WAYS TO COPE WHEN STRUGGLING FINANCIALLY

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At some time or another we’ll all face some kind of Financial Crisis. Often this can be quite unexpected. Here are some ideas on how to survive and offset the chances of losing control of your finances. Let’s learn how to become Financially Resilient!

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Don’t panic but plan
  • You are not alone! People experience financial crises in their lives and have bounced back. Many successful business owners have begun this way. Learn from your mistakes and you will grow stronger after the crisis. And don’t forget to call out for help. Learn how family and friends have survived their hard times.
  • Act early to avoid smaller problems becoming serious debts.
  • What are the reasons why you are struggling? Pin down your main issues and tackle them one by one. Let’s look at some examples.
    Have a budget and track your expenses like a hawk!
  • Are you sometimes a big spender? Holidays for example, can be times when we forget our limits. You can use our free Household Budget and Expense Tracking files to help you to curb your expenses. Also read our article on our website about how to save money.
  • Look at those areas of your spending pattern that you have control over. Changing your approach to eating out and purchases can even in the short term reap savings to help lower debt. For any area of debt you feel you have lost control over, seek some outside help.

 

Debt solutions

  • Consolidate debt. If you have multiple credit cards consider consolidating them into one Credit Card Account and try your best to pay it down.
  • If you are a home owner, see whether it is possible if the bank will allow you tap into your equity and top up your loan.
  • Prioritise your debt. Which debt do you need to gain control the most? Prioritise the debts that charge the highest interest rate, overdue penalty rates and admin fees.

 

Try to gain more income

  • If possible, rent out part of your house. Renting one room out can earn you around$100 to $150 a week, which is $5000 to $7500 a year. In some areas you can rent out a garage or parking spot and get a sizable income too. Be aware of any Council and Strata laws restricting these practices.
  • Rent out your car. Depending on the condition, you can earn up to $800 per month. Be mindful of Insurance implications.
  • If you have a good relationship with your employer, talk to your boss to see whether you can achieve a pay rise or an advance pay in relationship to your work performance.
  • Sell some of your possessions. The old fashioned garage sale isn’t very popular today. But you can still sell second hand clothes or unused items on websites such as Ebay and Gumtree.
  • If you can be flexible with your time consider getting a second job or working from home.

Declaration: The Excel files and content of this website have been prepared without taking into account your personal financial situation or knowledge of your financial needs. Impact Taxation and Financial Services cannot be liable for any losses or damages arising from using the information provided. It is the user’s responsibility to seek independent advice from a professional accountant before implementing any financial plan.

10 things you should consider before buying a property

Are you considering buying a property? Do you know you could miss opportunities to save thousands, or tens of thousands of dollars if you don’t plan well before the purchase?

Below are a few key considerations:

1. How should you set up your loan structure? If you don’t have a loan offset account for a rental property, after you make extra payments directly to the loan account, you can only claim interest deduction on the remaining balance of the loan. For tax purposes, this deductible balance can’t be changed even if you redraw the overpaid amount later. A good loan structure could also help you to stabilize interest rate and speed up loan repayment by combining a standard variable loan (with an offset account) and a fix rates account.

2. Timing of renovation. You might want to do a renovation right after you have bought the rental property. But do you know for any genuine repair & maintenance included in the renovation, you can claim an outright deduction against the rental income when the property is available for rental? If the work is done before the date when the property is available for rental, you can only claim the deduction against future capital gain when the property is sold. Depend on when you are going to sell, it could take years or up to decades before you can claim the deduction.

3. How should you split ownership? You might want to share the property ownership with a family member. For tax purposes, the percentage of ownership is based on the legal title, regardless of who is paying more on the mortgage. If the property will give you a tax profit, you might want to allocate more
ownership to the low-income earner to utilize the lower marginal tax rate. If it is giving you a tax loss, you might want to allocate more ownership to the high-income earner to utilize the loss. The goal is for the family to pay minimum tax together.

4. Should you use a family trust to purchase the property? There are many pros and cons related to a family trust. The advantages include tax savings on rental profit or capital gain, asset protection and succession planning on family wealth. However, family trust can’t distribute losses. All losses are trapped in the trust to be used to offset future trust profit. Therefore, you can’t utilize any rental loss in a trust to offset other income such as salary & wages. Family trusts also attract high accounting fees on initial setup and annual fees on financial statements and tax returns. State governments also charge much higher land tax on family trusts.

5. Will the income level change in future years for different owners? You might want to forecast the possible income for different owners to understand total tax payment / savings related to the property. This could also impact on your decision making on point 3 and 4 above.

6. Understand when you can treat your property as main residence to receive an exemption on capital gains tax. When eligible, even if you have received rental income, you could still treat your rental property as main residence and receive the exemption. To be eligible, you will need to treat it as your main residence at the beginning. Please check out this ATO link: Treating former home as main residence.

7. Decide whether you need to purchase a depreciation report. Most taxpayers don’t know that the depreciation on the building will need to be added back to calculate capital gains tax when the property is sold. When the property is held for more than 12 months, after applying the capital gains tax discount of 50%, it will effectively cut the tax rate by half at the time of sales. This makes depreciation deductions desirable for high income earners. However, for low-income earners it might not be ideal to claim depreciation as a rental deduction since they could be paying more on capital gains tax in the future. It could get more complicated if the property is under joint ownership between high and low income earners.

8. You might want to consider Centrelink payments for future or existing owners. Most Centrelink payments are income and asset tested. Before attaching a rental property to a family member who is receiving, or plan to receive government benefits, you might want to check the testing thresholds first to see if the Centrelink payment will be impacted. This is also applicable when you are making distributions from a family trust to different family members.

9. Have you considered using your SMSF (selfmanaged super fund) to make the purchase of a rental property? There are a lot of tax saving opportunities with a SMSF since the income tax rate is only 15%. And the capital gains tax rate is effectively only 10% after factoring in the 1/3 discount. The major downside with a SMSF is normally you can’t get the money out until you retire or on compassionate grounds (SMSF does have more flexibilities compared to normal retail super fund. But the choices are still very limited). It could be expensive to set up and operate a SMSF too. There are also strict legal requirements on the trustees. Penalties on incompliance could be severe. Tax law around SMSF is very complicated too. You will need to find a good tax accountant specialized in SMSF to help you to understand the structure, also do a cost-benefit analysis before setting it up.

10. Consider internal ownership changes. For your existing rental properties, you can also consider whether you should transfer the ownership between family members, or between different business structures (this is not applicable for SMSF). You might want to do this when the income level changes with family members, or rental property changes between tax profit and loss. Before the change, you need to consider the cost of transfer including capital gains tax, stamp duty, conveyancer fees, etc. Again, a cost-benefit analysis is a must before the change.

Last but not the least, did you combine all the above strategies and compare your choices? If you haven’t yet, how would you know that you have picked the best strategy to minimize your taxes? We can help you to factor in all considerations, compare different scenarios, also present you with a Property Prepurchase Report with all our findings to help you to make a decision. Contact us today to book in a consultation with an experienced tax accountant!

IMPORTANT INFORMATION
This is general advice only and does not consider your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from your financial adviser and seek tax advice from your accountant.

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