With the end of financial year approaching quickly, now is the time to discuss with us the actions you can take before 30 June 2021 to reduce your tax and grow your wealth.
Many business owners reduced their 2021 PAYG instalments to Nil during the COVID-19 period, but with JobKeeper payments you may find that you generated additional profits and have tax to plan for.
For 2021, key priorities are likely to include:
- Maximising superannuation contributions without exceeding the relevant limits
- Bringing forward deductible expenses
- Deferring taxable income
- Managing capital gains
- Using a Family Trust or a “bucket company” to cap your tax at 26% or 30%
TAX BENEFITS FROM SUPERANNUATION CONTRIBUTIONS
There are several ways you can receive tax benefits from super contributions:
How “Concessional” Super Contributions are Taxed
Concessional (before tax) super contributions include employer super contributions made on your behalf, any salary sacrifice contributions you make, or any personal contributions that you claim a tax deduction on in your tax return. These contributions are taxed at 15% when they are received by your super fund (up to a limit of $25,000 per year), provided you earn less than $250,000 annually.
Personal super contributions are especially useful for people who are on higher marginal tax rates or if their employer refuses to set up a salary sacrifice arrangement.
The people who would benefit the most are those who earn above $45,000 per year, as this is where the marginal tax rate plus Medicare Levy rises to 34.5%. Claiming a tax deduction on super contributions effectively makes your tax rate only 15%. That’s a big tax saving.
Catch Up Super Contributions
From 1 July 2018, people can make “carry-forward” concessional super contributions if they have a total superannuation balance of less than $500,000. Taxpayers can access their unused concessional contributions caps on a rolling basis for five years. Amounts carried forward that have not been used after five years will expire.
HOW LOW-INCOME EARNERS ARE TAXED
If you’re a low-income earner (earning up to $37,000 per year), the low-income superannuation tax offset ensures that you don’t pay a higher rate of tax on your super contributions than your income tax rate. The offset will be paid directly to your super account and the payment will be equal to 15% of your concessional contributions for the year, capped at a maximum of $500.
Individuals who earn between $39,837 and $54,837 during the 2021 financial year may also be eligible for super co-contributions from the government of 50 cents for each dollar, up to a maximum of $1,000 in non-concessional (after tax) contributions.
HOW HIGH-INCOME EARNERS ARE TAXED
If you earn more than $250,000 a year (including super), your concessional contributions are taxed at an additional 15%, bringing the total tax on these contributions to 30%. However, this is still less than your marginal income tax rate of 47%. This extra 15% is known as Division 293 tax. Only the concessional contributions which make your total income exceed $250,000 are subject to the additional tax.
If your concessional contributions exceed the concessional contributions cap of $25,000 per year, the excess is included in your tax return and taxed at your marginal tax rate (less an allowance for the 15% already withheld by your super fund). You can choose to withdraw some of the excess contributions to pay the additional tax.
PROFITS FROM A TRUST?
Do you have a Discretionary or Family Trust that generates profits? If yes, then this strategy may apply to you.
A “bucket company” allows you to “cap” the tax on profits distributed by a trust to 30% or 26%. This is much less than the individual top marginal rate of 47%.
Here’s how this works:
Assume a trust earns $250,000 in profits from business.
Option 1: Distribute profits 50 / 50 to Individuals 1 and 2. Total tax (inc. Medicare Levy) payable = $67,574 (27%)
Option 2: Distribute $90,000 each to Individuals 1 & 2 and distribute balance of $70,000 to a “bucket” company assuming a 26% tax rate. Total tax payable = $59,074 (24%). (Note: This strategy assumes that the $70,000 in cash is available to be distributed to a bucket company, otherwise what is known as a Div 7A Loan Agreement will need to be entered into and loan repayments made over a 7 year period.)
So a net wealth saving of ~$8,500!
The cash in a “bucket company” can be used to invest in shares, property, or to lend to other entities at a specific interest rate.
But: You need to discuss this with us BEFORE you do it. There are different tax laws that affect the use of this strategy, and whether your “bucket company” can use a tax rate of 30% or 26%.
As your Accountants, we are very aware of these tax laws and can make this easy for you.
The sooner we get started, the sooner we can help you save tax. Contact us well before 30 June 2021 for enough time to implement tax saving strategies.
Imagine what you could do with your tax saved:
- Reduce your home loan
- Top up your Super
- Save for a holiday (when we can all travel again!)
- Deposit for an Investment Property
- Pay for your children’s education
- Upgrade your Car
Below is a list of articles in this months newsletter:
- Vicarious liability
- Seasonal business changes
- Post COVID19 finances
- Employee mental health
- Cost of compliance
- Social media marketing