Now is a good time to review current plans and put in place strategies to help manage tax considerations.
While there may be changes in the future that will impact some client strategies — particularly if Labor wins the next federal election and is able to implement some of its recent policy announcements — it is impossible to “crystal ball” all the possible outcomes. Therefore it is generally best to plan based on the current rules but be ready to change tack if and when required.
New super rules
Changes to the superannuation rules, effective from 1 July 2017, mean that PAYG earners will now be able to claim a tax deduction for their personal superannuation contributions — an opportunity that may be overlooked in this first year of operation.
For those with income levels above $87,000 and in the 39 per cent tax bracket (including Medicare levy), the tax benefit of the contribution is 24 per cent, but the individual personally receives the 39 per cent benefit.
For those with funds in a mortgage offset account, assuming a rate of 5 per cent interest, they would still be well ahead by, say, taking $10,000 from the offset account and putting this into super and claiming the tax deduction. The limit on how much can be contributed to super personally is $25,000 less SG contributions, which is 9.5 per cent of salary.
For those aged 40 and over this will become much more common, as the tax benefits, together with the benefit of having greater retirement savings, should outweigh any reluctance to lock away money until retirement age.
It is important to make sure contributions are sent to the superannuation fund well before 30 June, as the contribution is dated from when the fund receives it, not when it is sent.
Apart from the tax deduction, super contributions are becoming the great tax planning tool.
With negatively geared loans not providing as much of a loss with the lower interest rates, and a question mark over the viability of other strategies such as agri tax schemes, it is difficult to claim large tax deductions elsewhere.
Take advantage of income splitting
Another strategy that should be canvassed is 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. The exception to this is negatively geared investments, which work to best advantage when the higher-earning spouse holds ownership.
Another option in the same vein is to hold investments in a family trust, with adult children as 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.
Review deductible versus non-deductible debt
Although not a tax tip as such, reviewing client accounts for tax purposes creates the opportunity to encourage a review of the levels of deductible versus non-deductible debt.
The best approach from a tax point of view is to pay down non-deductible debt wherever possible. It is common to take out an interest-only loan for all income producing investments while making principal repayments on the home loan and 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. Restructuring debt solely to avoid tax could attract the attention of the ATO.
For future planning, wherever possible, investors should consider tax-advantaged investments, as long as they suit the long-term investment strategy.
No investment should be taken out purely because it receives favourable tax treatment, but by the same token, it is important to be aware of the taxation implications of the investment structure. For instance, selecting an investment that returns discount capital gains or fully franked dividend income is a better option than choosing an investment that may offer the same return, but doesn’t have the same tax advantages.
For individuals, family trusts and super funds, listed investment company dividends are often an attractive, tax-effective option, as they are usually fully franked. They also come with the benefit of the CGT discount which shareholders can access if the company sells investment assets.
Maximise deductible expenses
An easy-to-overlook strategy is to ensure that client 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. As with super contributions, it’s important to make the payments well before year end.
For instance, a donation to a charity is recorded as the date it is received, not the date it is sent, so any cheques or payment forms should be sent a week or two before 30 June to make sure they count in this financial year, not next.
Be prepared to substantiate expenses claimed
The ATO has upped the ante on its usual focus on the type and amount of expenses claimed as tax deductible. Firstly, be aware that under legislation applying from 1 July 2017 it is no longer possible to claim travel expenses for inspecting a residential rental property unless you are carrying on a business of property investing (most people would not be).
More generally, the ATO is still concerned that taxpayers are claiming more work-related expenses than they are entitled to, and this remains a key focus area.
One area that continues to be misunderstood is the $300 limit for claiming work-related expenses without receipts. This does not mean everyone gets an “automatic” deduction of $300 — people still need to have spent the money and be able to detail the amounts and nature of the expenses. All it means is that all the receipts aren’t required.
Another major area where errors are made is car expenses, especially claiming “home to work” travel as a business trip. If you drive from home to a meeting and then on to the office then both legs of the journey qualify as business travel. However simply driving from home to work is regarded as private travel.
If the “cents-per-kilometre” method is used, an accurate record of all business trips during the year must be kept. If the “log book” method is used then it must be a current (no more than five years old and reflecting current circumstances) log book that is a reasonable reflection of the actual car usage.
Private health insurance considerations
The Medicare levy surcharge applies an extra one per cent tax for singles earning over $90,000, or couples earning over $180,000. This rises to 1.25 per cent at higher income levels, and up to 1.5 percent for singles earning over $140,000 and couples earning over $280,000.
As with investment decisions, clients’ approach with private health insurance should be to consider the likely financial, and in this case medical, impact of making particular choices, and not be ruled entirely by tax considerations.
This is also a good time of year to undertake a general superannuation review, and to ensure super funds, and the underlying investments, are still appropriate for current needs and timeline to retirement.
People should look at the fees being charged by their super fund, the type of investments the fund holds, and whether the level of investment risk taken is appropriate for their needs.
It is always worth knowing what other funds are in the market, what they charge in fees and the type of investments they make. As the superannuation balance grows, it may also be worthwhile to consider whether a self managed superannuation fund is a good option.
Regardless of your client’s tax position and what they are planning to claim and deduct, don’t forget to lodge the tax return early if a refund is expected.
Not only do they get the refund sooner, but this may help reduce their ongoing quarterly tax instalment payments.