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Get tax smart

As the financial year ends, all taxpayers should be on the look out for ways to legally reduce the tax they pay. This is an unchallengeable proposition.
Do yourself a favour and ask yourself these taxing questions:
. Are you happy with the tax you currently pay?
. Have you read the Tax Act?
. Have you sought out a great tax adviser who has looked at your position with an eye to legally reducing your tax bill?
. And finally, if you answered "no" to all these questions, then it's time you got a whole lot smarter, tax-wise.
Look ahead
Let's face it, there's not much time left to reduce your tax, so the plan should be to start now to ensure that next year's tax bill shrinks.
Individuals need to do some homework on all of the legitimate expenses they are able to claim. Keeping all receipts relevant to you earning income is essential and I recommend keeping a diary for some small expenses. For example, cash put into a parking meter when going to a course for professional development.
Get the knowledge
If you don't want to visit a tax expert (and I think you should), at least go to www.ato.gov.au to see what expenses are deductible for various careers. This website is worth spending some time on.
Also talk to work colleagues to see what they have learnt about tax-deductible expenses.
Consider an investment property
If your tax bill is big, it might be time to look at buying an investment property, or else some shares using a loan. Negative gearing is not just a way for people to buy an investment property or shares, it is a method to own assets that grow in value.
In case you don't understand how it works, have a look at the following simple explanation.
Negative gearing explained
Assume you buy a one-bedroom flat in Sydney for $400,000. You borrow the lot using interest only at 7%. The interest bill is $28,000 and you get rent of $300 a week, which means you get slightly more than $15,000. Throw in costs of say $3000 for other expenses of being a landlord and you have $31,000 going out and $15,000 coming in. Call it a loss of $16,000. This can be deducted off your annual income and effectively brings down your tax bill.
A smart move
By the way, you can inform your paymaster that you're expecting a loss from your investment property and he/she can adjust your weekly tax bill, so you don't have to wait an entire year for a tax refund.
The same process works for shares and can be a great way to hold a bigger load of shares while reducing your tax bill.
By the way, if share prices fall or there's a property slump, this can make you feel a bit sick, but provided you keep your job and can make your payments, then the market should eventually move in your favour.
Expert know-how
Tax experts and financial advisers can come up with other strategies to lower your taxes and increase the chances of building your wealth.
Starting a business - even a part-time one - can not only give you income, but also give you legitimate tax deductions. You can even borrow for a business, and once again, the interest is deductible and can help you own an asset that increases in value.
Enter the simplified tax system
People in business should look at the benefits of enrolling in the Simplified Tax System (STS). As of 1 July, the turnover test increases to $2m GST exclusive.
The STS option is also good for the treatment of deductions. For example, a non-STS small business can claim an immediate deduction for assets costing less than $100 GST inclusive.
However, an STS small business can claim an immediate deduction for assets costing less than $1000 GST exclusive, which is a good reason to buy up before 30 June.
There are advantages of being in an STS business and if you don't want to get an accountant to explain it, then try the ATO's website or a good small business tax book.
A multitude of tricks
Without doubt there are many tax tricks worth knowing that can mean you can save yourself from the impost of a very big tax bill. Generally, if you have lost money on your share investments, it's a good idea to sell those shares to take the losses and set them against any shares you have sold that have made a capital gain.
Some advisers tell their clients to hold off selling their shares until after 30 June to give a year's breather before having to pay the capital gains tax. Some people might sell their shares in a year when they are not working to minimise the tax slug.
Others might build a share portfolio in the name of a non-working partner to once again reduce the potential tax bill. In fact, income-splitting, done legally, can reduce overall family tax bills. This works well, say if a husband and wife were both teachers, IT consultants, accountants, etc. Also in the area of super, there are so many tax tricks that the novice might ignore while the expert would always have a good look at.
Savings can outweigh the cost
And this is the point, an expert costs you money, but in so many cases they will find you savings in one year equal to or more than their bill. Then for every year after, this could be contributing to your bottom line.

Undoubtedly you could teach yourself with homework, but if you weren't a great homework-type at school, then it might pay to consult an expert. 

Published on: Thursday, June 21, 2007

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