THE end of the financial year is rapidly approaching - and now is the time to start planning you tax. Waiting until the last week of the financial year is leaving it too late.

In previous years, the Government has given all workers a break by reducing marginal tax rates (MTRs).

This year, the tax breaks are being directed towards those in retirement - through superannuation.

So, it's up to us to legally minimise our tax. Question is, how do we do it?

First we must consider whether the tax deduction or the underlying investment is our main concern? That is, if I invested $1000 today, fully tax deductible to achieve a refund of $465 (assuming top MTR), then receive no further return on my investment, is it a smart move?

The answer, clearly, is no, as you have just lost $535 from your original investment. You would have been better paying the tax on the $1000 at 46.5 per cent (or $465), leaving you with $535 - $70.

With this in mind, it must be the underlying investment that is our main concern - the tax benefit

The next issue that must be addressed is for how many years will you require the deductions?

That is, do you require deductions to reduce your employment income (assuming this will continue until you decide to change your employment, lifestyle, retire etc), or do you require a deduction to offset a one-off, lump sum of income (for example, a capital gain from the sale of an investment)?

This will have a large impact on which tax-effective investment is right for you. There are investments which cater for either one or the other - but unfortunately in most cases, not both.

To look at the type of tax planning that will affect most of us - that is, where we would like to reduce our tax bill each year - I have considered borrowing to invest.

The underlying investment for this illustration example can be any income-producing investment (eg. investment property, shares, managed funds etc).

Assume you borrow $100,000 to invest:

• Borrowing interest rate 10.0 per cent

• Return 10 per cent (four per cent income, six per cent)

• Tax rate 31.5 per cent

• Tax paid by investment

• Tax refund kept by investor

• No Capital Gains Tax Paid

After 20 years, your investment would be worth $584,954.82 and the total interest paid (less the tax refund generated) would be $137,000. Therefore, once the $100,000 loan was repaid, your investment would be worth $484,954.82 - compared to $389,510.69 had you invested the same $6850 per year (or $137,000 over 20 years).

Not only has borrowing to invest increased the values of your investment you, have created an extra $10,000 per year in tax deductions.