Tax planning is often overshadowed by other financial advice needs. Investment, superannuation and personal insurance make good examples. In fact, the majority of new clients we see are seeking advice specific to these areas alone.
Tax planning, on the other hand, is rarely considered an area that requires expert financial advice. It should be. Not addressing your tax position can cost you a lot of money – particularly over the long term. Paying too much tax can also mean it takes longer for you to achieve financial goals such as retirement.
To illustrate my point, let’s look at an example. Take an average Australian family; 2-3 kids, a mortgage, mum and dad working full time to try and get ahead. Now let’s assume the parents are 40 years old, earning $75,000 pa each and want to retire at age 65.
Over the next 25 years, combined, they will earn a staggering $3.75m. And this figure does not even account for any wage increases resulting from promotions or indexation. Nor does it account for the income tax the family has to pay.
Using today’s tax rates, the family will pay a whopping $850,000 to the tax office over the next 25 years. This means around 23% of the family’s income does not see their bank account!
But what can the family do, we all have to pay income tax, right?
Yes, income tax is necessary for a range of reasons, but the family can seek expert advice to manage the amount of income tax they pay. Managing income tax is crucial to achieving long term financial goals. Implementing effective strategies early on often means building up an asset base faster and retiring sooner.
Ok, so what are the right strategies?
This will depend on your individual circumstances but broadly speaking, strategies such as salary sacrificing/packaging, getting the right ownership structures in place before purchasing assets (e.g. company, trust), maximising tax deductions by keeping good records, investing in tax-effective investment vehicles and asset classes, tax-efficient use of debt and taking out Income Protection insurance should all be considered.
An expert can assess your situation and recommend strategies that are appropriate for you.
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