With the start of a new calendar year comes the realisation that we are in the second half of the financial year, and that 'tax time' is fast approaching.
Generally speaking, approaches to reduce tax bills as a financial year draws to an end revolve around last minute superannuation strategies, trying to generate other tax deductions, and trying to defer the receipt of some income into a future tax year.
Despite recent changes to the superannuation regime, this option still has significant benefits, and you should consider strategies involving salary sacrifice, spouse and co-contributions, deductible contributions, and if you are nearing retirement, delaying your retirement date into the next financial year.
Salary sacrificing involves an individual foregoing a portion of their pre-tax salary (and bonuses) and asking their employer to contribute this amount into their superannuation account on their behalf. While this strategy remains one of the most attractive ways to reduce your taxable income and therefore your tax bill, it really needs to be commenced at the beginning of the financial year to gain the maximum benefit. Notwithstanding this, a couple of months of salary sacrifice are better than none at all.
Eligible couples where one low income spouse (earning less than $13,800) is employed to do some casual or part time work during the year can potentiallybenefit from an offset for contributions made into this spouses superannuation account. The offset is worked out as 18% on a maximum contribution of $3,000, or $540. While this may not seem like much, the dollar for dollar reduction to actual tax calculated is attractive! In addition, the low income spouse should also be entitled to receive the maximum Government co-contribution of $1,500, as long as they personally make a further after-tax contribution of $1,000.
A person aged 75 or less is generally entitled to a tax deduction for contributions made to superannuation if:
- He or she is eligible to contribute into superannuation; and
- The person satisfies the 10% test, ie less than 10% of the total of assessable income and reportable fringe benefits for the income year is attributable to employee-like activities
This strategy is especially useful for retirees who have left employment and wish to reduce their income tax and/or capital gains tax liability. The contribution is tax deductible at the person's marginal tax rate, while the superannuation fund is liable to pay tax on the contribution at a maximum rate of 15%.
Due to the operation of the 10% test mentioned above, employees are generally precluded from using this strategy. However, opportunities do exist if a salary sacrifice strategy can be used to reduce an employee's income. Again, starting early is the key, and due to its complexity, our expert advice should be sought on this strategy.
For the lucky ones nearing retirement, it may be worthwhile to hold off retirement until the next financial year when income will potentially be reduced.
This has several benefits:
- Any retirement payments, eg golden handshakes etc maybe the only taxable income earned in that year, and are likely to be taxed in a lower tax bracket; and
- A new tax year may mean a favourable change to tax and other relevant thresholds.
Other tax deductions
Tax deductions reduce your taxable income, and thereby reduce the amount of tax you have to pay. There are a variety of strategies available to generate deductions, mainly revolving around the prepayment of expenses.
Typical expenses that individuals can pre-pay are interest on investment loans,income protection premiums, and expenses on investment properties generating taxable income etc.
Borrowing to invest and pre-paying your interest bill (for up to 12 months in advance) generally enables you to bring forward the tax deduction and pay less income tax in the current financial year. This popular strategy allows borrowers to grow their wealth with borrowed money, and also generates a tax deduction that can be used to reduce other taxable income. We can help you explore whether this is a viable strategy for you to consider.
Owners of investment properties can bring forward costs by pre-paying some expenses such as water and council rates, body corp fees (for units) and repairs. In addition, consideration should also be given to the viability of having a depreciation schedule prepared by a qualified quantity surveyor – this alone could potentially add thousands of dollars in deductions for rental properties.
Where possible if you can defer the receipt of income into the next tax year,you may be able to reduce the tax payable in the current year. This is particularly relevant if the tax thresholds are increasing, as you may end up paying tax in a lower tax bracket. This strategy is relevant for all but company tax payers,as companies are taxed at a flat rate of 30%.
Business owners could try and delay invoicing clients until after 30 June to push the income into the next tax year. As salaries, fees, bonuses, interest, dividends and rent are assessable when received; individuals could try to defer receipt of these until after 30 June as well.
While not strictly an income deferment strategy; if it is likely that you will have to pay capital gains tax (CGT) on the sale of some assets, consider also selling some poor performing assets that are showing a loss. These losses can then be used to offset the gains and reduce or totally eliminate the CGT.
As you can see, there are a variety of methods of legally reducing your tax bill. The effectiveness of most strategies is really dependant on starting early, and above all, on obtaining expert advice from a trusted professional. If all else fails, try to focus on the fact that if you are paying some tax, it is more than likely that you have made a return on your investment. After all is said and done, isn't this the ultimate goal?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.