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Tax Australia: Effective Reduction Strategies Explained | Loopholes Your Accountant May Use In 2020 - YouTube
Channel: Kent Cliffe
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in Australia we pay a lot of tax but
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have you actually physically thought
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about if I said go out right now and put
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$50 fuel in my car how much tax I would
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be paying well let's just say I earn
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$100,000 first things first is 37% of
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that would be going as income tax then
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we're working on 2% Medicare surcharge
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then we are paying 10% GST on the fuel
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price plus as excises hidden within that
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fuel price then we all pay council rates
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of water rates and we pay utilities
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which are all government-owned and we
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need a paying regardless anyway and
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before I even got my money my employer
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probably paid the government payroll tax
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everyone hates paying tax and the
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simplest way to pay less tax is to not
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earn an income but we can't live off
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hopes and dreams so there are these
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smart boffins called accountants which
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go out that way every year to think of
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different strategies in order to save
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you tax I'm not a lawyer and I am not an
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accountant but what I wanted to do is
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share with you some things that I have
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heard around the traps that middle to
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upper income earners use to optimize
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their tax affairs now I didn't want to
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make this video a generic maximize your
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work deductions I wanted to dig a little
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bit deeper this is an important
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disclaimer and as I mentioned before I'm
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not an accountant I'm not a tax lawyer
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I'm not a financial adviser and this is
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not any form of any financial advice
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whatsoever this is simply just general
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discussion points that you will need to
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raise with your own advisor so that they
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can give you guidance based on your
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personal financial circumstances now it
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is important that you go to the
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disclaimer that I have linked below in
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the description because once you
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continue past this point on their video
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you agree to be bound by the terms and
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conditions in the disclaimer
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some might say that tax is a lot like
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Fight Club in a sense that the ATO
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considers your intent massively when
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determining your tax situation so it is
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essential to never go into a scheme with
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a view to reduce tax and you should
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always seek professional advice
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firstly let's talk about capital gains
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tax capital gains tax is a tax that you
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pay when you realize a gain on and
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this is not for enterprising and
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conducting business this is purely
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buying assets to invest in and speculate
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to sell at a higher price the first tax
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haven
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clickbait you must consider is your
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primary place of residence provided a
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house qualifies as a primary place of
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residence if you sell it for more in the
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future you don't pay any tax on that
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gain now there is a common misconception
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with qualifying for a primary place of
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residence the ATO has a fairly
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comprehensive list of what qualifies you
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as a primary place of residence but the
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misconception is that you need to live
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in it for a minimum of six months there
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is actually no time limit as determined
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by the ATO it all comes back to intend
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there is also a right to reset this
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timer meaning that if you come back into
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your house after six years and you live
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in it again for a period and then a
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force to leave again for work you will
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be able to claim that as a primary place
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of residence for up to six years later
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so in terms of dollars and cents how
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much do you actually save with this
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exemption well hypothetically say in
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that month you bought a property for
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$300,000 and you spend some money
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renovating it it owes you about $330,000
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now in two years later you had some
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growth and you sell a property for say
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$400,000 in that scenario under the
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primary place of residence exemption you
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would pay no tax but say you held it as
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an investment property and it didn't
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qualify as a primary place of residence
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basically if at OSU three hundred and
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thirty thousand dollars as a base and
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you sell it for say four hundred
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thousand dollars there would be about
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eleven thousand dollars tax payable
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provided you also qualify for the 50%
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CGT discount this brings me on to the
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12-month CGT discount and this is
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another thing that can save you money
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with capital gains tax if you hold an
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asset over 12 months you are then able
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to get a 50% reduction on the capital
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gain effectively what that means is that
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you only pay half the amount of tax that
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was due there is a common misconception
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that we should only keep our receipts
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for seven years and this might relate to
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income tax reasons but actually with
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capital gains tax you need to keep your
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receipts for the asset for the entire
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time that you hold the asset and the
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reason for that is when you calc
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later capital gain you also calculate
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improvements to that asset if you've
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spent money on improvements ten years
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ago and you're selling an asset you can
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actually claim those improvements ten
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years ago on the cost base so that it
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will reduce your capital gains tax bill
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in the future another interesting quirk
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when looking up capital gains tax on the
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ATO website is that cars and daily
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drivers are actually capital gains tax
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exempt now I don't profuse to know all
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the rules of the technicalities about
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what cars qualify as your capital gains
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tax exempt vehicle but let's just think
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about if you drove a luxury car now
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since 2015 the luxury tile industry has
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seen the index go up over 200% does this
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mean that if I owned a luxury car and it
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was my daily driver and I sold it for a
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gain would I have to pay tax on that
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while we move on from capital gains
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let's talk about capital losses and
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there's an interesting conundrum when
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you consider international property I'm
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just going to run for a hypothetical
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example because this is probably the
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easiest way to explain the situation so
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in 2001 let's just say hypothetically I
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purchased a unit in London for a hundred
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thousand pounds and in 2020 almost 20
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years later I decided to sell that asset
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for 80 thousand pounds it was a horrible
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investment and I lost 20,000 pounds now
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currently the exchange rate is around
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about 1.8 Australian dollars to 1
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British pound
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meaning that 20,000 pound loss is
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actually the equivalent of 36,000
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Australian dollars would I claim that
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capital gains tax loss of $36,000 well
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the answer is maybe not because what you
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need to take into account is the actual
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exchange rate as well when you purchase
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the asset so in 2001 when I purchased
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100,000 pound unit the exchange rate was
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about 2.9 Australian dollars to one
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pound meaning that in Australia that
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relative units value was 290 thousand
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dollars when we fast forward to now that
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80,000 pounds is only the equivalent of
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about a hundred and forty-four thousand
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Australian dollars meaning that I've
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actually lost a hundred and forty six
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thousand Australian dollars and
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therefore instead of claiming the
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$36,000 as a capital loss I can
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potentially claim up to a hundred and
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forty six thousand Australian dollars
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this is why it's very important to get
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the right tax advice because which
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number do you use on your tax return to
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be able to offset it against other
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capital gains another tax strategy that
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people often use is bringing forward
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expenses or deferring income or gains so
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in property investment one common thing
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you could look at is if you decide to
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prepay interest in advance this might
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mean that expense comes all into this
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tax year with commercial property on the
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other hand if you're renegotiating with
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a tenant and you're deciding to give an
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incentive to maintain that tenant
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determining what type of incentive you
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give say for example a rent free period
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might book the revenue in a later tax
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year but what about stocks is if some
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way I can bring forward some losses in
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stocks well there's actually a really
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good website called delisted comm today
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you and I hopefully I'm not the only one
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that's been guilty of buying a penny
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dreadful that either gets withdrawn from
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the ASX or suspended from trade in that
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example what might happen is those
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shares might go private they may come
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back on the boards that's a possibility
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but in my experience it often is a long
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process to go through administration and
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ultimately those shares are worthless
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the ATO doesn't care if you think those
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shares are worthless and they're never
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coming back from the grave what they'll
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require you to get is a letter from the
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administrator or a liquidator at state
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that those shares are worthless but this
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could take a long period of time the
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other option is a little bit different
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is when you dispose of the asset so this
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might be an arm's length transaction
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when you sell those shares on to a third
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party that actually determines an exit
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price for that share which means you're
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able to calculate your entry and exit
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and therefore you're able to book the
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loss into this tax year well this is
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exactly what delisted calm today.you
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allows you to do they provide a service
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where you can sell those shares to them
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and then that means you can enter the
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exit price but ultimately a lot of
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things can happen with those shares so
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there could be a class lawsuit that day
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listed dr. Condon au gains from that
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they could get back on the board so it's
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not always the best opportunity to sell
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those shares but it just gives you an OP
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if you never think they're coming back
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from the grave I'm not affiliated with
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delisted comdata you in any way but it's
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just a service that I thought was very
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interesting if you have had those penny
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dreadfuls like me while we talk about
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penny dreadfuls let's talk about being a
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stock investor verse a stock trader now
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simplistically a stock investor is
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someone who still qualifies for the
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12-month capital gains tax discounts if
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you hold the stock over 12 months you'll
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be able to get a 50% reduction a stock
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trail is not likely to get that
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exemption now different entities can be
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stock traders and different entities can
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be stock investors but what is actually
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the advantage of being a stock trader if
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you can't get that discount let me step
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you through an example because being a
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stock trader allows you to value your
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shares based on accounting principles
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let's just say hypothetically you have a
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portfolio of five shares three of those
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shares you haven't sold and there it
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currently worth more than what you paid
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for one of those shares
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you've sold for a profit and this is the
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tax burden that you may be paying
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finally there is one share in your
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portfolio that is worth less than what
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you paid for it but you haven't yet sold
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it there are two different accounting
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principles that are important when
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valuing trading stock which is shares in
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this example the first way you can value
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shares is the purchase price that you
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paid for it the second way is the
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current market price so in this example
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the three shares that you currently own
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are effectively worth more than what you
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paid for them so you can potentially use
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the purchase price that you paid from on
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the 1 share that's worth less than what
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you paid for it you can use the current
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value of that this means that you are
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able to desert the reduction in that
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shares value against the share you've
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actually sold ultimately deferring or
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reducing the amount of tax you're going
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to pay now this is not necessarily a tax
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reduction strategy as it is a tax
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deferral strategy moving out of the
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stock market into something different a
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common thing that people talk about is
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debt recycling now depth recycling at a
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very simplistic level is reducing your
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non-deductible debt so debt on your
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primary place in residence for example
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and increasing your deductible debt
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so debt that you hold over investment
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properties or a margin loan or a raft of
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other different business lines so how
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does this all work
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well one simple way is that a bank or
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broker could open a cash out facility
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against one of your investment
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properties and then when you are to pay
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interest on those investment properties
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instead of it coming out of your income
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what you might want to do is capitalize
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that cash out facility so effectively
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the interest that you're paying on it is
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increasing that loan balance with the
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money that you've saved out of your
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income that you're not putting towards
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your investment property you can then
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use this to pay down your non-deductible
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debt so the other kicker with this
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strategy is rental income so if instead
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of using the rental income to offset the
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interest that's payable on your
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investment property you might want to
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channel that rental income into your
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primary place of residence ultimately
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this means that the interest that you're
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capitalizing goes up at an increase rate
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but now instead of your income paying
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down your investment property and your
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rent paying down your investment
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property both of those forms income are
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being channeled into non-deductible debt
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when doing research into this strategy
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I've noted that could potentially be
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done with shares through dividends and
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margin loans as well as potentially
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business loans so it doesn't necessarily
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have to be property related so the big
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scary thing with this strategy is that
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if you don't get the right advice
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upfront you're often chipping away at
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your non-deductible debt over multiple
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years meaning that if there's a problem
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with how you set it up it's going to
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take a lot of time to unwind and often
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it's going to result in a lot of
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heartache and cost to you while we are
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on the topic of property another thing
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that property investors pay a lot of is
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land tax and land taxes state-based tax
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based on the value of the property that
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you hold within that state so how can
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you reduce your land tax burden
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ultimately it really depends on who the
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beneficial owners of your properties are
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I'm gonna run for a quick example let's
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just say I have two investment
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properties and a spouse I currently hold
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both of those investment properties in
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my name and they're $500,000 each I will
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then go to the office of state revenue
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with a million dollars of property and
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in Western Australia I'll pay about 1750
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dollars in tax
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other option is let's just say I have a
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spouse and we both had one of those
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investment properties H of $500,000 both
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of us would then go to the Office of
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State Revenue and we would get assessed
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on our land tax rates and each of those
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rates in Western Australia would be
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about $300 per property meaning that the
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total tax payable would be $600
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effectively I would save about $1,100 in
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that land tax this does not really sound
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like much but remember property
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investments often a long-term investment
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so if you hold those assets for 20 years
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effectively you're paying this tax 20
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times over the second thing to remember
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is that property investment primarily
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should be about capital appreciation so
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as your property values increase you're
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going to be paying more tax anyway and
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the third thing is is that the land tax
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rates are progressive meaning that as
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the value of your property increase over
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time the proportion of your tax is
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higher so it tends to accentuate
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especially if you have multiple
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properties worth a lot the land tax bill
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which you would be paying it's worth
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noting that every single state has a
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different set of rules around land tax
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for example in some states if you hold a
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property in a trust they look through
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that ultimately to the beneficial owner
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and then aggregate all those properties
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whereas some states don't do that
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remembering as well that land tax is
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also based on a per state basis so if
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you have an investment property in
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Western Australia and one in Queensland
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the value of the property in Queensland
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won't necessarily impact the value of
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the property in Western Australia this
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is where good advice is very important
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because firstly if you need to change
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the beneficial owner of a property
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midway through owning that asset you
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might be up for Stamp G's again secondly
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you might have decided to put two or
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three properties in one person's name
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based on income tax purposes to maximize
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the deductions against the income so as
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always speak to your accountant your
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financial adviser before you purchase a
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property because often if it's done
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wrong at the start is very hard to
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unwind while we are on the topic of
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property what I wanted to talk a bit
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about is depreciation now the laws
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around residential depreciation has
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changed recently which is something I'm
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not going to talk about this particular
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section is going to be more about
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commercial property in particular this
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applies to unit trusts
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or managed investment schemes that also
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own the underlying asset of commercial
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property in terms of dollars and cents
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what this is actually all mean well
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let's just say your own or a unit trust
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that you have a unit in owns a
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commercial property with a building
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value of a million dollars and a
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quantity surveyor has applied a
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depreciation rate on that building of
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2.5 percent meaning that you're able to
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apply a $2,500 discount or a
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depreciation against the income that you
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receive on that commercial property the
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kicker often with this is that you're
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often using gearing which means you
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might only have five hundred thousand
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dollars of equity and five hundred
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thousand dollars a debt but you're able
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still to claim a hundred percent of the
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depreciation in the structure but there
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is no such thing as a free lunch and
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what do I mean by that well depreciation
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effectively reduces the cost base of
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your asset meaning that when you sell it
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the cost base even if the capital value
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doesn't increase has dropped so the
[982]
amount of capital gains tax that you pay
[983]
on it increases however this is where
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that 12-month capital gains tax
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reduction kicks in remembering that you
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are able to claim two and a half
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thousand dollars against the full income
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that you received on that property
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however when you are paying the capital
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gains tax you are now only paying the
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capital gains tax on half of what that
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property has been depreciated at
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effectively for every dollar that you
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depreciate on that asset you're only
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paying fifty cents of it back in tax so
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all these schemes concepts and
[1013]
discussion points are very simplistic
[1015]
and boiled down so that almost anyone
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can understand them technically there is
[1019]
a lot going on there so it is very
[1021]
important that you speak to your tax
[1023]
accountant your financial advisor and
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they will be able to talk with you about
[1028]
if any of these suit your particular
[1029]
situation but once you've had that
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meeting with your professional advisor
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and you've gone through your personal
[1035]
situation and they've optimized your tax
[1038]
strategy what I would encourage you to
[1040]
do is dust out the very best avocado
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that you own smash it up on some toast
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and enjoy the free money that you are
[1046]
getting from well it is the first rule
[1049]
of Fight Club thank you and enjoy
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