Understanding End of Financial Year Strategies
Hang on a minute! I’m not going to bore you with topics such as – “Top tips for preparing for EOFY” “Tips for ….” You get my point. I’d like to focus on how these “top tips” may impact you
Pay Interests in Advance
We’re making a big assumption that you’ve started to create wealth using some growth assets (property or shares). If you’ve borrowed money to invest in these asset classes, then consider structuring the loan to allow you to pay your interest costs in advance. Benefits of pre-paying interest may be suitable to you.
Let’s break this down in dollar terms. Say your interest repayment on an investment loan is $20k per year. Come June 30, 2017, you get to offset $20k against income earned. By paying next year’s interest cost – say $25k – by June 30, 2017, you get to offset $45k this tax year. Of course, you need to set it up in a way that each year you’re paying the interest in advance.
Beware of the traps! Most banks will have a facility to accommodate that but you may pay a premium for that benefit and chances are you may be locked into a fixed rate.
Interest in advance is a fantastic strategy, helping individuals, with a large income in that particular tax year, benefit from deductions to minimise their tax liabilities. However, it needs to be done right because the cost of breaking a fixed rate mortgage may outweigh any short-term benefits derived from this strategy. So, speak to your professional adviser to ensure that this is the best strategy for you based on your personal circumstances.
Pre-paying Income Protection Insurance
Well, I’m assuming that by now you know the importance of Wealth Protection and you’ve protected your number one asset – Income. Good idea! One key EOFY tip out there is to pay and pre-pay annual premiums.
What does this mean to you?
Paying premiums annually by June 30, allows you to claim the cost of the insurance as a deduction immediately, reducing your out of pocket expenses and saving you money through premium discounts. Pre-paying next year’s premiums by June 30, allows for a greater deduction. But beware! Once you’ve done this, you need to continue to do this each year. Should you stop prepaying, you’ll miss out a year’s deduction as you’ve already claimed that deduction.
Paying insurance premiums in advance is a great strategy. It is even more powerful if you have an unusually large income in that tax year – through the sale of assets or receiving bonuses – taking you into a different tax bracket. This strategy may help in minimising that impact. We caution you to seek qualified financial advice before doing so.
From 1 July 2017, contribution caps change for all working Australians. This has caused a frenzy out there with some people rushing to maximise their contributions by June 30, 2017. Remember, Superannuation itself is a tax structure and not an Asset class. Making extra contributions into super – much as it can be a relevant strategy – might not necessarily be the right strategy for everyone.
Yes! Superannuation is concessionally taxed. Which means, for someone earning $100k, if you were to make a $1,000 contribution into super, you only pay $150 in tax as opposed to $370 in tax. So, a great tax savings strategy.
BUT!! That tax savings is locked in super and cannot be accessed until you reach a preservation age. That is not necessarily a bad thing as you’ll eventually need the savings in retirement years.
I’d strongly advise anyone thinking of maximising their contributions this tax year to seek professional financial advice before doing so. You’ll have to consider your personal circumstances in line with other strategies that may be well suited to you and your investment objectives.
General Advice Disclaimer
“Things you should know: In preparing this material, no account was taken of the objectives, financial situation and needs of any particular person. Before making a decision on the basis of this material, you need to consider, with or without the assistance of a financial adviser, whether the material is appropriate in light of your individual needs and circumstances.”