Every year there comes a time when retail stores put on stocktake sales, advertisements for private health insurance take over our airways and when speaking to your Accountant comes to mind. All tell-tale signs it’s nearly the end of the financial year. If you feel like you’ve run out of time to get your affairs in order, the good news is there’s a few considerations which can help minimise your tax, and make the most of the money you earn.
Whilst this article is intended to be informative, it does not replace the need to seek personal advice for your circumstances.
Pre-pay deductible interest or bring forward deductible expenses
For those with geared investments, such as a rental property or a margin lending investment portfolio, the interest you pay on these debts may be tax deductible. If you have incurred interest as a result of purchasing an asset which is expected to produce income, there is a very good chance this interest can be offset against your assessable income. If this sounds like you, it might be worthwhile to pre-pay the interest on your loans.
The same idea applies to expenses incurred for work. Have you bought a new laptop for work or completed a training course for your work, at your own expense? If so, you may be able to claim these expenses through your tax return.
You could also pre-pay education costs, which might be a good idea given the proposed capping of deductions relating to work expenses at $2,000 from the 2013/14 financial year. At present these expenses are only capped at your assessable income. If you incur these costs this financial year, you may be able to claim a deduction in this year’s tax return, even if the expense relates to the following year!
Of course you need to have the cash available to do this – and if you expect to have a higher level of assessable income in the following financial year you might be better off paying the interest next financial year, hence the importance of receiving personal advice.
Make a Personal Concessional Contribution
Do you work for yourself, or is most of your income a result of work that doesn’t pay you Superannuation Guarantee contributions? If so, you may be eligible to make a Personal Concessional Contribution.
Nearly anyone can make a personal contribution to superannuation, but only people who are “substantially unsupported” are able to then claim a tax deduction for such a contribution. Broadly, if less than 10% of your assessable income (including reportable superannuation contributions) relates to income without a liability to Superannuation Guarantee contribution, you may be able to claim a tax deduction for your personal contributions.
There are a couple of things to note regarding these types of contributions.
Firstly, you cannot claim a deduction for a contribution which reduces your assessable income below $0. If this occurs, the portion of your concessional contribution which is over and above what was required to reduce your tax payable to $0 will be re-classified as a non-concessional contribution – which may have consequences if you have made any other non-concessional contributions in the same financial year (or triggered the averaging provisions).
Secondly, there is some paperwork that must be completed. Namely, a Notice of Intent to Claim a Tax Deduction must be lodged by you to the superannuation fund in which you made the contribution, and you must have acknowledgement of acceptance of the notice by the fund before you can claim the deduction in your personal tax return. This notice must also be lodged and accepted before any rollovers or withdrawals are made from your superannuation account, as even a partial rollover will reduce the amount you can claim as a deduction.
If you aren’t self-employed superannuation may still offer a benefit in the form of a Government Co-Contribution. If you are working and have assessable income below $61,920, you may consider making a personal contribution to superannuation of up to $1,000. If you are eligible (there are other criteria to meet), the Government will then chip in some additional money into your superannuation – up to the amount you have contributed, or $1,000 – whichever is lower.
Once again you need to have sufficient cash available to make the contribution, but given there’s not many opportunities to effectively get free money, this is definitely one to be on your radar.
There is currently legislation before the House of Representatives to reduce the Co-Contribution matching rate from dollar to dollar to dollar to 50c. This would reduce the maximum Co-Contribution amount to $500 and has the flow on effect of reducing the amount of income you can earn to $46,920. Although this is unlikely to be passed this financial year, the legislation is intended to take effect from 1 July 2012, thus capturing the current financial year.
If you are in a spousal relationship (including de-facto and same-sex relationships) where one of you has income below $13,800, the higher income earner could make a Spouse Contribution to the lower income earner’s account of up to $3,000. The higher income earner may then be eligible for a tax rebate of 18% of the amount contributed up to a maximum rebate of $540. If the spouse’s income is between $10,800 and $13,800, the optimal contribution amount may be less.
Although $540 doesn’t sound like much, it should be noted this is a rebate rather than a deduction in the sense that rebates offset tax payable, rather than taxable income (which is what a tax deductible expense reduces).
A Spouse contribution is included in the receiving spouse’s non-concessional contributions so beware where other non-concessional contributions have been made previously.
Low Income Superannuation Contribution
During last year’s budget, the Government announced a refund of tax paid on concessional contributions of up to $500 for those who have income under $37,000. Although this has been termed a “contribution” it is important to note that this does not count towards any of your contribution caps.
To give you an idea as to how this refund works, let’s consider an example. Jenny has Superannuation Guarantee contributions of $3,000 made on her behalf, which incurs $450 in contributions tax within Jenny’s superannuation account. Over the year, Jenny’s total assessable income is $35,000. As such, she is eligible for the Low Income Superannuation Contribution. As she had $450 in tax attributable to contributions taken out of her account, the Government pays $450 into her account.
Importantly, there is nothing you need to do to claim this contribution outside lodging your tax return.
Get Covered – Private Health Insurance
Private Health Insurance advertisements make a strong appearance towards the end of the financial year, and there’s a reason. If your income is above certain levels (depending on whether you are single or a couple), without eligible Private Health Insurance you may be liable to pay the Medicare Levy Surcharge – which is a different rate based on your age, of up to 1.5% on your assessable income.
Further, the premiums for your Private Health Insurance policy may be eligible for a rebate, which most providers offer in the form of reduced upfront premiums (rather than leaving you to claim the Private Health Insurance Rebate in your tax return). Another thing to note is that if you are over age 30 and don’t have Private Health Insurance, you will accumulate a Lifetime Loading on your Private Health cover. This loading will make it more expensive to obtain Private Health Insurance next year as it increases as you get older) so the sooner you act, the lower your loading.
One final thing to note is that the Medicare Levy Surcharge is pro-rated across the financial year – so by obtaining Private Health Insurance you may not be solving your Medicare Levy Surcharge this financial year, but you are solving it for future financial years. You may be able to pre-pay your premium too.
Make a Donation – or claim donations previously made
If you are in a philanthropic mood, consider making a donation to a charity (or “Deductible Gift Recipient”, in tax office speak). Not only do you get the emotional reward of helping those in need, any donations over $2 are tax deductible. There are two things to consider in making a donation.
Firstly, the donation has to be made without expectation for anything in return. For example, if you attend a charity dinner as a supporter of the charity, even though you may have had to raise funds for the charity to get your seat at the table, amounts you pay towards this are not likely to be considered a donation. This is because you expected to get dinner in return, whilst those contributing on your behalf do not.
Secondly, a deduction based on a donation does not have to be claimed in the year it is made. You have up to five years to claim the deduction so long as you have proof that you made the deduction. So if you find any donations you have made in previous years but have not previously claimed, you may still be able to do so.
Capital Gains and Losses
Although the end of the financial year is close, there is still a chance to minimise tax through realising capital losses. Selling an asset that may not have been performing so well can offset the tax you would otherwise pay on the sale of assets which have crystalised capital gains (that is, an asset that has been sold during the year for more than the purchase price, taking into account other acquisition and capital costs).
The major issue to note here is that you are obtaining the deduction based on the fact you are selling an asset for less money than what you paid for it. If you are comfortable with this and looking to tidy up your portfolio this may be a good time to apply this strategy.
It should also be noted that capital losses can only offset capital gains – so you cannot use a capital loss to offset your work income, for example.
SMSFs and Minimum Pension Requirements
If you are a Trustee of a Self Managed Superannuation Fund (SMSF), and you have a pension within your account it’s important to double check you have paid the minimum pension for the financial year. Whilst it sounds simple, if you have not met the minimum pension for the year, the ATO can determine that a pension did not exist at any stage during the financial year, and as such the Fund is liable for all income and capital gains realised within the account.
Going forward – Next Financial Year
Now that we have looked at what you can do pre 30 June, there’s a couple of items you might want to consider taking up from 1 July.
Review Salary Sacrifice Arrangements
One of the less recent changes to superannuation – announced two budgets ago – was the gradual increase of the Superannuation Guarantee rate from 9% to 12%. The 2013/14 financial year is the first step in this journey, where your Superannuation Guarantee contributions will now be calculated as 9.25% of your earnings.
If you have an existing Salary Sacrifice arrangement in place, it would be a good idea to ensure that you have taken into account this increase in compulsory employer contributions in the amount you are contributing through Salary Sacrifice just in case your projected contributions would put you over the Concessional Contribution Cap. It should also be noted that if your salary changes throughout the year, this should be a trigger to review your Salary Sacrifice amount.
Splitting contributions to your spouse is something that has become less prevalent in recent years, but is still a valid option for those who are looking to move superannuation capital between spouses, without withdrawing this capital first. Contribution splitting allows you to split “eligible contributions” (generally the value of concessional contributions after contributions tax has been paid) to your spouse’s superannuation account. The two main benefits of this are balance equalisation, and obtaining access to superannuation capital sooner by moving contributions from the younger spouse to the older.
Whilst it may not seem like a major benefit, it is something to consider. Further, an application to split superannuation contributions can only be lodged for contributions made the financial year before, unless you have lodged a request to rollover your benefits (when you can apply to split benefits contributed in the current financial year).
Time for Action
June is here and as you can see there are a number of options to consider. Don’t leave it until July to look into these options. Gather your receipts and look at your tax position to see what can be done to further minimise your tax and/or maximise your benefits.