fund.
This year's budget didn't change the provisions allowing for an immediate tax deduction for prepaying up to 13 months' interest on an investment loan. Doing this is advantageous even if it involves borrowing to make the payments especially if, as could be the case, marginal tax rates are lower the next year.
Besides lowering the cash flow needs to service the debt in the following year, prepaying interest brings forward in time the receipt of the negative gearing tax deductions. Even positively geared investors benefit from lower future provisional tax bills.
For younger and even middle-aged taxpayers, prepaying deductible interest expenses can be more attractive than superannuation contributions. All the prepayments involve is bringing forward payments that have to be made. They don't make money untouchable as super does.
The overall returns will still depend on choosing sound investments. Gearing solely to maximise tax deductions doesn't ensure the better eventual outcome. One strategy worth considering by self-employed people as they grow older is to boost tax-deductible super contributions rather than reduce deductible investment debt. This will allow them to maximise gearing deductions whilst also gaining the tax benefits of unsupported super contributions.
Daryl Dixon is the executive chairman of Dixon Advisory. comments@dixon.com.au
