Are you minimising your personal tax?
Now’s the time to review what strategies you can use to minimise your tax before 30 June 2020.
Saving tax means you can use it to:
- Reduce your home loan
- Put it towards a holiday
- Save for a deposit on an investment property; or
- Upgrade your car
Small changes today could potentially add up to saving you thousands over 10, 20 and 30 years, not to mention contributing to your wealth creation.
There is no point spending money to get a tax deduction unless it’s going to result in something useful for you.
We have compiled the following key tax-saving strategies for you to think about and action before 30 June.
While you might not be flush with cash now and able to put large amounts into superannuation, it’s important that you are aware of what is possible to maximise your super balance and possibly reduce your tax at the same time.
Deductible Super Cap of $25,000 for everyone
The tax deductible super contribution limit (or “cap”) is $25,000 for all individuals under age 75. Individuals need to pass a work test if over 65. To save tax, consider making a contribution up to the maximum before 30 June 2020. The advantage of this strategy is that superannuation contributions are taxed at between 15% to 30% compared to typical personal income tax rates of between 34.5% and 47%.
Salary sacrifice your salary to super
If your annual income is $37,000 or more, salary sacrifice can be a great way to boost your superannuation and pay less tax. By putting pre-tax salary into super rather than having it taxed as normal income at your marginal rate you may save tax. This can be especially beneficial for employees nearing their retirement age.
Get a depreciation report
If you have an investment property, a Property Depreciation Report (prepared by a Quantity Surveyor) will allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself.
The cost of this report is generally recouped several times over by the tax savings in the first year of property ownership.
Keep a motor vehicle log book
Ensure that you have kept an accurate and complete Motor Vehicle Log Book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2020. You should make a record of your odometer reading as at 30 June 2020 and keep all receipts/invoices for your motor vehicle expenses. Once prepared, a log book can generally be used for a 5-year period.
Carry forward super contributions
Carry-forward contributions are not a new type of contribution, they are simply new rules that allow super fund members to use any of their unused concessional contributions limit (or cap) on a rolling basis for five years.
This means if you don’t use the full amount of your concessional contribution cap ($25,000 in both 2019 and 2020), you can carry-forward the unused amount and take advantage of it up to five years later.
Carry-forward contributions are calculated on a rolling basis over five years, but any amount not used after five years expires. These carry-forward rules only relate to concessional contributions into super, not non-concessional contributions, as they have different caps.
Additional tax on super contributions for high income earners
The income threshold at which the additional 15% (‘Division 293’) tax is payable on super is $250,000 per annum. Where you are required to pay this additional tax, making super contributions within the cap is still a tax effective strategy.
With super contributions taxed at a maximum of 30% and investment earnings in super taxed at a maximum of 15%, both these tax points are more favourable when compared to the highest marginal tax rate of 47% (including the Medicare levy).
Government co-contribution to your super
If you are on a lower income and earn at least 10% of your income from employment or carrying on a business and make a “non-concessional contribution” to super, you may be eligible for a Government co-contribution of up to $500.
In 2020, the maximum co-contribution is available if you contribute $1,000 and earn $38,564 or less. A lower amount may be received if you contribute less than $1,000 and/or earn between $38,564 and $53,564.
Prepay expenses and interest
Expenses relating to investment activities can be prepaid before 30 June 2020. You can prepay up to 12 months of interest before 30 June on a loan for a property or share investment and claim a tax deduction this financial year. Also, other expenses in relation to your investments can be prepaid before 30 June, including rental property repairs, memberships, subscriptions, and journals.
Possibly your greatest financial asset is your ability to earn an income. Income Protection Insurance generally replaces up to 75% of your salary if you are unable to work due to sickness or an accident. The insurance premium is normally tax deductible, plus you get the benefit of protecting your family’s lifestyle if you cannot work due to sickness or an accident.
It’s a small price to pay for peace of mind. Like rental property interest, income protection premiums can also be pre-paid for 12 months to increase your deductions.
Defer investment income and capital gains
If practical, arrange for the receipt of Investment Income (e.g. interest on term deposits) and the Contract Date for the sale of Capital Gains assets, to occur AFTER 30 June 2020.
Realise capital losses
Tax is normally payable on any capital gains. You should consider selling any non-performing investments you hold before 30 June to crystallise a capital loss and reduce or even eliminate any potential capital gains tax liability. Unused capital losses can be carried forward to offset future capital gains.
The Contract Date (not the Settlement Date) is generally the key date for working out when a sale or purchase occurred.
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from your financial adviser and seek tax advice from your accountants at PK Chartered Accountants. Information is current at the date of issue and may change.
Talk to us TODAY before the 30 June 2020 deadline for assistance to reduce your tax.