EOFY Mortgage and Finance Tax Planning Essentials
Coming into EOFY (End of Financial Year) season there is a call to arms by everyone from consumer and business goods retailers, motor dealers through to accountants and financial advisers.
They’re all keen to highlight the benefits of planning for the months ahead to take advantage of the tax benefits of purchasing their goods before the end of financial year or in the case of those in financial services, taking their guidance to make decisions which could result in significant tax savings for the current financial year.
In this post I’m going to focus on two categories:
For businesses and the self employed asset purchases almost always come with the ability to claim depreciation. Depending on the size of the business these assets can fall under the instant asset write-off category or under general depreciation rules. In either case the business or individual must intend to use the asset for business purposes and must purchase the asset within the tax year being claimed.
Accountants and financial advisers include among other things the recommendation to consider pre-paying some expenses or commitments to bring forward a tax deduction from the next financial year to the current. This can include payment of interest, business expenses, superannuation and a host of other things.
How Can Mortgage And Finance Strategies Help?
Purchasing an asset or pre-paying expenses before EOFY can come at a heavy cost to capital or cashflow. Let it be said that borrowing to pay something that you can’t afford should never be the practice of any person or business. That said the ability to finance an asset purchase or pre-payment of expenses can result in significant savings. Here is a case study to illustrate this.
A Simple Case Study.
Brian is a HR consultant operating as a sole trader who works out of a shared office space.
He anticipates his taxable income for the 2019 financial year to be approximately $170,000. Aside from his home on which he has a small mortgage of $150,000 at a rate of 3.80%pa principal and interest, he owns an investment property on which he owes $500,000 which is interest only variable at a rate of 4.70%pa. He has signed a lease to occupy a small office and will need approximately $20,000 worth of computer equipment, desks, furniture and peripherals. His lease will commence in late July of 2019.
Here is how finance can help him reduce his taxable income:
- Office equipment invoiced for purchase and financed using a 12 month interest free facility offered by the equipment supplier. This gives a $20,000 deduction to taxable income for FY 2019
- Investment loan mortgage switched to a fixed 1 year interest in advance at a rate of 4.19%pa (usually 4.39%pa but discounted by 0.20% by his lender as it is paid in advance). This requires a full years interest pre-payment on 29/06/2019 at an amount of $20,950
- To finance the full year’s interest, Brian uses the redraw facility on his home loan to effectively borrow the $20,950;
- Brian is able to claim the full $20,950 as a tax deduction in the 2019 financial year
- As Brian’s marginal tax rate on income is 37% the combined $40,950 in deductions will result in a tax saving of $15,151.50
Caveats to what Brian has done:
- Brian needed the assets purchased. He did not simply buy them unnecessarily or on impulse and they were essential to his plans for filling his new office;
- The $20,950 redrawn on Brian’s home loan would constitute a personal borrowing and the interest would not be tax deductible. Given his home loan rate is 3.80%pa this would incur an annual interest of $796. However applying the tax saving to pay this down, then repaying the balance over several months would make the interest cost negligible
- Brian has the cash flow to repay the $20,000 finance facility over 12 months and the repayments will not hinder his personal finances
Like Brian businesses can use overdrafts, line of credits, chattel mortgages and interest in advance facilities to manage the end of financial year opportunities.
Call us today on 1800 93 10 20 to discuss your circumstances and see how mortgage and finance could be used to assist in your tax planning.
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