How To Reduce Taxable Income
MBA, BSc, DipFP
Financial Planner / Managing Partner
How To Reduce Your Taxable Income?
The big question is how to reduce taxable income?
(00:00): What strategies can we use to reduce tax this financial year in order to limit the leakage caused by tax on your overall financial situation, as we deal with this difficult COVID-19 period, just as we did during the aftermath of the global financial crisis in 2008/2009?
Strategy 1 – Pre-Tax Super Contributions
(00:27): Concessional or pre-tax super contributions are a great way in which to reduce tax, and concessional contributions are pre-tax contributions and include the nine and a half percent super guarantee contribution that’s made from your employer.
(00:39): These contributions are tax deductible, and we have a limit of up to $25,000 that we can contribute, pre-tax into super each year. We can now contribute any personal cash we have accumulated into super, to make up the gap between what our employer puts in and this $25,000 limit, and thereby claim an extra tax deduction.
(01:00): In the past, we’ve not been able to use up any of the unused concessional contributions in previous years. However, from this financial year, we can use up last year’s financial year limit, plus make the contribution this year and claim a larger tax deduction, as long as we have less than $500,000 in superannuation, and we’re able to contribute to super.
Strategy 2 – Prepay Income Protection
(01:22): As I mentioned in previous videos, protecting your most important asset, that is your ability to earn income, is critical to ensuring that your financial situation is secure, and that you’ve got a safety net that will protect you during any unforeseen disability, or illnesses that may strike.
(01:39): Not only do these policies act as a safety net, but premiums can also be tax deductible to the individual and a great tax planning strategy, is to prepay income protection premiums prior to the 30th of June, in order to deduct the entire premium, for your income protection in the current financial year.
Strategy 3 – Managing Capital Gains Tax
(02:04): We’ve all experienced the market volatility that’s been ever present due to this COVID-19 pandemic, and we’ve all got some assets that we’ve lost money on since we’ve purchased them.
(02:13): Similarly, you might have assets that you’ve purchased and made profit on over the first six months of this year, that you may have sold before this market correction took place. And you’ve got to pay tax on the capital gains that you’ve generated on these good performing assets.
(02:27): So strategically, if we have some assets such as stocks in our portfolio, that we’ve lost money on, we’ll be able to sell them and use those losses, to offset any previous gains from the same financial year.
Strategy 4 – Use The Tax-Effective Super Environment
(02:42): Now, the last strategy involves superannuation again. Superannuation is a really good vehicle, as it allows you to save for your retirement over the long term, and to reward you for locking away your money for a long period of time, the super system gives you really good tax rates on both capital gains and investment income within the superannuation system.
(03:02): For instance, investment income or interest generated in super, is only taxed at 15%. In pension phase, when we do retire, it’s even better at 0%, whereas outside of super, that income is taxed at our marginal tax rate.
(03:17): This does sound too good to be true as it is a great tax benefit. To limit the amount that it costs the government, there are annual limits, as to how much we can put into super from personally held assets.
(03:33): So there you go. There’s four simple strategies among several that you can look at in order to reduce tax this financial year, and reduce leakage of tax from your cashflow during this difficult COVID-19 period just as we looked at doing at the aftermath of the global financial crisis in 2008/2009.
(03:51): Please note, this is not advice, and you really do need to sit down with a qualified financial planner in order to discuss these strategies, your goals, and your objectives in order to formulate a plan in order to reduce tax this financial year. If you found this video informative, please give us a thumbs up, subscribe to our channel to be kept up to date with any future videos that we present.Interested in knowing more?