As is the usual practice for some taxpayers and their advisers, the lead-up to year end represents the start of a short, frenzied attempt to try to legally minimise significant tax liabilities before the tax man comes knocking. But then again, no court or tax law says you need to pay more tax than you are legally obliged to.
Even though the current financial year will soon be over it's still not too late to implement some valuable tax strategies. Institute of Chartered Accountants tax counsel, Yasser El-Ansary, takes a look at some simple actions that will alleviate potential tax burdens.
The major corporate collapses that have occurred in the last few years have caused many people to stop and think about how best to achieve long-term tax-effective strategies that don't carry high levels of risk. It's important to remember that the best tax-effective strategies do much more than focus on cutting down this year's tax bill. The best strategies involve finding the right marriage between optimising long-term investment and minimising the tax-man's share of those returns.
Perhaps the best advice is to know your limits. If you're not sure about how the tax law applies in relation to certain income or gains (or deductions or losses), seek expert help from someone who does, like a registered tax agent or professional accountant. At the end of the day, knowing how to identify the issues - rather than necessarily trying to solve every one of them - is a skill in itself.
Contrary to popular belief, there are some very good tax-effective strategies and concessions out there. A few of them are listed below.
Tax tip number one: If you have children of school age, claim your education gift from the government.
There are hundreds of thousands of taxpayers who don't know what they're missing here. The government introduced the education tax refund from 1 July 2008 to provide assistance to families with school-age children in meeting the costs of schooling. For every child of primary school age, the refund is $750, for children of high school age, the refund is $1500.
The refund is only available in relation to certain types of expenditure such as laptops and Internet connections, educational software and textbooks, so check that the costs qualify before making your claim.
Tax tip number two: Crystallise capital losses if they are available.
With the worldwide slump in equity markets in the past couple of years, it's still worthwhile to consider whether or not you might be sitting on unrealised losses that are unlikely to reverse anytime soon (or ever in some cases). Crystallising unrealised losses into real losses can be achieved through selling down the relevant shareholding and buying back other stocks (that are more likely to generate better returns) with the proceeds received from the sale.
The benefit of this strategy is that it allows the taxpayer to offset the capital gains tax losses against other capital gains that may have been derived during the course of the year, say from the sale of an investment property.
Care should be exercised here though, because the Australian Taxation Office (ATO) has recently issued a warning to taxpayers about 'wash sales'. This occurs where stocks are sold and immediately bought back on the same day. Check the ATO's alert and make sure you steer clear of breaching the tax office's boundaries, otherwise significant tax penalties could be imposed.
Tax tip number three: Prepay interest while the going's still good.
Normally, prepaying 12 months' worth of interest in advance doesn't achieve much if the taxpayer's income is constant from year to year. It does, however, work quite effectively when the taxpayer's income is variable and, in particular, if their income in the current year is expected to be higher than their income in subsequent years.
But, given that our current cash rates are still (relatively) low by historical standards - and they are set to rise over coming months - it might be a good idea to consider whether prepaying 12 months' worth of interest is possible from a cash-flow perspective. If nothing else, at least it provides the taxpayer with certainty about their interest rate position for the next 12 months, and could shield them from further rate rises that are expected in 2010. Get in quickly and talk to the loan provider about this option before the Reserve Bank of Australia board meets too many more times this year.
Tax tip number four: Use a registered tax agent to legitimately delay the payment of tax.
As someone once said: "A dollar paid tomorrow is a dollar saved today." This logic holds true when it comes to tax. If someone told you it's possible to get away with not having to pay a tax liability on 31 October, and instead have access to, what is in effect, an interest-free loan from the tax office for around six months, would you do it? Of course you would.
If a taxpayer uses a registered tax agent they can generally defer the lodgement of their tax return and payment of any associated tax liability until around May, a whole 11 months after the end of the tax year. This is a significant benefit for those who find themselves in a tax-payable position.
Incidentally, the reverse of this logic applies when the ATO owes you a refund. In that situation, you're much better off getting your return in quickly to make sure you get the cash back into your pocket as soon as possible. Best strategy: stand outside the tax office at 9am on 1 July and wait for the doors to open.
Tax tip number five: Keep pouring money into super.
Even though the concessional contribution caps were halved in last year's federal budget (down to $50,000 a year for those over 50 and $25,000 a year for those under 50), diverting income into a concessionally-taxed superannuation environment is still a great idea. And, of course, doing this has the added benefit of boosting retirement income. Think of it as a two-for-one deal.
In the lead-up to the federal budget in May, keep an eye out for these potential changes.
Things 2 keep an eye out for
In the lead-up to the federal budget in May, keep an eye out for these potential changes.
- Further means-testing of tax concessions. If you earn more than $150,000 a year, watch out. The government is still focused on cutting back the cost of tax concessions that have previously been available to all taxpayers irrespective of their income levels. With a huge budget deficit to pay down, the chances of further reductions around concessions are highly likely.
- Transition-to-retirement superannuation concession. These generous rules introduced by the Howard government in 2005 may come under the microscope this year and this government may decide to limit eligibility to the concession by imposing some form of restriction on hours per week that can be worked. Get ready for changes.
- Word around Canberra is that the tax rules around superannuation are going to continue to tighten over the next few years. The government sees the current rules as being inequitable and it wants to do something about it. So, use any opportunity available to make contributions towards your own retirement income.
