They implemented a customised and tax effective strategy that allowed them to:
- Reduce their combined annual tax liability by $95,201 per annum
- Accumulate a $10.21 million self-funded investment portfolio that will continue to achieve compound growth in a low tax environment to help them accumulate more wealth
- Increase the investable value of their super to $3.3+ million and reduce super taxes to below 2%
- Grow a $2.8+ million investment portfolio in a family trust
- Grow a share portfolio worth $8 million
- Build a personal property portfolio worth $4.5 million
- Protect their assets from unscrupulous claims
- Build a well-balanced, tax effective and diversified investment portfolio
- Increase net wealth by $3.1+ million
It does sound like someone could only achieve such great results if they’re already wealthy.
However, we’re here to tell you that’s not the case.
It’s true that Victoria and Alistair started off from a great financial position. But here’s the most important thing to remember.
Victoria and Alistair were initially in the same position that most Australians find themselves in at some point in their life.
They wanted to do more with the wealth they had already amassed, and they were sure there was a way to do it - but none of the accountants or financial advisers they saw implemented any effective tax or financial strategies that were working for them.
They knew that the difference between being financially successful and being like everyone else lay in what they were doing vs what they weren’t. There were strategies out there for them to use, which were perfectly accessible to them - they just hadn’t yet found someone who was able to show them how.
So, they began looking for someone who would help them proactively seek financial strategies to build their wealth, instead of being content with a few deductions in their tax returns.
They wanted to implement serious proactive tax planning.
Victoria and Alistair’s Situation
In 2009, Victoria earned about $642,000 per year in dividends and interest income. This meant they were up for a tax bill of around $256,000 every year.
They had absolutely no tax planning in place, and despite doing the rounds and seeing many different accountants, she realised that they kept hearing the same old excuses and weak suggestions:
"There's not much you can do to reduce your taxes"
"Sell your shares to avoid the issue"
(Which would incur a massive capital gains tax liability)
"Make more tax-deductible donations"
(They'd have to be very big tax-deductible donations)
Most of us have heard all this before and Victoria was finding that this was her experience with most accountants.
They could do very little to help her tax situation, and when it came down to building wealth, they were unable to provide her with the results she so desperately wanted.
She decided this wasn't good enough any more.
Victoria was determined to find an accountant who was good at tax planning and could also help her build a powerful and tax effective wealth creation strategy. They wanted to find out just how much more they could be doing with their money.
She asked a friend for a referral and was directed to us.
We arranged for them to come in for an initial consultation, where they told us the following:
- Victoria owned a share portfolio valued at $6.8 million
- The portfolio was paying her a fully franked dividend income in excess of $610,000 per annum
- She had personal savings of over $400,000
- The savings were paying her around $32,000 in interest
- She paid more than $256,000 per annum in taxes
- They had a fully paid off home in Sydney's Lower North Shore
- They had a combined superannuation balance of only $60,000
- Alistair studied full-time and had no assets under his name
From all of that, it was the enormous tax bill that presented them with the biggest problem. Like so many Australians, Victoria and Alistair needed to find a way to reduce it.
The Challenges
Now we had a good understanding of the situation they faced, and we were in a better position to develop relevant strategies and structures to address the challenges facing Victoria and Alistair.
Their main challenges were as follows:
1. Every asset they owned was in Victoria's name
2. This meant they paid the highest marginal tax rate of 47% (including the Medicare Levy) on all income
3. They were not taking advantage of Alistair's tax-free threshold and lower tax rates
4. Victoria's portfolio lacked diversification, which put her at real financial risk
5. Selling the portfolio would lead to hundreds of thousands of dollars in capital gains tax
6. They weren't using the low-taxed superannuation environment to their advantage
7. They had no tax structures in place that could significantly minimise taxes
8. There was no meaningful tax planning on the horizon
These were common issues that most Australians can and do have. But unlike most Australians, Victoria and Alistair were willing to implement a tax plan and strategy that would help them recognise their true financial potential.
Victoria wasn't aware of the danger investing in only one asset class presented. It may seem like a smart idea when the market is strong, but as soon as it starts to struggle, you could potentially lose a lot of money very quickly. We needed to diversify, and fast.
They hadn't received the best advice from those they had previously worked with and they needed to be brought up to speed on the latest tax effective strategies and how they could benefit them.
This meant thinking beyond the conventional "wisdom" that so many accountants offer.
You Can Do More Than You Think About Your Tax Bill
Victoria was a victim of her own success.
She had followed the conventional route and worked hard to obtain a high passive income. When the time came, she'd invested well and continued building her wealth.
She came to believe that having a huge tax bill was just part of that success. At least, that's the impression she had gotten from the accountants she had spoken to.
All of them told her the same thing:
"There's not much that you can do about your tax bill."
Those accountants missed so many opportunities to help Victoria better set up her finances.
Things like:
- Making greater use of her super so that she could work within a much lower taxing environment
- Taking advantage of property investing to claim back hundreds of thousands of dollars in potential deductions and most importantly, diversify her portfolio
- Taking advantage of gearing, allowing her to compound any investment growth and claim further deductions on their investments
- Setting up family trusts to income split to help reduce income tax and protect their assets from any claims that may potentially be made against them
And that's just to name a few of the options available to them.
Instead, they focused more on paying the tax bill than the many things they could do to reduce it.
This concept applies to people at any point of the earnings spectrum. It’s not just for high earners who benefit from implementing tax effective strategies and structures.
Regular people can use their money intelligently too. They can also pay less tax and build their wealth tax effectively.
Victoria needed so much more than just the stock standard advice. She needed a way to maintain and grow her wealth while lowering her tax bill.
She understood that things had to change and they both wanted to implement a range of tax-effective strategies specifically designed to target their exorbitantly high taxes
Strategy #1 - Use Residential Property to Diversify Their Portfolio and Provide Some Meaningful Tax Planning
Having all of Victoria's wealth tied up in the share market led to a lot of risk being attached to her portfolio. If the market saw any downturn, her portfolio could lose a big chunk of its value.
Couple that with being in the midst of the Global Financial Crisis (GFC) and it was clear the portfolio needed diversifying.
We advised Victoria and Alistair to consider diversifying into residential property.
They initially expressed some concerns. The GFC had led to a downturn in the property market too.
But here's the secret:
The best time to buy an investment property is during a downturn. It provides the opportunity to snap up some good properties at a reduced price that will appreciate in value much quicker down the track.
This is just one example of going against the grain to help you achieve much more with your money.
We worked with them to purchase properties in blue-chip areas that have high yields and low vacancy rates. These properties offered substantial tax benefits. Plus, they'd achieve capital growth over time.
Did you know?
"Over the past 30 years, Australian housing prices have increased on average by 7.25% per year..."
- Long-run trends in Housing Price Growth
The Reserve Bank of Australia
Then came the masterstroke.
We created a financial strategy that ensured they paid no more than $2,974 p.a. to hold all four investment properties.
Victoria and Alistair put their new investment strategy into action and over the next three years they:
- Purchased four properties in Sydney's Inner West, Easter Suburbs, and Inner Sydney
- Used their existing property as security so they never had to pay a deposit
- This meant that they bought $2.7 million of blue-chip real estate without having to put any of their own money down
Over 8 financial years, the strategy enabled Victoria and Alistair to earn $885,819 in rental income, claim $1,412,365 in tax deductions, and receive $247,477 in tax refunds.
Their portfolio has almost doubled in value and grown to over $4.5 million. Every property they own now pays for itself - meaning the properties are negatively geared while cash flow positive.
And that’s the key when it comes to property investing. If you can have the property negatively geared while cash flow positive - the sky’s the limit.
Everything we just discussed highlights just some of the many benefits of diversifying through property investing (scroll a little further down to see Strategy #2 in action it's a bell ringer).
Strategy #2 - Advanced Investing Using Their Super
Like so many Australians, Victoria and Alistair had very little money in their super, and they were not using their super to its fullest potential.
With only $60,000 in their retail super account they clearly were not taking advantage of the low-tax environment that superannuation provides - both from an income tax perspective and a capital gains tax perspective.
With that in mind we helped them set up a self-managed super fund (SMSF) where they were both beneficiaries for the following reasons:
- They'd get full control over what they invested in
- They'd only pay a maximum tax rate of 15% on earnings that the super generated
- The money they'd save on tax, which amounted to around 68%, could be reinvested back into their super instead
- Self-managed funds can borrow money for buying shares and property
- Gearing in an SMSF allows them to reduce and/or potentially eliminate income taxes within the fund
- They pay no income or capital gains tax when the SMSF is in pension phase
Potentially saving them hundreds of thousands of dollars, if not more, on future tax liabilities.
Let that sink in for a minute, you can build all your wealth outside of your superannuation and have all income produced from it taxed accordingly (up to 47%), even when you have retired - or you can build some of your wealth in an SMSF, and when the fund is in pension phase you pay no tax at all.
First, we examined Victoria’s share portfolio and advised her to sell any shares that were in a capital loss position. Selling those shares along with a few shares that were in a capital gain position meant they were able to avoid paying any capital gains tax at all while cashing out on some of her share portfolio.
That gave her around $800,000 in cash that she could now add to her $400,000 in savings to help fund the next phase of strategies we had in store for them.
They then placed $585,000 into their newly created SMSF.
Victoria also committed to making a further $25,000 in tax-deductible contributions per year from her dividend income. This one small act of contributing to their SMSF also saved them a further $8,000 in income tax per annum.
Money she could now put towards their investing – every dollar counts.
When Alistair started working, he’d also direct his employer’s super contributions to the self-managed super fund.
Then, we got into the fun stuff.
We advised them to establish three Limited Recourse Borrowing Arrangements within the SMSF – required for each asset that you need to borrow funds to purchase (like properties and shares).
Some of the newly deposited cash was then used to cover the deposit and any purchase costs (like stamp duty) required to purchase two $600,000 properties. The remaining amount required to purchase the properties came from residential investments loans that we set up for the SMSF.
A combination of rent and super contributions funded the whole strategy including the purchase of the two investment properties worth a combined $1.2 million.
This is the perfect example of how you can fund the purchase of a property using the tenant, your employer and the taxman. All this was done with pre-tax dollars and with no impact whatsoever to their cash flow.
Best of all, this meant they paid even less tax on any contributions or their investment earnings from within the SMSF. Because we were now able to bring into the SMSF tax deductible gearing strategies that lowered the total tax payable on income and contributions from the standard 15% to no more than 2%.
They went from paying up to 47% tax on earnings on their share portfolio to now paying as little as 2% within their SMSF.
We then used the remainder of the newly deposited funds to further diversify their superannuation assets by purchasing a high performing geared Exchange Traded Funds portfolio.
In just under 10 years, their SMSF has increased from $60,000 to $3.3+ million today. In the process they have saved tens of thousands of dollars in tax already, and will continue to save hundreds of thousands of dollars more well into the future.
A self-managed super may be able to help you to reduce your tax bill too. Get in touch with our team today to find out how.
Strategy #3 - Establishing a Family Trust
Another thing that Victoria and Alistair didn’t realise was that they could take full advantage of the fact that Alistair wasn’t working at the time, and studying at university instead.
On our advice, they created a discretionary family trust to further invest and to income split between themselves as they saw fit, in turn helping them take full advantage of Alistair’s tax-free threshold and lower tax rates in general.
We wanted to bring the benefits of gearing into the trust, so this time Victoria gifted the trust $700,000 to invest.
As an example, if we invested that money under Victoria’s name it would have created, on average, a taxable income of around $35,000 per annum. With a tax rate of 47% it would have left her with a tax liability of approx. $16,975. Investing that amount via the trust dropped that liability to only $3,247.
That's an 81% tax saving that left them with $31,753 to reinvest.
The fund also allowed for any capital gains to be allocated to Alistair on his lower tax bracket - further reducing any tax liability down the track.
After doing a cash flow analysis we concluded that the trust’s investment income would also offset any gearing losses, leaving it in a cash flow neutral position.
The trust also offers flexibility in terms of when and to whom it distributes income to.
Finally, the trust also provides strong asset protection. The assets are held by the trust for the benefit of its beneficiaries - any assets held by the trust cannot be touched by anyone suing a beneficiary of the trust.
We went to work and poured some of the funds of the trust into high performing exchange traded funds (ETFs) and also helped them find and purchase 2 more blue-chip investment properties.
The properties had a combined value of $1.324 Million and the trust had to borrow a further $1.034 million to help fund the investment which brought even more tax benefits into the trust.
Any additional income the trust generated was then distributed solely to Alistair which meant they paid little to no tax at all on this strategy.
Today, the trust holds self-funding assets that include ETFs and blue-chip properties worth well over $2.875+ million. Its income can be distributed as and when required to the most tax efficient beneficiary.
All the while keeping the assets always protected (scroll down to read the actual results).
(continue reading "The Results" below...)
Real Client Success Stories
Nestor
Medical Professional
We designed a custom plan helping Nestor save $31,500 per annum in taxes, instantly pay off his non-tax deductible home loan debt and eliminating hundreds of thousands of dollars in future capital gains tax liabilities.
Alan and Stephanie
Professional Couple
Alan and Stephanie are executives who were paying tax at the highest marginal tax rate of 47%. So we designed a custom strategy that reduced their taxable income by $48,980 and increased their net wealth by $912,000 in just four years.
Joe
Business Owner
We created a plan to help Joe automate his business while implementing business and personal tax strategies and trust structures that helped him save $123,000 in taxes per annum. Our plan also enabled his expansion into four new profitable businesses while amassing a sizable property investment and share portfolio.
Schedule your FREE consultation with a tax specialist and discover strategies that can slash your tax and RAPIDLY grow your wealth today (Normally $895). This one meeting could save you tens of thousands of dollars!