Most taxpayers accept that paying tax provides community benefits and they meet their tax obligations voluntarily.
In meeting this obligation, you have a right to arrange your financial affairs to keep your tax, to a minimum – this is often referred to as tax planning or ‘tax-effective’ investing.
Tax planning is legitimate when you do it within the letter and the spirit of the law.
There are ways to minimise tax as long as it’s done lawfully.
If you’re not sure of a tax investment offered to you by anyone then please make sure you get professional advice.
Look at the finer details, does the arrangement have a product disclosure statement or prospectus?
Does it have the certainty that comes with being covered by a Tax Office ‘Product Ruling’?
Has the ATO issued a taxpayer alert about it or a similar arrangement?
There are however basic areas where an individual can effectively reduce the amount of tax they pay.
Therefore, leading into the end of the financial year I have set out below a few strategies that you should be aware of.
Increased Medicare Levy and Temporary Budget Deficit Levy
Over the 2014/2015 year period, the base Medicare Levy rate has increased from 1.5% to 2%.
Furthermore, individuals earning over $180,000 are subject to the additional 2% Temporary Budget Deficit Levy (which shall also be in place for the 2015/2016 and 2016/2017 years).
Accordingly, the top marginal tax rate is effectively 49% (excluding the Medicare Levy Surcharge, which is referred to below).
Medical expenses tax offset
To be eligible for a 20% tax offset, eligible net medical expenses must exceed the minimum threshold of $2,218 p.a. (the offset is calculated as 20% of the excess over $2,218).
However, for singles earning more than $90,000 or couples earning more than $180,000 (plus $1,500 for each dependent child after the first child) the net medical expenses must exceed $5,233.
The offset rate for this is at 10% on the out of pocket expenses in excess of $5,233.
For the 2015 income year, most individuals will only be eligible to claim a tax offset for certain medical expenses if they received a credit for this tax offset in their 2014 Notice of Assessment.
However, expenditure on items such as disability aids, attendant care and aged care expenses may continue to qualify regardless of prior year eligibility.
It is important, therefore, that you seek advice on whether you will qualify for any tax offset and consider if it is worth bringing forward any expenditure into the 2015 financial year.
This is particularly vital due to the fact that from 1 July 2015, only the expenditure items specified above will be eligible to claim an offset.
Claiming travel allowance deductions
We are continuing to observe an audit focus by the ATO on travel allowance expenses being claimed by individual taxpayers.
There are a number key eligibility points to be aware of if you are intending on using the exception for retaining substantiation for these claims, including;
- You must be receiving a bona fide travel allowance from your employer.
- You must be working away from home (on overnight stays) in the course of performing employment duties.
- You must calculate the claim correctly for your salary level and location of work.
- You must be able to show that you are incurring travel expenses.
With this area currently considered high risk, we recommend that you seek advice in relation to your eligibility for these claims.
It’s important to note that the way your employer provides and reports the allowance can impact on your level of risk in this regard.
Medicare Levy Surcharge (MLS) and Private Health Insurance rebate (PHIR)
The thresholds for the imposition of the MLS (if not covered by private hospital insurance) are broadly as follows;
- Singles (no dependants) – $90,000 p.a.
- Families – $180,000 p.a. (plus $1,500 for each dependent child after the first).
Note – there are a number of income amounts such as reportable fringe benefits, reportable superannuation contributions and investment losses counted in testing against these thresholds.
There is also a “tiered” system for calculating MLS in the 2015 income year.
The rate of MLS will be between 1% and 1.5% depending on the extent to which income exceeds the above thresholds.
In addition, the PHIR is means tested in the 2015 income year under a “tiered” system.
The rate of rebate will be between 0% and 30% depending on income levels.
This means some taxpayers who have claimed a full 30% rebate from their health insurance provider on their premiums will have an additional liability on lodgement of their return.
Areas of ATO focus in 2015
The ATO’s “Building Confidence” publication reminds individuals of its extensive data matching capabilities, based on information it receives from various sources including banks, share registries, employers, government agencies, and via its network of global information exchange agreements.
In terms of focus areas for compliance activities the ATO continues to closely monitor;
- Work related expenses, particularly overnight travel.
- Motor vehicle expenses for travel between home and work.
- Work-related usage proportion of electronic devices such as computers and phones.
- Rental property expenses, particularly in relation to holiday homes.
- Splitting of income and expenses by spouses.
- Deductibility of interest where a loan is partly for private purposes.
- Planning considerations.
- Capital Gains Tax (CGT)
Realised capital losses are able to be offset against realised capital gains to reduce the net capital gain and therefore tax payable.
Review your portfolio and crystallise capital losses before 30 June 2015.
Caution – the ATO has a Public Ruling relating to “wash sales”.
This refers to the instance whereby an asset is sold before year end and a substantially identical asset is purchased immediately afterwards, such that the owner continues to have an economic exposure to the asset.
The Ruling considers that the ATO can apply Part IVA anti-avoidance provisions to cancel tax benefits and apply penalties.
Donations or gifts of $2 or more to approved organisations and charities are tax deductible.
Ensure you retain receipts for donations made.
Derivation of income
It is worth considering whether assessable income can be deferred to the 2016 income year.
This requires careful consideration and should be discussed with your accountant.
Maximising allowable deductions
Expenses that are incurred before year end can reduce taxable income.
Consider up and coming liabilities and the value in incurring them before year end.
If you have a rental property, consider whether you are maximising claims for capital allowance and capital works deduction on the property..
Pay income protection insurance premiums before year end.
We can assist you with obtaining quotes from insurance companies that are appropriate for your circumstances.
In limited circumstances, an immediate deduction is available for non-business prepaid expenditure, for example, interest on a loan relating to a rental property or on other passive investments such as a share portfolio.
Motor vehicle expenses
There are four methods which can be used to claim a deduction.
- The cents per km method.
- The log book method (log book kept over 12 weeks and updated every five years).
- One third of actual car expenses.
- 12% of original value method.
Detailed records assist in maximising deductions.
To ensure the strategy is effective for you and your circumstances, the benefits received must be taxed at a lower rate than your salary under the Fringe Benefits Tax (FBT) rules.
Due to the varying calculations for different benefits under the FBT rules, we are happy to discuss whether a salary sacrifice arrangement is beneficial for you.
Low income earners
The tax-free threshold of $18,200, together with the low income tax offset, means that some low income earners will not need to lodge income tax returns for the 2015 income year.
Salary sacrifice bonus into superannuation
You may be able to optimise your tax position by salary sacrificing any end of year bonus into super.
There are important considerations that need to be addressed in this regard to ensure it is tax effective and to ensure contribution caps are not breached.
Superannuation – income
Individuals aged over 60 are generally not taxed on any payments from a superannuation fund.
Individuals aged between 55 and 60 will generally be taxed on a concessional basis.
Superannuation – non-concessional contributions
Non-concessional contributions can be made up to $180,000 p.a. or a total of $540,000 on a bring forward basis over a 3-year period (provided that the bring forward rule wasn’t triggered in either 2012-2013 or 2013-2014).
Superannuation – rebate
A rebate of up to $540 is available for superannuation contributions made during the 2015 year for your spouse where your spouse’s income is less than $10,800 p.a.
This rebate reduces for income amounts up to $13,800 p.a.
Superannuation – personal deductions
You should check that the total of your personal contributions (for which you are eligible to claim a tax deduction) and any employer contributions during the income year do not exceed $30,000 for individuals under 49 years of age on the 30th June 2014, or $35,000 for all other individuals.
Concessional contributions above these caps are assessed to the individual at their marginal tax rate, and also incur an interest charge from the ATO.
For a personal superannuation contribution to be deductible in 2015:
- You must be under 75.
- The amount you earn as an employee must be less than 10% of your combined assessable income, reportable fringe benefits and reportable superannuation contributions.
- Contributions must be made by 30 June 2015.
- You must notify the trustee of your fund in writing of your intention to claim a deduction.
Superannuation – Government Co-Contribution
The maximum co-contribution amount that you can receive is $500, based on an after-tax contribution of $1,000 (i.e. for every $1 contribution made, the government contributes $0.50).
This is reduced by 3.33 cents for each $1 of income over $34,488 p.a. up to $49,488 p.a. As there are also other qualifying criteria, you should contact your accountant or financial advisor if you wish to access this benefit in 2015.
Transition to Retirement Income Streams
If you are 55 or older on the 30th June 2015, you may be eligible to commence a “Transition to Retirement” pension. Benefits may include;
- Receiving pension income while still working.
- Ability to salary sacrifice to superannuation to access lower tax rates.
- Concessional tax treatment within your super fund.
Disclaimer: This article contains general information. Before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs.