End of Year Income and Tax Planning Individuals - June 2013

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1 The tips below will assist you in your end of year income and tax planning strategies. These tips are not meant to be exhaustive nor applicable to each and every individual taxpayer. Further you should contact our office directly to discuss the various impacts which your decisions may have on reportable income given these decisions may affect cash flow, banks, ATO and other interested parties. Tip 1 - Medical Expenses The government intends to phase out the medical rebate by June If a taxpayer does not claim the medical rebate in any one year, the taxpayer will not be eligible to claim the medical rebate in a subsequent year. This could mean that it could be beneficial to ensure your medical expenses, for the year ending 30 June 2013, exceed the applicable levels particularly if you are likely to incur additional costs over the next month or so. For the year ending 30 June 2013, a 20% offset is available for net medical expenditure over $2,120 for taxpayers with adjusted taxable incomes below the Medicare levy surcharge thresholds ($84,000 for singles and $168,000 for families). Taxpayers with adjusted income above the relevant threshold may claim a 10% offset for net medical expenditure above $5,000. Consider aggregating family medical costs and ensure the spouse with a taxable income that will recover the rebate pays for the medical costs during the financial year. You should also consider bringing forward health related costs before the end of the year. If towards the end of the current tax year, it becomes apparent that the minimum cap will not be reached, consideration could be given to deferring the payment into the following financial year. Tip 2 - Uses of Low Rebates and Tax Rates Planning should be undertaken at the beginning of a tax year to ensure investment income is derived by a low income recipient. As the tax free threshold has increased since 2012 (the tax free amount of $18,200 applies to the year ending 30 June 2013), taxpayers will be further encouraged to continue to make arrangements to split income with their spouse who may have minimal or no assessable income. Tip 3 - Accelerate Tax Deductible Expenditure The tax laws only allow prepayment of tax deductions up to twelve (12) months in advance. You should consider prepaying various subscriptions, donations, interest and other costs before the end of the year to effectively bring forward the tax benefit of the payment. Page 1 of 5

2 Tip 4 - Tax Schemes Beware of making last minute decisions into alleged tax minimisation schemes! Both ASIC and the ATO issue warnings about taxpayers investing into a variety of schemes promoted as year-end tax saving arrangements. Unless the promoter can provide an ATO Product Ruling then taxpayers should be wary when undertaking their investment decisions. Tip 5 - Deferring Taxable Income There is an incentive to defer taxable income into the next financial tax year if you are seeking to defer the actual payment of income tax on that income for a further twelve (12) months. However, the availability of this strategy will depend on your personal situation. Interest income derived from deposits will generally be assessable when received (or when entitled to be received). You should consider planning for the next financial year when you are investing in term deposits and take care in your selection of the date on which the interest is payable by the financial institution. Please be aware the ATO is provided with information from Financial Institutions and match such available information to the actual income tax return as lodged. Tip 6 - Work Related Expenditure The following expenses should be considered as useful strategies for reducing taxable income before the end of the financial year: - Income protection insurance - Travelling costs - Subscriptions - Home office costs (if you use an area of your residence for work activities) (Note that you could be subject to capital gains tax when you sell the property please contact us if you require specific tax advice on this complex area) - Self education expenses (currently there is no cap however, from 1 July 2014 it is proposed that the cap will be at $2,000 per year) - Motor vehicle expenses (ensure records are maintained for business use) The ATO have been issuing guidance advice to certain taxpayers as part of an education process as well as warning taxpayers on excessive and inappropriate work related claims. Please ensure you consider your individual circumstances before making such claims or contact our office for specific advice. Page 2 of 5

3 Tip 7 - Tax Deductible (Concessional) Superannuation If you are an employee, then you should ensure you have a salary sacrifice arrangement for your remuneration in place before the date of payment. For self employed taxpayers to claim a tax deduction for superannuation in the current year, the contribution amount must be paid before the end of the year. Please note the ATO recently won a legal case against a taxpayer who made a payment on 30 June but the bank processed the amount after the date even noting the transaction should be 30 June. The lesson is to ensure the contribution is transacted before end of the year. The current annual deductible contribution for all individual taxpayers is $25,000 (i.e. the total of all superannuation contributions from all employers). The current Government budget announcement allows for an increase to the deductible amount for some individual taxpayers however, such measures have not yet been passed into legislation. If you are considering establishing your own Self Managed Superannuation Fund ( SMSF ), please contact our office. Tip 8 - Superannuation Co-Contribution Taxpayers who derive less than $46,920 in assessable income who make a non concessional superannuation contribution can receive a Government co-contribution of up to $500. The maximum co-contribution of $500 is available to individuals on total income of $31,920 or less and a pro-rated co-contribution applies if income is between $31,921 and $46,920. Tip 9 - Excess Superannuation Contributions Tax If contributions (concessional and non concessional) actually received by your fund during the financial year exceed the cap limit, then an excess tax is incurred. We recommend you check the amount of actual contributions received by your fund before undertaking a final year end contribution to avoid the excess tax. Tip 10 - Superannuation Split with Spouse This strategy is best applied where the taxpayer s spouse is older or where the taxpayer has an accumulation balance that is likely to exceed $500,000 over the next few years. The splitting of a taxpayer contribution with a spouse has no additional income tax benefit. The strategy simply provides for the opportunity to have earlier access to the accumulated balance and to provide two (2) taxpayer thresholds below $500,000. Page 3 of 5

4 Tip 11 - Transition to Retirement If you are over 55 and have a superannuation accumulation balance, then you should ask your advisor to discuss the opportunity to convert your member balance into a transition to retirement income stream pension (TRIS). This strategy could save tax on your fund earnings and allow access to a maximum amount of pension each year which will supplement your existing earnings from other sources. Tip 12 - Rental Property - Interest Expense A line of credit is often utilised by investors of rental properties as a borrower may draw down funds to an agreed credit limit. Where a line of credit is used for both income producing and personal purposes, interest is only deductible to the extent that the borrowing was used for income producing purposes. Accordingly, the interest expense must be apportioned. However, a feature of a line of credit is a taxpayer can elect to split the facility into sub accounts, thereby quarantining fully deductible loans in a sub account. This will ensure interest on sub accounts that were wholly used for income producing purposes is fully deductible. Tip 13 - Rental Property - Repairs and Maintenance The distinction between what is a repair and expenditure which constitutes capital is vitally important due to the different income tax treatment that will apply to each item. This is an issue that the ATO regularly focuses attention in their review of investor tax returns. Generally, the cost of a repair is to remedy a defect, damage to, or deterioration of a depreciating property asset. Such costs are generally fully deductible in the year the expense is incurred. The costs of capital works are generally not deductible but may be eligible for a deduction over a period of time as a building write off. If you are considering incurring expenditure on your rental property before the end of the year, please contact our office if you wish to clarify whether the cost is likely to be considered a repair or capital. Page 4 of 5

5 Tip 14 - Capital Gains and Losses A capital loss that is realised during the current year can only be offset by a capital gain. If there are no capital gains in the current year, the loss can be carried forward and absorbed by capital gains in future years. Realised capital gains however, are taxed at marginal rates of tax (after any CGT concessions). Therefore, if you have already realised a capital gain in the current year (e.g. from the sale of shares or property), and have unrealised capital losses associated with other investments, you should consider a strategy to realise the capital loss before the end of the year. Tip 15 - Appoint a Tax Agent Consider appointing a tax agent if you desire to legitimately defer the filing of your tax return (beyond the 31 October 2013 deadline) and the tax due as a result of the lodgement. Page 5 of 5