Are You Tipping the Tax Man?
A lot of people leave their preparation for the end of the financial year until it is too late. If you feel that your finances could do with a shake-up before June 30, here are just a few strategies that you and your financial adviser can implement now to ensure that the end of the financial year runs as smoothly as possible and you are not tipping the tax man.
Co- Contributions
If you are a low or middle-income earner and make personal after tax (non-concessional) contributions to your super fund, the government will also make a contribution up to a maximum of $500.
The federal government will pay $0.50 for every dollar contributed to super, as an after tax (non-concessional) contribution, up to a maximum of $500, if you're earning less than $35,454. Consequently if you make an after tax (non-concessional) contribution of $1,000, the government will contribute $500 to the Superannuation fund, subject to the eligibility requirements set by the tax office. For information regarding eligibility, please refer to Super Co-Contribution.
Between $35,454 and $50,454 the figure reduces by 3.33 cents for each dollar over the $35,454 figure. For example if you earn $40,000 and you put in $1,000, the government will contribute $348. For more information, please refer to the ATO Calculator.
The personal superannuation contributions need to be received by your superannuation fund prior to 30 June to be eligible to receive the government co-contribution.
Spouse Contribution
Partners can earn a tax offset on contributions for low income earning spouses. The offset can be up to 18% on contributions of up to $3,000.
For the full benefit, the spouse needs to have an adjusted taxable income of less than $10,800. If the partner makes a spouse contribution of $3,000 (which is non-concessional), they will be able to claim the offset.
If the spouse’s total income exceeds $10,800 the contribution limit for the tax offset is reduced by $1 for each $1 that the total income exceeds $10,800 up to $13,800. If the spouse’s income exceeds $13,800 no tax offset will apply. For more information, please refer to the Spouse Contribution Tax Offset.
Superannuation opportunities
Review the amount of superannuation contributions you have made in this financial year, and consider the benefits of making additional concessional or non-concessional contributions. If you are aged less than 49 you have a $30,000 cap on concessional contributions (CC), while those aged 49 and above have a $35,000 cap on CCs. Any CCs in excess of these caps are included as taxable income and taxed at your marginal rate plus an excess concessional contributions charge. Furthermore, these excess contributions may count towards the non-concessional contributions (NCC) cap.
For NCCs, the cap is currently $180,000 per person per year. Individuals who are under 65 at any time in a financial year can bring-forward two years worth of future NCCs, making the NCC cap $540,000. Where these caps are exceeded, the excess contributions may be subject to excess non-concessional contributions tax.
Bring it forward
Where possible, in order to bring forward tax deductions, work related expenses should be paid in this financial year. These include self education expenses, subscriptions to professional literature, membership fees for professional associations and home office related expenses.
Insurance discounts
Premiums for personal income protection insurance can usually be paid one year in advance with a discount for this annual payment. This provides a significant benefit as opposed to paying in regular instalments.
Investment deductions
It is important to understand what is tax deductible in relation to your investment property, shares and managed fund investments. Most of the expenses incurred with managing an investment property - for example strata fees and council rates - are tax deductible. This also applies to shares or managed fund expenses, as well as ongoing fees for financial advice. Some of these, for example interest on a margin loan, may be able to be pre-paid one year in advance. You need to confirm which fees are tax deductible and can be claimed.
The ATO will continue to focus on rental property deductions and ensure that expenses are claimed correctly. If you are a new rental property owner, you can access this fact sheet for an overview of your deductions.
Realising capital losses
Realising losses on poor investments can help to offset tax payable on any capital gains made throughout the year. However, it is important to sell assets legitimately, not purely for taxation purposes. The ATO has issued a warning on what they consider ‘wash sale arrangements’, so be wary, certain transactions may be scrutinised as to the primary purpose of the sale.
Tax deductible gifts and donations
Many people forget about the tax deductible gifts or donations they have made during the year. Dig out your receipts and have them on hand for tax return time. Alternatively, if you are thinking about making a donation, make sure you do so before 1 July 2016.
Budget announcements and impact
Non-Concessional Contributions
Under the proposed changes outlined in the 2016 federal budget a lifetime $500,000 cap on after tax (non-concessional) contributions was announced. The cap would limit lifetime non-concessional contributions made on or after 1 July 2007 to $500,000. If the change is implemented, any non-concessional contributions made in excess of the $500,000 after budget night (3/5/16), would be treated as excess contributions.
Division 293 tax
Individuals with an adjusted taxable income of more than $300,000 currently have their concessional contributions tax rate increased from 15% to 30% within their Superfund.
Where an individual exceeds the income level of $300,000 because of the inclusion of their concessional contributions, the higher tax rate of 30% will only apply to the excess contributions that take the income over $300,000.
In the budget it was announced that the threshold for Division 293 tax would be reduced from $300,000 to $250,000.
General Comments
There were many proposed changes to superannuation announced in the 2016 Federal Budget including changes to the transition to retirement pension rules and the introduction of a $1.6million transfer cap. Please note, legislation to implement these changes has not yet been introduced to parliament and will depend heavily on the outcome of the election to be held in July.
If you are concerned about how the announcements in the budget may affect you, please contact your tax professional or financial advisor.
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Source: Written by Tess Uncle, Associate Director of Wybenga & Partners Pty Limited, Chartered Accountants, Sydney