How to reduce your income tax - tips on getting all the tax deductions you deserve
Make sure you get all the tax deductions you deserve
Make sure you get all the tax deductions you deserve
Every June we all start to consider if we have claimed all we can for the financial year or we may be thinking 'I should have done more this year'. As another financial year ticks over in a few weeks now is the time to make sure you have a quick check list of things to consider before the end of June. There is nothing like the 30 th of June to focus the financial mind. To gain any tax advantage you must take action by the end of June.
Deductions
Generally speaking, expenses incurred in producing assessable income are tax deductible. Although, it's important to differentiate between losses incurred running a business and private expenses even though they are necessary in order to facilitate the earning of your income. Private expenses include childcare costs or commuting to your place of work. These are not deductible.
A tax deduction reduces the taxable income on which tax is calculated so more money in your pocket. This means for every tax deductible dollar spent multiplied by your marginal tax rate will be saved.
This is always first of mind as investors seek a tax saving by making a last minute investment into super. The idea is to arrange a salary sacrifice pre-30th June of your salary or bonus or even future earnings. This will allow the deduction this financial year. The usual contribution limits apply this year plus the one-off BIG WINDOW OF OPPORTUNITY - the million dollar contribution. For those who can afford it (or sell or borrow to afford it) you can contribute up to $1 million in a one-off after-tax contribution pre-June 30th .
Next year the new rules allow you to contribute $450,000 in un-deducted contributions. In effect this allows individuals almost $1.5 million. For couples that's $3 million that can go into super and earn and grow tax free (see last month's newsletter).
From 1 st July the age based limits will be replaced by a flat $50k contribution limit for all.
Don't forget the other great superannuation free kicks.
Take advantage of the co-contribution scheme. This allows you to contribute $1,000 to a spouse's super fund and in return the government will contribute $1,500. Provided your spouse earns more than $1 and less than $28,000 you will get the full $1,500 contribution. This also applies to children over 16 who are working part time.
Pre-Payment of Interest
This is a common strategy to claim the interest deductions on your margin loan or investment property loan so you will have the tax deductions this financial year.
As long as the loan is used to generate taxable income you can claim a tax deduction on the interest payments. Some margin loans will also give you a reduced interest rate for paying in advance, a very good reason to explore this strategy if you can.
Off-Setting Capital Gains Tax
Where a capital gain has been derived on the disposal of an asset a capital gain will be payable in your tax return. If the gain has been made under 12 months and the asset sold the CGT will be 50%. If you have held the asset for longer than 12 months the CGT will be 25%.
The other side of the coin is this. If you have an asset that has reduced in value you can also claim the loss. The trick here is to sell and crystallise the loss on that asset to offset the growth on the performing asset.
These losses can be carried forward against any future gains but you have to sell to reap the advantage. Remember you can always buy back those shares that made a loss at some future date if you wish. This is a good time to update your portfolio. Be careful of buying managed funds at the end of the financial year . Fund managers make their distributions at this time so some will see a unit price drop as the distributions are made (you are converting capital to income if you get a distribution here). There may be some good reasons to buy now so its very wise to seek advice on your particular situation.
Deferring Income Tax
Deferred tax is tax saved. Is there any way that you can have any income deferred into the next financial year? You pay tax on the income when it is received not when it's due. Look at any money due this financial year and see if it can be received next year. The advantage here is you may be on a lower tax scale next year.
Income Splitting
This is simple and is probably already in place if you have received advice but remember the person on the lowest tax bracket should hold the income producing assets.
Medical Expenses
Often forgotten but make sure you claim the tax rebate of 20% for net medical expenses (including dental and optical) you incur in excess of $1,500.
Tax Schemes
This is the last year the ATO is giving a full dollar for dollar deduction for agricultural schemes, although the actual start date for the proposed changes in unclear due to the extensive industry lobbying in response to those announcements. Yes they do give you a deduction (provided the operators stick to the ATO product ruling specifications issued with the scheme) but they also give you a debt if you borrow to invest for many years to come. There is no liquidity, they are long term and there are too many variables with this type of investment e.g. weather, future demand etc. I have seen them all and have yet to be convinced these schemes create wealth for clients. Be careful.
Expenses Related to Your Job / Income
Ask your accountant for a list of expenses related to your job. Many occupations have deductions which are specific to their particular industry. Very few people claim their full entitlements. Don't forget the contributions to that school building fund associated with the school fees. Did you put your hand up at any charity functions and buy deductible items this year. And don't forget to complete your 13 week log book to maximise your claim for work related motor vehicle expenses.
And Finally...
Always seek advice. Make sure you use an accountant to complete your tax return to maximise your deductions and don't forget that your ongoing wealth creation advice fees are tax deductible.
Next Financial Year (2007-2008)
It may be too late for this year but start a file / shoebox and collect all tax related items. All receipts and credit card expenses can be filed here. Make a photocopy of your credit card statement and highlight the relevant expenses. If you don't have a receipt make a diary entry of the expense and photo copy the diary page and place it this file.
If you wish, during the year (or at the end) you can enter all expenses on to a spread sheet and email to your accountant at the end of the year. Your accountant will probably not need to see the receipts to lodge your return but make sure you have them in a safe place if needed.
Every June we all start to consider if we have claimed all we can for the financial year or we may be thinking 'I should have done more this year'. As another financial year ticks over in a few weeks now is the time to make sure you have a quick check list of things to consider before the end of June. There is nothing like the 30 th of June to focus the financial mind. To gain any tax advantage you must take action by the end of June.
Deductions
Generally speaking, expenses incurred in producing assessable income are tax deductible. Although, it's important to differentiate between losses incurred running a business and private expenses even though they are necessary in order to facilitate the earning of your income. Private expenses include childcare costs or commuting to your place of work. These are not deductible.
A tax deduction reduces the taxable income on which tax is calculated so more money in your pocket. This means for every tax deductible dollar spent multiplied by your marginal tax rate will be saved.
Strategies for Reducing Your Tax
SuperannuationThis is always first of mind as investors seek a tax saving by making a last minute investment into super. The idea is to arrange a salary sacrifice pre-30th June of your salary or bonus or even future earnings. This will allow the deduction this financial year. The usual contribution limits apply this year plus the one-off BIG WINDOW OF OPPORTUNITY - the million dollar contribution. For those who can afford it (or sell or borrow to afford it) you can contribute up to $1 million in a one-off after-tax contribution pre-June 30th .
Next year the new rules allow you to contribute $450,000 in un-deducted contributions. In effect this allows individuals almost $1.5 million. For couples that's $3 million that can go into super and earn and grow tax free (see last month's newsletter).
From 1 st July the age based limits will be replaced by a flat $50k contribution limit for all.
Don't forget the other great superannuation free kicks.
Take advantage of the co-contribution scheme. This allows you to contribute $1,000 to a spouse's super fund and in return the government will contribute $1,500. Provided your spouse earns more than $1 and less than $28,000 you will get the full $1,500 contribution. This also applies to children over 16 who are working part time.
Pre-Payment of Interest
This is a common strategy to claim the interest deductions on your margin loan or investment property loan so you will have the tax deductions this financial year.
As long as the loan is used to generate taxable income you can claim a tax deduction on the interest payments. Some margin loans will also give you a reduced interest rate for paying in advance, a very good reason to explore this strategy if you can.
Off-Setting Capital Gains Tax
Where a capital gain has been derived on the disposal of an asset a capital gain will be payable in your tax return. If the gain has been made under 12 months and the asset sold the CGT will be 50%. If you have held the asset for longer than 12 months the CGT will be 25%.
The other side of the coin is this. If you have an asset that has reduced in value you can also claim the loss. The trick here is to sell and crystallise the loss on that asset to offset the growth on the performing asset.
These losses can be carried forward against any future gains but you have to sell to reap the advantage. Remember you can always buy back those shares that made a loss at some future date if you wish. This is a good time to update your portfolio. Be careful of buying managed funds at the end of the financial year . Fund managers make their distributions at this time so some will see a unit price drop as the distributions are made (you are converting capital to income if you get a distribution here). There may be some good reasons to buy now so its very wise to seek advice on your particular situation.
Deferring Income Tax
Deferred tax is tax saved. Is there any way that you can have any income deferred into the next financial year? You pay tax on the income when it is received not when it's due. Look at any money due this financial year and see if it can be received next year. The advantage here is you may be on a lower tax scale next year.
Income Splitting
This is simple and is probably already in place if you have received advice but remember the person on the lowest tax bracket should hold the income producing assets.
Medical Expenses
Often forgotten but make sure you claim the tax rebate of 20% for net medical expenses (including dental and optical) you incur in excess of $1,500.
Tax Schemes
This is the last year the ATO is giving a full dollar for dollar deduction for agricultural schemes, although the actual start date for the proposed changes in unclear due to the extensive industry lobbying in response to those announcements. Yes they do give you a deduction (provided the operators stick to the ATO product ruling specifications issued with the scheme) but they also give you a debt if you borrow to invest for many years to come. There is no liquidity, they are long term and there are too many variables with this type of investment e.g. weather, future demand etc. I have seen them all and have yet to be convinced these schemes create wealth for clients. Be careful.
Expenses Related to Your Job / Income
Ask your accountant for a list of expenses related to your job. Many occupations have deductions which are specific to their particular industry. Very few people claim their full entitlements. Don't forget the contributions to that school building fund associated with the school fees. Did you put your hand up at any charity functions and buy deductible items this year. And don't forget to complete your 13 week log book to maximise your claim for work related motor vehicle expenses.
And Finally...
Always seek advice. Make sure you use an accountant to complete your tax return to maximise your deductions and don't forget that your ongoing wealth creation advice fees are tax deductible.
Next Financial Year (2007-2008)
It may be too late for this year but start a file / shoebox and collect all tax related items. All receipts and credit card expenses can be filed here. Make a photocopy of your credit card statement and highlight the relevant expenses. If you don't have a receipt make a diary entry of the expense and photo copy the diary page and place it this file.
If you wish, during the year (or at the end) you can enter all expenses on to a spread sheet and email to your accountant at the end of the year. Your accountant will probably not need to see the receipts to lodge your return but make sure you have them in a safe place if needed.
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Home | Superannuation Funds | Property Investment | Income Tax | Income Protection Insurance | Fund Managers
Margin Lending | Stock Trading | Stock Market Crash | Tips | Quotes | Property Boom | Baby Boomers | Mortgage Trust
Reduce Tax | Buying Shares | How To Invest | Investment Scams | End Of Financial Year | Building Wealth
Oulook 2006 | Investment Types | Property Trust | Market Investment