Reduce your tax today
The end of the 2010/11 financial year is fast approaching, which also means tax time. If you haven’t thought about your tax yet, don’t fear, there are a number of strategies you can put in place to trim your tax bill.
Minimise your assessable income
Your primary goal, for tax purposes, is to minimise your assessable income. ‘Assessable’ income is your gross income i.e. a combination of your salary and wages, plus additional income sources such as interest from cash accounts, share dividends, managed fund distributions, property rental income and capital gains. Take away all allowable tax deductions and then you have taxable income which is the figure used to calculate your tax bill.
Make the most of your super
For employees, and business owners for that matter, one way to minimise assessable income and reduce your tax bill is by making ‘salary sacrifice’ contributions to your super. Salary sacrifice is an arrangement with your employer where you make additional super contributions from your pre-tax salary, rather than receiving it as take-home pay. The money that goes into super is taxed at a low rate of 15 per cent, which means you could reduce your taxes by up to 31.5%!
It’s also worth noting that salary sacrifice contributions are ‘concessional contributions’, and these types of contributions are currently limited to a total of $50,000 a year for those 50 and over. If you’re under age 50, the limit is currently capped at $25,000 a year. So you need to ensure you stay under your relevant contribution cap to avoid any hefty penalty tax rates.
If you have spare cash lying around (or you’re nearing your concessional contributions limit), it’s still possible to make the most of your super via ‘non-concessional contributions’ from after-tax income.
Non-concessional contributions are also capped annually before penalty tax applies. In 2010/11, the non-concessional contributions cap is $150,000. If you are under 65 years of age as at 1 July this year, you can ‘bring forward’ two years-worth of contributions, giving you a total non-concessional contributions cap of $450,000 for the three years, rather than a $150,000 cap in each year. This is a very useful strategy that requires some careful planning. So please call us today to ensure you make the most of your super.
Consider splitting your income
If you have a spouse or partner who either doesn’t work or who earns a low income, it’s possible to minimise your combined total tax bill by holding some of your investments in the name of the person who earns the least. You can’t split income from, say, wages or salaries with your spouse, but you can certainly hold investments in his or her name. This means any income from them goes into your spouse’s tax return and is taxed at their lower marginal rate – or not at all if they earn below $16,000 in 2010/112.
Maximise your deductions
Generally, deductions are any expenses made in earning your income. Expenses might include mobile phone charges, membership of professional organisations, tax agent services, vehicle expenses and investment property management charges.
If you own an investment property you can claim expenses including advertising, pest control, body corporate fees, property agent’s fees, some repairs, gardening, insurance, interest on loans and even land tax. It’s worth making sure you get minor maintenance tasks out of the way before the end of the financial year so you can claim these costs against your income.
Get your timing right
If you’re thinking about selling a capital asset before the end of the financial year, consider timing the sale to manage any capital gains tax (CGT). Simply put, CGT is tax assessed on the gain in value of certain assets you sell like shares or an investment property. You may be able to include certain costs of the asset to reduce the total gain. Also, if you have held the asset for more than 12 months, you will generally be entitled to discount the gross gain by 50 per cent and only pay tax on half the gain. The net taxable gain will be taxed at your marginal tax rate.
You may benefit by deferring an asset sale until after 30 June, particularly if you are expecting to be on a lower income in the next financial year. This may apply if you’re considering retirement or taking extended leave.
It might also be possible to prepay some future expenses associated with holding an investment and claim an immediate deduction. For example, if you have borrowed to invest in a rental property, it might be possible to prepay the loan interest for the 2011/12 tax year before 30 June this year.
1Including Medicare Levy
2includes Low Income Tax Offset
What you need to know
Information current as at May 2011. This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances. Some of the information in this article is based on our interpretation of the law. It is a summary of the subject matter covered and is not intended to be comprehensive tax or financial advice. No reader should act on the basis of this article without obtaining specific professional advice.
I hope this helps some of you.