End of Financial Year - Tax Deductions
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 30th 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. It's important to differentiate, however, between losses incurred running a business and private expenses, even though private expenses 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 income on which tax is calculated which means more money in your pocket. This means that every tax deductible dollar spent multiplied by your marginal tax rate will be saved.
What Are The New Tax Rates?
How Much Tax You Pay
2007/08: $0-$6,000: Nil
$6,001-$30,000: 15c per $1 over $6,000
$30,001-$75,000: $3,600 + 30c per $1 over $30,000
$75,001-$150,000: $17,100 + 40c per $1 over $75,000
$150,000+: $47,100 + 45c per $1 over $150,000
2008/09
$0-$6,000: Nil
$6,001-$34,000: 15c per $1 over $6,000
$34,001-$80,000: $4,200 + 30c per $1 over $34,000
$80,001-$180,000: $18,000 + 40c per $1 over $80,000
$180,000+: $58,000 + 45c per $1 over $180,000
Boost your super savings by salary sacrificing before 30 June
This is always first to 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. By using this strategy, you can pay less income tax this financial year and make a larger after-tax investment.
When you salary sacrifice a bonus (or salary / wages) into superannuation, the contribution is taxed at a maximum rate of 15%. If taken as cash, your bonus will be taxed at your marginal rate (which could be as high as 46.5%). Depending on your circumstances, a salary sacrifice strategy could reduce the tax rate payable on your bonus by up to 31.5%.
Note: To be effective, the salary sacrifice arrangement needs to be in place before your employer determines your bonus entitlements.
Concessional contributions
A concessional contribution is one from pre-tax income, so this includes your salary sacrifice contributions. The cap on concessional contributions is $50,000 if you are under 50 years old.
Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply for people aged 50 or over. During this period, a person who is aged 50 or over has an annual concessional contributions cap of $100,000 p.a.
Non-concessional contributions
Following last year's Budget, the new rules for non-concessional (un-deducted) contributions allow you to contribute $450,000 in a three year period. An un-deducted contribution is simply one that you make to your super fund (rather than one that is paid by an employer) that you are not claiming a tax deduction for and that is always tax free because it is considered a return of money that you have already paid tax on. You can contribute $150,000 in un-deducted contributions each year, or a maximum of $450,000 over a three year period. The benefit of making un-deducted contributions is that you can move money into the super environment without paying tax on the contributions, and of course the super environment is a great tax environment with tax on earnings only 15% rather than up to 46.5% you can pay on earnings outside super.
Don't forget the other great superannuation free kicks:
Take advantage of the government's co-contribution scheme. This allows you to contribute $1,000 of after-tax money to your super fund and in return the government will contribute $1,500. Provided you earn 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.
If your spouse has a low income, you should consider making super contributions on their behalf from your after-tax pay or savings. By using this strategy before 30 June 2008, you can receive a tax offset of up to $540 this financial year and maximise the benefits of super as a couple.
To qualify for the full tax offset under the current rules, you need to make a minimum after-tax contribution of $3,000 into super on behalf of your spouse. Your spouse must earn less than $10,800 in the financial year in which the contribution is made. If your spouse earns more than $10,800, a reduced offset may be payable and the offset cuts out if your spouse earns $13,800 or more per annum.
Pre-Payment of Interest
Pre-paying the interest on your margin loan or investment property loan is a common strategy so that you can claim the 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.
Pre-pay 12 months Income Protection Insurance Premiums
If you're unable to work for an extended period due to illness or injury, income protection insurance can help pay your bills and maintain your lifestyle. However, if you take out income protection insurance before 30 June 2008, and pay your premiums for up to 12 months, you may be able to bring forward your tax deduction and pay less income tax this financial year.
If you pre-pay your income protection insurance premiums for 12 months before 30 June, you can bring forward an expense that would otherwise be tax-deductible in the following financial year. This is despite the fact that the majority of the premium may relate to insurance cover after 1 July 2008.
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 on at some future date if you wish.
An important note here is you cannot sell shares one day and buy them back again the next day to crystallise your losses. The ATO considers this a wash sale and as such comes under part IV A of the Tax Act, which is tax avoidance. Be careful seek advice.
Also, while the end of the financial year can be a good time to update your portfolio, do be careful of buying managed funds at the very end of the financial year. This is because 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 it's very wise to seek advice on your particular situation.
Defer Asset Sales to Manage Capital Gains Tax
If you need to sell a profitable asset, you should consider delaying the sale until after 1 July 2008. By implementing this strategy, you can defer paying capital gains tax (CGT). Depending on your situation, you may also be able to reduce your CGT liability.
Defer paying CGT
CGT is generally only payable by individuals after they lodge their tax return for the financial year in which an asset is sold. By selling an asset after 30 June 2008, you may be able to delay paying tax on your capital gain for up to 12 months - in some cases longer.
Reduce your CGT Liability
If you expect to earn a lower taxable income next financial year (e.g. because you plan to retire or intend taking parental leave), the marginal tax rate you have to pay on realised capital gains in 2008/09 may decline considerably - resulting in a significant tax saving.
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
The ATO has focused heavily on tax effective agricultural investments in recent years, disallowing deductions for investments made in projects considered primarily "tax-driven".
In particular the ATO has reconsidered its views on the deductibility of investments in forestry and non-forestry schemes. The effect of this change is that investors in non-forestry schemes will no longer be able to claim upfront deductions for their contributions on the basis that the investor is "carrying on a business".
Going forward under the new rules, investors in forestry schemes will still be entitled to an upfront statutory deduction for all expenditure, provided that at least 70% of the expenditure is directly related to developing forestry.
Yes forestry investments 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 that are completely out of everyone's control. I have seen all these schemes and have yet to be convinced they create long term 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.
Want to make an appointment? Contact us on 02 9299 2505.
Next Financial Year
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 you can enter all expenses on to a spread sheet that you can simply email to your accountant at the end of the financial 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.
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 30th of June to focus the financial mind. To gain any tax advantage you must take action by the end of June.
DeductionsGenerally speaking, expenses incurred in producing assessable income are tax deductible. It's important to differentiate, however, between losses incurred running a business and private expenses, even though private expenses 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 income on which tax is calculated which means more money in your pocket. This means that every tax deductible dollar spent multiplied by your marginal tax rate will be saved.
How Have The Tax Rates Changed?
The top marginal tax rate for individuals is 46.5% including Medicare so every dollar tax deduction is worth 46.5 cents. This is only if your income exceeds $150k per annum. The last three Federal Budgets have reduced tax rates and most tax payers are now on a marginal tax rate of 30% plus Medicare. So at a marginal tax rate of 30% you would get back 31.5 cents for every tax deductible dollar you claim.What Are The New Tax Rates?
How Much Tax You Pay
2007/08: $0-$6,000: Nil
$6,001-$30,000: 15c per $1 over $6,000
$30,001-$75,000: $3,600 + 30c per $1 over $30,000
$75,001-$150,000: $17,100 + 40c per $1 over $75,000
$150,000+: $47,100 + 45c per $1 over $150,000
2008/09
$0-$6,000: Nil
$6,001-$34,000: 15c per $1 over $6,000
$34,001-$80,000: $4,200 + 30c per $1 over $34,000
$80,001-$180,000: $18,000 + 40c per $1 over $80,000
$180,000+: $58,000 + 45c per $1 over $180,000
Strategies for Reducing Your Tax
Superannuation:Boost your super savings by salary sacrificing before 30 June
This is always first to 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. By using this strategy, you can pay less income tax this financial year and make a larger after-tax investment.
When you salary sacrifice a bonus (or salary / wages) into superannuation, the contribution is taxed at a maximum rate of 15%. If taken as cash, your bonus will be taxed at your marginal rate (which could be as high as 46.5%). Depending on your circumstances, a salary sacrifice strategy could reduce the tax rate payable on your bonus by up to 31.5%.
Note: To be effective, the salary sacrifice arrangement needs to be in place before your employer determines your bonus entitlements.
Concessional contributions
A concessional contribution is one from pre-tax income, so this includes your salary sacrifice contributions. The cap on concessional contributions is $50,000 if you are under 50 years old.
Between 1 July 2007 and 30 June 2012, a transitional concessional contributions cap will apply for people aged 50 or over. During this period, a person who is aged 50 or over has an annual concessional contributions cap of $100,000 p.a.
Non-concessional contributions
Following last year's Budget, the new rules for non-concessional (un-deducted) contributions allow you to contribute $450,000 in a three year period. An un-deducted contribution is simply one that you make to your super fund (rather than one that is paid by an employer) that you are not claiming a tax deduction for and that is always tax free because it is considered a return of money that you have already paid tax on. You can contribute $150,000 in un-deducted contributions each year, or a maximum of $450,000 over a three year period. The benefit of making un-deducted contributions is that you can move money into the super environment without paying tax on the contributions, and of course the super environment is a great tax environment with tax on earnings only 15% rather than up to 46.5% you can pay on earnings outside super.
Don't forget the other great superannuation free kicks:
Take advantage of the government's co-contribution scheme. This allows you to contribute $1,000 of after-tax money to your super fund and in return the government will contribute $1,500. Provided you earn 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.
If your spouse has a low income, you should consider making super contributions on their behalf from your after-tax pay or savings. By using this strategy before 30 June 2008, you can receive a tax offset of up to $540 this financial year and maximise the benefits of super as a couple.
To qualify for the full tax offset under the current rules, you need to make a minimum after-tax contribution of $3,000 into super on behalf of your spouse. Your spouse must earn less than $10,800 in the financial year in which the contribution is made. If your spouse earns more than $10,800, a reduced offset may be payable and the offset cuts out if your spouse earns $13,800 or more per annum.
Pre-Payment of Interest
Pre-paying the interest on your margin loan or investment property loan is a common strategy so that you can claim the 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.
Pre-pay 12 months Income Protection Insurance Premiums
If you're unable to work for an extended period due to illness or injury, income protection insurance can help pay your bills and maintain your lifestyle. However, if you take out income protection insurance before 30 June 2008, and pay your premiums for up to 12 months, you may be able to bring forward your tax deduction and pay less income tax this financial year.
If you pre-pay your income protection insurance premiums for 12 months before 30 June, you can bring forward an expense that would otherwise be tax-deductible in the following financial year. This is despite the fact that the majority of the premium may relate to insurance cover after 1 July 2008.
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 on at some future date if you wish.
An important note here is you cannot sell shares one day and buy them back again the next day to crystallise your losses. The ATO considers this a wash sale and as such comes under part IV A of the Tax Act, which is tax avoidance. Be careful seek advice.
Also, while the end of the financial year can be a good time to update your portfolio, do be careful of buying managed funds at the very end of the financial year. This is because 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 it's very wise to seek advice on your particular situation.
Defer Asset Sales to Manage Capital Gains Tax
If you need to sell a profitable asset, you should consider delaying the sale until after 1 July 2008. By implementing this strategy, you can defer paying capital gains tax (CGT). Depending on your situation, you may also be able to reduce your CGT liability.
Defer paying CGT
CGT is generally only payable by individuals after they lodge their tax return for the financial year in which an asset is sold. By selling an asset after 30 June 2008, you may be able to delay paying tax on your capital gain for up to 12 months - in some cases longer.
Reduce your CGT Liability
If you expect to earn a lower taxable income next financial year (e.g. because you plan to retire or intend taking parental leave), the marginal tax rate you have to pay on realised capital gains in 2008/09 may decline considerably - resulting in a significant tax saving.
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
The ATO has focused heavily on tax effective agricultural investments in recent years, disallowing deductions for investments made in projects considered primarily "tax-driven".
In particular the ATO has reconsidered its views on the deductibility of investments in forestry and non-forestry schemes. The effect of this change is that investors in non-forestry schemes will no longer be able to claim upfront deductions for their contributions on the basis that the investor is "carrying on a business".
Going forward under the new rules, investors in forestry schemes will still be entitled to an upfront statutory deduction for all expenditure, provided that at least 70% of the expenditure is directly related to developing forestry.
Yes forestry investments 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 that are completely out of everyone's control. I have seen all these schemes and have yet to be convinced they create long term 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.
Want to make an appointment? Contact us on 02 9299 2505.
Next Financial Year
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 you can enter all expenses on to a spread sheet that you can simply email to your accountant at the end of the financial 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