With the end of financial year (EOFY) fast approaching, now is the time to be looking at your taxation planning. Here are some tax planning strategies that you may want to consider:
1. Make a contribution to your superannuation
This financial year, there are new rules about who can claim a deduction for personal (after tax) contributions to super.
In the past, you could only claim the deduction if you earned less than 10% of your income from employment. But from 1 July 2017, deductions for personal contributions can also be claimed by employees.
How it works
If you contribute some of your after-tax income or savings into super, you may be eligible to claim a tax deduction. This means you’ll reduce your taxable income for this financial year – and potentially pay less tax. And at the same time, you’ll be boosting your super balance.
The contribution is generally taxed at up to 15% in the fund (or up to 30% if a higher income earner). Depending on your circumstances, this is potentially a lower rate than your marginal tax rate, which could be up to 47% (including the Medicare Levy) – which could save you up to 32%.
Once you’ve made the contribution to your super, you need to send a valid ‘Notice of Intent’ to your super fund, and receive an acknowledgement from them, before you complete your tax return, start a pension, or withdraw or rollover the money.
Keep in mind that personal deductible contributions count towards the concessional contribution cap, which is $25,000 for this 2017/18 financial year (which also includes all employer contributions, including Superannuation Guarantee and salary sacrifice). Penalties may apply if you exceed the cap – so it’s important that you stay within the limits.
Adding to your super is done by making an after-tax super contribution and claim a tax reduction. The tax deductible super contribution limit is $25,ooo for all individuals under age 75. Consider making the maximum deductible super contribution this year before 30 June 2018.
The benefits may include:
- Increasing your retirement savings
- Paying less tax on your income
- Superannuation Contributions are taxed between 15% to 30% compared to personal income tax rates between 34.5 and 47%
2. Get more from your salary or a bonus
If you’re an employee, you may be able to arrange for your employer to direct some of your pre-tax salary or a bonus into your super as a ‘salary sacrifice’ contribution.
Again, you’ll potentially pay less tax on this money than if you received it as take-home pay – generally 15% for those earning under $250,000 pa, compared with up to 47% (including Medicare Levy).
How it works
Ask your employer if they offer salary sacrifice. If they do, it can be a great way to help grow your super tax-effectively. Remember salary sacrifice contributions count towards your concessional contribution cap, along with any superannuation guarantee contributions from your employer and personal deductible contributions.
3. Convert your savings into super savings
Another way to invest more in your super is with some of your after-tax income or savings, by making a personal non-concessional contribution.
Although these contributions don’t reduce your taxable income for the year, you can still benefit from the low tax rate of up to 15% that’s paid in super on investment earnings. This tax rate may be lower than what you’d pay if you held the money in other investments outside super.
How it works
Before you consider this strategy, make sure you’ll stay under the non-concessional contribution cap, which in 2018 is $100,000 – or up to $300,000 if you meet certain conditions. That’s because after-tax contributions count as non-concessional contributions – and penalties apply if you exceed the cap.
Also, to use this strategy, your total super balance must have been under $1.6 million on 30 June 2017.
Remember, once you’ve put any money into your super fund, you won’t be able to access it until you reach preservation age or meet other ‘conditions of release’. For more information, visit the ATO website at ato.gov.au.
4. Get a super top-up from the Government
If you earn less than $51,813 in the 2017/18 financial year, and at least 10% is from your job or a business, you may want to consider making an after-tax super contribution. If you do, the Government may make a co-contribution of up to $500 into your super account.
How it works
The maximum co-contribution is available if you contribute $1,000 and earn $36,813 pa or less. You may receive a lower amount if you contribute less than $1,000 and/or earn between $36,814 and $51,812 pa.
Be aware that earnings include assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions also apply – speak to your financial planner to find out more.
5. Boost your spouse’s super and reduce your tax
If your spouse is not working or earns a low income, you may want to consider making an after-tax contribution into their super account. This strategy could potentially benefit you both: your spouse’s super account gets a boost, and you may qualify for a tax offset of up to $540.
How it works
The income thresholds increased on 1 July 2017. So now, you may be able to get the full offset if you contribute $3,000 and your spouse earns $37,000 or less pa (including their assessable income, reportable fringe benefits and reportable employer super contributions).
A lower tax offset may be available if you contribute less than $3,000, or your spouse earns between $37,001 and $39,999 pa.
6. Additional tax on super contributions by high income earners
On 1 July 2017 the income threshold at which the additional 15% tax is payable on super contributions has reduced from $300,000 to $250,000 pa. Where you are required to pay this additional tax, making super contributions within the cap is still a tax effective strategy.
With super contributions taxed at a maximum of 30% and investment earnings in super taxed at a maximum of 15%, both these tax points are more favorable when compared to the highest marginal tax rate of 47%.
7. Other things to consider
Investment Property
- If you have sold an investment property or shares that were purchased after 20 September 1985, then you have to pay Capital Gains Tax on the profit of the sale. If the investment was held for more than 12 months, you only pay tax on half the gain.
- Do you have a depreciation schedule for your investment property? If not – get one prepared as you could be missing out on valuable tax deductions
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If you have an investment property you can prepay interest for the next 12 months and associated running costs of the property, and receive a full tax deduction this year. Consider your circumstances and if this is a useful strategy.
Motor Vehicles used for work
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Do you use your personal car for work – and travel more than 5000 kms per year? Start a log book prior to 30 June to be able to use this method.
Income Protection Insurance
- Don’t have income protection but have a family, home loans and personal investment loans ? You may want to get income protection insurance prior to June 30 and claim the premiums this tax year.
Medicare
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Consider your circumstances around the Medicare levy surcharge and having or not having health insurance.
Superannuation
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Are you salary sacrificing to Superannuation as a tax minimisation strategy? The Concessional super contributions cap of $25,000 applies to payments received by the fund in the 2018 tax year. So make sure you don’t exceed the cap as this includes your employer’s SG payments
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Check your superfund statements and adjust contributions before 30 June if required. If unsure what amounts you can contribute please ask us.
8. Small Business Owners
- Equipment purchased with a value less than $20,000 (ex GST) attracts an immediate deduction in 2018 as opposed to being depreciated. So if business equipment is needed, it might be worth bringing forward purchases prior June 30 due to the tax savings.
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If a prepayment of 2019 expenses satisfies the “12 Month Rule”, pay before June 30 2018 to receive a full deduction. Examples could be:
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Office Rent
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Equipment leases
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Interest payments
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Business trips planned after June 30 2018.
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Training Courses.
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Write off Bad Debts.
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Bring forward maintenance & repairs.
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Ensure your super contributions are paid before 30 June (They must be received by the fund to be tax deductible).
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Review your asset register and claim any items no longer in use and not yet fully depreciated.
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If you are registered for GST, equipment purchases made before 30 June can claim a GST refund in your June BAS return. This is a great way to front load a cash injection.
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Manage timing of a CGT event, tax on capital gains is applied to contract date not settlement. If possible manage the contract date to 1 July 2018 if this improves your tax position.
Need advice?
You’ll need to meet certain eligibility conditions before benefitting from any of these strategies. If you’re thinking about investing more in super before 30 June, please get in touch.
We can help you decide which strategies are appropriate for you.
