A strategy to consider before the end of the financial year is pre-paying expenses such as investment loan interest or investment management (financial advice) fees. Doing this might help increase your immediate tax deductions which will bring down your tax bill.
Financial Advice Fees
Generally, fees that related to producing taxable income are tax deductible. If you pay a fee for ongoing investment advice (e.g. to a financial adviser) then you may be able to claim the expense as a tax deduction.
By pre-paying an ongoing advice fee for the upcoming financial year (in June) you can bring forward the tax deduction into the current financial year.
Investment Loan Interest
Lenders will usually allow you to prepay 12 months’ worth of interest in one upfront payment. You will receive a locked interest rate for the year ahead and this rate is generally different to your existing rate.
This is essentially bringing forward the next financial year’s tax deduction and claiming it in the current year.
Why would you want to prepay expenses?
Well, there are a number of benefits to this strategy and they include:
- Receiving a fixed annual rate that is lower than the standard fixed interest rate, and potentially protects you from interest rises during the year;
- Being able to claim an immediate tax deduction;
- Helping reduce taxable income if you expect income next financial year to be lower than the current year (e.g. because of a capital gain, change in work arrangements, retirement etc)
- Making the most of lump sum amounts you might have received and freeing your cashflow or budget throughout the year.
If you do decide to prepay the interest portion of your loan, make sure to contact your lender and arrange the prepayment treatment.
Contacting your lender and having this arrangement set up avoids any errors where the payment might be treated as a reduction in the principal of the loan instead, which is not tax deductible.
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Disclaimer: This post has been prepared for general information purposes only. It is not specific advice to any particular person. You should consult an authorised Align Financial adviser before making financial decisions. Align Financial | Financial Planner Northern Beaches | Servicing North Narrabeen, Narrabeen, Mona Vale, Elanora Heights, Newport, Avalon, Palm Beach | Enquire with us online