Oct. 22, 2019
-- Oftentimes, people spend money to deduct expenditure from their tax payable but this practice usually leads to buying unnecessary things just to get a tax deduction. To save on taxes, it is more beneficial to focus on building your profit instead of trying to reduce tax through spending. The first thing to do this is choosing the best structure for your business and personal assets.
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Under a trust structure, you will gain access to a 50% capital gains discount. A company structure, on the other hand, doesn't have access to this but has the advantage of having a capped tax rate at 30%, which could be beneficial if your investment generates significant income every year.
Early stage companies are usually overlooked as a tax reduction strategy because it's only been a few years since the concessions were introduced for early stage or Angel investors. The concessions include a CGT exemption and a tax offset. Investors should have a minimum gross income of $250,000 for the last two financial years and net assets of at least $2.5 million to be classified as a sophisticated investor. Those who don't qualify for the above are classified as non-sophisticated investors. The maximum amount that non-sophisticated investors can invest in early stage companies is $50,000 per year.
Tax offsets are direct reductions on your tax payable. An annual assessable income of $100,000 would have an estimate tax payable of $26,000 and a $10,000 tax offset would reduce a tax payable down to $16,000. Early stage company investment concessions allow investors to claim a 20% tax offset on their investment so a $1 million investment would allow a sophisticated investor to claim a $200,000 tax offset against his or her tax payable.
Early Stage Venture Capital Partnerships, on the other hand, have an investment structure that combines multiple investors in a structure that makes investments, similar to early stage company investments. All the partners should have at least $10 million in combined investment to get a 10% tax offset for the investment amount.
Another effective tax strategy is negative gearing - as long as the investment provides continuous growth in capital value. Negative gearing is when the income from the investment is less than its expenses. For example, you earn $40,000 in rent per year for an investment property but pay $50,000 for loan interest, maintenance fees, etc. The $10,000 difference can be deducted from your taxable income that year. The negative gearing strategy works only if the property value increases by more than $10,000 for that year. The same goes for shares.