The end of next week marks the end of the financial year, meaning that you don’t have long to act to ensure that you pay the optimal amount of tax. Here are our top 7 top tax tips.
- Have you been working from home during the pandemic?
If you are one of the millions of Australians who have been working from home during the pandemic, you can access a temporary ‘short-cut’ method to claim home office expenses as a tax deduction. You don’t have to use this method (you can choose whichever method gives you the best outcome), but it is very simple and requires almost no documentation.
For the period from 1 July 2020 to 30 June 2021, you can claim a deduction of 80 cents per hour for each hour worked at home. This covers all work from home expenses such as phone expenses, internet expenses, electricity and gas for heating, cooling and lighting, and the decline in value (depreciation) of equipment and furniture.
You don’t need any expense records, nor do you need to have a dedicated work area to use this method. All you require is a timesheet or diary that shows the hours worked.
For example, if you worked two days a week from home (say of 8 hours each), you would be eligible for a tax deduction of $12.80 per week. Over 48 weeks, this provides a tax deduction of $614.
If you use the ‘short-cut’ method, you can’t claim any other expenses for working from home.
There are two other methods to calculate home office expenses. Firstly, a fixed rate method of 52 cents per hour for each hour worked from home. This covers running expenses (depreciation of furniture, electricity and repairs), but not all work from home expenses such as internet and stationery expenses (which are separately claimed). To access this method, you need to have a dedicated work area such as a home office, produce receipts, and maintain a diary over a representative four-week period.
The final method is the ‘actual cost’ method for expenses such as electricity, phone, internet, cleaning, computer consumables, stationery, depreciation of office furniture and depreciation of computers or phones. Childcare, mortgage interest, rates, water or tea or coffee expenses are not eligible. You will need receipts, a record of hours worked and a diary of a representative four week period, and follow the ATO’s rules for apportioning expenses between work-related and home usage.
- Are you a business that needs some equipment to expand or grow?
As part of its response to Covid-19, the Government has expanded the instant asset write-off scheme, which allows businesses to claim a 100% tax deduction upfront on the purchase of equipment. Businesses with an annual turnover of up to $500m are eligible and the equipment threshold is $150,000.
Some important points to note:
The threshold excludes GST, so you can potentially purchase an item that costs up to $165,000 (including GST);
Can be new or second-hand equipment;
A car limit applies to passenger vehicles (up to $59,136);
If the equipment is for both business and private use, you can only claim the business portion,
It is available on a per item basis and can apply to multiple assets. Potentially, you could spend $300,000 purchasing 2 units of the same item each costing $150,000 provided they are separately invoiced.
The main caveat is that you must have sufficient taxable income to apply the tax deduction, and of course, the cash flow.
- Can you bring forward or accelerate expenses, defer revenue?
If your cash flow is sound and you have a taxable income (that is, you will be paying tax this financial year), you could consider bringing forward expenses and/or deferring revenue. Essentially, a tax deferral strategy where you shift the burden from paying tax this financial year to next year.
Pre-paying interest on loans (for example, a business loan, investor home loan or margin loan) is a classic example. Technically, you can pre-pay interest for up to 13 months in advance and claim the interest expense as a tax deduction in the current tax year.
Taking out an annual subscription to an investment newsletter or professional journal, which will generally be tax deductible, is another example. You can also consider accelerating the payment of other general expenses.
And please don’t forget about our charities, many of whom have found that Covid-19 has led to an increase in demand for their services. Donations are, of course, tax deductible, meaning that for high-rate taxpayers, the Government pays almost half. (If your marginal tax rate is 47%, a donation of $100 only costs $53). Get your donations in by 30 June!
If you are operating a business or are a contractor, you may want to push back invoicing customers so that you defer the receipt of revenue to the 21/22 tax year.
- Can you get a tax offset for helping grow your partner’s super?
If your spouse earns less than $37,000 and you make a spouse super contribution of up to $3,000, you can claim a personal tax offset of 18% of the contribution, up to a maximum of $540. Tax offsets are the same as tax rebates – a dollar for dollar saving in how much tax you will pay.
The offset phases out when your spouse earns $40,000 or more. Income includes assessable income, reportable fringe benefits and reportable employer super contributions such as salary sacrifice. And, you cannot claim the offset if your spouse exceeded their non-concessional super cap of $100,000 or their total super balance was more than $1.6 million.
- Can you claim a tax deduction for making a personal super contribution?
There are two caps that limit how much you can contribute into super. A cap on concessional (or pre-tax) contributions of $25,000 and a cap on non-concessional (or post tax) contributions of $100,000.
Concessional contributions include your employer’s compulsory super guarantee contribution of 9.5% and any salary sacrifice contributions you make. There is also a third form which is a personal contribution you make and claim a tax deduction for. Previously, this was only available to the self-employed under the ‘10% rule’, but this rule has been scrapped and anyone can now claim this tax deduction.
There are two important caveats. Firstly, you must be eligible to make a super contribution. If you are under 67, or aged between 67 and 74 and pass the work test, you will qualify (there are some particular rules for the under 18s). Secondly, you aren’t allowed to exceed the $25,000 cap on concessional contributions.
Let’s take an example. Tom is 45 and earning a gross salary of $100,000. His employer contributes $9,500 to his super, and he has elected to salary sacrifice a further $5,000. Potentially, prior to 30 June, Tom can contribute a further $10,500 to super and claim this amount as a tax deduction, which he does when he completes his 20/21 tax return. He will also need to notify his super fund and complete a ‘Notice of intent to claim a tax deduction for a personal super contribution’.
- Can you get the Government to chip in and boost your partner’s or kid’s super?
There aren’t too many free handouts from Government. The government super co-contribution remains one of the few that is available. If eligible, the Government will contribute up to $500 if a personal (non-concessional) super contribution of $1,000 is made.
The Government matches on a 50% basis. This means that for every dollar of personal contribution made, the Government makes a co-contribution of $0.50, up to an overall maximum contribution by the Government of $500.
To be eligible, there are 3 tests. The person’s taxable income must be under $39,837 (it starts to phase out from this level, cutting out completely at $54,837), they must be under 71 at the end of the year, and critically, at least 10% of their income must be earned from an employment source. Also, they can’t have exceeded the non-concessional cap or have a total super balance over $1.6 million.
While you may not qualify for the co-contribution, this can be a great way to boost a spouse’s super or even an adult child. For example, if your kid is a university student and doing some part time work, you could make a personal contribution of $1,000 on their behalf – and the Government will chip in $500!
- Do you have any capital gains or capital losses?
When assets are sold, capital gains tax (CGT) is payable. The main exemption is the family home. The gain (essentially the sale proceeds less the cost base) is counted as part of your assessable income and taxed at your marginal tax rate. If you have owned the asset for more than 12 months, individuals are eligible for a 50% discount (meaning they only pay tax on 50% of the gain), while super funds are eligible for a one-third discount (they pay tax on two-thirds of the gain). There is no discount for companies that own assets.
Capital gains can be offset by capital losses, and if the losses cannot be applied, they can be carried forward from one tax year to the next and then applied to offset a capital gain. If you make a capital loss, don’t forget about it.
If you have taken a gain in 20/21, consider these questions:
Do you have any carried forward capital losses from 19/20 that you can apply?
Have you taken losses on other assets in 20/21 that you can apply?
Do you have assets in a loss situation that you should sell now to crystalize a loss?
While you should never do anything just for tax reasons, crystalizing a loss on a non-performing asset can often make sense. Potentially, you can always re-purchase the asset if you subsequently decide that the sale was a mistake.
Conversely, if you have taken capital losses during the year, you may want to consider the disposal of assets in a gain situation.
One other point to note. If you have multiple parcels of the same asset (for example, shares acquired through a dividend re-investment plan) and you sell part of that asset, you can choose which parcel(s) you sell. There is no set formula (such as FIFO (first in first out) or LIFO (last in first out)) to apply, meaning that you can select the parcels which best optimise your CGT liability.