Making Money - Pay Tax early

[Paul@PFI]

Its rare tax advice that encourages taxpayers to pre-pay tax. But it does happen.

Its a little known benefit that if a taxpayer pays a tax liability ahead of its due date by 14 days + the ATO pay interest. And its not a bad rate either. Was 5% (maybe 4-4.5% for 2015)

One client has just prepaid their 2015 tax. We will defer lodgement to May 2016. (You must use a tax agent to do this!!!). The cash paid reduces their assets so they get a slightly higher pension too.

The alternative was to invest the cash and pay tax on it. This defers the tax a whole year to a year they will have low income - so not tax.

Benefits of tax planning for a known tax liability

 

[r3ckless]

Hi Paul,

Nice tip, gee thats not bad even at 4% compared to cash accounts with banks today!

 

[Paul@PFI]

Yep. Shhh Don't tell Hockey. Once HECS debts could be discounted by 10% by pre-paying one day before assessments were issued... Swann dumped that.

 

[pasey25]

is the interest tax free?

 

[Paul@PFI]

Very funny Its assessable in the following tax year on receipt. The ATO have a process of data matching such amounts so omission is detected later. The old HECS one wasn't assessable as it was a discount to the debt. This is interest paid to the taxpayer.

 

[pasey25]

Very funny Its assessable in the following tax year on receipt. The ATO have a process of data matching such amounts so omission is detected later. The old HECS one wasn't assessable as it was a discount to the debt. This is interest paid to the taxpayer.

the fact that it assessable in the following tax year could be advantageous to some, depending on circumstances.

 

[Paul@PFI]

Agree. In one client example her income will be low in the successive year so tax rate = Nil.