Three Handy Hints to Cut Your Tax Bill in 2012


‘And here’s the rub. You don’t own the minerals. I don’t own the minerals. Governments only sell you the right to mine the resource, a resource we hold in trust for a sovereign people.’ – Prime Minister, Julia Gillard

At least the PM is consistent.

When you think about it, the way the pollies treat mining royalties is the same way that they treat your income.

You don’t own it. It’s everyone’s. Your income is just held in trust until you earn it.

Then the government takes a slab, leaving you what’s left over.

Yes, dear reader, it’s almost tax time again.

It’s time to see just how much of your income the government has stolen from you in the past 12 months.

But just as important, it’s time to plan ahead to make sure you’re able to legally cut your tax bill next year.

Here’s three handy and practical hints…

Money Saving Tax Tip #1
Prepay next year’s compulsory health insurance

OK. Strictly speaking, health insurance isn’t compulsory.

But penalising taxpayers for not having private health insurance makes it compulsory. For instance, any single person earning over $84,001 or a family earning over $168,001 has to pay the Medicare Levy Surcharge (MLS) of at least 1%.

That’s on top of the 1.5% Medicare Levy.

But if you have private health cover, you don’t pay the surcharge. And seeing as the cost of private health is usually less than the surcharge it makes sense to buy insurance…hence making it effectively compulsory.

But there’s a sting for health insurance buyers next tax year. The 30% rebate (or discount) on your health insurance will drop depending on your income. As the following table shows:

health insurance

Source: Australian Taxation Office

For example, a single person earning $100,000 per year will only get a 10% rebate rather than the current 30% rebate. So if their insurance policy is $1,000, they’ll only get a $100 discount (net cost $900).

But if they ditch private insurance, they’ll have to pay $1,250 for the Medicare Levy Surcharge…making them $350 worse off.

That’s the cruel nature of government and the State. Forcing ‘sovereign people’ to buy something they don’t need and won’t use.

But there is a small silver lining. You can dodge the reduced rebate bullet for one year. According to the experts, if you pre-pay next financial year’s health insurance before June 30 you’ll still qualify for the old 30% rebate.

For the single person on $100,000 that’s a $200 saving…it’s not much, but it’s better in your pocket than in your health insurer’s.

Before you do anything, check with your accountant and private health insurance firm to make sure that this is the best option for you.

Money Saving Tax Tip #2
Lock in gains and losses before June 30

This strategy is as old as the hills, but it’s worth reminding you about it.

If you have any investment gains during a tax year you have to pay tax at your marginal tax rate during that year.

But, if you have any losses from investments you can use those losses to offset any realised gains.

For instance, if you made a profit of $1,000 buying shares in Company A, you’ll need to pay tax on that profit of say 30% (depending on your tax rate).

But if you made a loss of $1,000 on Company B, you can use that loss to offset the gain…providing you sell the shares of Company B to realise the loss. You can’t claim the loss if you continue to hold the losing shares.

Hopefully you haven’t made any losses this year. But if you have, and you don’t think the stock has a chance of making a comeback, then you should think about selling out.

Just beware of one thing. Tax busy-bodies take a dim view of investors who sell a stock to claim the tax loss and then buy the stock back again.

If you think there’s a chance the stock could recover and you don’t want to miss out if it does, then maybe think about just selling half your position…at least it’ll give you a partial tax break while still keeping some skin in the game if the stock goes up.

Money Saving Tax Tip #3
Invest for tax effective income

A simple way to take advantage of the tax system is to buy income-friendly shares.

Those are shares that have what’s called a ‘fully franked’ or ’100% franked’ dividend.

Now, we won’t go into all the details about franking credits, because to be honest, it’s not very interesting.

But to put it simply, if a company pays a 70-cent fully franked dividend, it means the company has already paid tax on that dividend at the company tax rate of 30%.

So you get that tax benefit, allowing you to ‘gross up’ the dividend to $1. You then pay tax on the $1 dividend at your marginal tax rate.

If your tax rate is below 30% then you’ll receive a credit. If your tax rate is above 30% then you’ll have to pay a bit more tax.

But either way, it shows you the benefit of investing in income stocks that pay franked dividends compared to stocks that don’t.

We asked our in-house income investing expert, Nick Hubble to give us a worked example comparing two Aussie stocks – one with a fully franked dividend and one with an unfranked dividend…


Nick told us:

‘Notice how the after tax dividend yield on the fully franked share fell far less (1.31% to 1.04%) from the pre-tax dividend yield as a result of the franking credit offset. You should always double check dividend yields for this change.

‘Just to be clear, there is nothing inherently better about a franked or unfranked dividend. After all, every company is different. What is important is that the true dividend yield is different to the quoted yield. So you should always look beyond the quoted yield to work out the true yield based on your personal tax rate.’

Of course, this is only general advice. But with Australian taxes rising and the ability to reduce taxes being made harder all the time, it’s important you make the most of any tax breaks available.


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Three Handy Hints to Cut Your Tax Bill in 2012