An Exciting Discussion about Tax-Deductible Investing

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Coming up to the tax reporting season, many of us consider viable tax deductions… oh wait.  If you’re a business owner, you won’t even be thinking of doing end-of-year tax preparation now. But you might be finalising needed purchases that are within the $20,000 immediate asset deductible limit. As a canny business owner, you may be considering ways your business and life can improve in the next Financial Year.

Rather than focussing on short term tax planning, what about investing for the longer term?

So let’s talk about Deductible Debt. Excited? Good.

This is debt where the interest and costs may well be tax deductible – either in advance or in arrears.  A song to the hearts of many a medium to high individual earner on the 32.5% or 37% marginal tax rate. But remember your tax-free margin – making it a little tricky to work out in the head.

You could be deciding whether to invest through company, or through individual, or through a trust. The base rate entity company tax is 27.5% for the companies with aggregated turnover threshold less than $25 million for 2017-18.  Trust taxes – it depends on the trust beneficiaries’ tax rates.

Where to Invest for the Future

Some of the areas where you might consider expending on an investment and then getting tax deductible interest – now or at the end of next financial year – are:

  • Commercial premises – buying your own or a nearby premises. (As well as accounting advice, you’ll need a commercial loans broker for this big step)
  • Share/ETF investing – possibly with margin lending and deductions on the interest rate. (Currently it varies depending on whether in advance or in arrears and how long, but say around 6.49% topline, quite a bit less after tax deduction)
  • Super – on personal drawings, rather than just 9.5% SG, you might elect to pay in 11 – 15% of your pre-tax individual income, as a director or shareholder. However, your ability to pay only 15% contributions tax is limited to the concessional cap, which has gone down to $25,000 per year from 2017-18, for every age.  

Getting a tax-deductible loan is only one reason to invest, so ensure all the other variables are in place first, like a secure and growing asset.

Most newer premises have tax deductible components on the building and fittings that can also aid cash-flow (the Depreciation Schedule will clue you in). And franked dividends are by nature, already taxed either on part or 100% of the amount. The thing with shares and ETFs is they are more liquid and while they should be held more than one year, they can be sold right away if in dire need.  

Helping your Net Wealth

The exciting part comes in to play when you realise that your personal wealth can be helped by the leverage combined with some growth in:

a)  the ASX, or b) commercial property, or c) a mix of assets in your super.

It also helps to diversify away from having every wealth hope based on your business’s future. Call us if you would like some holistic advice on investing in a tax-minimising manner.