As the year marches on towards 30 June, you may begin to wonder “Am I paying too much tax and is there anything I can do about it?”. Whilst the answers to these questions will vary depending on your circumstances, it is always beneficial to revisit the issues to ensure that you are maximising your financial position each year.
The process of tax planning essentially involves a review of your overall taxation affairs including investment structures, income and deductions to make sure that you are taking advantage of any possible tax savings. This process is most beneficial if it is done throughout the year, but there may still be some advantages in examining your available deductions at the end of the financial year.
Whether you are an employee or in business, some of the areas to consider include:
This continues to be a tax effective way to provide for your retirement as tax on contributions is generally limited to 15% in superannuation funds. There are differing rules governing the availability of deductions, depending on whether or not you are employed, but generally, if you are under 50 years of age, you can contribute up to $25,000 per year and obtain some tax benefit. For example, if you are self-employed on an income level of $250,000 per year, a $25,000 contribution into superannuation will save you approximately $8,000 in tax, (the difference between a 46.5% personal marginal tax rate, and the 15% super fund tax rate).
If you are an employer, you may be able to bring forward deductions for compulsory super contributions by making sure they are paid prior to 30 June.
Superannuation – extra tax on contributions for high income earners
Effective 1 July 2012, the Government introduced a new tax on superannuation contributions for high income earners. This tax is known as the “Division 293 Tax” and applies to taxpayers who earn over $300,000 in a financial year (after making a few adjustments).
As a result of this tax, contributions tax levied on concessional contributions made by high income earners is effectively increased from 15% to 30%. The tax is levied to the taxpayer in the first instance, but the taxpayer can request that his/her super fund pay the tax on his/her behalf. The assessment notice for Division 293 Tax usually issues a few months after your personal tax return has been lodged with the Tax Office.
Despite this extra tax, deductible contributions into superannuation are still considered to be highly tax effective because:
- The effective tax rate applied to contributions is still lower than the highest marginal tax rate
- Ongoing earnings derived by the contributions within the fund are likely to be subject to a maximum 15% tax rate; and
- When you retire, your superannuation savings may be able to be withdrawn tax-free.
Salary Sacrifice Arrangements
If you are employed, salary sacrifice arrangements for either superannuation or other benefits are always worthwhile considering, as in some cases the tax savings can be significant. As sacrifice arrangements are only valid for prospective wages, it is critical to review this option now to ensure that you obtain any potential benefit before 30 June.
For those of you with investment related debt, it is worthwhile to review your level of interest deductions at the end of the year. In some circumstances it may be possible to prepay interest to obtain additional tax deductions this year.
Property Investments – Capital Allowances
The most popular form of tax deductions are referred to as “non-cash deductions”. Accelerated depreciation on income-producing buildings is one such deduction. If you own either a commercial or a residential property, obtaining a quantity surveyor report to determine the amount of additional depreciation that may be claimable in relation to the buildings is a low-cost avenue to optimise your tax position.
There may be many other opportunities available to you, depending on your personal or business situation. These opportunities will not be available to everyone but may include prepaying or bringing forward business expenses.
You may also have structure specific issues (such as may occur in a company or trust) that compulsorily require some level of action by you prior to 30 June.
The key to successful tax planning is allowing yourself enough time to take advantage of available benefits. Hurried decisions in the last week of June often do not achieve the best outcome, so take the opportunity now to invest some time in your financial goals.