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Keeping savings in a mortgage offset account can save thousands of dollars of tax that you’d ­otherwise pay on a savings account.

And a family trust can shave big dollars off a ­household tax bill, thanks to distributions going to lower-earning family members including children over 18.

Taking a careful look at where you’re keeping your assets can keep more of your income in the family coffers.

These tax-minimising strategies are right under your nose – they’re widely available, legal and can make a significant difference to your overall wealth creation.

One of the simplest everyday strategies is setting up an offset account against a mortgage to harbour any extra cash. Superannuation, too, offers great tax benefits to boost retirement savings, particularly if you are close to finishing work. Once a super fund starts paying a pension, the earnings on the investments within the fund are tax-free, along with any money taken out of the fund.

But there are caps on the amount that can be contributed to super each year, and not everyone wants to wait until retirement to access their savings. There are plenty of major expenses to consider along the way.

Mortgage offset account

This is more often viewed as a strategy to cut interest costs and the length of the loan on a ­mortgage. The other side of the equation is a tax saving on money that would otherwise have been parked in a savings account and earning interest, on which you would be taxed at your marginal tax rate.

Say you’ve accumulated some cash or sold some assets and you’re not sure what to do with the proceeds. If you’ve got a home loan, putting this extra cash into an offset account can not only reduce the amount of interest payable on the loan but it will also stop you paying tax on the interest you would otherwise have earned.

After-tax super contributions

Much of the focus with super is on the tax savings from making pre-tax contributions through salary sacrifice. This is because of the 15 per cent concessional tax rate paid on super contributions up to the age-based caps.

But there are also potential tax savings from non-concessional or after-tax contributions, “The thing to focus on is the environment that your money is invested within,

“Compared with investing post-tax money into an investment in your own name, investing via super is taxed at a maximum of 15 per cent on earnings and 10 per cent on capital gains; and for those eligible for transition to retirement, their money grows in a 0 per cent tax environment.”

The contribution forms part of your “non-taxable component” within super – which for people starting transition to retirement pensions before age 60 means that this portion of their income is tax-free.

There are also caps on after-tax contributions.

Discretionary family trust

An effective way to hold investments, a trust is a separate investment structure where assets are controlled by one or more persons (the trustee/s) on behalf of a group of other persons (the beneficiaries).

A discretionary trust allows the trustee to decide who gets the income and capital the trust owns. These can suit someone on the highest tax bracket with family members listed as beneficiaries who are on lower rates.

For example, income from an investment owned by the trust could go to members of the trust on lower incomes.

The trust does not pay tax, but the beneficiary does, with income and capital gains derived by a trust generally assessed at the tax rates of the beneficiary.

Using a properly drafted discretionary trust, distributions can be made to the most appropriate members of the trust in terms of their tax status or other criterion.

More income may be distributed to beneficiaries on lower tax brackets or those with no other income to utilise their $18,200 tax-free threshold, and potentially the low-income tax offset (LITO).

Capital gains may be distributed to a beneficiary who has capital losses available or who can make use of the 50 per cent general discount. And franked dividends may be paid to a beneficiary who can use the imputation credits to eliminate or reduce tax on other income.

Trusts can use the 50 per cent ­discount on capital gains tax on the sale of an asset if it has been held for a minimum of 12 months.

Trusts can be more complicated to set up and maintain, so there are higher set-up and compliance costs. Set-up costs will include fees payable to the specialists who advise on setting up the trust, government stamp duty, registration fees and establishing a ­corporate trustee.

There will be ongoing costs for specialist advice on completing the trust tax return and other records that must be lodged annually.

A trust is a separate entity to the trustee and the requirement is that personal affairs and those of the trust are kept quite separate. As well as a separate bank account and some form of accounting records for the trust, all decisions made by the trustee – for example payments to beneficiaries – must be ­properly documented.

As far as the distribution of income goes, all taxable income earned during the trust’s financial year should be distributed to beneficiaries and included in the beneficiaries’ taxable income in the same tax year. Any undistributed income is taxed within the trust at the top personal tax rate of 46.5 per cent including the Medicare levy.

Further, trust losses cannot be distributed to beneficiaries. Where a discretionary trust has a nil net income or a net loss, it will not be entitled to a refund of excess ­imputation credits.

Transition to retirement

If you are over 55, the combination of salary sacrificing pre-tax income into super and drawing an income from super benefits can be very tax effective.

Not only does it get more into your super fund but your cash flow remains the same. You first have to start a transition to retirement (TRIS) income stream funded from your super fund. A minimum income of 4 per cent and a maximum of 10 per cent must be drawn from the account balance each year.

You then also start a salary ­sacrifice arrangement with your employer so part of your pre-tax salary is redirected into super, replacing salary with ­superannuation income and redirecting salary to super will “improve net income, reduce taxation and increase the end ­retirement benefit”.

The income tax reduction comes about thanks to receiving less salary income (and therefore paying less tax) and more concessionally taxed pension income.

On top of that, salary sacrifice super ­contributions are subject to 15 per cent tax, which means much more goes into super than if you contributed after-tax income.

Once you turn 60, you receive the whole income stream tax-free.

Investment bonds

Long dismissed because there was little choice in what your money was invested in, investment or insurance bonds are back in favour because earnings don’t need to appear on your tax return and there’s now far greater choice in underlying assets – from bonds to Australian and ­international shares.

They suit younger people on marginal tax rates above 30 per cent who are already contributing to super, and who want the money for purposes other than retirement.

They also suit executives under 60 who’ve already contributed the maximum concessional (or pre-tax) $25,000 to super, older investors who can no longer contribute to super and those saving for their ­children’s education.

Earnings from the underlying investments in the bond are excluded from personal income because the bond provider pays the tax at 30 per cent internally – less any deductions and franking credits – leaving nothing to declare on your tax return. To get the full tax benefits, you have to leave your money in the bond for 10 years. After this, there is no tax to pay.

It is possible to get access to the money before 10 years but there will be some tax payable.

The bonds can be added to under what is known as the 125 rule, which means investors can contribute up to 125 per cent of their previous year’s contribution without re-starting the 10-year rule period. This is a big bonus for those with large amounts of money earning returns they want to keep off their tax return.

This is why they also work for retirees who can’t contribute any more to super and are entitled to government benefits such as a part pension or healthcare card.

“Money such as an inheritance or the proceeds of a house can be invested in an insurance bond to minimise tax.”  “Because it doesn’t get counted as income, it doesn’t impact on government assistance.”

For those making the decision to invest in insurance bonds, the next step is to think about their risk profile and how they want the money invested.

How well the investment does depend on the underlying asset allocation.

Providers with a master fund approach, where a number of fund managers are selected to look after the investment.

There are several education bonds that carry the same tax advantages, with the sole purpose being to save for a child’s education.

An investment company

Setting up a company through which investments are bought is one way of ensuring the tax paid is never more than 30 per cent.

An ­investment company can assist in keeping funds accessible and outside super, or in cases where after-tax super contributions have already been used. But because a company does not have access to the 50 per cent capital gains tax discount, we generally recommend keeping income type assets in a company rather than growth assets. “Gains are taxed at the full 30 per cent.”

It works when a company is established and assets are bought in its name.

This can include any type of investment – managed funds, shares, direct property, cash – depending on your portfolio needs and overall risk profile.

“We tend to keep a client’s company portfolio defensive [bonds, high interest cash, term deposits] and tilt their super/pension portfolio to more growth to match their overall risk profile. In super, the capital gains tax is no more than 10 per cent.”

When income is distributed, the person receiving it pays tax at their marginal tax rate less 30 per cent company tax. It makes sense to try to distribute to someone on a lower tax rate at a given point in time. An example could be ­someone who has worked only part-time over the year.

As well as the 30 per cent tax rate, other advantages of an investment company include the ability to choose the timing of a distribution from the company to a suitable individual to minimise personal tax payable. A company can also be discontinued at any time. On the downside, expect some additional costs with setting up and maintaining a company.

For an obligation free chat, call us today on  03 9416 2065 or send us a quick message and we will get back to you promptly.


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