Tax time comes around every year, just like Christmas and our birthday – but how often anyone is totally prepared or organised for any of them is very much in the individual's court.
But with June 30 on the horizon it is timely to remind you about some tax planning tips – some tactics or merely reminders that can help you fill in your tax return when the end of the financial year arrives. These tips will also set your tax affairs in better order for 2011-12 (remember, the best tax planning is done in July, not June – speaking of which, there are 27 fortnights for 2011-12 instead of the usual 26, so keep employer super contributions in mind for the annual caps).
One of the first things on most people's minds is finding more and bigger tax deductions, but proper tax planning needs to focus on more than scratching around for just a few more deductible dollars. And of course it's never a good idea to just cross your fingers and make a claim if you haven't checked that it's legitimate first.
Doing some basic homework (and if you're reading this, you've made a good start) will tell you if a deduction is allowable or not . But you could also find out that there are some other tax tactics that could save you money. We all need to pay tax, but there's no need to pay a cent more than we have to.
Here are some options you may like to consider. Not all of them will suit your circumstances, and you should always check with your tax professional or accountant before implementing, but as a list of possibilities they may get you thinking along the right track.
Kids still at school?
If you have school age children, you should investigate the education tax refund scheme. You may qualify for a refund of 50% of expenses, up to a maximum of $750 for primary school children and $1,500 for secondary school children.
The refund is available for items like laptops, educational software and textbooks, and from July 1, 2011, for uniforms (so these can't yet count towards this tax year). School fees are not covered however. And if you've been pestered to get them an iPad, the Tax Office says an iPad is just another laptop, and therefore qualifies for the education tax refund.
If you can, pre-pay investment loan interest
You may be able to negotiate with the lender of your investment property or share loan to pay interest on the borrowings upfront, thereby giving you a handy deduction this year. You can only claim for up to 12 months ahead, and make sure that your lender allocates the payment correctly, as the deduction is only allowed against the costs of financing income producing investments, such as the interest charged on borrowings (not the principal loan amount itself).
Defer income, bring forward expenses
If you can, try to bring forward any deductions (like the interest payments mentioned above) into the 2010-11 year – although you've got to get organised now. By bringing forward deductions, you may be able to get more substantial after-tax benefits for the current financial year when they may be more immediately useful.
And by deferring income into 2011-12, you could be taxed at a lower rate in another tax year. Both of these tactics depend very much on your personal circumstances, but can be useful to keep in mind.
An exception will arise if you expect to earn a lot more next financial year. In that case, if you will be taxed at a higher rate, it may be to your advantage to delay any tax-deductible payments until the next financial year, when the financial benefit of the deduction could be greater. Likewise, if you know that you will be earning a lot less (say due to maternity leave or some such) it could be a mistake to defer expenses, when it is the present financial year when these expenses will give you handy deductions.
A strategy that can take advantage of this area of tax planning will be to place money into a term deposit that matures after June 30, where interest will accrue to you in the 2011-12 tax year, just in case your tax rates may be lower. It's probably leaving it a bit late to adopt this strategy now, but is one to keep in mind for later years, should circumstances and tax regimes suit.
The flood levy effect
One looming tax change to keep in mind is the flood levy. This is due to kick in from July 1, 2011, and is set at 0.5% for income over $50,000 up to $100,000. Above this it is applied at 1%.
Because of the levy, there may be a case of reversing the above tactic and not deferring income but rather bringing it forward (if possible, and if your circumstances make this a better option). In the case of someone paying the highest marginal tax rate, the levy will increase the rate of tax paid from 46.5% to 47.5%. So if you know you will have income coming in next financial year (which probably won't apply to the 'vanilla' wage earner), you could secure a lower rate by having it taxed at this financial year's rates.
The other side of the same coin will mean that deductions will have a greater effect after the flood levy is in force.
Another area where the flood levy may make a difference is with employee share plans. If you have a significant parcel of shares or options, exercising them this financial year will see them taxed at a lower rate as they are taxed at the time of 'vesting' or transferring to ownership of the employee.
Many expenses stemming from owning a rental property are claimable, and in the spirit of the above tip, it can be helpful to bring forward any expenses before June 30 so that you can claim them in the present financial year.
Deductible costs include body corporate fees, council rates, insurance, pest control, maintenance costs, property management fees, depreciation of assets, borrowing costs and much more..
Again, if possible, there could be a tax advantage in deferring rental income into the next financial year.
Use the CGT rules to your advantage
Capital gains made on investments cannot be 'carried forward' to future tax years, but unused capital losses can be, and used to offset future realised capital gains. So if you have made and crystallised any capital gain from your investments this financial year (which will be lumped on to your assessable income and taxed at your highest marginal rate), think about selling any investments on which you have lost money before June 30.
That way you can offset the gains you made on your successful plays with the losses you'll have made on the less successful ones, and so be able to reduce your overall taxable income.
Of course, tread carefully and don't let mere tax drive your investment decisions – with the sharemarket for example, be careful not to actualise a loss for a stock that may very well be only temporarily at the bottom of its value curve.
With sharemarket investments also, it may be wise to only sell stocks in companies that you do not intend buying again for some time. The Tax Office is keeping an eye on what it terms 'wash sales' , which is basically the practice of selling stock to realise a capital loss, only to buy the same stock back almost immediately (and for much the same price), but in the meantime getting a handy capital loss to offset tax.
Put as much as you can into superannuation
If you are self-employed and aged less than 50 years, you can put up to $25,000 into your super fund and get favourable tax treatment, and those aged over 50 may be able to put in up to $50,000 (for the 2010-11 and 2011-12 income years). The money you can put into super will only be taxed at 15%, and in the hands of the fund. There are particular rules around 'concessional contributions' to super..
If you are a salary or wage earner and have a job that offers an end-of-year bonus, your super fund is also a perfect place to stash this away and secure a more beneficial tax rate on it. A strategy going forward is salary sacrificing to super, which can hive off taxable income before it is taxed at your marginal rate, garner extra money for retirement, and see it taxed at the concessional rate as well.
But a warning: Be aware of how much you are putting into super, as going over the legislated limits can see tax levied on the amounts at punishing rates. (And remember, in some income years there are 27 fortnights for the year instead of the usual 26. This will be the case in the 2011-12 financial year commencing on July 1, 2011.)
The Federal Budget of May 2011 has some relief from this in that up to $10,000 in excess super contributions can be 're-allocated' to assessable income, (and so be taxed at marginal rates) rather than incurring excess contributions tax (you are only allowed one such re-allocation however).
Then again, from July 1, 2012, over-50s will only be able to make contributions of $50,000 a year if their balances are less than $500,000, so make the most of it while you can (and see the next tip).
And by the way, if you haven't had a great year but can still see your way to putting in $1,000 of your own after-tax money into super, you could get yourself a government co-contribution. The same goes for your spouse.
Split super contributions with your spouse
Most concessional super contributions – salary sacrificed, compulsory, and personal contributions for which you can claim a tax deduction - can be split between members and spouses. So some super contribution amounts can be directed to a spouse's super fund.
It is a strategy that is more significant now that anyone over 50 will continue to have a $50,000 contributions cap after July 1, 2012 if their fund balance is $500,000 or less (confirmed in the 2011 Federal Budget).
A smart use of the strategy, if your circumstances suit, will be for a spouse whose super savings are under $500,000 to direct contributions to the spouse who may have more than $500,000. This will help the lower-balance spouse stay under the threshold for longer, and potentially boost the family's ability to save more into superannuation after July 1, 2012.
In the same vein, if both partners have funds under the threshold, contributions can be directed to the lower-balanced fund so that both stay under the threshold for longer. But remember, the contributions cap applies to the member making the contributions, even where these are directed to the spouse's fund.
Use a tax agent
Every individual taxpayer is required to lodge their tax return before October 31, but tax agents are given more time to lodge their clients' returns. If you have to pay tax, this can be a handy extension to delay having to pay.
Of course, if you're sure you are going to get a refund it's no use delaying your tax return, so in these cases it will be worth getting all of your tax information into your tax agent as close as you can to July 1. Also, a fee paid to a tax agent is an allowable deduction in the tax year the fee was paid.
Are there any tax deductions you may not have thought of?
You can claim up to $300 of work-related expenses without receipts, provided the claims are for outgoings related to earning assessable income.
No-one can think of absolutely everything, and just in case there are tax deductions that may have escaped your attention, have a look at our checklist attached (you can download it as a PDF and keep it as a handy reference). Also, here is a list of deductions that is grouped according to certain professions. They may not all apply to your situation this year, but there may be a deductible item you can use that you hadn't considered before.