Preparing for the end of financial year
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 legitimately save on your tax bill.
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 investment loan interest
If you have an investment loan, you can prepay up to 12-months’ interest in advance. You may be able to claim a tax deduction for the prepayment in this financial year (subject to the relevant prepayment rules), further reducing your taxable income. This may work well if your total taxable income is going to be lower in the next financial year. Consult your tax agent to learn more.
Tax deductions for investment expenses
Expenses you incur while earning assessable investment income may be tax deductible. These expenses may include account-keeping and management fees and interest payments on investment loans. Claiming a tax deduction for these expenses could reduce your taxable income for the financial year, although not all expenses are immediately deductible. Your tax agent 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, if they are on a lower marginal tax rate, may reduce the tax you pay on future investment income and capital gains. However, these transfers may 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 realise 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 agent.
Timing is everything
Some of these strategies can take time to plan and implement. So stay ahead of the curve and get in touch with your tax agent 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?
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.
For most concessions, small businesses are those with an aggregated turnover of less than $10 million. To meet the definition, the business must satisfy one of the following criteria:
• aggregated turnover for the previous income year was less than $10 million
• aggregated turnover in the current income year is likely to be less than $10 million (note that this test cannot be used if business income in the last two years was greater than $10 million)
• aggregated turnover for the current income year is actually less than $10 million, calculated at the end of the income year.
However, a lower threshold applies for some concessions:
• For small business capital gains tax (CGT) provisions, aggregated turnover must be less than $2 million.
• For the unincorporated small business tax offset, aggregated turnover must be less than $5 million.
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 use between 12 May 2015 and 30 June 2018.
Eligible businesses can claim an immediate deduction for prepaid expenses where the goods or services to be provided are for a period of 12 months or less and ends before the end of the next financial year.
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 (note, a range of other eligibility criteria applies depending on the small business CGT concession being claimed).
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.
Make repayments before 30 June to ensure a deduction can be claimed.
Purchase any necessary office equipment before the end of the financial year so you can claim these expenses. Ensure you have kept receipts for purchases made throughout the year.
Ensure any eligible 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 are made by no later than 28 days after the end of the quarter, so that no super guarantee charge becomes payable to the ATO.
Check that all of your motor vehicle log books satisfy the substantiation requirements.
Changing tax rates for small businesses
The tax rate for small business companies, and the definition of a small business company to access these lower rates, has been gradually changed from 1 July 2016 as follows:
• 2016-17 the aggregated turnover for less than $10 million is 27.5%
• 2017-18 the aggregated turnover for less than $25 million is 27.5%
• 2018-19 to 2023-24 the aggregated turnover for less than $50 million is 27.5%
• 2024-25 the aggregated turnover for less than $50 million is 27%
• 2025-26 the aggregated turnover for less than $50 million is 26%
• 2026-27 the aggregated turnover for less than $50 million is 25%
Source: Australian Tax Office, Changes to Company Tax Rates, 12 December 2017, https://www.ato.gov.au/Rates/changes-to-company-tax-rates/.
In addition, the unincorporated small business tax offset of up to $1,000 is available. From 2016-17, the offset is 8% of eligible net business income.
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 effectively reduce your individual tax liability.
Currently, most employees receive super guarantee (SG) contributions from their employer of at least 9.5%1 of their salary. Adding to these contributions directly from your gross (pre-tax) salary can be an easy and tax- effective way to top up your super. This is called salary sacrifice.
Some of the benefits of salary sacrifice are:
• It’s simple, automatic and consistent.
• You do not pay income tax on salary sacrifice contributions to super (up to certain limits). Your super contributions are generally taxed at 15%2, which may represent a significant tax saving, particularly if you are on the highest marginal tax rate of 45% plus applicable levies.
• By making a salary sacrifice contribution, you can reduce your taxable income.
• The difference in taxation may mean more money is available to invest in super than if you were to receive the money as after-tax income and then invest it.
• Future earnings on contributions made to super are concessionally taxed at a maximum of 15%.
You should check with your employer first to see whether salary sacrifice arrangements are available and that adopting a salary sacrifice strategy will not reduce the amount of SG contributions your employer pays on your behalf.
Personal tax-deductible contributions
Prior to 2017-18, only people who were substantially self-employed or earning passive income could claim a tax deduction for superannuation contributions.
However from 2017-18, this requirement has been removed so that all eligible contributors can claim a tax deduction for their personal contributions. This means that employees who were previously unable to make a personal tax-deductible contribution may now be eligible.
While still subject to the $25,000 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.
Take advantage of the government co-contribution
To encourage you to save for your retirement, if your total income3 is $36,813 pa or less and you make a $1,000 after-tax contribution to super, the Government will contribute $500 to your super.
The co-contribution is calculated as 50% of your after tax contribution, but the maximum $500 government co- contribution also reduces by 3.33 cents for every dollar you earn over $36,813 pa and ceases once your total income reaches $51,813 pa.
When determining eligibility for the Government co- contribution, earnings that are salary sacrificed to super and reportable fringe benefits come 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 the financial year may be a great way to top up your super, and get an extra boost from the Government.
Your financial adviser can give you the latest updates and more information on this opportunity.
Split super contributions with your spouse
If you have a spouse, you are permitted to transfer certain super contributions from the previous financial year over to the super account of your partner. If the receiving spouse is over preservation age at the time of the split request, he or she must declare that they are not retired. Splits cannot be done once the receiving spouse turns 65. You can do this every year, once the financial year has ended. Up to 85% of taxable (concessional) contributions such as SG, salary sacrifice and personal tax-deductible contributions made to super can be transferred.
There are several reasons for considering splitting super with your spouse:
• There may be potential tax advantages to withdrawing the money from two super accounts rather than one (between preservation age and age 59).
• Transferring contributions from the younger spouse to the older spouse could enable you to access more retirement money earlier.
• Transferring money from the older spouse to the younger spouse could enable the older spouse to receive more Age Pension by delaying the date at which their super becomes an assessable asset.
• Splitting superannuation monies does not count towards the receiving spouse’s contributions cap.4
• To help equalise balances between you and your spouse. From 1 July 2017, a $1.6 million ‘transfer balance cap’ applies to limit the total amount of super savings you can use to commence retirement phase income streams (where earnings on assets are tax free). Because this cap applies on an individual basis, equalising super balances between members of a couple can ensure that both members stay below this cap.
Super splitting is not offered by all funds, so you will need to check whether your fund offers this feature.
The benefits of spouse contribution tax offsets
Another potential tax concession is a spouse contribution tax offset. This strategy may be available if you make after tax contributions directly to your spouse’s super account – these are known as eligible spouse contributions. To take advantage of this strategy, your spouse will need to be under age 65, or aged 65 to 69 and have satisfied a work test during the financial year. You can open a super account in your spouse’s name and make contributions to that account from your after-tax pay. You can also make these contributions to your spouse’s existing super account.
If your spouse’s assessable income, reportable employer super contributions and reportable fringe benefits are under $37,000 pa, you will receive an 18% tax offset on the first $3,000 you contribute on their behalf, up to $540 pa. The offset operates on a sliding scale and phases out to zero once their income exceeds
A word on contributions caps
When considering any super strategy, it’s important to assess how much you are contributing to super in any one year. The Government has set annual limits – known as contributions caps.
The contributions caps for the 2017-18 financial year are:
• $25,000 (indexed) for pre-tax (concessional) contributions, regardless of age.
• $100,000 for after-tax (non-concessional) contributions, or $300,000 over a three-year period if you are under 65 any time during the financial year you make the contribution.
o Your non-concessional cap reduces to Nil once your total super balance (just before the start of the year) is $1.6 million or more.
o The cap you have available under the bring forward rule will reduce once your total super balance (just before the start of the year) is $1.4 million or more.
o If you triggered a bring forward rule in 2015-16 or 2016-17 (the bring forward cap during those years was $540,000) but did not use all of your cap by 30 June 2017, transitional rules reduce the remaining cap you have available.
In order to make voluntary super contributions, at the time of the contribution, you must be:
• Under age 65
• Aged 65 to 74 and have been employed for gain or reward for 40 hours in a 30 consecutive day period during the financial year –
o This includes up to 28 days after the end of the month in which you turn 75
o Spouse contributions cannot be made where the receiving spouse is aged 70 or over.
Voluntary contributions generally cannot be made once you have reached age 75.
Mini super checklist
• Do I have a record of all my super accounts and contributions?
• Does my employer allow salary sacrifice contributions?
• What are my current contributions for this financial year?
• Can I make a spouse contribution?
• Did I make a contribution last year that I could ‘super split’ this financial year?
• Should I make a personal tax-deductible superannuation contribution?
Talk to your financial adviser, they can help simplify your end of financial year preparations and ensure you maximise the tax benefits.
The Money Edge | Bundaberg