Even with COVID and the incentives provided by the Australian government, there are still genuine concerns from high-income earners and their taxable income, because tax laws make it so that high-income earners get taxed at the highest rates.
It’s never too late to focus on tax deduction strategies that can result in you paying fewer taxes.
Why is Tax Planning Important?
It improves income flow and leads to greater flexibility
When you take the right steps in your tax bracket, you’ll be able to keep more money flowing to your household and lower tax payable to the ATO. This could possibly save you thousands of dollars per year and allow you to focus your finances on other important areas without digging into your savings.
You can take advantage of all the deductions and exemptions
If you’re not well-versed in tax affairs, you might miss out on a few available allowances, deductions, and exemptions. A reliable tax accountant would be up to date with any recent changes, and let you know when and how to take advantage of these concessions when completing your tax refund.
You remain compliant and current
When it comes to tax planning, many individuals like to take the safer course of action as the last thing they want to appear like they are conducting tax evasion or dodgy practices. A tax accountant can look for opportunities within the tax compliance boundaries and provide you with the tax deduction advantages it needs to improve when completing your tax return.
The below tips are ways to reduce your tax, include the general tax tips and more advanced tax return tips that would also cover high net worth individual taxpayers and sophisticated investors.
1. Make personal super contributions
Making personal contributions from free cash flow (salary sacrifice) each year is an effective way to both reduce your tax bill and increase your retirement savings. You are able to contribute up to $25k each year (including contributions made on your behalf by your employer). Individuals with a taxable income of between ~50k and $250k tax brackets gain the most from this strategy due to the super tax rate (15%) versus your marginal tax rate.
2. Main residence
The main residence capital gains tax concessions are arguably the most valuable tax break in Australia for building personal and family wealth. If you are able to invest in property, ensure you make it your main residence once it’s acquired. If circumstances change you are able to move out and rent the property for up to 6 years whilst continuing to treat it as your main residence for tax purposes. Expats should be aware of recent changes to these rules which make them less tax concessionary for such individuals, however, these risks can be managed.
3. Negative Gearing
“Negative Gearing” means generating investment losses (generally due to interest costs) which can be written off against your salary/wage income to create a tax refund. Negatively gearing a property or share portfolio is a tax-efficient strategy where you expect the investment to go up in value in the long-term. The long-term gain in value is generally a capital gains tax on future sale (at concessional rates), whilst in the short-term, the tax refunds can assist in funding the losses. Key to negatively gearing is ensuring the investment pays an income stream to make the interest tax deductible. Always obtain advice prior to investing to ensure the interest is deductible!
4. Franking Credits
“franking credits” are attached to most dividends you receive from Australian share investments. Franking credits are unique compared to other “tax offsets” in that they can give rise to a cash refund where they are greater than the amount of tax you owe for the year. The tax benefit of franking credits is magnified in a self-managed super fund environment due to the tax rate in super only being 15%.
5. Home office expenses
As workplaces become increasingly flexible with WFH arrangements, all eligible individuals should be claiming home office expenses. You have a choice of keeping records and claiming deductions for using your home as an office or “place of convenience” to undertake work. The ATO has provided a “shortcut” method for calculating home office expenses due to COVID-19 for the first half of FY21, so ensure to keep records of hours worked at home for this period.
6. Keep a car logbook
For anyone who travels for work-related purposes (e.g. to/between clients or workplaces), please keep a 12-week logbook of your most busy travel period. This can then be used to calculate your deductible percentage of your car expenses for the financial year. This can give you a better outcome than the “cents per kilometre” method, which is often the default in the absence of good records. Keeping a logbook during the year gives you the option of a more favourable method to maximise your car deductions at tax time.
Make personal deductible superannuation contributions before (say) 25 June to ensure the cash is received by the fund before 30 June – for tax savings and co-contribution purposes
7. Deferral OR bring forward of bonus income
Ask your payroll manager to pay any bonuses on 1 July instead of before 30 June IF you anticipate less income next financial year & vice versa (pregnant women, women planning pregnancy and taking maternity leave in 2020, returning expats with carried forward losses, taxpayers planning a step-down job switch or a career break in 2021, clients exiting Australia and switching tax residency status in 2021 etc).
8.Deferral OR bring forward of discretionary income
Defer discretionary income until after 30 June IF your circumstances will become favourable in the 2020 FY and vice versa e.g. maternity leave, imminent retirement, changing tax residence out of Australia, triggering capital gains (contract dates on disposal contracts) etc & vice versa
9. Share investors (capital account) – non-discountable capital gains
Consider pre 30 June disposals to book square against non-discountable gains triggered in the current financial year.
10. Share investors (capital account) – general CGT discount
Consider pre 30 June disposals which maximise the general CGT discount.
11. Employees with ESS interests in Australian listed employers
Consider points 10 & 11 above in addition to the 30-day disposal rule. Review your vesting schedules and enter into auto sale facilities with your employer/broker where appropriate.
12. Employees with ESS interests in foreign listed employers
Consider points 10 & 11 above in addition to ensuring that any foreign tax withheld is actually paid as soon as possible for Foreign Income Tax Offset purposes. Note: this one is complex. Please call Chris Bloxham (0414 985 724) to discuss before taking any action.
13. All capital account investors
Consider points 10 & 11 above along with optimal utilisation of carried-forward capital losses.
14. Property investors – interest in advance
Start interest in advance paperwork/authorisations/elections with your mortgagees NOW to make sure all payments are irrevocably committed before 30 June.
15. Property investors – ghost town Division 43 deals
The approach promoted by ‘ghost town’ Division 43 deals with caution. Please call Chris Bloxham (0414 985 724) or seek the opinion of a quantity surveyor before signing contracts.
16. Investment property depreciation
Please arrange for a Property Tax Depreciation Report as generally this will allow you to claim the maximum amount of depreciation and building write-off tax deductions on your investment property in Australia.
17. Defer investment income & capital gains
If possible, arrange for the receipt of Investment Income and the Contract Date for the sale of Capital Gains assets, to occur AFTER 30 June 2020. The Contract sales date is generally the key date for working out when a sale occurred, not the Settlement Date.
18. Higher-income employees with deductions or losses – PAYG variations
For PAYG earners with significant deductions or tax losses e.g. some property investors, returning expats with carried forward tax losses for utilisation in the 2020FY or the 2021 FY, call Chris Bloxham (0414 985 724) as soon as possible to consider putting a PAYG variation in place for your 2021 payments to capture the first pay cycle after 1 July 2020.
19. Private Health Insurance
If your taxable income exceeds $90,000 as an individual or $180,000 as a couple or you are 30 years of age and older, you should have complying private health insurance for all family members otherwise you may become liable to additional Medicare levy called the surcharge.
20. Tax deductible gifts
Make tax-deductible gifts before 30 June in the name of your family group’s highest income earner. Note: only gifts to registered Deductible Gift Recipients (“DGR’s”) qualify for a tax deduction.
21. Lodge your return early
If you are due a refund! This is your money, and it has real time value, so is better served to be in your pocket. Keep good records and lodge your return as soon as possible after year-end (30 June) every year to avoid paying penalties. Then invest or spend the money!
22. Keep records for efficient business management
In the event of an ATO review or audit, you will be asked to provide sufficient and relevant support including documents to substantiate the claims made.
Please ensure you have documented relevant records such as sales receipts, expense invoices, bank statements, credit card statements, lists of debtors and creditors, employee records (wages, super, tax declarations, contracts), vehicle records, logbooks, stock take listing, and asset purchases.
Contemporaneousness is supreme!
We hope you found some helpful hints and tips to consider leading to the end of every financial year. Please call us at Solve Accounting to discuss any of the above tax strategies and how they might apply to benefit your financial life.