The end of the financial year is coming, and so too is that one thing everybody dreads doing – their tax return. Even though your tax return can be lodged up to 31 October 2020, you may need to act now to implement some of the tax reduction and wealth building strategies outlined in this newsletter. Make sure to pay attention to the items that require action in early June to meet the 30 June 2020 deadline as they may involve giving your HR or payroll department enough notice to take action.
When reviewing and preparing your income tax position for the 2019/2020 financial year, we suggest you take into consideration the following three points:
1. Claim all deductible items
There are numerous expenses you can declare on your tax return that will reduce the amount of tax you pay. The most common tax deductions are work related expenses and charitable donations. Work related expenses are purchases made in the process of earning your assessable income. You can claim up to $500 of work related expenses without needing a receipt (unless a single expense exceeds $300). However, we advise that you keep proof of all purchases where possible.
Note that due to COVID-19, you are able to claim certain home office related expenses can be claimed (check with your account for specific advice around this).
2. Offset capital losses against your capital gains
You can also deduct any of your capital losses against your capital gains to reduce the amount of tax payable. For most people, a capital gain will occur when they sell shares or property. If at sale, these assets are worth less than when they were purchased, you can reduce any other capital gains for that financial year by offsetting the amount of the loss.
3. Review your investments
End of financial year is a good time to review how your investments are going and evaluate if they are performing to expectations, especially if you have recorded a capital loss in the current financial year. In some cases, it may be appropriate to sell off an under-performing asset and realise a capital loss to potentially reduce the amount of capital gains tax you pay om any other realised capital gains. You can then use the money from that sale to invest in a new asset that is likely to grow in the future.
Tip: Electronic Tax Returns
When it comes time to lodge your tax return you may be able to do it online using the government’s myTax online portal. To do this, you will need to:
- - go onto the ATO website and create a myGov account.
- - link your myGov account to the ATO.
- - Access myTax portal.
Personal income tax rates
The personal income tax rates which apply from 1 July 2020 are as follows:
|Taxable Income||Tax on this Income1|
|$0 - $18,200||Nil|
|$18,201 - $37,000||19%|
|$37,001 - $90,000||32.5%|
|$90,001 - $180,000||37.0%|
|$180,001 and over||45.0%|
1 Excluding Medicare Levy of 2%.
In this section we look at a range of things you can do before 30 June 2020 to get the most benefit from superannuation and maximise your retirement wealth.
Salary Sacrifice into super and you could save tax
Salary sacrifice forms part of your concessional contributions (which also include your employer’s 9.50% compulsory SG contributions, any further contributions made by your employer and any contributions made by your employer to a superannuation insurance policy). If it is too late for you to make a salary sacrifice contribution via your employer’s payroll before 30 June 2020, you can still make a tax effective contribution via a personal deductible super contribution. This involves contributing money from your after-tax dollars (e.g. savings) and then claiming a tax deduction for the contributed amount on your FY19/20 Tax Return. Note these contributions are all subjet to the Concessional Contributions Cap (see below).
Extra super contributions via salary sacrifice can have tax advantages (up to certain limits). Although any salary sacrifice contributions are “preserved” (i.e. remain within super), the contribution tax rate of 15% compares very favourably to most people’s marginal tax rate (note if taxable income is over $250,000 a higher 30% rate applies to concessional superannuation contributions). Since 1 July 2018, you can also carry forward any unused amounts below the $25,000 cap limit for a maximum of 5 years if your super balance is less than $500,000.
Paul is 45 and receives an annual salary of $75,000pa. He decides to salary sacrifice $833 per month (i.e. $10,000pa) into his super.
|Income Considerations||Gross Salary||$75,000||$75,000||$0|
|Salary Sacrifice Contributions||$0||$10,000||+$10,000|
|- Less income tax payable||-$15,922||-$12,672||-$3,250|
|- Less Medicare Levy||-$1,500||-$1,300||-$200|
|+ Low & Middle Income Tax Offsets||+$1,080||+$1,105||+$25|
|Total take home pay||$58,658||$52,133||-$6,525|
|Salary sacrifice amount||$0||$10,000||+$10,000|
|Tax on contribution (15%)||$0||$1,500||+$1,500|
|Net contribution to super||$0||$8,500||+$8,500|
|Total net benefit|
|Net total benefit from gross salary||$58,658||$60,663||+$1,975|
By re-arranging his package, Paul has effectively given himself a nearly 3.4% pay rise!
|However, take care when making salary sacrifice contributions, there are limits!|
Warning: Don’t exceed the caps
The annual limit or “cap” for concessional contributions is $25,000 per financial year – regardless of your age.
If you are currently making salary sacrifice contributions or commencing salary sacrifice contributions, take care not to exceed these caps as contributions above these caps are taxed at your marginal tax rate plus an interest charge rather than at the concessional tax rate of 15%.
Take advantage of the Government Co-contribution scheme and you could add up to $500 to your super
The government co-contribution is a scheme that rewards low income earners for making extra contributions into their superannuation fund. Currently the co-contribution is:
- $500 if you earn less than $38,564/li>
- $1-$500 on a sliding scale if you earn between $38,565 and $53,564.
Tip: Review Salary Sacrifice Amount
If you are currently making concessional contributions that exceed the maximum annual cap of $25,000 it is important that you review and adjust your sacrificed amount from 1 July 2020 to ensure that you do not exceed the cap.
Starting a new job?
If you’re starting a new job on a higher salary, consider starting salary sacrifice super contributions.
Help boost your spouse’s super and you could get a tax rebate of up $540
The spouse contribution rebate allows one person in a relationship to contribute money into their spouse’s super account while earning a tax rebate for themselves. This is particularly relevant for families (de facto or married) where there are two working adults - one full time and the other who earns less than $40,000 per annum. You will receive a tax rebate of 18% for any money you contribute (up to $3,000) into your spouse’s account. The maximum rebate available is $540. To be eligible, a spouse contribution must be made from your after-tax income and must be made before 30 June 2020.
“Splitting” your concessional super contributions (i.e. your 9.50% SG and any Salary Sacrifice contributions) with your spouse may minimise tax and produce other benefits. Under the current rules, you can transfer up to 85% of your concessional contributions to your spouse’s super fund (provided your spouse is under 65 and not retired). If your spouse is older than you, this may allow them to access this money earlier as they will reach their preservation age before you. To split your contributions for this financial year, the appropriate form must be submitted to your super fund. Note: the split occurs in the following financial year.
Get your kids started on the road to super
Anyone earning up to $38,564 can put money into their super and the government will add up to $500 to that. There’s no age minimum for your kids. They just need a tax file number and have earned income from a job (not exceeding $53,564). Make an after-tax contribution (of up to $1,000) into your working child’s super account and they could get up to an extra $500 from the government (contribution amounts change based on your child’s income).
Consider making after-tax personal contributions
You may wish to consider making contributions to your super account from your after-tax income. These contributions are known as non-concessional contributions and can be an effective way to reduce tax, particularly on the investment earnings of that money if contributed to super. Investment earnings in super are taxed at a maximum of 15% as opposed to your marginal tax rate in a non-super investment.
Warning: Non-Concessional Contributions Cap
You can put up to $100,000 of after-tax money into super per financial year (or up to $300,000 in one go using the three year ‘bring forward provisions”.
You are restricted from making further after-tax contributions once your super balance reaches $1.6 million.
SG contribution rate increase timetable
|Financial Year||SG Contribution %|
|1 July 2015 - 30 June 2021||9.50%|
|1 July 2021 - 30 June 2022||10.00%|
|1 July 2022 – 30 June 2023||10.50%|
|1 July 2023 – 30 June 2024||11.00%|
|1 July 2024 – 30 June 2025||11.50%|
|1 July 2025 onwards||12.00%|
Tip: Contribute your tax refund to super
You can contribute your tax refund into super. This may give you (depending on your taxable income) a government co-contribution in the next financial year.
This can be an effective way to grow your super and get a little bit extra from the government.
Review your investment strategy
The end of the financial year offers a good opportunity to review your investments to determine whether you are content with the performance of the assets you hold and to ensure that your investments continue to match your personal risk profile. Perhaps you hold assets (particularly in a Self-Managed Super Fund) which are underperforming and it makes sense to sell, or perhaps you have carry-forward capital losses which you can use to minimise your net capital gains and thus reduce your capital gains tax liability.
If you are making changes to your assets, be weary of ‘wash-sale’ rules. A ‘wash-sale’ involves the sale and immediate repurchase of the same investment in order to either realise a capital loss or reset the cost base of that investment. This is considered tax avoidance by the ATO and is harshly penalised.
Claim any unclaimed super
The government currently transfers to the Australian Tax Office (ATO) the balance of all unclaimed super accounts with a value of less than $2,000 where the owner has been unidentifiable for more than 12 months. If the owner finds and claims the money, the ATO will pay interest on the unclaimed money at a rate equal to the inflation rate.
Inactive super accounts with insurance
You may have additional super accounts other than the one your employer and/or you currently contribute to. If so, these accounts may have Death, TPD and/or Income Protection insurance within them which you may want to keep. However, if the account is under $6,000 or does not receive and contributions for 16 months it is considered inactive and must be transferred to the ATO, cancelling any insurances within the account.
The end of the Financial Year often presents a good opportunity to review your estate planning arrangements.
A properly drawn up Will and Power of Attorney protects the interests of your family should anything happen to you. You can also tell your super fund that you wish any death benefits that may become payable to be paid into your Estate. Simply complete a Nomination of Beneficiary form from your fund. You can also nominate your Spouse (incl. Defacto Spouse), children and financial dependants.
Tip: Estate Planning
It is often best to get your Will done properly by a qualified solicitor. If you don’t have a solicitor, you can contact the Law Society in your state who can refer you to an appropriately qualified law firm. Ask them for a quote first and plan ahead to think about who you would like to be the executor of your Will, your Power of Attorney and who you would like the beneficiary/ies of your Estate to be.
2. Consider a Testamentary Trust
When you meet with a solicitor, ask about Testamentary Trusts.
3. Beneficiary nomination in super
It is also important to ensure that you have made a valid Nomination of Beneficiary on your super account and to update this as and when circumstances dictate.
Now is the time to start thinking about planning your day to day finances for the next financial year. One of the best ways to do this is to create a budget. Here are our top tips for creating an effective budget:
- Identify and list down what you want to achieve.
- List them in order of importance (most important to least important).
- Break your goals down into short term (1-2 years), medium term (3-5 years) and long term (over 5 years).
- Determine what action you need to take and any resources you need in order to implement your action items and ensure you write them down.
- Evaluate your progress on a regular basis and take corrective action if/where needed.
Contact Harvest for a copy of our free budget worksheet and get started today.
- Consider the appropriateness of a self-managed super fund.
- If semi-retired, consider a Transition to Retirement account.
- Would you benefit from holding some assets in your spouse’s name? Talk to Harvest. We can give you advice in this area,
- Effectively timing when you receive income, realise a capital gain (or loss), prepaying investment expenses and/or your insurance premiums or deductible expenses, can be very tax effective strategies you could use,
- Borrowing (i.e. “gearing”) to invest can be a very tax effective way to build wealth over the longer term,
- Is your mortgage competitive? Make sure you are not giving your bank more of your money than you need to. Get your mortgage reviewed to ensure it is structured correctly and that the interest rate is competitive.
- Are your assets and income adequately protected with insurance?