With June 30 done and dusted, now is the time to ensure your finances are on track for the upcoming financial year to take full advantage of any tax benefits, says Peter Bembrick, tax partner at HLB Mann Judd Sydney.
At the top of his tax to-do list is to review deductible versus non-deductible debt.
“Having high levels of non-deductible debt – such as a mortgage, a car loan or a credit card – is a disadvantage as no tax deduction can be claimed on the interest payments. The best approach is to put all spare funds towards paying down such debt in the shortest time possible, starting with the debt with the highest interest rate.
“Deductible debt, on the other hand – such as the interest on a loan over an investment property or a share market portfolio – can be claimed as a tax deduction, and should be paid off only after the non-deductible debt has been eliminated.
“To maximise cash flow and repayments, a useful strategy is to have an interest-only loan over all income-producing investments, while making principal repayments on the home loan and other non-deductible debts.
“However, care must be taken when restructuring loans solely to avoid tax, as this can attract the attention of the Australian Taxation Office.”
James Macfarlane, a director with HLB Debt Advisory, said reviewing the interest rates being paid on both deductible and non-deductible debt is another useful exercise for the start of the financial year.
“Some very recent and significant changes by both the bank regulators and Government have led all the banks to consider their policies and pricing and, more recently, the major banks have announced wide-ranging changes to investment or interest-only lending.
“With an owner-occupier mortgage and associated facilities, for example, it is important to ensure that the interest rates are still competitive. Interest rates change over time, as new offers, changing competition, regulation and newcomers enter the market. The bank that offered the best rate and loan options three years ago is unlikely to still offer the best rate today.
“If a home loan or interest-only loan is no longer competitive, getting the right advice can help people understand the current market and what their options may now be.
“This can range from restructuring current arrangements right through to helping refinance the facilities to another financial institution. This process can be managed for you and the interest savings generated over the term of the loan may make the investment in time worthwhile.
“Of course, the fastest way to decrease the size of your non-deductible mortgage is often overlooked. That is, simply paying more than the minimum amount, more regularly, over a sustained period of time,” Mr Macfarlane said.
Another consideration for those looking at their future tax liability is the type of investments they hold.
Mr Bembrick says wherever possible, investors should consider tax-advantaged investments, as long as they suit the long-term investment strategy.
“No investment should be taken out purely because it receives favourable tax treatment, but by the same token, it is important to be aware of the taxation implications of the investment structure,” Mr Bembrick says.
“For instance, selecting an investment that returns discount capital gains or fully franked dividend income, is a better option than choosing an investment that may offer the same return, but doesn’t have the same tax advantages.
“So for individuals, family trusts and super funds, listed investment company dividends are often an attractive, tax-effective option, as they are usually fully franked. They also come with the benefit of the CGT discount which shareholders can access if the company sells investment assets.”
Meanwhile, those running a small business in a company structure need to be aware of the company tax rate changes that kicked in for companies carrying on a business after 1 July 2016, and the further changes that apply from 1 July 2017.
“The reduced 27.5% tax rate applied for the 30 June 2017 year where a company’s turnover was less than $10m, and this threshold increased on 1 July 2017 to $25 million, measured based on the previous year’s total income. This means, for example, that a company with a turnover of between $10 million and $25 million would pay tax at 30% for the 2017 tax year, and at 27.5% for the 2018 tax year.
“A key issue is the flow-on effect to franking of dividends, which will apply to any dividends paid by the company during the year. This means it is not just an end of year issue, but is one that is relevant during the course of the financial year.
“A related point is the company tax cuts do not apply to investment vehicles but are only for business entities.
“We now have a confusing system where some private companies are taxed at 30% (and franking dividends at 30%), while others are paying tax at 27.5% and franking dividends at the same rate.”
The new financial year is also a good time to review superannuation, and to ensure super funds, and the underlying investments, are still appropriate for current needs and timeline to retirement.
“Undertaking a super fund review is a useful exercise, and people should look at the fees being charged, the type of investments the fund holds, and whether the level of investment risk taken is appropriate for their needs.
“It is always worth knowing what other funds are in the market, what they charge in fees and the type of investments they make. As the superannuation balance grows, it may also be worthwhile to consider whether a self managed superannuation fund is a good option.
“Making additional superannuation contributions is another good strategy to build wealth in a tax advantaged environment, as long as the additional contributions remain within the mandated limits,” Mr Bembrick says.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.