Three days before the end of last financial year I received a call from a journalist from the Australian Financial Review. He was writing an article for publication the next day about tips for managing your tax that financial year.
With tongue firmly in my cheek I suggested my top tip was “to slap yourself in the face for leaving it that late.”
Fortunately he laughed, agreed with me, and also agreed not to quote me.
June is not the time to start thinking about how you will reduce your tax that financial year. Often it is too late to implement the most tax effective strategies.
June is the time for implementing the final tactics of the tax strategy you planned well in advance.
Right now is the time for tax planning
Most Australians are employees so they have reasonably predictable incomes, even when you include investment income and debt.
Therefore your tax position for the financial year can be estimated close enough to give you a good insight into key tax management factors including:
- Your taxable income
- Your marginal tax rate
- Your tax payable
- Your surplus income after lifestyle expenses
Knowing those factors you can review strategies to decide how you will manage and hopefully reduce your tax.
How to reduce your tax
Tax management should be considered in the broader context of how you manage your money.
The ultimate purpose of managing your money is to ensure you have enough for what you need when you need it.
Yes, reducing your overall tax will increase the money you have.
However many tax effective strategies have significant impacts on your cash flow. Some tax strategies can increase your investment risk way above your risk tolerance and risk capacity.
So tax should not be looked at in isolation. More importantly for most people tax reduction should not be your primary driver in selecting financial strategies. In my experience most people have much bigger financial fish to fry.
I have published a detailed introduction to key ways to reduce your tax. Read the article and consider the strategies that may be appropriate to you this financial year.
What you can do right now
My top tips for the tax effective financial strategies you can implement right now include:
- Salary sacrifice a regular amount to superannuation based on what you have estimated you need to save in order to achieve your financial independence goal
- Purchase an income protection insurance policy (if you don’t already have one)
- Contribute a regular amount after-tax to superannuation related to your eligibility for the spouse contribution tax offset and/or the Government co-contribution.
- Shift your cash savings into the name of the lowest income earner (or better still onto your home mortgage)
- Submit a PAYG Variation form to your employer considering the expected net taxable income loss from your geared investments (e.g. property). This strategy is better for your cash flow and avoids giving a large loan to the Government.
What you do in June
In June you make tactical tweaks to your strategies. For example:
- Advise your employer of how much of your anticipated annual bonus you want to salary sacrifice to superannuation.
- Adjust the after-tax amount you contribute to superannuation that month now you can closely estimate your eligibility for the co-contribution and tax offset.
- Pre-pay interest on investment loans
- Self-employed people can make their annual deductible contribution to superannuation based on what they earned that year.
- Extra charitable donations from your surplus
Guidance on which strategies are right for you
Not sure which tax effective strategies fit your situation and goals?
If you’re in Perth I recommend you attend my next DIY Wealth Creation for Busy People course. You’ll discover how you can strike a balance between spending, saving and tax.
If you’re outside Perth or can’t make the course then call me to discuss financial planning.