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Tax Minimisation Strategies

Christmas comes but once a year, and so does a tax return which can also produce plenty of winter bounty (especially if tax minimisation rules are explored to their fullest extent). 

No matter what your situation, age or income, a little bit of End of Financial Year planning can go a long way in helping you to minimise your tax liabilities and even boost your retirement savings.

It doesn’t need to be complicated, and everyone who pays tax can benefit from reviewing and estimating their tax position PRIOR to the end of the financial year.

There are a number of legitimate strategies available which the ATO accepts as fair and reasonable ways to manage your tax obligations within the letter of the law.

To assist in navigating the complex guidelines set by the ATO, we have compiled a non-exhaustive “smart list” of legal winning formulas for individuals, property investors and small business.

Reducing tax is in everyone’s interest, and we’re here to help!

Small Business

1. Pre-pay your expenses

Pre-pay some of your expenses for the coming financial year while you’re still in this financial year. This can be things like your rent, insurance, and subscriptions to any professional associations. Up to 12 months of the coming year’s expenses can be deducted in the current tax year.

2. Take advantage of the $150,000 instant asset write-off

This enables you to immediately deduct the business assets you purchase from your assessable tax, both new and used. Unfortunately the luxury car limit still applies capping luxury vehicle depreciation at $57,581 for the 19/20 FY.

3. Review your invoicing

Review your invoicing for the current tax year and postpone some of them until the following year, if appropriate.

4. Contribute to your super

Top up your voluntary superannuation contributions. Remember, you can contribute up to $25,000 in deductible super contributions each year.

5. Review your debtors

Review your debtors and write off any unrecoverable debts. These debts will come off your income in the year in which you write them off, regardless of the year you invoiced them.

6. Review your structure

Review your business structure and personal assets, and where your investments are held. Some structures are able to take advantage of reduced or capped tax rates. For example, an eligible small business company structure is capped at a 27.5% tax rate, which can make a big difference if your business or investments are generating significant income.

7. For Trusts – Document your trust resolutions

Prior to 30 June every year, the trustees of discretionary trusts are required to make and document their resolutions on how the income from the trust is distributed to its beneficiaries.

If a valid resolution isn’t executed by this date, any default beneficiaries become entitled to the trust’s income, and are subject to tax. For any income that’s derived, but not distributed by the trust, the trust will be assessed at the highest marginal tax rate on this income.

8. Take advantage of Early Stage Investment Companies

Investing in Early Stage Investment Companies (ESIC) allows you to take advantage of generous concessions. If you invest in a new company, the ESIC concessions entitle you to a 20% tax offset on the amount you invest. ESIC investments are also free from capital gains tax for a period of 10 years. So, if you hold the investment for less than 10 years and you sell it, you won’t pay any additional tax.

9. Look into income protection

Investing in income protection not only provides peace of mind that your family is taken care of should anything happen to you, but you can also claim it as a tax deduction.

10. Take advantage of depreciation

Review your depreciation schedule for obsolete items and write them off completely.

11. Delay deriving assessable income

Where appropriate, and if it won’t adversely affect your cashflow, consider deferring some of your assessable income until after 30 June. Generally, income is considered to be earned when:

  • The payment has been received
  • The goods have been provided
  • The services have been performed

However, this is only applicable if you’re registered for GST on a cash basis. If you’re registered under accruals, see tip #3.

12. Complete a stocktake

Review your stock valuation and write off any stock that is damaged or obsolete. Complete a stocktake, and remember that stock can be valued at the lower of cost or net realisable value.

13. Keep thorough records

The better tax records you keep, the more deductions you can substantiate, and the less tax you’ll pay. Keeping good records also ensures you can accurately deal with the ATO should they enquire about your tax returns.

14. Undertake strategic tax planning with your accountant

Great accountants look at two types of tax planning: short-term and long-term tax planning. Short-term planning looks at what you can do before 30 June to minimise your tax this financial year. Long-term tax planning looks at how you can utilise your business structure to minimise tax, and the type of investments you can make to minimise tax over the long term.

Individuals

1. Contribute to your super

Top up your voluntary superannuation contributions. Remember, you can contribute up to $25,000 in deductible super contributions each year.

If your spouse’s ATI income is $37,000 or less (previously $10,800) you can top up their super by $3,000 and claim the maximum tax offset of $540.

2. Donations

Donations to eligible recipients over $2 are deductions so be sure to collect receipts. It all adds up..

3. Update your vehicle logbook/s

Updating your logbooks ensure you’re claiming the most accurate amounts for your motor vehicle expenses.

4. Document your home office expenses

Working from home this year, at least for some time, was unavoidable for a lot of people so ensure you document your hours and expenses.

There are three ways you can choose to calculate your additional running expenses:

  1. shortcut method ─ claim a rate of 80 cents per work hour for all additional running expenses
  2. fixed rate method ─ claim all of these
    1. a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture
    2. the work-related portion of your actual costs of phone and internet expenses, computer consumables, stationery
    3. the work-related portion of the decline in value of a computer, laptop or similar device
  3. actual cost method ─ claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis.

4. Know what’s on the ATO’s watchlist

Each year when it comes to tax time the ATO likes to let Australians know the things it’s keeping an eye on for that year. So, it pays to be aware of what’s on their hit list. Common items are home office expenses, motor vehicle costs, or education expenses.

5. Keep thorough records

The better tax records you keep, the more deductions you can substantiate, and the less tax you’ll pay. Store receipts somewhere safe through the year so nothing is lost, missed or forgotten.

Property Investors

  1. Borrowing, interest and prepaying expenses
  • Borrowing expenses over $100 are deductible over 5 years. Borrowing expenses include: title search fees charged by your lender, loan establishment fees, stamp duty charge on the mortgage, LMI, broker fees and valuations for loan approval. Borrowing expenses can be quite significant and definitely not something you want to overlook.
  • Prepaying deductible interest and other expenses, such as rates and insurance, up to 12 months in advance enables taxpayers to increase immediate tax deductions. This is a good strategy for those with changing employment circumstances or wanting to offset additional income such as CGT.
  • You can claim interest expenses on any borrowing used to purchase investments. The purpose of the loan determines deductibility not what asset was used by the bank as security.
  • If you have refinanced investment loans throughout the year the balance of the original borrowing costs or exit fees are fully deductible. 
  • Rates and interest expenses on borrowings to purchase land is deductible if the intention is to build an investment property on the land, even if construction has not yet commenced. 
  1. Land tax
  • Land tax costs are deductible (not capital) so ensure to claim the expense each year if applicable. 
  • If you’re a commercial or residential landlord who has reduced your tenants’ rent due to COVID-19, you may be eligible for land tax relief so be sure to check your state, eligibility and what you need to do so you don’t miss out.
  1. Depreciation
  • Depreciation is an easy one however many investors do not claim depreciation or use an inappropriate schedule that underestimates the deduction. Even your older properties can offer good deductions so ensure you have a depreciation schedule prepared by a specialist quantity surveyor so you claim every possible entitlement.
  • When conducting renovations a quantity surveyor should prepare a scrapping or demolition schedule to place a value on all items being thrown away or demolished for an immediate tax deduction. On completion of the renovation or construction a new depreciation schedule will be needed. 
  • Review your depreciation schedule for obsolete items, or items that have and opening value below $300 and write them off.
  • Consider moving items that fall below $1,000 to the low value pool for accelerated depreciation at 37.5%.
  1. CGT & Timing
  • When selling an investment property you should include all possible associated costs such as conveyance to buy and sell, stamp duty, selling agent’s fees, buyer agent’s fees, costs associated with marketing the property (for example touch-up paint, temporary furniture etc.) and the balance of borrowing costs (which are amortised over five years). 
  • Remember to consider the timing of a sale. CGT is triggered at date of contract not settlement so planning a sale in conjunction with anticipated income across a year is always a great idea where possible.
  • If an investment property is held for 12 months then a 50% capital gains tax discount applies. If an investment property is sold before 12 months then the gains are still a capital gains (but without the 50% discount… hence the importance of timing!)
  • Capital losses offset capital gains so you may wish to sell any non-performing assets with losses to offset capital gains if applicable. 
  • If you have sold a property used to operate your business you may be eligible for the 50% small businesses exemption (active asset) on top of the 50% CGT general discount. Yes, two 50% deductions.
  1. Review prior year returns

And finally, if you think you’ve missed out on something in a prior year it may not be too late. Taxpayers are entitled to amend returns lodged within the past two years so be sure to request a review of your past returns if you have any doubts!

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