Spring Clean Your Finances

Market Insights
9 years ago
4 minutes

Taking advantage of smart strategies to grow your wealth and reduce tax can make a real difference to your finances.

We’ve identified four strategies to get you thinking about the various options available. And this is just the tip of the iceberg! Your financial planner can help you with other strategies that may be suitable to improve your financial position.

Use debt to grow your wealth

While most of us have some degree of debt, we tend to see this as a burden. But by harnessing the power of ‘good’ debt, such as borrowed capital used to invest in assets like shares, you can grow wealth and generate an income. What’s more, unlike your home loan, the interest on an investment loan is generally tax deductible.

One example of this is drawing on the equity in your home to establish an investment loan, and investing this money in shares. By doing this you’re building an income producing asset apart from your home and you can use the income from this additional investment (and any tax advantages) to reduce the outstanding mortgage.

Make your insurance more cost-effective

There are ways of setting up personal insurance so it’s more affordable and tax-effective. The most common strategy is to purchase life and total and permanent disability (TPD) insurance through your super fund.
Insurance premiums can be paid from your existing account balance, your employer contributions (such as superannuation guarantee) or you can salary sacrifice an amount to super, giving you a cashflow advantage.

In some cases, you may be eligible for a discount if you pay your premiums annually rather than monthly and holding all your personal insurances in the one policy can reduce fees. Savings can also be made by consolidating the insurances held by yourself and family members into one policy.

Reduce your mortgage

One way to do this is by having your salary paid into a 100% offset account linked to your mortgage. You can still access the money for everyday transactions. Any money you put in the offset account is deducted from your loan balance before interest is calculated, meaning you save interest and pay off the home loan sooner.

Make the most of your super

By putting more money into your super, you can take advantage of tax benefits that may not be available to you otherwise.
Undoubtedly you would have heard the term salary sacrifice used a number of times. But it’s not about sacrifice, rather about investing a portion of your pre-tax salary into your super fund.

The beauty of this strategy is you pay less tax because your super contribution is taxed at a maximum rate of 15%. This could be much better than your marginal rate, which may be up to 46.5%1. You can even use this strategy for any bonuses you receive.

If taken as cash, your bonus will be taxed at your marginal rate. Depending on your circumstances, a salary sacrifice strategy could reduce the tax rate payable on your bonus by up to 31.5%.
If you’re self-employed2 or not employed, you may be able to claim your personal super contributions as a tax deduction. The more you do this, the less taxable income you receive, which reduces the overall amount of tax you pay.

Consider the caps

Before you decide to invest more in super, you need to be aware that caps apply to different contribution types and penalties may be payable if you exceed the relevant cap. You also need to consider that super contributions generally can’t be accessed until you retire. So if you are saving for something else, you’ll need to consider other options.

Next steps

To find out more about these and other strategies, speak to your financial planner who can help you identify the strategies that best suit your needs.

1 Includes a Medicare levy of 1.5%.
2 To qualify as self-employed, you must earn less than 10% of your assessable income plus reportable fringe benefits from eligible employment.