A quick guide to getting your tax affairs in order for June 30, by Sally Patten.
The bell has rung and, like it or not, the dash to the finish line has started.
With just three weeks to go before the end of the financial year, sprinters have limited time to get their financial affairs in order before the taxman comes calling. There may not be many waking hours left, but inevitably there are last-minute strategies consumers can employ to reduce their tax bills, boost their savings and set themselves up for next year.
After that is done, it might be a good time to make a few financial resolutions for the new year. But first things first.
Pre-paying tax-deductible expenses by the end of June will enable you to bring forward the deduction into the 2015-16 financial year.
You might want to do this if you have made a large capital gain this year, or, happily, have received a larger-than-usual bonus, and are staring down the proverbial barrel at a hefty tax bill.
Tax-deductible expenses include interest on an investment loan and income-protection insurance.
Andrew Zbik, senior financial planner at advice firm Omniwealth, says insurers will often offer discounts of up to 10 per cent if you pre-pay 12 months of income-protection premiums, on top of which you can claim the tax deduction in the current financial year if you make the payment before June 30. You need to contact your insurer or adviser to get started on this.
Investment loans and properties
Pre-paying property investment loans or margin loans is another common trick. But there is a potential downside. In order to do this, says Peter Bembrick, a tax partner at financial services firm HLB Mann Judd, the bank will generally require you to agree on a fixed rate for the interest payment, so if interest rates fall during the year, you won't benefit.
"This means the individual would need to weigh up the benefit from getting an up-front deduction against not only having to pay the amount earlier than they normally would, but also the risk of sacrificing the saving from a rate cut," Bembrick warns.
Zbik goes a bit further, given the number of predictions that the Reserve Bank of Australia will continue to cut the cash rate. "Pre-paying interest might not make sense unless you have got a large capital gain or bonus to offset because of the potential for interest rates to fall further," he says.
Rocco Musumeci, managing partner, accounting and taxation, at advice boutique Henderson Maxwell, also suggests doing some minor repairs on an investment property before the year end. These too can be claimed against your taxable income.
But, don't get carried away. This year the Australian Taxation Office says it will be paying "close attention" to excessive interest expense claims and "incorrect approportionment" of rental income and expenses.
"If you are claiming deductions for your rental property, be sure to include all your rental income and make sure that your property was genuinely available for rent when the expense was incurred. You must also make sure to apportion any deductions to take any private use into account, and you must have records for the claims you make," says ATO assistant commissioner Graham Whyte.
Purchasing work-related items, such as professional body memberships, magazine subscriptions or tools, is a common end-of-financial year strategy, but Zbik cautions against getting carried away.
If you really need the item, it makes sense to purchase it. As Zbik notes: "Better the money in your pocket rather than an interest-free loan to the tax office."
But by the same token, buying unnecessary items makes no sense.
"Don't get into the trap of buying something you don't really need to get a tax deduction. You are not going to get rich by chasing tax deductions," Zbik says.
Pre-paying for a short course that you are planning to take in the next financial year is worth considering, says Musumeci, as long as it is related to your day job. The course fee can be deducted against this year's taxable income.
This year, it is more important than ever to ensure that you have exploited your pre-tax super contributions limits, assuming you are in a position to do so, says Bembrick.
This is because under changes unveiled in the May budget, the annual pre-tax, or concessional contributions caps, are likely to fall from July 1, 2017 to $25,000, giving savers only the remainder of this year and next year to make use of the current higher limits.
In 2015-16 and 2017-17, individuals can inject up to $30,000 into super if they are under the age of 50, or $35,000 if they are 50 and over.
"You should maximise your contributions this year in particular, given the budget changes," Bembrick says.
Contributions can be made in two ways. The self-employed are able to make a lump-sum contribution and claim a 15 per cent tax deduction. If you are an employee you will need to contact the payroll office and see if you can make a contribution by salary sacrificing. Assuming you earn less than $300,000 a year, you will pay just 15 per cent on the amount you pump into your super account, while at the same time boosting your retirement savings.
"You might want your full pay to go into your super fund, if you can afford it," says Musumeci.
But, warns Musumeci, you will need to ensure that the money actually hits your super account before June 30. If it doesn't, it will throw out your plans to maximise the higher contributions limits while they still last.
Elsewhere on the super front, if you earn less than $50,454, you will be eligible for a government co-contribution payment. Under this scheme, if you make an after-tax contribution of $1000 into super before June 30 the government will make a contribution of up to $500. Happily, you don't need to apply. All you need to do is to make the injection and the money from the government will turn up in your super account automatically.
If your spouse earns less than $13,800 a year, you could bolster their account through a spouse contribution. Under this scheme, if you place $3000 into their super account before the end of the financial year you will be eligible for a tax offset of up to $540.
One tip worth remembering is that from July you will be able to hand over up to 85 per cent of your pre-tax super contributions made in the current financial year to your spouse's account, as long as your partner is under 65 years of age and not yet retired. According to Graeme Colley of the SMSF Association, this can help provide super benefits earlier by splitting contributions to the older spouse and pay for insurance premiums for a non-working or low-income spouse.
Still on the super front, Musumeci points out that savers should avoid exceeding the annual pre-tax concession limits of $30,000 or $35,000, depending on age. Employees should be able to check how much they have put into super so far in 2015-16 by contacting their payroll office or retirement fund.
"You might need to make an adjustment," says the Henderson Maxwell partner, such as making no super contribution from your last pay packet for the year.
Self-managed super funds
Self-managed super fund members who are also self-employed can employ a rather clumsily worded strategy called a contributions reserving strategy. It allows them to double the pre-tax contribution limit that applies to the current financial year.
The member effectively brings forward the tax deduction from the following financial year to the current year and so is able to claim two years of tax deductible contributions without breaching the rules.
It is a neat strategy for individuals who have realised a particularly large capital gain in the current year. But remember, you must be eligible to make a personal contribution in order to use the strategy.
Musumeci adds that self-managed super fund members should have a checklist of items to go through before the end of June, such as ensuring that their trust deed is up to date, the investment strategy is relevant, and binding death-benefit nominations are current.
Ensure that, if you have a full super pension, you have met the minimum drawdown rules this year. Depending on your age you need to withdraw between 5 per cent and 14 per cent of your pension savings each year.
If you are under 65 and have a transition-to-retirement pension, you must withdraw a minimum of 4 per cent and a maximum of 10 per cent from your account in 2015-16.
There are two key strategies around shares. The first is that, particularly if you have made a large capital gain this year, you might like to realise a loss by selling shares whose value has plunged and you think is unlikely to recover.
"If you have got a particularly large capital gain and have got a ‘dog stock’, this would be the time to cut your losses," Zbik says.
Alternatively, if you are harbouring losses on a stock in your personal name but think it is worth holding on to, you could "contribute" that stock as an "in specie" transfer into a self-managed super fund, or indeed some retail funds. This will enable you to maintain exposure to the stock through your super fund, but realise a capital loss in the current financial year in your personal name. The loss can be offset against this year's tax, or be carried forward indefinitely until a time when you sell an asset and make a capital gain.
Experts add it is a strategy that makes particular sense if you are intending to retire within the next five years, because the stock will become capital gains tax free when it is transferred to a private pension.
It is the time of the year to think about making charitable donations, which can be offset against your tax. But, Musumeci cautions, make sure first that your chosen charity actually has charitable status. The ATO website has a list of eligible charities.
Sally Patten is a personal finance columnist for Fairfax Media. This article was first published by Fairfax on June 8, 2016.