The end of the financial year is rapidly approaching. It is certainly a great time to take steps in reducing your tax bill and put yourself in the best position for the financial year. Too often tax planning is left to the last minute which makes it difficult to minimise tax, so consider the tips below for your personal tax, business or superannuation fund and seek professional advice as early as possible.
What is tax planning? Is tax planning lawful?
You have the right to arrange your financial affairs to keep your tax to a minimum – this is often referred to as tax planning. Tax planning is legitimate when you do it within the letter and the spirit of the law. However, some arrangements may attract the ATO’s attention to determine whether or not they are lawful. Involvement in a tax avoidance scheme can risk your original investment and you may also have to pay back any missing tax with interest and penalties.
Your personal tax return – Individuals
- Keep records: Consider whether you’re maximising your legitimate allowable deductions and keep detailed records to manage work related expense and investment property related deductions.
- Prepay your expenses: By prepaying 12 months of tax-deductible expenses before 30 June, you can bring the deduction forward into the current financial year. A good example of this is income protection insurance but other options are prepaying interest on margin loans or investment loans.
- Delay income: If you are able to, try to defer income until after June 30 to avoid paying tax this financial year. As an example this may be done by reviewing term deposit maturity dates or legitimately deferring income by holding off issuing invoices until July 1.
- Charity: If you are thinking of donating money, do it before 30 June and you may be able to receive a tax deduction for gifts this financial year. You need to obtain a receipt form the charity and the charity has to be registered as a deductible gift recipient (DGR) in Australia.
- Repairs and Maintenance: If you hold an investment property, consider doing minor repairs and maintenance prior to 30 June.
- Buy health insurance if you are a high-income earner: To avoid the Medicare Levy Surcharge, high-income earners should take out private health cover. To avoid the surcharge for the entire year, the insurance needs to be held for the entire year otherwise it will be prorated.
For your business
- Structure: Whether you operate as a sole trader, partnership, in a trust or company, it’s always a good idea to review your current business structure and whether this is still appropriate and most tax efficient for your current situation.
- Timing: Consider the timing of income and consider up-and-coming liabilities, and the value in incurring them before year end to maximise allowable deductions.
- Pay super early: Superannuation guarantee payments for your staff aren’t due until July but paying these in June will give you a deduction for them in this financial year as opposed to next financial year.
- Trusts and companies: Trusts and companies can distribute funds to recipients on lower tax brackets to minimise tax payments. Ask your adviser to review your options.
- Immediate write offs: New laws have passed that allow small businesses to claim an immediate deduction for assets they start to use or have installed ready for use, provided each depreciable asset costs less than $20,000. Check with your adviser as to whether you are eligible.
- Bad Debts: If you are not going to get paid, then it is best to write these off as a bad debt prior to June 30 in order to claim the tax deduction.
- Trading stock: A stock take is the best way to write off any lost, damaged or obsolete stock and can reduce your taxable income.
- Stationery: Stocking up on stationery and other consumables before June 30 can help offset profits.
Your superannuation contributions
- Spouse contributions: If your spouse earned less than $13,800 this financial year, you can claim a tax rebate of up to $540 if you contribute on their behalf.
- Avoiding exceeding your contributions cap: The cap on concessional contributions (before tax) is $30,000 or $35,000 depending on your age. Exceeding your contribution cap can leave you liable to penalty tax, so it is certainly worth looking at your position prior to the end of June!
- Don’t leave yourself short: If you are likely to be under the contributions cap, and are in position to make additional payments, it may be in your best interests to make the maximum payments available prior to 30 June. If your personal tax rate is more than 15%, taking advantage of the cap may mean an extra tax saving.
- Review your Salary Sacrifices: Be aware that salary sacrificing into your superannuation fund affects your concessional contribution cap. If you have pay rise since you set up your salary sacrifice that can push you over the cap from 1 July. Don’t forget this to review your salary sacrifice amount!
- Time it right: To have deductible contributions counted for this financial year, they must be received by the trustee by 30 June. Remit these contributions a number of days prior to ensure they are received in plenty of time.
- Self-employed contributions: You can claim a 100% tax deduction for any superannuation contributions you make if you are fully or substantially self-employed. Contact your adviser to see if you are eligible as this is a great way to save tax.
If you are close to retirement age
- Add extra to your super: If you have surplus funds outside of your superannuation fund, consider making additional contributions into your fund. The cap for non-concessional (after tax) contributions is $180,000 per year but if you are under 65, you can make contributions up to a $540,000 limit at any time over the course of the current year and in the following two years without being penalised. This is particularly important for anyone close to 65 who wants to make maximum contributions prior to turning 65.
- Consider a ‘Transition to Retirement’ pension: Workers who are over 55 can access up to 10% of their super as a “Transition to Retirement” pension (TTR pension) and can potentially save considerable tax. However, if you exceed the 10% limit, penalties will apply.
- Business Concessions: If you are thinking about selling a small business and retiring, you may be eligible to use one of the several small business capital gains tax concessions. Some and possibly all of the proceeds may be able to be rolled into super, reducing or even eliminating the capital gains tax applicable on the sale.
For Trustees of self-managed super funds (SMSF)
- Be compliant: Ensure that you have completed all the necessary paperwork for the SMSF. Confirm that the fund’s strategy is documented and investments are aligned with the strategy. Ensure the investment strategy considers members’ insurance needs.
- Minimum pension payments: Make sure that the minimum pension payment has been taken by June 30 or the fund will be considered to be in the accumulation phase for the whole year and pay extra tax. Minimum pension amounts vary based on age, so a close check on this is worthwhile to ensure you are minimising tax.
Points to consider for your records
Paperwork: If you find yourself scrambling through paperwork to keep a track of your tax deductions, consider revamping how you keep your records. Scanning receipts, storing in a cloud base bookkeeping system like Xero or even having a separate bank account to keep a track of expenditure that can be claimed will help you maximise your tax refunds each year.
Look at this End of Financial Year as an opportunity to discuss your financial future with your adviser, not just as a time to minimise your tax. Take the time to consider your superannuation, investments and retirement plan as well as your tax return.
This article discusses above general tax planning tips which may not be applicable to your circumstances. You should seek you own professional advice from your accountant/adviser before making any financial decisions.
For further information please contact:
Syed Akram Ullah
MCom CA CTA
Principal & CEO
Syed Partners – Chartered Accountants & Business Advisors
Telephone: 02 8712 6838
Mobile: 0430 800 455