Money
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Minimise your tax liability
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When it comes to paying tax, your responsibility is to pay as much as you are legally required to pay – certainly no less, but definitely no more! So while avoiding tax is an absolute no-no, minimising the amount of your taxable income and ultimately, the amount of tax you pay is a legal and financially prudent principle.
And you don’t need to be on the rich list to implement sensible tax planning actions. Here are several ideas just sitting within your existing situation that you may not have thought about:
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Couples
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Take advantage of the tax-free threshold
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You can earn up to $14,000 (2008/09) and $15,000 (2009/10) without paying tax on your income (combination of tax free threshold and low income tax offset) and the tax rate increases only gradually over the next few tax brackets. So it makes sense to transfer any substantial cash reserves into the name of the spouse with the lower earnings.
Here’s an example. Mary earns $90,000 as a company executive. Husband George has taken time out of his career to write a book and is currently not earning an income. The couple have $100,000 in a bank term deposit in joint names paying 6.5% pa, which results in assessable income of $6,500.
Mary’s salary puts her in the tax bracket of 40%. So any additional income earned, such as her half share of the bank interest ($3,250), will also be taxed at that rate. Simply by transferring their joint money in the bank into George’s name, the couple can save $1,300 in tax (not taking Medicare Levy into consideration).
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Contribution to spouse’s super rewards with rebate
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Here’s a top way to provide more financial security for your spouse and slice a chunk off your own tax bill of up to $540.
If your spouse earns less than $13,800 (including Reportable Fringe Benefits) and you make a contribution to his or her super fund, you will be in line for a tax rebate of 18% of the contribution (up to a maximum of $3,000). The rebate reduces by $0.18 for every $1 the spouse’s income exceeds $10,800, cutting out at an income of $13,800.
The full rebate of $540 is available to you if your spouse’s income is less than $10,800 and you contribute at least $3,000 to his or her super. Certainly well worthwhile for both reasons!
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Individuals and families
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Keep count of medical costs
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The tax law provides for a tax offset (rebate) of 20% where net medical costs (i.e. the cost to you less any refund from Medicare and your private health insurer) exceed $1,500 over the financial year.
These costs include hospital charges, fees for doctors, dentists and chiropractors, and a host of other therapeutic practitioners and pharmaceutical costs. However, there are some restrictions and limitations on what falls within the rules for this rebate, so it is well worthwhile talking to your tax professional. If you have spent the money on medical costs, you are certainly entitled to get the benefit of the tax concession.
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Protect your income
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You have heard it before. Your ability to earn an income is your most important asset. But are you protecting this asset like you do your home, your car or your personal possessions? If you are like most Australians the answer is ‘probably not’, which means you leave yourself and your family open to potentially disastrous financial disruption if, because of accident or illness, you can’t earn your regular pay packet.
Most money experts agree that having income protection insurance, which generally pays up to 75% of your usual income, is a must. And the premiums are tax deductible.
All the reasons in the world to have the protection and a tax incentive to boot!
You have heard it before. Your ability to earn an income is your most important asset. But are you protecting this asset like you do your home, your car or your personal possessions? If you are like most Australians the answer is ‘probably not’, which means you leave yourself and your family open to potentially disastrous financial disruption if, because of accident or illness, you can’t earn your regular pay packet.
Most money experts agree that having income protection insurance, which generally pays up to 75% of your usual income, is a must. And the premiums are tax deductible.
All the reasons in the world to have the protection and a tax incentive to boot!
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Employees
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Even little costs can add up to good tax savings
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1. Home office use
Taking work home is often unavoidable, so make sure your tax return reflects the additional cost of having a home office. The Australian Tax Office (ATO) sets a guide to reasonable home office costs each year, currently 26c an hour. Might not sound like much, but every little bit helps whittle down your tax bill.
2. Salary sacrifice
Here the principle is to reshuffle the way you are paid to gain long term benefits and reduce your taxable income in the short term. Many people opt to move a bigger chunk of their salary package into super, boosting their retirement income earnings and reducing tax at the same time by moving to a lower tax bracket. Your financial adviser will be able to help you work out whether this is an appropriate strategy in your particular circumstances.
3. Employee share option plans
Here is another one to discuss with your tax adviser. If you are entitled to participate in an employee share or option plan (“ESOP”) - which can be a very sound way to build up your long term investment portfolio – you may be eligible for a tax concession under Section 139E of the legislation.
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Property investors
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Dig a little deeper for all the deductions you are entitled to
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It is usually well worth the cost of a quantity surveyor’s report on your investment property. Not only will the cost of the report be tax deductible, but chances are it will unearth deductions which are sitting there ready to be used to reduce your taxable income.
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Investors
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Take advantage of franking credits
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There are a variety of reasons to choose one share over another. The payment of franked dividends is likely to be one. Where all else is equal, if company A pays fully franked dividends (which means 30% of the tax on that income is already paid) and company B doesn’t, company A will provide you a better tax outcome.
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Hang in there to reduce CGT
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Certain assets, including investment property and shares, attract capital gains tax when you sell them. However, if you hold them for at least one year before you sell you will be entitled to a 50% discount on the capital gain. Therefore, if you make a $100,000 capital gain on the sale of an investment property, you will only be assessed on a net capital gain of $50,000. This could translate into lower CGT than would have been the case if you had sold before the period was up.
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Remember to claim borrowing costs
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The cost of borrowing, which may include establishment fees, lender’s mortgage insurance, search and valuation fees and the like, to finance an investment are deductible. However, unless these expenses are less than $100, which is pretty unlikely these days, you have to spread the total cost over the term of the loan or 5 years, whichever is the shorter. For example, if your total borrowing costs are $2,300 and the term of the loan is 4 years, the deductible amount for each of those 4 years is $575. However, if the term of the loan is 20 years, the borrowing costs are averaged over 5 years, resulting in a deduction for each of those 5 years of $460.
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All taxpayers
Seek professional advice to make sure you are claiming every tax benefit and concession you are entitled to.
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This article has been prepared for general information and has not considered any particular person’s investment objectives, financial situation or needs. Accordingly, no recommendation (express or implied) or other information should be acted on without obtaining specific advice from an Authorised Representative of Big Sky Financial Solutions. Big Sky Financial Solutions (ABN 95 133 452 589) is a corporate authorised representative of Outlook Financial Solutions Pty Ltd (ABN 40 083 233 925, AFSL 240959).
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