posted in: Tax Planning
Don’t get derailed by the end of the financial year hype!
Why sticking to a long-term plan and avoiding end of financial year gimmicks is often the best way to go
The media hypes the end of financial year. Financial experts are wheeled out to give helpful tips on how to reduce our tax. Shops like Officeworks helpfully remind us that we could buy some new equipment before 30 June.
The air crackles with urgency. Businesses are told to reduce hard earned profit. Individuals feel like they should be cleverly embracing some kind of tax break that they’ve overlooked.
Do your research and stick to your long term plans
As financial planners, we recommend that you do your research before committing to any short term initiative. Financial planning is about long-term planning. One month of the year shouldn’t make a significant difference to Your long term plans. The incentives most often talked about at the end of financial year typically aren’t actually game changers for individuals or companies.
Rather than getting caught up with the latest gimmick (or the latest tax-deductible laptop), you should keep focused on your long-term plans and strategic goals. Don’t let the hype make you deviate from your longer term strategies unless a certain tax incentive is beneficial to you. (And of course if you don’t have a longer term strategy, you should get one.)
Below, we demystify some common areas where you might be tempted to think short term.
Many business owners prioritise saving on tax at the end of the financial year. While saving on a large tax bill is a benefit, there’s a major consequence to reducing your income to minimise your tax if you’re self-employed or running a small business.
By reducing your income to save on tax, you might find this limits your ability to borrow money to pro-actively invest. The bank will often just look at your income after tax. They won’t be interested in hearing that a lower income is a tax strategy; all they’ll hear is “lower income”.
In many cases you would be better off paying a bit more tax so you have a greater borrowing ability for future investments such as a home or investment property). Again, it comes back to your long term goals. How will a short term saving impact your future by reducing your ability to Access investments such as property.
End of year hype is often generated around property investments and tax deductions. But don’t invest in a $600,000 property investment purely for a tax deduction in a certain financial year. It’s crucial that you ensure that it’s a sound investment for the long term, beyond the initial tax savings sugar hit.
You’ll quickly forget that tax saving when you find out you rushed into investing in the wrong area. Making a poor investment decision will cost you much more than you saved in tax when your investment is going backwards Many property investors have found this to be the case when investing in areas oversupplied with investors or regions susceptible to economic down turns i.e. mining towns.
Pre-paying interest on an investment property in advance. Does it work?
For those of you who own an investment property or properties, pre-paying the coming years interest could be one way to increase your overall tax deduction for that year.
For this strategy to be effective it really depends on your possible income for the current financial year and if there is likely be to material change to that income level at some stage in the future i.e. if you know your income is likely to be less in the following year then potentially you could be getting a greater tax deduction by bringing forward the following years interest payments. If that’s not the case, then you could simply being more interest without any material gain.
What should you do with your superannuation at the end of the financial year?
If you’re heading for retirement, you could consider maximising your super contributions before the end of the financial year. For example, you can put in a maximum of $25,000 per year in concessional contributions (employer contributions or personal contributions where you can claim a tax deduction). However, due to recent legislation changes if you miss the 30 June cut off, you can actually carry this amount forward into the next financial year. There’s no need to rush the decision because the EOFY clock is ticking.
Non-concessional contributions (non-deductible after tax contributions) still have a three year limit, i.e. $100,00 a year or $300,000 brought forward to cover the next three years. The most common type of non-concessional contributions are personal contributions where no income tax deduction is claimed.
If you’re putting large sums of money into your super, changes to the super structure can obviously have an impact. There are rules that need to be followed and you need to be aware of them and the timing of things that need to be done prior to financial year end.
Paying attention to your super is important because it’s money that’s going to grow. If you’re a retiree, your money is going to grow in a really tax efficient environment including potentially being able to pull it out tax free when you reach preservation age. However, if you’re younger and in a wealth building phase then the end of financial year quite often makes no difference to your super especially if your investment objectives outside super are of greater priority i.e. buying a home.
Most clients with a well-structured financial plan that accurately reflects their current lifestyle and future aspirations don’t get caught up in a cycle of living year to year. They know where they are and where they’re going year-to-year, not month to month, so they don’t get distracted by hype coming from people who have an incentive to part them from their money.
You’re simply not going to make some enormous stride on 30 June. Nothing connected to the end of financial year is going to be a winning lottery ticket. The winning ticket is having a plan that you’ve taken the time to think about and that you can execute over a medium to long term.
Montara Wealth is a privately owned financial planning company. Being privately owned allows us to start by designing a bespoke strategy just for you, not by working backwards from a generic suite of products and sales targets.
If you’re looking for a planner with a long track record of acting in their clients’ interests, of offering ongoing service and transparency, please give us a call.
The above is article is general in nature and doesn’t consider your personal situation or objectives. As with all matters relating to tax and investing, we recommend you seek the services of a professional such as an accountant or Financial Planner before undertaking any investment or tax decisions.