Although June 30 is nearly upon us, there is still time to review your financial situation and see if there are any actions you can take that will make a difference to your tax position.
The most important areas to look at before the end of the financial year include bringing forward and maximising tax-deductible expenses, adhering to new superannuation rules and, if there is the opportunity, taking advantage of income splitting and negative gearing.
Bring forward and maximise deductions
It’s usually best to pay any tax-deductible expenses (such as donations, subscriptions and income protection insurance premiums) now, so the deductions can be made this year to reduce taxable income, and put off non-deductible costs until after June 30 where possible.
It’s the same for super contributions (discussed later), where it is also important to make payments well before year end.
For example, a donation to a charity is recorded on the date it is received, not the date it is sent, so any cheques or payment forms should ideally be sent a week or two before June 30 to make sure they count in this financial year, not next.
Individuals not carrying on a business should also be aware that they can pre-pay deductible expenses at June 30 for up to 12 months in advance for items such as association membership fees or investment management charges.
New super rules
Changes to the superannuation rules, effective from July 1, 2017, mean that PAYG earners can now claim a tax deduction for their personal contributions.
Because it was new, this opportunity was commonly overlooked in the 2018 tax year but should become standard practice for PAYG earners in future.
For those with income levels above $90,000 who therefore have a marginal tax rate of 39% (including Medicare levy), the net tax benefit of the contribution is 24%, but the individual personally receives a
39% tax saving, with their super fund paying a 15% contributions tax.
People with funds in a mortgage offset account would still be well ahead by, say, taking $10,000 from the offset account and putting it into super and claiming the tax deduction (assuming a 5% interest rate).
The limit on how much can be contributed to super personally is $25,000 less the superannuation guarantee contribution, which is currently 9.5% of your salary.
It is important to make sure contributions are sent to the super fund well before June 30, as the contribution is dated from when the fund receives it, not when it is sent.
Another case for topping up your super is that negatively geared loans are not providing as much of a loss with lower interest rates, and with a question mark over the viability of other strategies such as agricultural tax schemes it is difficult to claim large tax deductions elsewhere.
Income splitting and negative gearing
Other strategies that should be canvassed are income splitting and negative gearing.
Couples should consider making investments in the name of the lower-earning spouse to minimise the tax payable on income distributions and capital gains.
The exception to this is negatively geared investments, which work best when the higher-earning spouse holds ownership.
Another option is to hold investments in a family trust, with adult children as beneficiaries. Children aged 18 or over are entitled to the full adult tax thresholds, which can be handy during the years when they are in full-time study.
Investments in discretionary family trusts offer maximum flexibility and this strategy can allow the trust to distribute income from its investments in a way that can provide significant tax savings.
Investors should, however, be wary of using trusts for negatively geared investments, as gearing generates tax losses that can be trapped in a trust.
Review deductible versus non-deductible debt
From a tax point of view it is generally recommended you pay down non-deductible debt wherever possible.
A common approach is to take out an interest-only loan for all income-producing investments while making principal repayments on a home loan and other non-deductible debt. This is a sensible strategy and perfectly acceptable to the tax office when set up properly.
However, beware of debt restructuring that appears tax-driven as the ATO could apply anti-avoidance legislation.
For future planning, wherever possible, investors should consider tax-advantaged investments, as long as they suit the long-term investment strategy.
No investment should be taken out purely because it receives favourable tax treatment, but by the same token it is important to be aware of the tax implications of the investment structure.
For example, selecting an investment that returns discount capital gains or fully franked dividend income can be a better option than choosing one that may offer the same return but doesn’t have the same tax advantages.
Be prepared to substantiate claims
The ATO has upped the ante on its usual focus on the type and amount of expenses claimed as tax deductible.
First, under legislation applying from July 1, 2017, it is not permitted to claim travel expenses for inspecting a residential rental property unless you are carrying on a business of property investing. Many people are still unaware of this change.
More generally, the ATO is still concerned that taxpayers are claiming more work-related expenses than they are entitled to, and this remains a key focus.
An area that continues to be misunderstood is the $300 limit for claiming work-related expenses without receipts.
This does not mean everyone gets an “automatic” deduction of $300 – people still need to have spent the money and be able to detail the amounts and nature of the expenses; it just means that all the receipts aren’t required.
Another major area where errors are made is car expenses, especially claiming home-to-work travel as a business trip.
If you drive from home to a meeting and then go on to the office, both legs of the journey qualify as business travel. However, simply driving from home to work is regarded as private travel.
If the cents-per-kilometre method is used, an accurate record of all business trips during the year must be kept.
If the logbook method is used then it must be a current logbook (no more than five years old and reflecting current circumstances) and be a reasonable reflection of the actual car usage.
Health insurance surcharge
The Medicare levy surcharge applies an extra 1% tax for singles who earn over $90,000pa and couples who earn over $180,000. This rises to 1.25% at higher income levels, and up to 1.5% for singles earning over $140,000 and couples earning over $280,000.
As with investment decisions, each person’s approach to private health insurance should be to consider the likely financial, and in this case medical, impact of making choices, and not be ruled entirely by tax considerations.
Sooner the better
Finally, it’s good to get organised early. Regardless of your tax position and what you plan to claim and deduct, don’t forget to lodge the tax return early if a refund is expected.
Not only do you get the refund sooner, but this may help reduce your ongoing quarterly tax instalment payments.