Dropping the ball now can be costly

Forget the Ashes, State of Origin or soccer’s World Cup qualifiers, the big challenge facing Australian taxpayers this month is to reduce their tax bill before the end of the financial year without getting the Tax Office umpire offside.Melissa Browne: maximise the money in your pocket at tax time
杭州桑拿

Each year the Australian Taxation Office (ATO) focuses on occupations with a pattern of large claims for work-related expenses. This year, the red card is out for builders and sales and marketing managers (see right). You have been warned. On a brighter note, the tax-free threshold jumps this year from $6000 to $18,200. While low-income earners benefit most, anyone with taxable income under $80,000 will receive a tax cut. If you earn less than the threshold you may not have to file a tax return.

At the same time, the federal government has clawed back many of the tax offsets, or rebates, previously available, in a bid to simplify the tax system.

Work-related expenses

The general rule at tax time is to bring forward tax-deductible expenses to the current financial year and delay income until the next financial year. Financial planner Laura Menschik, of WLM Financial Services, suggests bringing forward work-related expenses such as membership fees and subscriptions. Income-protection insurance held outside your super fund is also tax deductible, so it makes sense to pre-pay next year’s premiums and claim the full amount as a tax deduction in this year’s return. Generally speaking, all claims must be backed up with receipts or other records. But the ATO does allow individuals to claim for work-related items up to a total value of $300 without receipts. So if you buy a newspaper on the way to work and don’t have time to collect a receipt, estimate the annual cost and claim a deduction.

Advertisements for end-of-financial-year sales are everywhere, but don’t be fooled into buying a laptop before June 30 for the tax benefits. Paul Drum, CPA Australia head of policy, says employees who buy an item for income-producing purposes can write off items that cost less than $300 outright, but more expensive items must be depreciated over their effective working life. Because depreciation is worked out on a pro-rata basis, if you buy on June 30 you can only claim one-day’s depreciation.

A better option might be to salary-sacrifice that new laptop, if your employer allows it. That way, you are in effect paying for the item from pre-tax salary and reducing your income tax bill.

Different rules apply if you are self-employed or run a small business. Geoff Walker, WLM Financial Services tax specialist, says that, as of this year, you can write off business-related assets worth up to $6500 in the year you buy them. Special rules have also been introduced for motor vehicles used exclusively for business. You can write off the first $5000 in the year you buy the vehicle, plus 15 per cent of the vehicle’s remaining value. On a $20,000 car, for example, this amounts to an immediate deduction of $7250.

Health costs

One of the spending cuts announced in the May budget was the phasing out of the medical-expenses tax offset beginning July 1. ”If you want to get your teeth done or you are going to have elective surgery, you might want to bring it forward,” Drum says. This financial year anyone with taxable income above the Medicare Levy Surcharge thresholds of $84,000 for singles and $168,000 for families can claim 10 per cent of eligible out-of-pocket medical expenses in excess of $5000. This threshold increases by $1500 for each dependent child after the first. Lower-income earners can claim 20 per cent of net medical expenses above a threshold of $2120.

Investors

After another wild year on financial markets, investors may need to rebalance their portfolios, taking profits on some of their winning investments and selling poor performers. ”If you are looking at your portfolio, it’s important to be aware of the capital gains tax (CGT) implication of selling investments, including the timing,” Peter Bembrick, tax partner at HLB Mann Judd, says. If you are looking to take some profits, consider selling an investment you have held for at least 12 months to qualify for the 50 per cent CGT discount.

You can reduce your tax bill further by matching a capital gain with a loss incurred in the same financial year or carried forward from previous years. If you’re looking at new investments, Bembrick says to think about the entity or the name you hold them in. Take the example of a couple with a rental property. If it is positively geared (where the investment income exceeds your total costs, including loan interest) you should hold it in the name of the person earning less to minimise the tax paid on rental income. Negatively geared investments (where costs exceed income) might be better held by the higher-earning partner. Even better, if you hold the asset inside your super fund, investment earnings are taxed at the concessional rate of 15 per cent and capital gains are tax-free if you sell in pension phase.

It is always important to keep documentary evidence of transactions to back any items disclosed in tax returns, dating from the time of purchase. ”This is especially true for CGT because the normal five-year time limit for keeping records does not apply,” Bembrick says.

If you have a tax-deductible investment loan, you may be able to pre-pay 12 months’ interest in June and claim the full deduction in your 2013 tax return. ”Try to structure the deductible debt as interest-only so that any principal payments go first against the non-deductible debt such as your home mortgage,” Bembrick says.

Superannuation

If you are trying to top up your super, make sure you are not caught out by recent changes to contribution limits. This financial year, the maximum pre-tax concessional contribution for people over 50 has been reduced to $25,000.

This includes employer-paid super guarantee payments, salary sacrifice and personal contributions by the self-employed. If you can afford to put in a larger sum, you can make a non-concessional (after-tax) contribution of up to $150,000. Even better, under the bring-forward rule, you can contribute up to $450,000 in any three-year period.

Low-income earners are not entirely forgotten. If you make a personal-super contribution, the government will pitch in 50¢ for every dollar up to a maximum of $500 for people on incomes of $31,920 or less. For every dollar above this amount, the government co-contribution reduces until it phases out at incomes above $46,920.

If you have more than $450,000 to invest, Menschik says it may be better to put in $150,000 this financial year and wait until next month when you can contribute an extra $450,000 under the three-year rule.

There are financial penalties for exceeding your limits, so it is important to monitor the amount and type of contributions you make. Equally, you don’t want to inadvertently contribute less than you intended.

”If you send a cheque at the last moment, even if you mark it June 30, it may not be processed by your super fund until next financial year,” Menschik says. Retirees with a super pension should ensure they have withdrawn the minimum pension amount by June 30 or risk losing the tax exemption on investment earnings.

Rental property deductions

Just as the property market shows signs of life, the ATO is writing to 110,000 rental property owners to clarify exactly  what they can and can’t claim as a tax deduction.

You can claim an immediate deduction for:Interest on a loan to purchase a property, a depreciating asset such as an airconditioner or to finance renovations.  Repair and maintenance. Tenancy costs, such as the preparation of a lease agreement or eviction. You can also claim certain expenses over a number of years, such as the cost of depreciating assets, structural improvements and borrowing costs such as stamp duty and loan fees.

You can’t claim: Expenses paid by your tenants, such asutilities. Expenses related to your own use of aholiday home you rent out for part of theyear. Borrowing expenses or interest on part of your loan used for private purchases.

If you sold a property this financial year you need to include any capital gain or loss on your tax return, unless you bought it before September 20, 1985.

Crackdown on tradies

The ATO is writing to about 218,000 people it sees as ‘‘at risk’’ of making inflated claims for work-related expenses, with a focus on:Building  project managers and supervisors; Construction labourers; Sales and marketing managers.

Common mistakes are not separating private expenses from work-related ones, such as the sales manager claiming for mobile phone calls based on time spent at work rather than work-related use. Or the builder claiming  vehicle expenses for travel to and from work.

A deduction can only be claimed if the builder carries bulky goods that can’t be stored at the worksite.

The original release of this article first appeared on the website of Hangzhou Night Net.

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