“In this world nothing can be said to be certain, except death and taxes.”
– Benjamin Franklin
Taxes are a fact of life – one we can’t opt out of. That said, paying more than you are required to is just bad management. You don’t need to resort to offshore accounts in the British Virgin Islands. Sensible tax planning can maximise the amount you take home – legally. Dentists, as high income earners, have a number of vehicles available to them:
1. Mortgage Offset Account
If you have a home loan, tipping some extra cash into an offset account will reduce the amount of interest payable on the loan. Interest avoided isn’t taxable, so the effective after-tax return on your extra cash is your mortgage rate. That can be hard to beat, particularly when you consider that it’s a risk-free guaranteed return.
2. Contributing Extra to Super
Salary sacrificing into super (up to a maximum of $30K-$35K depending on your age including employer contributions) is a very effective way to reduce your tax bill. If you’re on the top marginal rate, saving an extra $1,000 a month by salary-sacrificing into super can shave over $4,000 off your tax bill.
You can also contribute after-tax earnings to super (though this is capped as well). Compared with investing after-tax money in an investment in your own name, income generated by investments held in super is taxed at a maximum of 15% and only 10% on capital gains (if held for more than 12 months). For those eligible for transition to retirement their money grows in a zero tax environment.
3. Discretionary Family Trust
A family trust is an effective way to hold investments offering tax-efficiency and in certain circumstances a level of asset-protection. By separating legal and beneficial ownership of your assets, these structures allow you to keep control of your investments but gives the trustees discretion as to which beneficiaries receive income and capital gains from year to year. This can suit someone on the highest marginal tax rate with family members who are on lower tax rates.
4. 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. The income tax reduction comes about thanks to receiving less salary income (and therefore paying less tax) and more concessionally taxed pension income from your super fund.
5. Investment Bonds
These vehicles are most applicable to those on higher tax rates. Earnings from an investment bond are excluded from personal income tax because the bond provider pays the tax at 30% internally, leaving you nothing to declare on your tax return. To get the full 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 then there will be some tax payable.
These vehicles can also be combined with family trusts in certain situations for optimal outcomes.
6. 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%. There are no CGT concessions though, so the characteristics of the investment held in a company need to be carefully considered. Another approach would be to have a company as a beneficiary of a family trust which would allow you to put a ceiling on the tax rate applied to trust income at 30%.
A Stitch In Time…
Like all financial decisions, you maximise your outcomes most effectively when you take action early. With a comprehensive tax-aware wealth management strategy you can maximise your after-tax returns to create financial comfort for you and your family.