As we approach the end of the financial year, there are a number of smart strategies you could consider to help you streamline your finances and minimise your personal tax liability.
Some insurance premiums, such as those for income protection insurance, are generally tax deductible as the proceeds in the event of a claim are taxable to you.
Don’t forget to keep any receipts for work-related expenses such as uniforms, training courses and learning materials, as these may be deductible for tax purposes.
Prepay margin loan interest
If you have a margin loan, you can prepay up to 12-months’ interest in advance. You can claim a tax deduction for the prepayment in this financial year (subject to the relevant prepayment rules), further reducing your taxable income. This will work well if your total taxable income is going to be lower in the next financial year.
Tax deductions for investment expenses
Expenses you incur while earning assessable investment income may be tax deductible. These expenses can include fees for financial advice, account-keeping and management fees and interest payments on margin loans. Claiming a tax deduction for these expenses could reduce your assessable income for the financial year, although not all expenses are immediately deductible. Your tax adviser can help you determine what can be claimed.
Review ownership structure of investments
Transferring the ownership of your investments to your self-managed super fund (conditions apply) or to your spouse, who is on a lower marginal tax rate, could reduce the tax you pay on future investment income and capital gains. However, these transfers have capital gains tax (CGT) implications so you should seek qualified tax and legal advice before proceeding.
Managing capital gains
It’s important to assess if you have made any capital gains or losses from your investments. The most common way you make a capital gain (or capital loss) is by selling assets such as property, shares or managed fund investments. Managed funds also distribute capital gains which you must report in your tax return. The Australian CGT system is quite complex so it’s important to consult with your tax adviser.
Contributions to super
Contributing to your super can be one of the most tax-effective ways of building your retirement savings.
However, you need to be extra careful not to exceed your contributions cap and incur excess tax.
The annual contributions caps for the 2015-16 financial year are:
- $30,000 per financial year (indexed) for pre-tax (concessional) contributions for anyone whose age is 48 or younger on 30 June 2015
- $35,000 per financial year (unindexed) for pre-tax (concessional) contributions for anyone whose age is 49 or over on 30 June 2015
- $180,000 per financial year for after-tax (non-concessional) contributions or $540,000 over a three-year period if you are under 65 in the financial year you make the contribution.
Keeping your financial adviser informed about any contributions you make will help ensure you don’t exceed these caps.
Contributions over these caps can be taxed up to the highest marginal tax rate plus Medicare levy.
If you currently:
- have a salary sacrifice package
- have a transition to retirement strategy
- are self-employed and make personal deductible super contributions.
- Speak to your financial adviser to discuss whether you can boost your contributions this financial year or need to review your current arrangement.
Timing is everything
Some of these strategies can take time to plan and implement. Just as importantly, a super contribution is registered in the financial year in which it is received and processed by the fund, regardless of a postal delay or technical problem.
So stay ahead of the curve and get in touch with your financial adviser soon to find out how you can plan to get the most out of this end of financial year.
EOFY tax strategies for small business
When times are tough, small businesses need all the help they can get. We take a look at the tax concessions that may be available to your small business and strategies you may be able to use to minimise your end of financial year tax liability.
What qualifies as a small business entity?
Small businesses are those with an aggregated turnover of less than $2 million. To meet the definition, the business must satisfy one of the following criteria:
- aggregated turnover for the previous income year was less than $2 million
- aggregated turnover in the current income year is likely to be less than $2 million (note that this test cannot be used if business income in the last two years was greater than $2 million)
- aggregated turnover for the current income year is actually less than $2 million, calculated at the end of the income year. If your small business qualifies as a small business entity, you may be eligible to access a number of tax concessions that could help reduce the end of financial year tax liability for your business.2A range of tax concessions are available to small businesses that meet the small business entity definition outlined above.
Small business tax concessions
A range of tax concessions are available to small businesses that meet the small business entity definition outlined above.
Small business are able to claim an immediate deduction on assets that cost less than $20,000. The deduction applies to assets that small business start to use or install ready for used between 12 May 2015 and 30 June 2017.
Eligible businesses can claim an immediate deduction for loan prepayments, as long as the service period of the loan is not more than 12 months.
Capital gains tax (CGT)
Small businesses may be eligible for a range of CGT concessions, which may provide substantial tax savings. These concessions are available to small business owners who have disposed of active assets in the current financial year, or who are looking to dispose of an active asset. To be eligible for these concessions, the business must qualify as a small business entity or have net assets of $6 million or less.
Pay as you go (PAYG) tax
Small businesses should review their PAYG instalments and notify the Australian Taxation Office (ATO) if the expected profit for this financial year is lower or higher than previous years, so instalments can be adjusted accordingly.
There are a number of other ways small businesses can look at reducing their income tax liability at tax time.
Make repayments before 30 June to ensure a deduction can be claimed.
Purchase any necessary office equipment and expenses before the end of the financial year so you can claim a deduction, and perhaps utilise tax concessions on depreciating assets. Ensure you have kept receipts for purchases made throughout the year.
Ensure any superannuation contributions are made no later than 30 June so you can claim the deduction in this financial year.
Ensure that required super guarantee (SG) contributions for employees of the business should be made by no later than 28 days after the end of the quarter, to ensure that the contribution is deductible and no super guarantee charge becomes payable to the ATO.
Check that all of your motor vehicle log books satisfy the substantiation requirements.
EOFY superannuation tax strategies
As we approach the end of the financial year, there are a number of smart strategies you could consider to help you make the most of your super and minimise your tax liability.
Salary sacrifice involves giving up part of your pre-tax salary and in exchange your employer agrees to make additional contributions to your super. If you do not already have a salary sacrifice arrangement in place, now could be an excellent time to make additional contributions. Be sure to check with your employer first to see if this is possible.3 The amount you contribute to super will be taxed at 15% or less4 when it enters the fund, rather than at your marginal tax rate, which could represent a significant tax saving. As you do not pay income tax on salary sacrifice contributions, by making an additional contribution before the end of a financial year, you could reduce your taxable income. However, be careful that this will not cause you to exceed your pre-tax or concessional contributions cap.
Access the government co-contribution
To encourage you to save for your retirement, if your total income is $35,454 pa or less and you make a $1,000 after-tax contribution to super, the government will contribute up to $500 to your account. The amount of government co-contribution reduces for every dollar you earn over $35,454 pa and ceases once your total income reaches $50,454pa. When determining eligibility for the government co-contribution, earnings that are salary sacrificed to super and reportable fringe benefits also fall under the definition of total income. If you fit within the income thresholds outlined above, and satisfy some other conditions, contributing to your super from your after-tax salary before the end of financial year is a great way to top up your super, and receive a boost from the government. This opportunity is also available to the self-employed. Your financial adviser can give you more information on this opportunity.
Contribute to your spouse’s super
Contributing to your spouse’s super is a great way to help grow their retirement savings. If you are a tax payer who is one of a couple, you could be eligible for a tax offset if you contribute to your spouse’s super. If your spouse’s assessable income, reportable fringe benefits, and reportable employer super contributions are under $10,800 pa, you will receive an 18% tax offset on the first $3,000 you contribute on their behalf, up to a maximum of $540 pa. The offset operates on a sliding scale and phases out to zero once their income exceeds $13,800 pa.5 To take advantage of this strategy, your spouse will need to be under age 65 or be aged at least 65 but under 70 and have satisfied a work test during the financial year.
Split super with your spouse
Super splitting involves transferring up to 85% of taxable contributions from a financial year (up to the concessional contributions cap) to your spouse’s super account. Depending on your circumstances, splitting super offers potential tax advantages and may give you greater flexibility at retirement. Note: super splitting is not offered by all funds, so you will need to check your fund offers this feature.
Super contributions and the self-employed
If you are substantially self-employed or earning passive income only, you can claim a full tax deduction for contributions you make to super. While still subject to the concessional contributions cap, this strategy may prove timely if you have made a considerable capital gain from the sale of a property or shares – as your deductible contribution to your super fund may help to offset your assessable capital gain. Not only could it reduce your marginal tax rate, it may also boost your super balance for retirement. Note that if you are not able to claim your super contributions as a tax deduction (for example, your income for the year is too low), they will be treated as after-tax (non-concessional) contributions. The government co-contribution is also available to self-employed people, so if you make contributions to super and your total income is under the threshold of $50,454 pa, you may be eligible to access the scheme.
- To be eligible to claim a tax deduction for personal super contributions, you must have received less than 10% of your income during the financial year from employment.
- To be eligible for the government co-contribution, at least 10% of your income must come from running a business, employment, or a combination of both.
It’s also important to note that to make contributions to super, you generally need to be under 65 or under 75 and have met a work test.
Impact of contributions caps
When considering any super strategy, it’s important to assess how much you are contributing to super in any one financial year. The government has set annual limits – known as contributions caps. The annual contributions caps for the 2015-16 financial year are:
- $30,000 per financial year (indexed) for pre-tax (concessional) contributions for anyone who’s age 48 or younger on 30 June 2015.
- $35,000 per financial year (unindexed) for pre-tax (concessional) contributions for anyone who is aged 49 or over on 30 June 2015.
- $180,000 per financial year for after-tax (non-concessional contributions) or $540,000 over a three-year period, if you are under 65 years in the financial year you make the contribution.
It’s important to keep your financial adviser informed about any super contributions you make so they can ensure you don’t exceed the caps. Contributions over these caps can be taxed up to the highest marginal tax rate plus the Medicare levy.
People who exceed their concessional cap after 1 July 2013 can withdraw the excess contributions and have them taxed at their marginal tax rate plus an interest charge. For non-concessional contributions, excess contributions made on or after 1 July 2013 are able to be withdrawn along with associated earnings. If withdrawn, the excess non-concessional contribution are not subject to tax and the earnings are taxed at their marginal tax rate.
In the 2016 Federal Budget, the government proposed a number of changes to the taxation of small and medium businesses including:
- Reduction in the company tax rate over 10 years to 25 per cent.
- Increase in the small business entity turnover threshold from $2m to $10m for the purposes of accessing certain existing income tax concessions such as simplified depreciation rules.
- Increase in the unincorporated small business discount from 5% to 16% over 10 years.
You need to have an effective salary sacrifice agreement in place that allows you to make extra salary sacrifice contributions. Also, some people are under awards that impose certain limitations, so it is best to check with your employer.
Individuals with income greater than $300,000 pa will have the tax on non-excessive concessional contribution increased from 15% to 30%. In the 2016 Federal Budget, the government has proposed reducing the income threshold to $250,000 from 1 July 2017.
From 1 July 2017, the government has proposed increasing the spouse income threshold for the spouse tax offset to $37,000. It is also proposed that spouse contributions for a spouse aged under 75 will be permitted without requiring the spouse to satisfy a work test.
The government has proposed removing the work test that applies for people making voluntary contributions between age 65 and 74 from 1 July 2017.