With the financial year coming to a close, I thought it was timely to share some of the common strategies we consider when helping clients minimise their taxation liabilities.
Of course, none of the information below should be considered personal taxation advice. I don’t know your circumstances and everyone’s situation is different. Therefore, please don’t act solely on the information contained in this blog. It is best to check with an experienced and appropriately licensed professional.
New work from home deductions
To accommodate the fact that the majority of people have been working from home during the Covid shutdown period, the ATO has provided a shortcut method to calculate these related deductions. In simple terms, employees are able to claim a tax deduction equal to 80 cents for each hour they have worked from home between 1 March and 30 June 2020.
If more than one person has been working from home in your family, each person is entitled to the shortcut deduction.
If you use the shortcut method, you are not able to claim any additional work from home expenses.
If you do not use this shortcut method, please refer to this blog which it sets out an alternate method for calculating deductions.
When to make additional personal super contributions
Anyone that is 65 years or younger is able to contribute up to $25,000 into super and claim a personal income tax deduction. Included in this concessional contribution cap is any contributions made by your employer on your behalf. This is referred to as Superannuation Guarantee Charge or SGC i.e. the mandatory 9.5% p.a.
If you earn less than $250,000 per year, all contributions are taxed at a flat rate of 15%. This means you pay less tax overall. If you are on the top marginal tax rate, contributing into super saves 35% (47% versus 15%).
However, if you earn over $250,000 per year, contributions are taxed at a flat 30%. This is called Division 293 tax. In this situation, you are still able to reduce your tax by making super contributions, just to a lesser extent.
If your taxable income is expected to materially exceed $90,000 this financial year and you have sufficient savings, then making an additional contribution into super may be tax effective. The marginal tax rate on income between $90,001 and $180,000 is 39% so contributing into super saves you 24%.
If you expect that your taxable income is unusually high this year
If you anticipate that your taxable income this financial year is likely to be higher than next financial year (e.g. due to receiving a bonus or crystallising a capital gain), then you might consider whether you are able to use the carry-forward rule.
The carry-forward rule allows you to access any unutilised concessional caps in previous financial years. This rule commenced on 1 July 2018. Therefore, if you did not fully utilise the $25,000 concessional cap last financial year (i.e. 2018/19), and your super balance was less than $500,000 as at 1 July 2019, then you can access the unused portion of the cap this financial year.
If you have a Self Managed Super Fund, you may also be able to contribute an additional year’s worth of contributions this year too. This is called ‘contribution reserving’ and whether you can or should avail yourself of this strategy is something you should discuss with your accountant and financial advisor.
Another strategy to reduce the amount of tax you pay this year is to consider paying interest in advance. This is only applicable if you have investment loans (e.g. you have borrowed to invest in shares or property). This strategy involves paying the next 12 months of interest in June and claiming a tax deduction for it this year. Given interest rates are historically low, particularly fixed rates, it is important to ascertain whether any potential tax savings are worthwhile.
If you expect your taxable income next year to be substantially higher than this year
If you expect that your income next financial year (2020/21) will be materially higher than this year i.e. push you into a higher tax bracket, then it might be advantageous for you to not make any additional contributions this financial year. Instead, you can use the carry-forward rule and make the additional contributions next year (so that you maximise your tax deductions in that year).
Spousal and government co-contributions
If your spouse’s income is relatively low, you may be able to save some tax and boost their super balance.
Government co-contributions – if your income is below $38,564 this financial year and you contribute $1,000 (as a non-concessional contribution) the government will make a co-contribution of $500. See here for all eligibility criteria.
Spousal contributions – if your spouse’s income will be less than $37,000 this financial year, and you make a non-concessional contribution into their super account of $3,000, you will be entitled to a tax offset of $540. See here for all eligibility criteria.
Sell any dud investments
If you have crystallised a capital gain this year then it might be wise to consider selling any dud investments that will crystallise a capital loss, which you can use to reduce the capital gain.
Capital gains are added to your taxable income in the year that the Capital Gains Tax event occurred. Capital losses can only be offset against capital gains and not other taxable income. Therefore, if you do not have any gains to offset a capital loss, you may be able to carry it forward to future tax years.
There are other tactics for businesses
This blog is aimed at individuals, not businesses. There are a number of tax saving tactics for businesses including trading stock write-offs, asset instant write off provisions and so on. Contact us if you wish to discuss these measures.
Don’t let tax saving measures come at the cost of building wealth
Quite often you have to spend money in order to save tax. However, it’s important that you are spending on things that ultimately help you build wealth and achieve lifestyle goals. There is little benefit gained from spending money just to chase a tax deduction.
If you are confident that you are taking advantage of all opportunities to reduce your tax but are still unhappy, perhaps the best thing to do is focus your energy on ensuring pre and post-tax dollars are wisely invested. Maybe you’d feel less concerned about the taxes you pay if your financial position was advancing at a faster rate each year.