FY Tax Options

[lenojd]

We're nearing the end of the FY and would just like some opinions on what I may be able to do to help my situation a little.

Due to favourable rates, income and being in a favourable position to reduce my debt (by the way of an offset account) I have a positively geared IO IP, Var loan. Sold off some shares earlier this year for a gain.

I've been searching for something as I can afford to buy again but nothing has been suitable as of yet.

I don't believe I can prepay interest on a Variable loan but wondering if there is something else out there which I may do?

For example, take out a loan of some sort, prepay interest, repay early next FY?

All help greatly appreciated.

Thanks

 

[Gools]

Repairs needed to your IP/IPs?

 

[Graingrower]

Why not support the economy by paying some tax and taking a local holiday. After exhausting all options to avoid it, paying tax is a sign of success IMO

 

[Gools]

Gg, wouldn't supporting the economy by filling your shed full of fertiliser and topping your tanks with diesel be a better way to go?

 

[jaycee]

Why not support the economy by paying some tax and taking a local holiday. After exhausting all options to avoid it, paying tax is a sign of success IMO

You read that the original poster has exhausted all options to avoid paying more tax than necessary

I read that the original poster is nowhere near so sure that they actually have exhausted all options to avoid paying more tax than necessary and trying to find out.........

 

[Terryw]

Do you have any shares that have made a loss? Selling these could offset the gain.

You may still have a few days in which you can prepay interest - but would have to fix the home loan to do so. Refinancing with another bank, at a better rate too, may help you bring forward some borrowing expenses.

 

[Graingrower]

Gg, wouldn't supporting the economy by filling your shed full of fertiliser and topping your tanks with diesel be a better way to go?

You're right Gools. If anyone else has this problem PM me and I'll give you delivery details. I could find room for any amount of fertiliser, no job too big or too small.

 

[Graingrower]

You read that the original poster has exhausted all options to avoid paying more tax than necessary

I read that the original poster is nowhere near so sure that they actually have exhausted all options to avoid paying more tax than necessary and trying to find out.........

If I had to post on here to find more ways to spend money on my business then I would be ready for a holiday or retirement.

 

[BV]

I don't believe I can prepay interest on a Variable loan but wondering if there is something else out there which I may do?

Other than to prepay interest?
Any repairs or improvements you need doing?
Install an aircon, a solar system?
Have you got a depreciation schedule?
Anything that can be written off and replaced?
And don't forget donations, there are many homeless people out there and the salvos, wesley mission etc are always in need of funds

 

[jaycee]

If I had to post on here to find more ways to spend money on my business then I would be ready for a holiday or retirement.

That's great (I assume, cause I don't kwno what it means)

People have different levels of knowledge. Some people may think a question asked is simple and the answer is obvious, that;'s great that you know as much as you do... But if other people aren't so sure of something's simplicity & how obvious the answers are, I'm not sure askin g questions is the wrong thing to, which is all I think the OP has done .

 

[wylie]

I don't believe I can prepay interest on a Variable loan but wondering if there is something else out there which I may do?

For example, take out a loan of some sort, prepay interest, repay early next FY?

We are fixing our loans and prepaying interest. We are fixing for one year because the one year fixed rate is cheaper than the two and three year options.

So I think you should be able to fix and prepay for a loan that is currently variable.

Of course, you need to get onto this very quickly. We have completed paperwork for two loans already with several more in the works, but not received, signed or returned.

You cannot simply prepay interest. It must be organised with the bank. And quickly.

Last year I had a nail-biting time waiting for the stuff-ups to be fixed with the loans we organised to be prepaid. I don't like this waiting game... what will the Bank stuff up this year? Will the bank actually get it right?

Don't forget you can prepay rates, insurance etc too.

 

[Terryw]

The problem with prepaying one year's interest is that next year you will have no interest to claim and so may have to prepay another year's interest to avoid a big tax bill, and so on the year after that.

 

[jaycee]

The problem with prepaying one year's interest is that next year you will have no interest to claim and so may have to prepay another year's interest to avoid a big tax bill, and so on the year after that.

This would be my issue.

Thankfully, unless my rough calculations are too far out, I'm happy with the tax return & tax paid this fin year. I would have prefferred more $ in both my income and tax paid sections, but that's another issue....

 

[BV]

The problem with prepaying one year's interest is that next year you will have no interest to claim and so may have to prepay another year's interest to avoid a big tax bill, and so on the year after that.

True, and if the interest prepayment doesn't bring your taxable income down enough so that you are taxed at the lower tax bracket the benefit would be small.

 

[Graingrower]

True, and if the interest prepayment doesn't bring your taxable income down enough so that you are taxed at the lower tax bracket the benefit would be small.

What's the BS about getting into a lower tax bracket. Do you not understand how the tax system works? Everytime you get into a lower tax bracket the benefit is actually less.

 

[bene313]

Any repairs or improvements you need doing?
Install an aircon, a solar system?
Have you got a depreciation schedule?
Anything that can be written off and replaced?
And don't forget donations, there are many homeless people out there and the salvos, wesley mission etc are always in need of funds

Agree on the repairs, donations and depreciation report.

Air-con, solar system and many replacements will be capital and need to be depreciated. Being June already, the depreciation will be minimal for 2011.

 

[bene313]

Due to favourable rates, income and being in a favourable position to reduce my debt (by the way of an offset account) I have a positively geared IO IP, Var loan. Sold off some shares earlier this year for a gain.

Generally the objective of investing is maximise after-tax returns.

That generally means maximising income and minimising expenses, before tax -- which from the sounds of it you've done quite well for 2011.

In order to reduce your tax by $1 you've got to spend at least $2. In doing so you'd be effectively reducing your after-tax returns.

If you have say repairs which need to be done, by all means push it into this financial year to maximise the tax benefit, but don't go needlessly spending $2 just to save $1 in tax.

Graingrower is right to say that paying tax is not a bad thing -- it means you're making money!

 

[Mry]

I'm not a fan of "timing" deductions myself as well, its a robbing Peter to pay Paul scenario that repeats itself year after year. An effective tax deduction is one that reduces your tax permanently while maximizing your investment opportunities. Once you get to the point of spending more than $1 for things that will reduce your tax bill by $1, its time to stop.

 

[wylie]

The problem with prepaying one year's interest is that next year you will have no interest to claim and so may have to prepay another year's interest to avoid a big tax bill, and so on the year after that.

This is the situation we found ourselves in several years ago when we prepaid interest for the first time due to having made a capital gain.

We have fixed and prepaid part or all of our loans since that first time, and are planning that we will probably continue to fix and prepay a portion of our loans until hubby stops work entirely.

He stopped work in July 2010, we arranged to sell an IP and take the gain in this year that he isn't working. Trouble is that he took on a contract as a favour for three months and has been there seven months. So we are fixing and prepaying and salary sacrificing to keep our capital gains tax down to less than that which he would pay otherwise. (The plan was he would not be earning much (if at all) this financial year, hence less capital gains tax.)

We are lucky that whilst we have borrowings of over $1M, the total consists of several loans, and we can, therefore, throttle up and throttle down the total that we will prepay in any one year, to suit our circumstances.

 

[BV]

What's the BS about getting into a lower tax bracket. Do you not understand how the tax system works? Everytime you get into a lower tax bracket the benefit is actually less.

I think you misunderstood my point.
Let's say I earn $140K and have another $80K from capital gains
Looking at the tax brackets, anything over $180K will be taxed at 45%
If I prepay interest and reduce my taxable income to $180K
the $40K will be taxed at 37% i.e $14.8K

If I didn't prepay $40K in interest my taxable income will be $220K
so the $40K over the $180K will be taxed at 45% or $18K

So by prepaying interest I'll save $3.2K

If however my base salary was $100K by prepaying interest I would not be saving anything because between $100K and $180K the tax is 37% so even if I prepay interest equal to the whole capital gain I'm unable to reduce the tax because in both cases I'll pay 37% tax.
In this instance, by prepaying interest I'll just postpone the tax payment that's all