Australian taxpayers need to be preparing for the upcoming End of Financial Year period now if they are to maximise their tax planning strategies and receive an optimal tax refund in the 2019/20 financial year.
Lodging a tax return sooner rather than later not only ensures any refund is received sooner, but also reduces any ongoing quarterly tax instalment payments.
According to HLB Mann Judd Sydney tax partner, Peter Bembrick, too many taxpayers leave their tax planning until the start of the new financial year and, as a consequence, potentially miss out on utilising tax strategies that could make a material difference to their bottom line.
“Late in the current financial year is when people really need to start thinking about their tax obligations and what they can do to minimise any tax incurred,” he said.
One area that typically attracts confusion among taxpayers is tax deductible expenses, with the Australia Taxation Office maintaining a strong focus on the type and amount of expenses claimed.
“The $300 limit for claiming work-related expenses without receipts continues to be misunderstood, yet it’s such a key area of focus for the ATO. It doesn’t mean an automatic deduction of $300 – taxpayers must still spend the money and detail the amounts and nature of the expenses; it just means you don’t need the receipts,” he said.
Mr Bembrick recommends taxpayers – in conjunction with a qualified professional accountant – assess the following areas of tax planning in advance of June 30:
- Bring forward and maximise tax-deductible expenses – pay any tax-deductible expenses now where possible, so the deductions can be made this year to reduce taxable income, and put off non-deductible costs until after 30 June. Deductible expenses can generally be pre-paid for up to 12 months and claimed up-front.
- New superannuation rules – changes to the superannuation rules, effective from 1 July 2017, mean that PAYG earners can now claim a tax deduction for their personal superannuation contributions. Because it was new, this opportunity was commonly overlooked in the 2018 tax year, but should become standard practice for PAYG earners going forward.
- 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. Alternatively the family may use a discretionary trust as their main investment vehicle which provides maximum flexibility while allowing distributions to lower income family members, including children aged over 18 and/or their retired parents.
- Take advantage of negative gearing of investments, including but not limited to property, which generally works best when the highest earning spouse holds ownership, and can be owned separately from positively geared investments. This can be a good opportunity to prepay expenses – e.g. in June 2019 pay the next 12 months’ interest on an investment loan and claim the deduction in the 2019 year.
- The benefits of negative gearing can also be maximised by taking out interest-only loans where it is feasible and prudent to do so, with any available funds applied first to repay the principal owing on non-deductible debt.
- Private health insurance – the Medicare levy surcharge applies an extra 1% tax for singles earning over $90,000, or couples earning over $180,000. This rises to 1.25% at higher income levels, and up to 1.5% for singles earning over $140,000 and couples earning over $280,000.
Similarly, once the new financial year has commenced, there are a number of additional tax planning areas which should be addressed, depending on individual circumstances. This is especially the case for those running businesses. These include:
- Reviewing business structures and opportunities for restructuring – this can become especially important as a business grows, or where the business owner is nearing retirement and considering family succession or exit strategies.
- Small business instant asset write-off (turnover up to $10m) – this allows small businesses to claim an immediate deduction for the entire amount paid for any fixed assets such as plant and equipment costing less than $20,000 per item that were acquired up to 28 January 2019, less than $25,000 for acquisitions between 29 January 2019 and 7.30pm on 2 April 2019, and less than $30,000 for acquisitions between that time and 30 June 2020, after which the write-off threshold is due to revert to $1,000.
- Medium business instant asset write-off (turnover between $10m and $50m) – this allows medium businesses the same instant asset write-off for assets costing less than $30,000 acquired between 7.30pm on 2 April 2019 and 30 June 2020, after which businesses in this category would revert to having no instant asset write-off.
Mr Bembrick said taxpayers are wise to adopt a more prudent and careful approach in both the lead up to, and immediately following, the start of the new financial year.
“Tax and superannuation, in particular, are two areas of policy that generate a consistently high level of legislative change, so planning now only ensures a maximum refund, but also helps to ensure any new policy changes are adequately addressed,” he said.