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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.

 

How to shrink your tax

Less is more...a bit of planning and research always pays off when tax time comes around. Let's face it, no one likes to pay the Government more than they have to. Bina Brown lists the ways to save as many of your hard-earned dollars as possible.

That’s why you should regularly review your finances to ensure you have done everything you can to minimise your tax and maximise your savings.

It seems there is no end of opportunities available; the challenge is to work out what is relevant and then act on it before June 30.

CAPITAL LOSSES

Nobody likes to take a loss on their investments but a drop in share and property prices might mean less tax. HLB Mann Judd partner Michael Hutton says if investors are contemplating selling personal investments such as shares or property and building up their superannuation portfolio, then this year gives an opportunity to do that.

"In the case of shares, the capital gains realised would be less than a year ago due to the lower share market. If you are putting that into super you may also be able to claim a tax deduction against the capital gains," Hutton says.

Selling assets at a loss can be a good way to offset capital gains tax but be warned that the Tax Office will frown upon "wash sales" - where someone sells an asset to crystalise a loss to offset against other gains and then turns around and buys the same asset back again.

Ipac Securities' head of technical services Colin Lewis says if it is a good opportunity to sell and buy a better asset, it is perfectly OK. But it has to be a genuine flight to quality. Even if you are not carrying substantial capital gains that you could offset, capital losses can be carried forward indefinitely for when the profits do start rolling in again.

DEFER INCOME

Deferring income and prepaying expenses are two ways of reducing the amount of tax payable this financial year.

Andrew Burns, a manager with accountants and business and financial advisers HLB Mann Judd Adelaide, says deferring income until next year might mean people benefit from the lower tax rates that may apply in future years.

One way to defer investment income is to have a term deposit mature in July rather than in June, or waiting until July to sell an asset that will result in a capital gain. He says deductions can be brought forward by paying deductible expenses in June rather than in July, such as prepaying interest on a deductible loan - including for a rental property or a share portfolio - or paying membership subscriptions of trade or professional bodies.

FREE KICK

Superannuation account balances have taken a bit of a beating this year but there is still one way of making a 150 per cent return on investment. Under the Government's superannuation co-contribution scheme, if your assessable income is less than $60,342 this financial year and you contribute $1000 in after tax dollars into your superannuation, the Government will pay up to $1500.

John Dani, national manager of advice development with Ipac Securities, says the co-contribution might have been designed for low income earners to boost their retirement savings, but there is nothing to stop the low-income earning wife of a high-income earner from taking advantage of an essentially risk free investment opportunity. "It should not be overlooked by anyone who earns less than $58,000 or can get their income down below that level," Dani says.

NO SACRIFICE AT ALL

By salary sacrificing into super, you pay pre-tax earnings into super and reduce your taxable income while taking advantage of the tax effective investment environment. The trick is to make arrangements at the start of the financial year, which means it might be too late to take advantage of this year but is just in time for next year.

Asteron's Louise Biti says anyone with surplus income each year who is looking to build their capital leading up to retirement might find salary sacrificing into super an appropriate strategy. "If your remuneration package includes potential bonuses, you may wish to have any bonuses sacrificed into super. However, the election to salary sacrifice into super must be made before any income and/or bonus is derived," Biti says.

Zurich's Jennifer Brookhouse warns that careful planning is also necessary to ensure the concessional contribution cap is not exceeded. "Deductible contributions, including salary sacrifice, are counted towards a person's concessional contribution cap. If the cap is breached, the excess amount is taxed at an effective rate of 46.5 per cent and counts towards the non-concessional contribution cap," Brookhouse says.

The current cap is $50,000 a year for anyone under 50 and $100,000 a year for those over 50.

SELF-EMPLOYED

The self-employed might be able to claim a tax deduction for up to $50,000 of personal superannuation contributions - and reduce the amount of tax payable. To be eligible, income from employment as an employee must be less than 10 per cent of your total assessable income. As an added bonus, if you are aged 50 or over, you can claim a tax deduction for up to $100,000 of contributions.

Employees of their own companies might wish to consider paying profits as tax-deductible employer contributions.

Asteron's Biti says using profits to pay an employer superannuation contribution instead of salary or dividend payments might provide a tax saving up to 31.5 per cent. Employer contributions are taxed at only 15 per cent in the fund, instead of paying tax up to 46.5 per cent on other options. If you use this strategy, ensure that the contribution limit of $50,000 per annum (or $100,000 if aged 50 or over) is not exceeded to avoid penalty tax on contributions.

OFFSETS

The focus of tax planning is generally on income, but tax concessions - which reduce tax payable - have become increasingly relevant. The Australian Tax Office automatically calculates a number of tax offsets including: tax offset for low-income earners; mature-age worker's tax offset and senior Australians' tax offset.

Other tax offsets, such as medical expenses and spouse contributions, must be claimed when a tax return is completed.

The medical expenses tax offset can be claimed by an individual whose net medical expenses paid exceed $1500 during the financial year. The offset is calculated as 20 per cent of the amount above the threshold. This tax offset can reduce tax payable to zero but does not reduce the Medicare levy. It is not refundable if it exceeds the tax payable.

The medical expenses tax offset should be of particular interest for residents of aged-care facilities. Expenses for aged care, such as basic daily care fees, income tested fees, extra service fees and amounts deducted from accommodation bonds paid as a lump sum, fall within the definition of medical expenses.

Zurich's Brookhouse says a taxpayer can make "eligible spouse contributions" on behalf of his/her spouse. In some situations the taxpayer is able to claim a tax offset of 18 per cent on the first $3000 contributed, which provides a maximum offset of $540.

"This assumes the receiving spouse has assessable income plus reportable fringe benefits less than $10,800. Once the receiving spouse's income reaches $13,800 there is no entitlement to this tax offset," she says.

SPECIAL SCHEMES

The end of the financial year is when the marketing of managed investment schemes (MIS), which promote tax savings, generally occurs.

HLB Mann Judd's Andrew Burns says investors should ensure that any MIS under consideration has a current product ruling issued by the Australian Tax Office, and that the circumstances of the investment are in accordance with this ruling, as this is the only way of guaranteeing a deduction.

It is essential that you look at any project or scheme - whether it be ostrich farming or olive groves - on the basis of the quality and the merits of the investment first and foremost. Any tax benefit (as generous as it might be) should be seen as an added bonus.

"No amount of tax deduction can make up for a poor investment. You need to look at the overall arrangement," Ipac Securities' Dani says.

TOP TIPS

* Hold investments in the name of the person with the lowest taxable income.
* Review your salary package for any tax-effective options.
* Set up a salary sacrifice arrangement with your employer to contribute to super to boost your retirement savings and reduce tax.
* Make a tax-deductible donation to charity.
* Hold insurance cover inside your superannuation fund to reduce the effective cost of premiums through tax concessions.
* Gear into growth investments if you can tolerate higher risk and have a long investment timeframe.
* Keep your medical receipts in case you spend over $1500 in a year and are eligible to claim the 20 per cent medical expenses offset.

Source: Asteron

PRE-JUNE 30 CHECKLIST FOR LANDLORDS

* Claim all deductions and depreciation prior to June 30. The chief executive of property group Raine & Horne, Angus Raine, says almost half of all landlords will potentially miss out on thousands of dollars this year. "Landlords can claim up to 12 per cent on depreciable assets and also in many cases 2.5 per cent of the building cost (not the value) of residential properties built on or after July 18, 1985. Depreciation can also be claimed on the cost of improvements made after February 26, 1992 to older properties," he says. On a residential property with a construction cost of $300,000, landlords with a depreciation schedule could claim a tax deduction of $7500 each year. Add to this the "depreciable" items, which could be in the vicinity of $1000 to $3000 and many landlords could reduce their taxable income by almost $10,000 every year, says Raine.

* Consider getting a depreciation schedule - an up-to-date, report showing depreciable assets such as carpets, blinds, curtains, air-conditioning, ventilation systems, fire alarms systems, light fittings and hot water units. Available from quantity surveyors and registered builders, they are tax deductible and can save you thousands of dollars.

* Prepay up to 12 months' interest in advance on an investment property mortgage and claim a tax deduction for 2007/08.

* Where possible, time a property sale for after June 30 to avoid triggering a capital-gains tax liability this financial year.

Source: The Sun-Herald
June 1, 2008

 


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