It is no use getting to the accountant in September and asking them to save you tax. While they can claim all you’re entitled to, they can’t take advantage of things you could have done to reduce your tax.
There are a number of aspects to tax planning, including:
• Deferral of income
• Splitting of income to take advantage of lower tax rates and tax offsets
• Bringing forward expenses to the current tax year
We have broken tax planning down into 3 categories.
Tax planning for everyone
• Ensure you maintain appropriate receipts as in most cases if you can’t provide proof then you can’t claim.
• If you exceed certain limits you may have to pay the Medicare levy surcharge. Having appropriate private health insurance will ensure you avoid the surcharge and receive the rebate.
• Salary sacrificing into super may reduce your overall tax liability, but be sure not to go over your contribution limits.
• Speak to your employer to see if they provide any salary packaging options and then speak to your adviser or accountant to see if it can benefit you.
• If you contribute super for your non-working spouse you may be entitled to a tax rebate.
• Claim for medical expenses over $1500.
• Borrowing to invest can be incorporated into your overall plan and may provide significant tax savings.
• A lump sum or regular debt recycling strategy may be a worthwhile long term strategy to reduce your taxable income and build wealth.
• Bringing forward personal expenses, such as paying for your income protection insurance annually in June or pre-paying interest on investment loans may significantly reduce your income for the current tax year and in turn reduce your tax payable.
• Managing capital gains by either deferring the gain by selling in the next financial year or by offsetting the gain through the realisation of capital losses.
Tax planning for property investors
• Ensure that you are claiming the maximum depreciation allowances for your property. If you don’t have a depreciation schedule for your investment property there are many firms that specialise in this.
o For example, depreciation on your building is 2.5% per year. If the value of your building is $200,000 that is a tax deduction of $5000.
• Carry out repairs to your investment property before the end of financial year and claim the deduction in this year’s tax return.
Tax planning for businesses
• Deferral of income for businesses can significantly reduce your tax bill if you are on cash basis. By invoicing on 1 July instead of middle to late June can have a substantial impact! Be aware, however, that this will also impact your cash flow.
• Splitting of income between family members can be a very useful strategy to reduce tax. The object is to direct income to members of the family who are on a lower marginal tax rate. This is most effective through the use of a family trust where distribution to children can be made. If this year’s federal budget is implemented this will be the last chance to take advantage of distributions to children where the children receive the low income tax offset of $1500. For a family with 3 children, and with the new changes, you could potentially be paying $4,649.54 more tax than you are currently paying. This is certainly an extra tax on small business and worth the call to your local member to voice your disapproval.
• Pay employee super contributions before 30 June to get the tax deduction.
• Realise assessable losses by scrapping obsolete plant and equipment.
• Write off bad debts by June 30.
• Pre-pay company expenses up to 12 months ahead.