Smart ways to use charitable giving for savvy tax deductions

Benevolent taxpayers often turn to charitable giving as a means of obtaining a tax deduction and the savvy ones among them opt for a smart strategy: bring forward multiple years of charitable giving to make a lump-sum contribution to a sub-fund within a public ancillary fund. This gives taxpayers the tax deduction they need while their tax rates are higher, along with the flexibility to gradually distribute the balance to charities over time.

It's a solution that can deliver significant tax savings, including for pre-retirees looking to maximise deductions while still working and wanting to continue to enjoy giving beyond retirement, or those facing a large one-off tax bill through the sale of assets.

It's a straightforward tactic that contributes to the community, as well as benefiting your tax bill. Make a cash contribution to a sub-fund and you will receive a tax deduction for the full amount you contribute. You can claim this in the current financial year when your marginal rate is higher, but if your income ends up being lower than expected, any unused portion of the tax deduction can be carried forward, spread over a period of up to five years. This means you can leverage the deduction over time, depending on your income.

The cash that you contribute goes into your own sub-fund, which is your charitable giving account. You choose which charities you want to support from your sub-fund, and how much you want to give each year. The only requirement is that at least 4 per cent of the balance is paid out annually. This ensures a steady stream of income to charitable causes, while still giving you the flexibility to adjust who you want to support and how much they receive each year. While you're thinking about the charities that you want to support, the balance of your sub-fund is invested for growth, and investment returns are tax-free. This means that even as you're giving money away from your sub-fund, investment returns can increase the total amount you can give, amplifying your impact.

Consider the example of my own sub-fund with the Australian Philanthropic Services Foundation. Entrusting them with the management and administration of my charitable dollars has been a wise decision. Despite consistent and generous giving from my sub-fund every year, the balance has grown. Tax-free investment returns have increased the balance by over half my original contribution. I've also made a few additional donations into the fund over time. At this rate, there will be enough in the sub-fund to get the grandkids involved.

A sub-fund is a gift itself to any taxpayer scrambling to select a charity to support before June 30. The mere thought of making a large donation to a charity can be daunting. A sub-fund gives you a breather. You can receive both the tax deduction and time to thoughtfully consider which charities to support. Use your sub-fund to dip your toe in the water and make smaller gifts to charities until you find the perfect fit, or spread your giving over time and experience the joy of giving for the long haul.

This strategy isn't just reserved for the wealthy. Any generous Australian looking for a tax deduction of at least $40,000 (the recommended minimum balance) can benefit from establishing a sub-fund. And with all Australians set to benefit from July 1 tax cuts, it's not just millionaires looking to charitable giving ahead of June 30.

I have just finished reading your book "10 Simple Steps to Financial Freedom" and it's really motivated me to re-asses my financial plan. For the past five years, my husband and I, age 28 and 27, have been putting as much as we possibly can into extra mortgage repayments. For some time, we weren't putting anything into a savings account, because we figured we could redraw if we were desperate. We are now putting 10% of our income into savings and 20% into extra mortgage repayments. Should we keep focusing on getting our loan down or should we invest in share -based investments at the same time.

It's long been my belief that the best strategy for people starting off is to get their mortgage under control, and then think about other investments. Because of the way compound interest works the shorter the time period of the loan the less affect extra payments make. For example, if you had a loan of $500,000 over 30 years at 6% repayments would be $3000 a month. Increasing those repayments by just $600 a month would cut the term by 10 to 20 years. But to cut a further 10 years off the term would require an extra $2000 a month.

I think a good target for home loan is 12 years - in which repayments would be $1000 a month for every $100,000 of the loan. For example in a loan of $500,000 the optimum payments would be $5000 a month. Once payments are at this level your loan is under control and you could think about other investments. I think an index fund which matches the ASX top 200 shares would be the perfect investment for that. There are no decisions to make and the fund has averaged 9% per annum for the last 120 years.

My parents aged 65 and 64 are still working full-time in their own business. They own their home, have no debt, and have over $3m in cash. Their super balances are around $600,000 each. I think they should make a non-concessional contribution before 30 June of $110,000 each and then an additional non-concessional contribution after 1 July ($330,000 each), to get $880,000 of their cash into super this year, so that it earns tax-free income when they retire and switch their super funds into pension mode.

If they use the bring-forward rule on 1 July 2024 to make non-concessional contributions of $330,000 each (using the 2025, 2026, and 2027 financial year caps), does this stop them from retiring and switching their funds into pension mode as soon as they like (let's say for arguments sake, 1 July 2025)? I'm unsure if contributing $330,000 using the bring-forward rule on 1 July 2024 means they'll have to wait for the three years to play out before being able to switch their funds to pension mode.

I think they're the perfect age for that strategy but just keep in mind that the non-concessional contribution limit increases from $110,000 a person to $120,000 after 30 June. Therefore, a $110,000 contribution can be made before 30 June and then $360,000, after 30 June using the bring forward rules. Once the once the contribution is received by the fund, the money is treated the same as any other contribution. There are no special rules for it, except that you have to wait three years to do it again. They can switch to pension mode once they reach age 65 or earlier if they have retired before then.

When the time comes should I pay of my investment mortgage from my inheritance or should I put in super and keep paying my mortgage

It would depend on your situation - if the mortgage is small and the payments are paid by the rents from the property, it would make sense, to put the money into superannuation. However, if the payments are in excess of the income it may be best to at least reduce the loan to a level where the properties is neutral geared.