Benjamin Franklin once said, “In this world, nothing can be said to be certain, except death and taxes.” This thought is a little depressing, but while some people might question which one is worse, we are here to make taxes easier to handle and less of a burden on you and your family. Read on to learn about key areas of tax planning that you should be aware of before the end of the financial year.
Why Tax Planning is Important
What is Tax Planning? Tax planning is the process of evaluating your financial position, including work, assets and liabilities, before the end of the financial year. This is to protect yourself from tax surprises, and ensuring you’re implementing the appropriate strategies before 30 June to manage your tax position. As well as the tax benefits you may achieve, it enables you to make well-informed financial decisions about the structure of your finances or business and make sure you don’t have any blind spots or leaks in your financial strategy.
Tax can look different depending on your situation in life, your age, or your assets. Therefore it is valuable to consider tax planning regularly. Tax for a retiree, a landlord, or a business owner can look very different, and you may need to consult a financial planner and accountant to ensure you are across all the legislative requirements or benefits that may impact you.
This is why you should plan ahead. Start now – or earlier in April & May – to ensure your opportunities are not lost and to avoid any unintended consequences. This guide will cover some of the key areas you should be familiar with. We recommend that you speak with a professional advisor to ensure you are utilising the strategies available to you most effectively.
Tax Planning Made Simple
We pay income tax based on our taxable income or an entity’s taxable income – this is usually made up of ‘assessable income’ minus allowed deductibles.
One of the simplest tax planning strategies to minimise your liability is to reduce your taxable income and increase your tax deductions. This needs to be achieved in a clear and orderly manner, ahead of time, and should always include only legitimate activity. We recommend setting up your business or personal finances to take advantage of legitimate tax benefits that you have access to and ensure you have these in place on an ongoing basis.
Reduce Assessable Income:
Some ways to reduce your assessable income are below. Note that these may not apply to your situation.
Defer business income: Businesses who are eligible may be able to report only actual income received for the financial year, leaving out income that has been accrued (invoiced but payment not yet received).
Negative gearing: When your expenses on an asset exceed your income, you may be able to reduce your taxable income by applying the negative difference.
Concessional super contributions: If you can make additional concessional super contributions or salary sacrifice towards super prior to June 30, this may reduce your taxable income (as well as increase your retirement savings!). This is valuable if your income has tipped into the next tax bracket.
Salary packaging: You may want to speak to your accountant or financial advisor about how salary packaging through your employer for expenses such as rent or a vehicle may have the effect of reducing your taxable income.
Restructuring personally held investments: There are benefits to not holding investments ‘personally’ if you are earning a high income or are paying a large amount of tax. Talk to your financial advisor if this applies to you.
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Increase allowable tax deductions:
First up, let’s just say that there isn’t a lot to gain by spending money JUST to get a tax deduction. Your tax deduction is aligned with your tax rate, so you’ll be able to claim back only the taxed percentage of your expense. Importantly, your tax deductions must only relate to expenses that you or your business have personally incurred, and they must have been incurred in the process of making assessable income or running your business. It is also required to have receipts to back up your claims. For employees, some of the possible deductions you can claim are below.
Home Office Expenses: You can claim expenses related to working from home. These can include relevant percentages of your power, phone and internet bills, as well as fittings and equipment such as home office furniture and computers. The ATO provides the following guidelines for calculating your home office expenses:
- You must have spent the money, and the expense must directly relate to earning your income
- You must have a record to prove it.
You can’t claim occupancy expenses, even if working from home for extended periods, whether due to Covid-19 or otherwise. You can only claim occupancy expenses if:
- It was necessary for you to work from home because your employer didn’t provide an alternative place to work
- The area of your home that you use is exclusively or almost exclusively used for work purposes – usually calculated on a floor area basis.
There is value in understanding the tax implications when setting up your home office to ensure your records and setup make it easy, or even possible, for you to claim what you are entitled to.
The ATO has provided several ways of calculating your WFH expenses – the fixed rate method, the actual cost method, or the shortcut method. The fixed-rate method means you can claim $00.52 cents per hour of working from home (as well as work-related internet and phone expenses and depreciation on work equipment such as computers). The actual cost method requires you to record what you spend on work-related expenses and claim the exact deductible amount based on your records. The shortcut method, introduced to allow Covid-19-impacted workers to claim more easily, allows you to claim $00.80 cents per hour worked from home until 30 June 2022. This is an all-inclusive rate and you don’t have to separately calculate other expenses or depreciation. The Australian Tax Office provides a Home Office expense calculator.
Work-related expenses: If you incur expenses related to your work, you will generally be entitled to a tax deduction. This includes the above-mentioned home office expenses, but can also include education, journals or publications, tools, subscriptions, uniforms & laundry, and work travel expenses (if not previously reimbursed by your employer).
Motor vehicle: If you use your private vehicle for work-related purposes, you can claim your car expenses as a tax deduction, using either the cents per kilometre method or tracking your work-related usage in a logbook. Keep in mind that ‘work-related usage’ does not include travel to or from work. Commercial vehicles are usually not required to follow this, however, it does depend on whether the commercial vehicle is also for personal use. Your accountant or financial advisor can assist you with planning and tracking for the next financial year or compiling the required supporting documentation for this financial year.
Income protection insurance: Depending on your personal circumstances, income protection may be tax deductible.
Superannuation contributions: Superannuation contributions can be claimed as a tax deduction within certain restrictions. An individual can generally claim a deduction up to the concessional super contributions cap of $27,500 (as of 2022). This cap includes salary sacrifice contributions and life insurance premiums if that is held with your super fund. These super contributions are taxed at 15%, and exceeding the cap has serious tax consequences. However, if you have not used prior years cap amounts, you can look back up to 5 years to your capped amount in the last 5 years, and you can apply these unused cap amounts to the current financial year. Note that your super fund – including SMSFs – must receipt concessional contributions prior to 30 June, and you can only look back as far as the 18/19 financial year. There is no tax deduction for non-concessional super contributions (capped at $110,000), but there are other benefits to these contributions that you can speak to your advisor about.
Tax Considerations For Business Owners
If you have a business, we recommend you undertake a thorough review of your tax position before 30 June each year. Tax-planning for business is individual and therefore the below points are only a brief overview of some general areas. We recommend seeing a business financial advisor to ensure your business tax benefits are optimised, and your income or revenue continues to drive greater growth both personally and for your business.
Thresholds for Immediate Business Deductions: If your business is eligible, you may be able to claim immediate deductions for assets purchased for the business. However, these deductions are up to a certain threshold.
Assets: If you have purchased a depreciating asset for your business within the financial year, you can generally claim the business portion of the expense back as an immediate deduction. This is called temporary full expensing, which is designed to encourage businesses to purchase work-related assets. You can choose to opt-out of ‘temporary full expensing’, and not choose to claim your depreciation, if it is more tax-beneficial to claim your deduction using a different rule.
Capital Expenditure: If you have purchased capital equipment in this financial year, ensure it meets the eligibility criteria prior to 30 June if you wish to claim it.
Repairs & Maintenance: You should try and carry out repairs or maintenance on your work-related business equipment or vehicles, or to your rental property prior to 30 June. Certain repairs may qualify for a tax deduction, but you should speak to your financial advisor to clarify how you can take advantage of this tax benefit.
Employees: Most employers are familiar with the Single Touch Payroll system, and micro employers and closely held payees will have started reporting from 1 July 2021. However, the STP system expanded from 1 January 2022. If you are unsure about the additional requirements, please contact your accountant or financial advisor.
Claiming Bad Debts: You can claim any bad debts as deductions, however, you must have written them off prior to claiming them This means you must have recorded the decision in writing before the end of the financial year. This could look like removing the debt from the customer’s account or recognising the bad debt expense in your bookkeeping. The debt must not have been waived, forgiven or sold in order to be claimed.
There are many other considerations for business that are not mentioned, due to the variability of each business and tax implications. The value to your business to get in early on tax planning is enormous – not only will you be able to save money, but you’ll avoid falling foul of the Australian Tax Office. Talk to a financial advisor today.
Tax Planning with Properties & Assets
Rental Properties
If you own a rental property, you have a few different considerations to make as you approach the end of the financial year. Keep in mind that to claim tax deductions for a rental property, it must be genuinely available to rent during the financial year, even if there is a period of time where no rental income was recorded. If the property is rented to friends or family at a significantly lower than market value rate, it is possible that it will not be considered ‘for rent’, and deductions may not be claimed in this scenario. You may also only claim certain deductions if you actually incurred them, not if they were paid by your tenants. You should also keep in mind that you need documentation and proof for these deductions.
Some of the deductions you can claim are:
Interest on a loan for investment purposes: The interest repayments on your loan are tax deductible if the loan is used for things such as 1) buying an investment property, or 2) repairs or renovations to a rental property. If you have used loan proceeds directly for your rental property, such as additional funds to renovate or improve, then you can usually claim the interest as a deduction. Costs involved with a loan, such as mortgage insurance or exit fees, are also often tax deductible over 5 years.
Repairs to an investment asset: There are also some tax claims you can make around general repairs and maintenance. If it has arisen through ‘wear and tear’ you can claim the expenses to restore it to its original condition. Repairs refer to fixing damage that occurred after you purchased the property. However, if you are making improvements rather than repairs, note that improvements are claimed differently.
Improvements to an investment asset: If you are spending to improve the asset or the asset was purchased in this condition, it changes to a capital expense and will need to be depreciated over its lifetime instead of being claimed as a deduction.
Other rental expenses you could claim: The ATO website lists several other expenses you could claim on your rental property. These can include regular maintenance such as lawn mowing or pest control, advertising costs to find tenants, body corporate fees or council rates, home insurance, and other fees associated with maintaining the investment property.
Capital Gains Tax
Capital Gains are usually added to your assessable income, and taxed accordingly – this is however known as Capital Gains Tax. If you have sold an asset or investment and made money on it, the capital gain is calculated on the profit generated from the sale. If you are selling any assets or investments prior to 30 June, you should ensure you have reviewed the potential tax implications with your accountant. There are concessions available including small business concessions. You should also consider if you can change the timing of the sale if it would be beneficial to align it with a period of lower assessable income or move the tax liability into the next financial year.
If you have unfortunately taken a capital loss in this financial year, it can be offset against other capital gains in the same financial year or carried forward to the next financial year. You can’t retrospectively apply the loss or offset it against your income, so make sure you are factoring this into your overall financial planning.
Another tip you might consider is contributing more to super if you anticipate a capital gain. This has the effect of lowering your taxable income, meaning you may benefit from not exceeding a particular tax bracket once you receive the capital gain. However, make sure you talk to your financial advisor about this first to avoid any unexpected implications.
Australian Tax Office Auditing
Seeking professional advice, particularly for more complex tax planning, is a very good idea as your tax situation grows in complexity. Firstly, you are able to take advantage of rules and opportunities you may not have known about. Secondly, you can avoid, or have support if, your tax return is flagged by the Australian Taxation Office for auditing. Audit activity has increased, and the ATO is usually focused on over-claiming, lack of appropriate recording, or other errors.
Audits usually occur due to alarms raised over work-related expenses, including motor vehicles, travel, home office expenses and self-education. There is particular consideration of the difference in work activity due to COVID-19, for example, home office expenses are expected to rise by a certain percentage, but correspondingly, motor vehicle, travel or uniform expenses are expected to decline. If your return contains the same deductibles as prior to the pandemic, there is a chance you will need to provide an explanation as to why you were not impacted in this way.
Other areas that the ATO is scrutinising more closely include rental properties, Airbnb revenue, ride-sharing income, and fringe benefits.
Conclusion
It can be invaluable to undertake tax planning prior to lodging your return, not just for this financial year, but also to ensure you are set up in the best way for the next financial year. If you’d like tax advice tailored to your particular financial situation or want to ensure you’re making the most of your tax advantages in the financial year ahead, get in touch with our advisors today.
