Get an early start on your new fiscal year finances

Bruce Brammall, The West Australian, 9 July, 2018

The New Fiscal Year

A big tax bill can sometimes be a nice problem to have – particularly if it has come care of a monster bonus.

I got that very call from a new client, just a week or so before the end of the financial year.

“I’m getting a $50,000 performance bonus and another $150,000 in company shares issued to me. It’s all coming before the end of the financial year. What can I do?”

As I said, sometimes it’s a nice problem to have. Sadly, the answer for her was: “Bit late. Not a lot”.

Sure, she could donate some money to charity and do some other minor purchases. She could have, potentially, quickly set up a geared investment and pre-paid some interest (but margin loans aren’t as simple as they used to be).

Her super contributions had already been maxed at her $25,0000 concessional contributions limit.

The dying days of a financial year is not the time to start sorting out this problem. June is when final adjustments are made.

July … you know, NOW … is when smart people start planning their finances and taxes. (Which is exactly when our high-income earner above understands she needs to put some work for this financial year.)

If you think it’s likely you’ll get a big bonus, a significant pay rise, sell an asset and make a capital gain or you’ve just made a new financial year resolution to get your act together, now’s the time to get serious.

What should you be doing? Today, I’ll focus on three important strategies.

Firstly, consider negatively geared investing, such as into property and shares.

The point of geared investment is that if you make a tax loss on a cash basis on the investment – that is, the income received in rent or dividends is less than the costs of holding the investment, such as interest – then you’re able to claim a tax deduction on that income loss.

For example, rent from a property might be $20,000. But the cost of interest, rates, insurance, agents’ fees, depreciation and general maintenance is $40,000. And that $20,000 loss is then used to offset your other income, thereby reducing your overall tax position by up to $9400.

The same can also be applied to the purchase of equity-based investments.

But be warned – geared investing is not for everyone. Any geared investing involves taking higher risks. And anyone who is contemplating geared investing needs to understand the risks involved. (Seek advice from a financial adviser.)

Second, super contributions can now be used by almost everyone as both a way of beefing up your superannuation fund and as a tax deduction (without needing salary sacrifice options).

From July 2017, employees became able to make tax-deductible contributions to super, at any time during a financial year.

These personal tax deductions make up part of your annual $25,000 concessional contributions limit, which also includes what your employer contributes as concessional contributions.

That is, if you’re earning $100,000 and your employer puts in 9.5 per cent as Superannuation Guarantee payments, then they  have contributed $9500. You could tip in up to a further $15,500 into your super fund.

It’s not as good a tax lurk for very high income earners, however. Those earning more than $250,000 a year have to pay extra tax on their contributions (30 per cent instead of 15 per cent). And if their employers are already contributing more than $25,000, their ability to use this as a tax deduction is limited.

Thirdly, something that far too few Australians do … protect their income with insurance. If you earn a reasonable income and you don’t have income protection, you’re possibly crazy. What happens if your wonderful income suddenly stops?

Income protection will replace up to 75 per cent of your earnings in the event that you can’t work because of accident or illness.

And it’s tax deductible.

Depending on your gender, age, occupation and smoker status, an income protection policy will cost most people somewhere between $800 and $4000 a year.

But what it’s protecting is millions of dollars. If you’re a 30-year-old earning $80,000 a year, it’s protecting $2.8 million (35 years times $80,000). If you’re a 40-year-old earning $150,000, it’s protecting $3.75 million (25 years times $150,000).

The time to start proper planning of your finances is now. Not next June.

Bruce Brammall is the author of Mortgages Made Easy and is both a financial advisor and mortgage broker. E:

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