With the end of the financial year less than three months away, now is a good time to undertake a “personal financial audit” and make any useful changes to ensure you don’t end up paying more tax than necessary.
Mr Michael Hutton, head of wealth management at accountants and financial advisers HLB Mann Judd Sydney, says that the earlier such an audit is done, the more opportunity there is to fix any problems or make the necessary changes to improve the overall tax position.
“There’s no point leaving it until June to make changes – by then, it’s usually too late to do any good.
“A few simple steps now could make a big difference to your tax bill,” he said.
Some areas that people should look at include:
Check superannuation contributions to date
“Last year, a number of people were caught out by the lower contribution caps, and inadvertently contributed too much to their super,” Mr Hutton says.
“The Tax Office has been very strict about such breaches and, in some instances, people faced tax penalties of up to 93 percent.
“Make sure that any planned contributions for the remainder of the year won’t exceed the cap – including any bonuses or lump sums. For instance, did last year’s bonus count in last year’s super contributions, or this year’s? When will the next bonus be paid?
“On the other hand, some people may find they can contribute more to their superannuation fund.
“Salary-sacrificing into superannuation is very tax effective but the agreement must be entered into with the employer before funds can be put into super.
This includes bonuses – if the bonus is based on performance up to 30 June 2011, the agreement must be made before that date. If it is made after that date, the ATO will not accept it, even if the bonus has yet to be paid.
“The tax advantages of making contributions on behalf of a spouse should also be considered,” Mr Hutton says.
The maximum concessional (tax deductible) contributions that can be made for those over age 50 are $50,000 per annum, and for those under age 50 the limit is $25,000 per annum.
For the first time in several years, the tax rates and brackets are unchanged, so it may not be useful to defer income to next year.
However, those who believe their income will drop next year should consider ways of delaying income where possible if it means they will fall into a lower tax bracket in 2012.
Consider any work expenses
“People often aren’t aware of the work-related tax deductions they can claim because these vary from trade to trade and job to job.
“Work expenses such as training courses or uniform may be claimable; however receipts must be produced. “Some expenses – for instance, gym membership – can be claimed in some jobs but not in others, so it is worthwhile taking some time to look into what can be claimed,” Mr Hutton said.
Also, anyone who drives their own car for work purposes (other than to and from the office) should keep log books up to date so they can claim motor vehicle expenses.
A log book can be up to five years old but after that time needs to be replaced. However all log books must be kept for five years after they have been used.
Consider capital gains timing
Capital gains are assessable in the financial year that a contract of sale is signed so it’s worth considering whether to ensure the sale happens this tax year, or whether it’s best to defer selling assets until after 30 June.
“If a capital loss has been realised this year, it’s probably best to realise a capital gain as well, so it can be offset,” Mr Hutton says.
“Another consideration is that assets held by an individual for more than 12 months qualify for a 50 percent discount on capital gains, so it may be a good idea to hold onto assets for a while longer, to meet this time requirement.”
Splitting income with a spouse who is on a lower tax bracket is a popular way of reducing income tax liabilities.
“This is a particularly good strategy for small business owners who employ their spouse and can specify how income is paid; however, executives in larger corporations may find it difficult to set up suitable arrangements,” Mr Hutton says.
Investments can also be made in the lower income spouse’s name (except where the investment is negatively geared) to minimise tax.
Pay off non-deductible debt
Mr Hutton advises always paying down non-deductible debt before deductible debt, where possible.
“It’s usually better to pay off the mortgage, for example, as these payments can’t be claimed against tax, before paying off interest-only loans for investment purposes which are tax deductible.”
Simplify your arrangements
“This may not result in a direct tax saving, but organising and simplifying finances can reduce costs, and may make it easier to identify tax savings.
“For instance, people with a number of small share holdings could consider consolidating them into a managed fund. Review insurance policies – if they are more than a few years old, the premiums may be too high for the current situation. Check whether all the bank accounts and credit cards are really needed – there’s no need to pay more bank fees than absolutely necessary!
“Also, complicated debt arrangements could mean people are paying higher rates of non-tax-deductible interest than they need to,” Mr Hutton says.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and is part of the HLB Mann Judd Australasian Association.
For more information please contact:
Michael Hutton – 9020 4194