The end of the 2010/11 financial year is fast approaching, which also means tax time. If you haven’t thought about your tax yet, don’t fear, there are a number of strategies you can put in place to trim your tax bill for this financial year before it ends on 30 June 2011.
minimising your assessable income
Your primary goal, for tax purposes, is to minimise your assessable income. ‘Assessable’ income is your gross income ie; a combination of your salary and wages, plus additional income sources such as interest from cash accounts, share dividends, managed fund distributions, property rental income and capital gains. Take away all allowable tax deductions and then you have taxable income which is the figure used to calculate your tax bill.
In other words, the lower your income, the less tax you will pay – it’s that simple. If your taxable income is, say, $50,000, your tax bill will be $10,0501; if your income is $80,000 your tax bill rises to $18,7501. To check personal tax rates, go to www.ato.gov.au.
use superannuation to minimise assessable income
For employees, and business owners for that matter, one way to minimise assessable income and reduce your tax bill is by making ‘salary sacrifice’ contributions to your superannuation. Salary sacrifice is an arrangement with your employer where you make additional super contributions from your pre-tax salary, rather than receiving it as take-home pay. The money that goes into super is taxed at the low rate of 15 per cent, which for many people will be lower than their marginal tax rate that they pay on this income if they received it in the hand.
It’s also worth noting that salary sacrifice contributions are concessional contributions, and are currently limited to a total of $50,000 a year for those over 50 before penalty tax applies. If you’re under age 50, the limit it is currently capped at $25,000 a year. These caps are indexed.
If you’re nearing the concessional contributions limit and you have spare cash lying around, it’s possible to make non-concessional contributions from your after-tax income.
There is also an annual cap for non-concessional contributions before penalty tax applies. In 2010/11, the non-concessional contributions cap is $150,000. If you are under 65 years of age as at 1 July, you can ‘bring forward’ two years worth of contributions, giving you a total non-concessional contributions cap of $450,000 for the three years, rather than a $150,000 cap in each year of the three years. This is a very useful strategy, however it can require some careful planning if you want to maximise the benefits and avoid the penalties that apply if you over-contribute.
Investment earnings of your super fund are also taxed at a maximum rate of 15 per cent instead of at your individual marginal tax rate. This is what makes super an attractive investment vehicle for many people.
This is a highly effective way for couples to minimise the total amount of tax they pay and the principle is very simple. If you have a spouse or partner who either doesn’t work or who earns a low income, it’s possible to minimise your combined total tax bill by holding some of your investments in the name of the person who earns the least. You can’t split income from, say, wages or salaries with your spouse, but you can certainly hold investments in his or her name. This means any income from them goes into your spouse’s tax return and is taxed at their lower marginal rate – or not at all if they earn below $16,000 in 2010/112.
maximise your deductions
Generally, deductions are any expenses made in earning your income. Expenses might include mobile phone charges, membership of professional organisations, tax agent services and vehicle expenses.
Making vehicle expense claims often involves keeping a log book that demonstrates your work-related vehicle use. The log book lets your tax agent or accountant calculate whether you are eligible for deductions related to vehicle maintenance and fuel costs. If you don’t have a log book, get one and also gather together any relevant bills and statements relating to your vehicle now to avoid panic later.
investment property expenses
If you own an investment property you can claim expenses including advertising, pest control, body corporate fees, property agent’s fees, some repairs, gardening, insurance, interest on loans and even land tax. It’s worth making sure you get minor maintenance tasks out of the way before the end of the financial year so you can claim these costs against your income.
You may also be able to write off the value of depreciating assets such as hot water heaters and stoves. However, be careful and seek the advice from your accountant if you are uncertain – remember if your rental property has been off the market for a period, for example while undergoing renovations, you may not be able to claim expenses incurred during that time.
Still on the issue of timing, it might also be possible to prepay some future expenses associated with holding an investment and claim an immediate deduction. For example, if you have borrowed to invest in a rental property, it might be possible to prepay the loan interest for the 2011/12 tax year before 30 June 2011. Usually your lender will calculate the amount and it will involve you making a lump sum payment. This amount can then be claimed as a deduction against your 2010/11 tax bill. Before embarking on this strategy, check with your accountant whether it’s the right course of action, also being aware that some lenders may not allow interest prepayments.
get your timing right
If you are thinking about selling a capital asset before the end of the financial year, consider timing the sale to manage any capital gains tax (CGT) you may have to pay. Simply put, CGT is tax assessed on the gain in value of certain assets you sell including shares or an investment property. You may be able to include certain holding costs of the asset to reduce the total gain. Also, if you have held the asset for more than 12 months, you will generally be entitled to discount the gross gain by 50 per cent and only pay tax on half the gain. The net taxable gain will be taxed at your marginal tax rate.
You may benefit by deferring an asset sale until after 30 June, particularly if you are expecting to be on a lower income in the next financial year. This may apply to people considering retirement or taking extended leave, whose income will be considerably reduced in the next year.
Nobody likes paying tax, and with some simple strategies like those above, it is possible to minimise your tax bill. Please talk to us about the ways we might be able to help you manage your tax affairs better.
2includes Low Income Tax Offset