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Disclaimer

This is not advice. Items herein are general comments only and do not constitute or convey advice per se. The information contained in these articles is for guidance only and should not be relied upon without obtaining professional advice having regard to your direct circumstances.

 

Review your Personal Tax Planning

After a period of sustained volatility and uncertainty across investment markers that is still affecting markets and investment outlook, it has never been more important to ensure financial needs and expectations.

Before the end of the financial year it is timely to look at areas that can affect your financial position, or action that can be taken to improve it

Employed executives should review salary packaging arrangements to ensure they suit current circumstances. It makes sense to do this before the end of the tax year so that tax considerations of any changes made can be taken into account, such as salary sacrifice, immediately to get tax benefits this year.

Superannuation strategies

• Super remains the most tax effective way to build wealth for retirement. It has a low maximum tax rate and allows retirees tax free super benefits from the age of 60.

Some strategies that could be effective include:

• Personal super contributions – Those earning less than 10 per cent of income from eligible employment (typically those self-employed or not employed) can reduce income tax or capital gains tax payable in the current financial year by making personal super contributions. Age based annual limits apply.

• Invest assets into super – People intending to realise assets that are held in their own name in the current financial year should consider re-investing the proceeds as a personal after-tax super contribution. The earnings within super will be taxed at a maximum rate of 15 per cent, not at marginal tax rates, allowing the effect of compounding to produce superior returns over the long term. Age-based limits apply to the amount that can be contributed each year.

• Access the Co-contribution – Low income earners in the current financial year may be eligible for the Federal Government’s generous Co-contribution Scheme. If after-tax super contributions of $1000 are made before June 30, the Government may add up to $1500 to the super account. The full amount is payable if income is below $30,342, with pro-rata payments continuing up to the maximum income of $60,342.

• Access the spouse contribution – Contributing to super on behalf of an eligible low-income spouse from after-tax earnings or savings before 30 June may result in a tax offset of up to $540. Age and income conditions apply and the minimum after-tax contribution required is $3000.

• Salary sacrifice any bonuses – Paying bonuses into super as a salary sacrifice will mean tax is paid at 15 per cent rather than at marginal tax rates. On a $10,000 bonus at a tax rate of 40 per cent, the tax saved would be $2650; in itself a substantial boost to superannuation.

Tax strategies

In addition to one’s superannuation position, personal tax positions should be checked before 30 June. Strategies include:

1. Use capital losses - Selling poorly performing assets before 30 June means any capital loss can be offset against a realised capital gain from another asset, thus reducing Capital Gains Tax (CGT) payable. The realised funds may then be used to re-invest in opportunities that are more suitable. However, selling an asset at the end of the current financial year and immediately repurchasing the same asset after 30 June constitutes a ‘Wash sale’ in the eyes of the ATO, and the capital loss may be disallowed.

2. Defer asset sales- If selling a profitable asset, it may be advisable to do so after 30 June, thus deferring the CGT liability to the next financial year (unless previous capital losses have been made). This strategy is particularly effective for anyone expecting to earn a lower taxable income in the following financial year (eg due to retirement or parental leave).

3. Tax effective investment – Agribusiness opportunities, sensible investment gearing (through the use of margin or home equity loans), and protected equity lending can all still be used to build wealth while reducing tax payable in the current financial year.

4. Pre-pay interest – If a geared investment portfolio is set up, taking out a fixed rate investment loan can help to manage tax. Pre-paying up to 12 months interest before 30 June brings forward a tax-deductible expense, thus decreasing income tax payable in the current financial year.

Other issues

1. Rental property

• Substantiate all claims relating to assessable income. Accurate and complete records are crucial

• Claim as a tax deduction the cost of having a depreciation schedule prepared by an accountant

• Prepay expenses 12 months ahead where possible

• Claim as a tax deduction any travel costs to carry out property maintenance or collect rent.

• Delay purchase of units in managed funds until after 30 June to avoid receiving a portion of capital back immediately as taxable income.

2. Agribusiness investments

Tax effective agribusiness investments give investors access to the production, processing and marketing of agricultural products. Agribusiness investments will suit investors who wish to:

• Diversify overall portfolio risk and return

• Offset realised capital gains from other investments; or

• Replace non-deductible with deductible debt.

Andrew Buchan
My Business, May, 2009

 


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