As the end of another financial year looms there are a number of tax strategies that can make a difference to your tax bill, says Peter Bembrick, tax partner with HLB Mann Judd Sydney.
“Tax planning shouldn’t be left until the last few weeks and days of the financial year. Forward planning is always best. Nevertheless, there are some approaches that taxpayers should consider, to ensure they are not paying more tax than necessary,” Mr Bembrick says.
1. Maximise deductible super contributions
The deductible contribution limit for superannuation has increased to $35,000 for those aged 60 or over, and is $25,000 for everyone else, Mr Bembrick says.
“For a couple this amounts to a combined limit of at least $50,000 and perhaps $70,000, so it is a strategy worth considering.
“For employees, additional superannuation contribution will need to be salary sacrificed, so ensure you allow your employer plenty of time before June 30 to implement this change.”
For those who are not employees, it is important to obtain the correct documentation from your superannuation fund to substantiate claiming the deduction before lodging a tax return.
“The ATO is very strict on this. Incorrect paperwork can result in loss of the tax deduction.”
2. Take advantage of income splitting
“Couples should consider making investments in the name of the lower earning spouse to minimise the tax payable on income distributions and capital gains,” Mr Bembrick says, although he warns this may not be the best approach for negatively geared investments.
Another option is to hold investments in a family trust, with adult children the beneficiaries.
“Children aged 18 or over are entitled to the full adult tax thresholds, which can be very handy during the years when they are in full-time study. Investments in discretionary family trusts offer maximum flexibility and this strategy can allow the trust to distribute income from its investments in a way that provides significant tax savings.
Investors should be wary, however, of using trusts for negatively geared investments, as gearing generates tax losses that can be trapped in a trust,” Mr Bembrick says.
3. Review deductible versus non-deductible debt
Good financial planning practice is to pay down non-deductible debt wherever possible.
“It is common to take out an interest-only loan for investment purposes, and then make all principal repayments against the home loan and any other non-deductible debt. This is a sensible strategy, and perfectly acceptable to the ATO when set up properly.
“It may be worth looking for ways to restructure debt, but beware of debt restructuring that appears tax-driven as the ATO could apply anti-avoidance legislation,” Mr Bembrick says.
4. Prepay deductible expenses at 30 June for up to 12 months
It’s an oldie but a goodie, and individuals who are employees can claim up to 12 months of prepaid expenses, for example, interest on investment loans and management fees.
“More generally, people should aim to make any tax-deductible payments, such as donations, subscriptions and income protection insurance premiums, before 30 June to ensure that they make it into this year’s tax return.”
5. Tax advantaged investments
No investment should be entered into purely on the basis of its tax treatment, but an investment that will return discount capital gains or fully franked dividend income will be a more effective option than an investment with the same return but without this tax advantage.
“Listed investment company dividends can also be tax-effective for individuals, family trusts or super funds. They are usually fully franked and they also come with an associated tax deduction designed to give shareholders the benefit of the CGT discount for investment assets that the company has sold.
6. Private Health insurance considerations
The Medicare levy surcharge applies an extra 1 per cent tax for singles earning over $88,000, or couples earning over $176,000. This rises to 1.25 per cent at higher income levels, and up to 1.5 per cent for singles earning over $136,000 and couples earning over $272,000.
“The surcharge can be avoided if the family takes out the appropriate level of hospital cover with an approved health fund,” Mr Bembrick says.
“As with investment decisions, your approach to private health insurance should consider the likely financial, and in this case medical, impact of making particular choices, and not be ruled entirely by tax considerations.
“Regardless of your tax position and what you are planning to claim and deduct, don’t forget to lodge your 2014 tax return early if you are expecting a refund
“Not only do you get the refund sooner, but this may help reduce your ongoing quarterly tax instalment payments,” Mr Bembrick concludes.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and a member of the HLB Mann Judd Australasian Association.
For more information please contact:
Peter Bembrick – Phone: 02 9020 4223
31 March 2014