11th Jun, 2010
By Scott Trevethan – Chartered Accountant
11 June 2010
This is the time of year that we need to be thinking “is there anything we should be doing before 30th June to legally minimise our tax?”
Unfortunately the Global Financial Crisis put paid to large problem profits and dividends in the share market as well as interest received and taxable income continues to suffer in spite of the soft landing that the Australian economy had. Still there are some standard things that both businesses and individuals should do every year before that magic date of 30th June arrives:
Review Capital Gains and Loss situation
This is the time of the year that you need to be reviewing what capital gains you made or losses that you realised. Capital losses may be carried forward indefinitely, but may only be offset against capital gains.
If you have made capital gains during the year, then consider your investments and if you were deferring making a capital loss, then consider realising that loss now to offset your capital gains.
You need to beware of “Wash Sales” which is where you sell an investment to realise the loss and then re-buy it again at the lower cost base. This is against the tax law. If you do sell to realise a loss you need to buy a different investment to replace it.
Bring forward work related expenditure /subscriptions
If you need a new briefcase of diary, some more work stationery or are considering subscribing to that “Work Related” magazine, do it before 30 June. These type of expenditures are deductible when “incurred” which effectively means when you pay for them. If you were going to buy them anyway then do it before 30 June to get the deduction in this year.
Beware of spending for spending sake though as you only get a small portion of your expenditure back in tax refunds. Make sure you really needed the item and were going to buy it anyway.
Prepay expenses such as interest
If you have a geared investment such as an investment property or share portfolio, you could consider prepaying the interest. Interest is deductible when it is incurred which includes when it is paid, so pre-paying interest, even if it wasn’t due, gives rise to a deduction.
The warning here is that this might be a useful tactic to offset income years that are unusually high. You will only get a double deduction in the first year as you paid interest when due and then in advance for the next year. Each subsequent year you will need to prepay the interest just to get the same annual deduction, so plan your prepayment to coincide when you made that large capital gain to get the maximum benefit.
Tax Effective investments
It hasn’t been big news for a couple of years due to poor returns, but prior to that there was a frenzy of June in tax effective investments such as Great Southern Plantations, Timbercorp etc. These investments are structured to give you a high percentage of deductions in the first year as they bring forward operating costs.
It isn’t an overstatement to say “frenzy” as taxpayers were often more interested in getting a tax deduction than in the investment itself, as can be witnessed by the collapse of both Great Southern and Timbercorp. I often ask clients who might be tempted to shoot first with deductions and look at the investment fundamentals later if they would like to pay me a large accounting fee. The fee is 100% deductible and I can guarantee that they will get a deduction if that is all they were after. The client gets the message that it’s about the value received and not deductions by themselves.
Always ask your tax advisor about any investments as the ATO give product rulings as to what is allowed and what isn’t. Many tax schemes are disallowed costing taxpayers as they need to repay any tax refunds received and are then hit with hefty penalties.
Defer income such as bonuses
Congratulations are in order if you are in a position to earn a bonus for the year. Make a estimate as to what your income might look like next year and if you think it would be down on this year, see if you could defer receipt of that bonus until after 30 June. The income is only assessable once it is received, so if it helps to delay it, then ask your employer if this is possible.
Superannuation Contributions
This is a favourite at tax planning time, although the reductions in the past budget have reduced the effectiveness of superannuation contributions considerably.
If you salary sacrifice superannuation contributions, subject to the maximum contribution levels, you don’t pay tax on that income that you “sacrificed” . So if you had $10k in salary that you sacrificed into superannuation and your marginal tax rate was 42.5%, you wouldn’t have to pay the $4,250 tax. The super fund, however will be taxed at 15% so the saving is more for higher income individuals than lower.
Where you are an employee, generally you can’t get a deduction for additional superannuation contributions that were not “Salary Sacrificed”. You are entitled, however to a government Co-contribution of up to $1,000 if you put in $1,000 into your fund and you earn less than $61,020. If you were in the lower income bracket and inclined to make a super contribution then this is something you should take advantage of.
You can also get a Tax Offset for a superannuation contribution made to a spouse if they earn less than $13,800 for the year. The offset isn’t much, just 18% of the lower of: $3,000; or the total of the spouse contribution.
If you think you want to make a superannuation contribution for either yourself or your spouse then contact your tax advisor or financial planner to get the ins and outs of how it can work. Beware that if you exceed the maximum contributions allowed, there are hefty tax penalties to be born.
PAYGW Variation
If you have a negatively geared investment, then you may wish to submit a Pay As You go Withholding Variation form to your employer. This will reduce the amount of tax that your employer will take out of your pay. So instead of getting a large tax refund when you put your tax return in, you just don’t pay the extra tax in the first place giving you more take home pay.
You need to complete this form every year around May so that you give your employer enough time to make the appropriate adjustment. If you miss the deadline, you can still make the application at any time throughout the year, and the adjustment will be made accordingly.
Please contact us to arrange a PAYGW variation if you think this might be appropriate.
Use Trusts to Spread Income
Less of a 30 June and more of a general tax planning issue. If you are considering making investments in the future, consider the use of a vehicle that might allow you to stream income and tax to individuals to minimise the amount of taxation payable. The use of a family trust can be an excellent planning vehicle; however you should obtain appropriate advice prior to going down this path.
