Tax Planning Strategy #2 – Claiming Big Tax Deductions on Prepaid Interest

Big Tax Refunds for Prepaid Interest for your Investment  Property or Portfolio 

Apart from the usual general tax planning strategies (e.g.. incur business expenses prior to 30 June to claim a tax deduction this financial year), there are only 2 main ways to reduce your tax:

1. Increase superannuation contributions; and

2. Prepay interest on borrowings for investments before 30 June.

This article will focus on this second point.

With the solid performance of equity markets over the past 9 months, we have seen a significant amount of interest by investors looking to leverage back into the share market.

This coupled with a reduction in volatility of shares and reduced borrowing costs have made share investments as attractive as ever.

Use Tax Money to pay for your Share Portfolio!

How this strategy works:

You borrow an amount (say $50,000) from the bank to purchase $50,000 of blue chip shares before 30 June. Some banks will lend you a further amount for you to use to immediately pay back to them to prepay interest on the original $50,000 loan for the next 12 months.

Assuming an interest rate of 6% and that your individual tax rate is 46.5%, using this strategy would result in a new tax deduction for you of $3,000. This would result in an additional TAX REFUND to you of $1,395.

You receive all dividends from the shares throughout the year.

Prepay your Investment Property interest and save!

One strategy for property investors, which you may want to consider is prepaying the interest on your investment property loan.

How it works:

You can prepay up to 13 months of interest that would normally be incurred throughout the year as one upfront interest payment. The interest rate applied is fixed at an annual discounted rate and works best with interest only investment loans.

Prepaying interest can be helpful for managing cash flow or budgeting your rental property expenses throughout the financial year. You won’t have to think about interest payments for 12 months or worry about fluctuating interest rates.

In undertaking this option you can lock in a fixed annual rate and protect against possible interest rate rises over the 12 month period and enjoy a discounted fixed interest rate.
You can also harness the money that you save to service non-deductible debt such as your home loan or any car repayments to accelerate these repayments and save in the long term.
For example a monthly interest saving of $200 per month on a typical home loan of $350,000 could save $90,000 in interest and reduce the loan term by 5.9 years.

Your Action Plan

If you are looking for some tax relief by leveraging back into the share or property market, contact us TODAY and one of our highly qualified Financial Planners will discuss your financial circumstances with you and provide you with a Statement of Advice tailored to your circumstances.

In summary, instead of paying some tax, you can use this money to prepay interest on a loan for shares or for an investment property loan.

It's a great option to consider – contact AGS Financial Group TODAY to implement this strategy before 30 June and save tax!


Published : 20 May 2014

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