A lot of people leave their preparation for the end of the financial year until it is too late. If you feel that your finances could do with a shake-up before June 30, there are many tax-effective strategies that you and your CGH accountant and financial adviser can implement now to ensure that the end of June runs as smoothly as possible.
A tax deductible way to manage risk
Income protection insurance is an essential part of any financial plan, designed to secure your family’s lifestyle in the event of illness or injury.
Income protection insurance premiums are generally tax deductible, so if you purchase income protection and pay your annual premium before 30 June 2015, you may be able to include the deduction in this year’s tax return.
Business owners may also be able to claim deductions on their business insurance premiums.
Splitting income with your spouse
Investing in your spouse’s name can reduce, or even eliminate, the amount of tax paid on the investment income. This is true if your partner has a lower marginal rate of tax or is earning less than $20,542 pa.
Splitting income with your partner can be as simple as having your cash reserves (excluding your everyday bank account) in the name of the partner with the lower marginal tax rate.
Private health insurance
The government made significant changes to the Medicare levy surcharge and the private health rebate from 1 July 2012. If you are currently paying the Medicare levy surcharge and want to beat the tax man, you should consider taking out private health insurance before 30 June to avoid paying the surcharge again.
Even though you might have private health insurance, you may find, based on your circumstances and income, your private health rebate has reduced this financial year ending 30 June 2015.
To ensure that you understand the full impact, contact your health fund for more details.
Keep your receipts
The most common reason why people don’t take advantage of tax deductions is simply because they don’t keep receipts. While keeping receipts for big ticket items is necessary, you don’t always need a receipt for the smaller items such as stationery and books. If the total amount you are claiming for work related expenses is $300 or less, you need to be able to show how you worked out your claims, but you do not need written evidence.
Claim your uniform
If you are a tradesperson or if you have to wear a uniform for work you might find the clothes or the laundry expenses may be tax deductible.
Pre-paying your investment expenses
Gearing (borrowing to invest) can be an effective way to achieve long-term lifestyle and financial goals. As an added bonus, the interest that you pay on your investment loan is tax deductible. If you have commenced a gearing strategy, or are about to set one up, pre-paying your interest bill for up to 12 months before 30 June 2015 may enable you to bring forward your tax deduction and pay less tax this financial year.
Negative gearing is another strategy used to manage tax liabilities. Geared investments use borrowed funds, therefore enabling a higher level of investment than would otherwise be possible. Negative gearing refers to the cost of borrowing exceeding the income generated by the investment. This difference is an allowable tax deduction. If you borrow to invest in shares you may obtain imputation credits which can be used to further reduce the amount of tax you pay.
Capital gains tax management
If you have a capital gains tax (CGT) liability this year, there are a few strategies that you could consider to reduce the impact. These can be complicated to undertake, so it is recommended that you speak to your financial adviser for more information.
Use a capital loss to offset your tax
The timing of the sales of assets (such as shares) can greatly affect your tax position. If you sell an asset because they are no longer appropriate for your circumstances and incurring a capital loss, the capital losses can be offset against any capital gains you have realised throughout the financial year allowing you to manage your CGT liability. If you don’t have a capital gain to offset, unused losses can be carried forward to offset gains in future years.
Stay in it for the long-haul
If you have purchased assets (such as shares or managed funds) and they have risen in value, you might rethink selling them; otherwise, you may have to pay a lot of CGT. A way to trim CGT is to hold on to the investment for more than 12 months. For assets purchased after 20 September 1999, investors have been entitled to claim a 50 per cent discount on capital gains they make on assets held for longer than a year.
Delay any income
Thinking of selling off a profitable asset, such as shares or property? It may be worth deferring this sale until after 30 June 2015. In doing so, you will delay incurring CGT for another financial year. So while you will still need to pay the CGT eventually, freeing up short-term cash flow may be beneficial depending on your circumstances.
Consider different types of investment structures
Investing into different types of investment structures (such as insurance bonds or superannuation) can prove to be a tax-intelligent investment. The investment income within an insurance bond is taxed at a maximum rate of 30 per cent which provides a saving of 19.0 per cent for a high income earner and tax-free withdrawals after ten years.
Insurance bonds offer a range of different opportunities from investing for children, wealth accumulation for high income earners to passing your wealth onto the next generation outside of your estate.
Salary packaging is also known as a salary sacrifice arrangement. This is where an employee agrees to forgo part of their salary or wage in return for the employer providing them with benefits of a similar value. For certain industries (such as the medical profession or charities) or for high income earners it can be an effective way to obtain tax savings, particularly if you are on the top marginal tax rate.
Some of the most common items that can be salary packaged include superannuation, motor vehicles and expenses that are otherwise deductible for the employee.
You should make sure any salary packaging agreement you get into has a positive outcome in after-tax terms. Employers are not required to offer salary packaging to employees and it is wise to ask your employer what benefits you can salary package and speak to your financial adviser or accountant about the opportunities.
Salary sacrifice into superannuation
Superannuation can be a tax-effective investment. If you’re an employee, you could look at contributing to superannuation through salary sacrifice, thereby reducing your taxable income. In the long term, salary sacrificing has many benefits as it not only helps to increase your superannuation savings but could also reduce the amount of tax you pay. You could even salary sacrifice your annual bonus into superannuation, but this needs to be arranged in advance with your employer.
If you decide to salary sacrifice into superannuation, this amount is taken from your pre-tax salary. Your employer will automatically deduct it from your salary and deposit it directly into your superannuation fund. As a result, your contribution will be taxed at a maximum rate of 15 per cent (up to 30 per cent for individuals with income over $300,000), as opposed to your marginal rate, which may be as high as 49.0 per cent.
Additionally, the reduced salary amount that you actually take home would then become your assessable income for tax purposes. This may enable you to move down a tax bracket, reducing your amount of total tax payable.
Concessional contributions, or those made with pre-tax money, are currently limited to $30,000 per person per year. If you were 49 or over on 30 June 2014, this cap increases to $35,000. You should consider speaking to your financial adviser about how this may impact your retirement planning strategy.
Have you turned 65 during this financial year?
If you have turned 65 this year, it is your last opportunity for you to contribute up to $540,000 before 30 June 2015 by using the three year bring forward non-concessional contribution cap. Making personal after-tax contributions into super can provide your superannuation a boost. This is complex and you will need to talk to your financial adviser about the contribution rules.
Get your government co-contribution
If you earn less than $34,488 (including reportable fringe benefits) and make an after tax contribution to super of $1,000, you will be eligible for the maximum super co-contribution of $500 from the government. The co-contribution amount reduces by 3.33 cents for every dollar of income over $34,488 and phases out completely once you earn $49,488. The ATO uses information on your income tax return and contribution information from your super fund to determine your eligibility.
Self-employed contributors may also be eligible for the government co-contribution until age 71. Just remember that you need to have personal non-concessional contributions in your account that you have not claimed as a tax deduction.