It’s a good time to check what may have changed in their financial situation over the year and what their current needs are.
There are a number of activities that are straightforward and will help minimise tax.
The usual approach is to defer any income until next financial year, but claim expenses this financial year, so that as much tax as possible is deferred for another year.
However, action must be taken before the end of this financial year if it is to be taken into account by the Australian Taxation Office (ATO).
One very simple tip is to lodge tax returns early if a refund is expected. Not only is the refund received sooner, but it helps reduce ongoing quarterly tax instalment payments.
For those looking for more help, the main tax planning methods for personal tax liabilities are superannuation and structuring the ownership of assets, but these should be implemented before the end of the tax year.
Other tax planning strategies involve deferring the taxation of income, advancing the deductibility of expenses and diverting income to low-rate taxpayers.
Some useful tactics include:
1. Maximise deductible superannuation contributions
Superannuation remains the most tax-effective investment vehicle, despite continued government tinkering.
Therefore, it makes sense for investors to contribute as much money as possible (and they are comfortable locking away until retirement) within the contribution caps to take advantage of the 15 per cent tax rate.
However, before making any additional payments, people should check to see how much has been contributed so far this year, and how much will automatically be added before 30 June 2011 from salaries or bonuses, or other lump sums. Anything over the maximum concessional (tax-deductible) contribution of $50,000 a year for those over 50 and $25,000 a year for those under 50 is likely to be dealt with harshly by the ATO. In some instances last year, people faced tax penalties of up to 93 per cent.
Also, don’t forget contributions on behalf of a spouse – this can double the contribution for a couple under 50 years old from $25,000 to $50,000.
Make sure the correct documentation is received from the super fund to substantiate claiming the deduction – the ATO is very strict on this point.
2. Income splitting
Married couples can split income with their spouse to reduce the tax levied, if their spouse is in a lower tax bracket. This strategy is a particularly good one for small business owners who can more easily specify how income is paid; executives in larger corporations may find it difficult to set up suitable arrangements.
Small business owners considering such a strategy should be careful of the personal services income (PSI) rules that apply to companies with only one or two clients. People in this situation should look closely at the various tests available under the PSI rules, otherwise attempting to split income with their spouse may cause problems with the ATO.
However, if income splitting can be used, it can result in significant tax savings. For instance, investments can be made in the lower income spouse’s name (except where the investment is negatively geared).
Discretionary family trusts can offer a great deal of flexibility in how investments are made, although there is a high level of uncertainty around family trusts at the moment, which is currently under government consideration.
Be aware of negative gearing, however, as attempting to split income may result in the tax saving from losses being reduced where the spouse is on a much lower tax rate, or where using trusts the tax losses can become trapped in a trust.
3. Review deductible versus non-deductible debt
If a choice needs to be made, the aim should be to always pay down non-deductible debt before deductible debt, where possible.
For instance, those who have obtained interest-only loans for investment purposes may prefer to retain this debt compared to, say, paying off a mortgage.
It can be beneficial to restructure debt for a number of reasons, but beware of any such restructuring that is purely tax driven as the ATO could apply anti-avoidance legislation.
4.Prepay deductible expenses
Any expenses that are deductible at 30 June 2011 for up to 12 months should be paid in advance, allowing the deduction to be claimed immediately.
For instance:
. Individuals who are not in business can claim up to 12 months of prepaid expenses, for example, interest on investment loans and management fees.
. Those who have invested in arrangements that have ATO product rulings, for example, afforestation/agricultural project (although it’s never a good idea to invest simply to get a tax deduction).
5. Realise capital losses before 30 June
If taxable capital gains have been realised during the year on investment sales, or are expected to be realised before 30 June, it is worthwhile reviewing clients’ portfolios for investments with unrealised capital losses. By selling these investments during this tax year, they may realise capital losses that can be used to offset the capital gains.
Be careful of selling and immediately buying back the same stock without any significant market risk or any variation that has the same effect. The ATO refers to these as wash sales and has specifically said it may deny access to any capital losses in these circumstances.
Finally, don’t forget to do some tax planning for next year – the earlier strategies are put in place, the better.
Written by: Peter Bembrick, HLB Mann Judd Sydney tax partner
