Savvy tax strategies for each stage of your investment journey

Tax is a knowledge area and skill set you will build over time, and it’s one you need to take ownership of no matter how good the professionals in your corner might be.

Everyone needs to invest time and attention to understanding the tax rules and how to use them. The good news is that this investment will pay dividends tenfold, if not more.

Tax strategy: Foundations

At the Foundations stage, your goal is to start building your tax muscle. You’ll learn to understand the tax rules and how to use them to your advantage.

Your goal for this stage is to use at least one strategy to save a minimum of $1000 each year in tax.

The first thing to focus on is keeping good records. You will set up a system for tracking and managing your tax that will serve you today and into the years ahead.

Maximising your deductions and end of financial year pre-payments are next up. It’s important to remember that tax-deductible expenses still cost you money; they just cost you less because you get the tax back.

Consider deductible super contributions, given the immediate tax deduction and the compounding impact of having more money in the lower tax superannuation environment. Starting additional super contributions of small amounts, even $10 a week or month, will help you create a habit you can build on into the future.

Tax strategy: Focus

By the end of the Focus stage, your aim will be to leverage multiple tax strategies to save at least $10,000 annually in tax.

This outcome is important for the stages that come next, because the $10,000 you save annually in tax is an extra $10,000 you can invest to push you into the further stages.

You should already have a system for tracking your tax and deductions and be maximising deductions each year, but if you’re starting to get serious around your money at the Focus stage, minimising tax should be your first priority.

Once you have your first property locked and loaded, you should revisit how much you’re putting into your super with a view to bumping up your contributions.

Negative gearing is a strategy that comes into play at the Focus stage as you buy your first investment property. If you get it right, this strategy alone has the potential to hit your $10,000 annual tax-saving target.

Tax strategy: Optimise

At the Optimise stage, you’ll continue to target a minimum of $10,000 in annual tax savings, with the added goal of introducing at least one tax structure outside your superannuation fund. I’m referring to investment bonds, trusts and companies.

Using tax structures when you invest will limit the tax you’ll pay on investment income this year and every year forever.

Be aware that tax structures can be incredibly effective, but they can also be complicated and it’s easy to make mistakes. I strongly suggest you combine introducing this strategy with getting advice so you get it right from the start.

At the Optimise stage, your target is to invest 10 per cent of your household income in share-type investments. This is a significant amount of money, so your wealth-building momentum will accelerate nicely. You’ll consider franked-dividend share investing in the mix, since reinvesting the tax saved will build your wealth faster.

If you own your home at the Optimise stage, you should be seriously looking at debt recycling, particularly given you’re going to be investing a significant amount of money in shares. Debt recycling is a serious accelerator for homeowners who are investing anyway.

Tax strategy: Accelerate

At the Accelerate stage, your goal is to ensure you’re not paying a dollar more than your fair share in tax.

Franked-dividend share investing, negative gearing and debt recycling if you own your own home are all tactics that will drive significant tax savings.

Because of the number of elements you have going on with your money at this stage and the complexity of their interplay, you’ll benefit from working with a tax adviser or team of advisers.

Tax-saving investment structures should be a big focus at this stage, as you seriously accelerate your wealth building and the balances in your investment holdings, and while you don’t need your investment income to cover living expenses.

Once you’re using multiple tax structures, the benefits of having the right investments for the right structures are huge.

Tax strategy: Impact

Again, you should be using all the tools available to you to maximise your after-tax returns and legally minimise how much tax you pay.

At this point, you’ll want to have a crack dream team directing traffic with your tax planning and they should be prompting you should you need to change strategies. That said, it remains important that you maintain a firm grasp of your tax position and strategy.

Remember never to invest for tax purposes alone. I’ve lost count of the weird and complex tax-saving strategies out there, and I’ve seen a number of people get so caught up with saving tax that they lose sight of what they’re actually doing with their money.

If you’re looking at an investment that can help save you tax, the most important thing is that it’s a good investment to begin with. Otherwise you’ll get burned.

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This is an edited extract from Virgin Millionaire: The step-by-step guide to your first million and beyond by Ben Nash, available at all leading retailers.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.