Tax planning tips to help you achieve the best possible return
As the tax year comes to a close, it's an important time to consider strategies to reduce your tax. Maher Group has prepared a list of tax tips that may apply to you or your business.
Please remember all information provided here is of a general nature and you should speak with us regarding your specific circumstances. If you think you might benefit from any of the suggested tax tips, reach out to us for a follow-up call or tax planning meeting.
FOR INDIVIDUALS
Personal deductible contributions
Claim a tax deduction for your personal contributions to super.
Personal deductible contributions
By making personal contributions to your super, you may be able to claim a tax deduction to reduce your tax liability.
What’s in it for me?
• Pay less tax by reducing your taxable income, while growing your retirement savings quicker.
• Retirees, self-employed persons and homemakers can build wealth more effectively.
Who can this strategy work for?
This strategy is most suitable if you:
• have a marginal tax rate above 19%.
• want to reduce tax.
• are eligible to contribute.
How does it work?
A personal deductible contribution allows you to reduce your taxable income. The amount of the contribution claimed as a tax deduction is generally taxed at 15% (contributions tax) in the fund, instead of your marginal tax rate.
Typically, people running a business as a sole trader or in partnership and some retired or unemployed people may make personal deductible contributions.
However, employees may also make personal deductible contributions.
How much can I contribute?
An annual cap on concessional contributions applies each financial year. The concessional contributions cap for the 2021-22 financial year is $27,500, regardless of age, but if your total superannuation balance is less than $500,000 your concessional cap may be higher.
Concessional contributions generally include employer contributions such as Super Guarantee, salary sacrifice contributions and personal contributions for which a tax deduction has been allowed. Concessional contributions are generally subject to 15% contributions tax in your super fund up to set limits.
If you exceed your concessional contributions cap the excess contributions are generally included in your assessable income and taxed at your marginal rate. You will receive a non-refundable tax offset equal to 15% of the excess contributions. An interest charge also applies to account for the late payment of tax.
When do I need to do it?
When working out your super contributions for the financial year, remember – contributions don't count when the payment is sent, they only count once the payment is received by your fund. To receive the deduction for the current financial year, your fund needs to have received all your contributions in the fund by 30 June. To allow for any delay for contributions to be processed through a super clearing house or by the super fund, please ensure contributions are made by mid-June at the latest.
How do I do it?
Making a tax-deductible contribution to your fund is easy. You can do it as a bill payment (BPAY) from your bank account. Check you have the right BPAY details for your fund. Another easy option is to speak with your employer and ask them to do it for you. Similar to a salary sacrifice arrangement (where an employer pays an extra amount of your pre-tax income to your super), many will do the same with post-tax income.
You must give a Notice of intent to claim or vary a deduction for personal super contributions (NAT 71121) to your fund by the earlier of the following:
• the day you lodge your tax return for the year in which you made the contributions
• the end of the income year following the one in which you made the contributions.
Your fund must send you a written acknowledgment, telling you they have received a valid notice from you. You must receive the acknowledgment from your fund before you claim the deduction on your tax return.
Government superannuation co-contribution
An Australian Government initiative to help you save more for your retirement.
What is the Government co-contribution?
The co-contribution is a payment the Government makes to your superannuation if you are in the low to middle income thresholds, make voluntary after-tax contributions to your super, and satisfy other eligibility criteria.
Generally, income thresholds are indexed each year and the matching rate is up to $0.50 for every $1 you contribute (up to a maximum of $500). This is an incentive for you to contribute to your super.
Who is eligible?
You are eligible for the co-contribution if, in a financial year (1 July to 30 June):
• you make personal, after-tax superannuation contributions by 30 June to a complying superannuation fund or retirement savings account (RSA).
• your total income is less than $56,112 (2021-22).
• you receive at least 10% of your total income from eligible employment or carrying on a business, or a combination of both.
• you are under 71 years of age at the end of the financial year.
• you don’t hold a temporary resident visa at any time during the financial year except where a temporary visa holder is also a New Zealand citizen or holder of a subclass 405 (Investor Retirement) or subclass 410 (Retirement) visa.
• you lodge an income tax return for the relevant financial year.
• your non-concessional contributions for the financial year do not exceed your non-concessional contributions cap.
• your total superannuation balance at 30 June of the previous financial year is less than $1.6 million.
You are not entitled to a super co-contribution for any personal contributions you have made that have been allowed as a tax deduction.
What is total income?
Total income is defined as assessable income plus reportable fringe benefits and reportable employer superannuation contributions (generally salary sacrifice contributions).
Work-related expenses
To claim a deduction, you need to have incurred the expense yourself and not been reimbursed by your employer or business, and the expense needs to be directly related to your work.
What expenses are related to work?
You can claim a deduction for all losses and outgoings “to the extent to which they are incurred in gaining or producing assessable income except where the outgoings are of a capital, private or domestic nature, or relate to the earning of exempt income.” That is, there must be a nexus between the expenses you are claiming and how you earn your income.
It all sounds simple enough until you start applying this rule. Take the example of an actor. To land the acting job she needs to attend auditions. She wants to claim the cost of having her hair and make-up done for the audition. But, because she is not generating income at the stage of the audition, she cannot claim her expenses. The expense must be related to how you are currently earning your income, not future potential income. The same issue applies to upskilling. If you attend investment seminars with the intention of building your investment portfolio the seminar is not deductible as a self-education expense unless it relates to managing your existing investment portfolio - not a future one. Or, a nurse’s aide who attendees university to qualify as a nurse. The university degree and the expenses associated with this are not deductible as the nursing degree is not required to fulfil the role of a nurse’s aide.
The second area of confusion is over what can be claimed for work. If the item is “conventional” it’s unlikely to be deductible. For example, you can't claim conventional clothing (including footwear) as a work-related expense, even if your employer requires you to wear it and you only wear the items of clothing at work. To be deductible clothing must be protective, occupation specific such as a chef’s chequered pants, a compulsory uniform, or a registered non-compulsory uniform.
Work related or private?
Another area of confusion is where expenses are incurred for work purposes but used privately. Internet access or mobile phone services are typical. A lot of people take the view that the expense had to be incurred for work so what does it matter if it’s used for private purposes? But, if you use the service on more than an ad-hoc basis for any purpose other than work, then the expense needs to be apportioned and only the work-related percentage claimed as a deduction. And yes, the ATO does check usage in an audit.
Claims for COVID-19 tests will be a test of this rule. COVID-19 tests are deductible from 1 July 2021 if the purpose was to determine whether you may attend or remain at work. The tax deduction does not apply if you worked from home and didn’t intend to attend your workplace, or the test was used for private purposes (for example, to tests the kids before school).
To assist us with preparing your tax return, start to compile your documentation for all work-related expenses you feel may be relevant and we will work through to determine what can and cannot be claimed.
Work from home expenses
Last financial year, one in three Australians claimed working from home expenses. Now we’re out of the pandemic, the ATO will be focussing specifically on what is being claimed. If you claimed work from home expenses last year and returned to the office this year, then there should be a reduction in your work from home claim. The ATO will be looking for discrepancies. For instance, if your working from home expenses are higher, there is an expectation by the ATO that your work-related motor vehicle expenses will be lower.
If you are claiming your expenses, there are three methods you can use:
· The ATO’s simplified 80 cents per hour short-cut method – you can claim 80 cents for every hour you worked from home from 1 March 2020 to 30 June 2022. You will need to have evidence of hours worked like a timesheet or diary. The rate covers all of your expenses and you cannot claim individual items separately, such as phone and internet expenses.
· Fixed rate 52 cents per hour method – applies if you have set up a home office but are not running a business from home. You can claim 52 cents for every hour and this covers the running expenses of your home. You can claim your phone, internet, or the decline in value of equipment separately.
· Actual expenses method – you can claim the actual expenses you incur (and reduce the claim by any personal use and use by other family members). You will need to ensure you have kept records such as receipts to use this method.
It’s this last method, the actual method, the ATO is scrutinising because people using this method tend to lodge much higher claims in their tax return. Ineligible expenses include:
· Personal expenses such as coffee, tea and toilet paper
· Expenses related to a child’s education, such as online learning courses or laptops
· Claiming large expenses up-front (instead of claiming depreciation for assets), and
· Occupancy expenses such as rent, mortgage interest, property insurance, and land taxes and rates, that cannot generally be claimed by employees working from home (especially by those who are working from home solely due to a lockdown).
To assist us with preparing your tax return, prepare a record of your total hours during the 2021-22 financial year spent working from home, and we will determine the best method to claim for you.
Capital gains from crypto, property or other assets
If you dispose of an asset - property, shares, crypto or NFTs, collectables (costing $500 or more) - you will need to calculate the capital gain or loss and record this in your tax return. Capital gains tax (CGT) does not apply to personal use assets such as a boat if you bought it for less than $10,000.
Crypto and capital gains tax
Cryptocurrency investment was one of the fastest-growing trends across our client base last year, however, we found that many people were buying and selling coins on an extremely active basis – up to multiple times a day – without fully understanding the tax consequences. So when do you pay tax on cryptocurrency?
If you acquire the cryptocurrency to make a private purchase and you don’t hold onto it, the crypto might qualify as a personal use asset. But in most cases, that is not the case and people acquire crypto as an investment, even if they do sometimes use it to buy things.
Generally, a CGT event occurs when disposing of cryptocurrency. This can include selling cryptocurrency for a fiat currency (e.g., $AUD), exchanging one cryptocurrency for another, gifting it, trading it, or using it to pay for goods or services.
Each cryptocurrency is a separate asset for CGT purposes. When you dispose of one cryptocurrency to acquire another, you are disposing of one CGT asset and acquiring another CGT asset. This triggers a taxing event.
Transferring cryptocurrency from one wallet to another is not a CGT disposal if you maintain ownership of the coin. However, transferring coins from your wallet to a spouse’s wallet will trigger a CGT event.
Record keeping is extremely important – you need records of the type of coin, purchase price, date and time of transactions in Australian dollars, records for any exchanges, digital wallet and keys, and what has been paid in commissions or brokerage fees. The ATO regularly runs data matching projects, and has access to the data from many crypto platforms and banks.
The work required to calculate each separate CGT event can be significant, particularly if the transaction volume is high. We have implemented specialist tax software to assist with calculating cryptocurrency capital gains, however the additional work and associated subscription costs required will likely result in the fee for preparing the tax return increasing.
Gifting an asset might still incur tax
Donating or gifting an asset does not avoid capital gains tax. If you receive nothing or less than the market value of the asset, the market value substitution rules might come into play. The market value substitution rule can treat you as having received the market value of the asset you donated or gifted for the purpose of your CGT calculations.
For example, if Mum & Dad buy a block of land and then eventually gift the block of land to their daughter, the ATO will look at the value of the land at the point they gifted it. If the market value of the land is higher than the amount that Mum & Dad paid for it, then this would normally trigger a capital gains tax liability. It does not matter that Mum & Dad did not receive any money for the land.
Donations of cryptocurrency might also trigger capital gains tax. If you donate cryptocurrency to a charity, you are likely to be assessed on the market value of the crypto at the point you donated it. You can only claim a tax deduction for the donation if the charity is a deductible gift recipient and the charity is set up to accept cryptocurrency.
Realise any capital losses and reduce gains
Neutralise the tax effect of any capital gains you have made during the year by realising any capital losses – that is, sell the asset and lock in the capital loss. These need to be genuine transactions to be effective for tax purposes.
Record keeping
The golden rule of working with the ATO is that you can’t claim it if you can’t prove it. If you are audited, the ATO will disallow deductions for unsubstantiated or unreasonable expenses. Even if the expense is below the substantiation threshold of $300 ($150 for laundry), the ATO might ask how you came up with that number. For example, if you claim $300 in work related expenses (that is, make a claim right up to the substantiation threshold), how did you come up with that number and not something else?
In addition to the obvious records of salary, wages, allowances, government payments or pensions and annuities, you need to keep records of:
· Interest or managed funds.
· Records of expenses for any deductions claimed including a record of how that expense relates to the way you earn your income. That is, the expense must be related to how you earn your income.
· Assets such as shares or units in a trust, rental properties or holiday homes, if you purchased a home or inherited a property, or disposed of an asset (including cryptocurrency).
You need to keep your records for five years. These can be digital copies of the records as long as they are clear and legible copies of the original. If your records are digital, keep a backup.
Records can be tax invoices, receipts, diary entries or something else that proves you incurred the expense and how it related to how you earn your income.
FOR BUSINESSES
Temporary full expensing
Temporary full expensing of assets has been extended until 30 June 2023. This allows eligible businesses to claim an immediate deduction for the business portion of the cost of an eligible asset in the year it is first used or installed ready for use for a taxable purpose, rather than an asset's cost being claimed over several years.
Temporary full expensing can be applied to new depreciable assets, improvements to existing eligible assets, and second-hand assets in the first year of use.
Remember, to claim a deduction for the 2021-22 year, the eligible asset must be held or installed ready for use by 30 June 2022 – it is not sufficient to have simply ordered and paid for it.
Pay June quarter employee super contributions now
Employers should pay June quarter super contributions this financial year if you want to claim a tax deduction in the current year. The next quarterly superannuation guarantee payment is not due until 28th July, however, some employers may choose to make the payment early to bring forward the tax deduction instead of waiting another 12 months. Don’t forget yourself. Superannuation can be a great way to get tax relief and still build your personal wealth. Importantly, the superannuation contributions need to be received by the fund before 30 June to be deductible, it is not sufficient to have simply paid the money by that date. Remember, using the auto-super platforms in your accounting software, such as Xero, often takes longer for the payment to clear compared to paying the fund directly, so you should be looking to lodge your June super batches now and no later than 24th June.
Declare dividends to pay any outstanding shareholder loan accounts
If your company has advanced funds to a shareholder or related party, paid expenses or allowed a shareholder or other related party to use assets owned by the company, then this can be treated as a taxable dividend. The regulators expect that top-up tax (if any applies) should be paid by shareholders at their marginal tax rate once they have access to these profits. This is unless a complying loan agreement is in place.
If you have any shareholder loan accounts from prior years that were placed under complying loan agreements, the minimum loan repayments need to be made by 30 June 2022. It may be necessary for the company to declare dividends before 30 June 2022 to make these loan repayments.
The tax rules in this area can be extraordinarily complex and can lead to some very harsh tax outcomes. It is important to talk to us as soon as possible if you think your company has made payments or advanced funds to shareholders or related parties.
Directors' fees and employee bonuses
Any expected directors’ fees and employee bonuses may be deductible for the 2021-22 financial year if you have ‘definitely committed’ to the payment of a quantified amount by 30 June 2022, even if the fee or bonus is paid to the employee or director after 30 June 2022.
You would generally be definitely committed to the payment by year-end if the directors pass a properly authorised resolution to make the payment by year-end. The employer should also notify the employee of their entitlement to the payment or bonus before year-end.
The accrued directors’ fees and bonuses need to be paid within a reasonable time period after year-end via your payroll system, and must also include a superannuation guarantee.
Write-off bad debts
To be a bad debt, you need to have brought the income to account as assessable income and given up all attempts to recover the debt. It needs to be written off your debtors’ ledger by 30 June. If you don’t maintain a debtors’ ledger, a director’s minute confirming the write-off is a good idea.
Please remember all information provided here is of a general nature and you should speak with your Maher Group account manager or adviser regarding your specific circumstances.