The Dirty Little Secret the Banks Don't Want You to Know...
That could help you with your tax planning and cash flow management
Have you ever stumbled upon a product or service your bank has available that could have been of benefit to you, if only they had let you know about it?
Well there are many products and services that banks deliberately don’t publicise or widely offer. You may be one of the lucky customers that get tapped on the shoulder and receive a whispered offer because someone at the bank considers you to be exceptionally “valuable”. But for most of us who are considered by our bank to be ‘less valuable’, we are unlikely to learn about these offerings first hand.
The reason for this has less to do with bank profitability, but rather, such products and services usually require a bit more work from the banks in terms of additional systems and processes.
One of these well-kept little secrets involves a service called “interest in advance”.
What is interest in advance you ask?
Firstly, it is important to understand that under Australian tax rules, people have the opportunity, for up to 13 months, to bring forward expenses they might incur in the following financial year.
This can apply to borrowings that have a business purpose or some other expense that might be payable before the 30th of June in the following financial year.
With interest in advance, you are effectively paying the interest liability on your loan up to 13 months in advance and because you are paying in advance, the bank will give you a discount on the interest prepayment.
So what are the taxation benefits of interest in advance?
Because you are pre paying your interest obligation for the following financial year, you are entitled to receive a ‘double deduction’ in your current tax return year. Therefore interest in advance can work as a very effective tax planning and cash flow management tool.
Is interest in advance suitable for everyone?
Interest in advance will be of particular interest to people who have additional income throughout the year that is threatening to put them in a higher tax bracket or, where people have very few eligible deductions but interest is one, so an interest prepayment on top of their regular payment will allow a double deduction on the interest paid in that year.
What are the key things I should consider when it comes to interest in advance?
There are 3 main things to take into account when it comes to paying interest in advance;
- Do you have a genuine case for interest in advance?
- Is there a net benefit in paying interest in advance as you will need to pay the additional interest as a lump sum?
- Not all banks offer interest in advance so you will need to ask your bank and perhaps shop around.
If you would like to discuss how interest in advance could apply to your personal situation, please don’t hesitate to call one of our brokers at Johnston Grocke today on 8303 0300.