28th June 2012
It’s that time again – end of another financial year. Perhaps you, like the majority of taxpayers are scrambling to determine what financial transactions to make before June 30 in order to ensure the current financial year has been tax efficient. Whether you have used common strategies such as paying investment loan interest in advance, additional contributions to super, purchase of plant and equipment for business, deferral of invoicing for work done or goods supplied, scheduling sale of property either into this financial year or the next one, you are likely to still groan when your accountant runs your tax return figures and estimates tax due.
The bad news is that, as we all know too well, there are two certainties – death and taxes. Particularly for those of us who have not made instalment payments on 2012 tax, or have cashed in an asset during this financial year and subject to pay Capital Gains Tax – those tax bills can be dauntingly large. Capital Gains Tax from investment sales can really catch you by surprise.
The good news is that there are some fairly easy ways to manage that tax bill going forward.
- If you are lucky enough to have some spare cash you can just pay it.
- If you have not the spare cash, then looking to some form of finance may be the answer, however, some serious number crunching needs to be done as the benefits vary with your situation:
- Negotiating a payment schedule with the ATO is actually a form of finance in that the ATO charges interest on the outstanding amount. Their interest rate varies from quarter to quarter. It is 11.37% for current quarter and 10.66% for next quarter. If the debt is below $25,000, the ATO has a payment hot line and you can ring this automated service to set your own repayment schedule. These interest payments are tax deductible to you and herein lies one of the interesting features. Cindy Su, a Senior Accountant at Chan & Naylor Pymble explains the following :
“The benefit of the tax deduction for ATO interest paid is greater for those on a higher marginal tax rate. If your marginal tax rate is at 38.5% any tax deduction at this level saves you more than the same deduction should your marginal tax rate be lower. This may mean that, in real terms, the interest rate that the ATO charges ends up only be costing you, for example, 7.0% . If you factor in the savings you make on tax you pay when you have a high income and apply a tax deduction to these incomes then net these off the actual ATO interest payment, it reduces the face value of the ATO interest.”
This can be complicated to assess but be aware of this principle being at work when you assess whether or not to pay off a tax debt immediately or set up periodic payments.
- If you have some available funds in existing loans secured by property you can use these to pay the ATO. The interest rate may be a lot better in general as your residential loans normally have lower rates that those the ATO charge, particularly at the moment. You do need to be aware that interest payments from these loans external to the ATO are NOT tax deductible. Check these points with your accountant.
- If you have no funds in existing loans but think you may have some spare equity in a property you could consider increasing existing loans to provide funds for your expected tax debts. Some lenders do accept the purpose of borrowings to be for paying off tax debts.
- If your tax debts are below $30,000 and you do not have spare equity in a property you may be able to qualify for setting up an unsecured personal loan. There are some personal loans where the funder is comfortable with funding to pay an ATO debt, but not all lenders have this approach. Again, interest payments here are not tax deductible. The interest rates on these products vary with the way they are structured but generally range from 9% to 14% per annum.
How one arranges the payment of tax debts will vary from person to person, but one thing most of us have in common is that we would just like it handled and structured in a way that lets us get on with the more important things in life. Discuss your specific situation with your accountant, or for expert advice on these matters please contact Chan & Naylor Finance firstname.lastname@example.org or call 02 9391 5053 if you’d like to discuss the ways a tax debt worry could be managed with clever finance options. A free 5-minute question and answer service is also provided by Chan & Naylor, to register your question, please go to www.chan-naylor.com.au and click on “Ask The Experts”.
Finance Strategist/Partner – Chan & Naylor Finance
Disclaimer: If you intend to rely on any of the information in this article to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The information contained in this article is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor, its officers, employees, directors or agents.