Tax Tips for Individuals
Albert Einstein once said ‘the hardest thing to understand in the world is income tax’, a sentiment that accurately describes the Australian tax legislation. A lack of knowledge about the legislation may lead to you giving the Government more of your Income and wealth than you need to. So here are my tips for tax time. Please remember everyone has different circumstances so it’s essential to rely on advice specifically tailored to your situation.
There are a number of actions that you may be able to make before the end of the financial year to help with this year’s situation. All require an assessment of what your situation is and how the legislation impacts on it. Planning before the end of the year allows you to take advantage of these opportunities and carry out the steps required. Once 30 June has passed, your options are reduced.
Capital Gains and Capital Losses
The sale of assets and investments should be reviewed prior to 30 June to determine if any Capital Gains have arisen. Generally, the Capital Gain is derived when the contract is entered into rather than at settlement. In the year that Capital Gains are derived, it may be opportune to crystalise Capital Losses in the same year to offset the Capital Gain. It’s also important to maintain good records and documentation of the Capital Gains and Losses disclosed in your tax return as the Tax Office may require evidence of these transactions.
Costs incurred in earning your income are deductible unless they are of a private or capital nature. Review your expenses before year end to ensure that you have as many expenses as possible to claim. This is another area that the Tax Office likes to target so it’s important to maintain good records and documentation of the claims.
Donations and Gifts
Donations and gifts of $2 or more made to charities and other benevolent organisations may be deductible. This year saw the establishment of the new Australian Charities and Not for profit regime. Given the new regime, it would be wise to ensure that you have documentation and confirm with the recipient that the gifts are deductible.
If you are self employed, less than 75 years of age, and you receive less than 10% of your Assessable Income from Wages, you may be able to contribute a maximum of $25,000 per year into superannuation. Deductible Contributions over this limit are taxed at 46.5%, so it’s wise to check the amount of contributions already made so you don’t exceed the limit.
Additional Superannuation Contributions
If you have money outside of super, nearing retirement and under 65 you may consider making non-concessional contributions into Superannuation Fund. While the contributions of $150,000 per annum or $450,000 (using the ‘bring forward’ provisions), do not generate a tax deduction they do provide a significant increase in Superannuation balances. It’s also wise to check the amount of non-concessional contributions you have made in the year to ensure that exceed this limits.
A medicare levy surcharge is imposed if you don’t have private health insurance and your income for surcharge purposes is above $84,001 or your family income for surcharge purposes is above $168,001. It is worthwhile reviewing your personal situation to determine whether you would be better off holding private health insurance.
Business (Non-commercial) losses
For an individual taxpayer, business losses are generally only able to be offset against other income if your adjusted taxable income is less than $250,000 and you satisfy one of the following tests relating to the business:
- The Assessable Income for the year is at least $20,000
- The cost base of property used (excluding privately used dwellings) is at least $500,000
- The total value of other assets used is at least $100,000
- The business has generated a taxable profit in 3 out of the last 5 years including the current year
The Commissioner does have the discretion to allow the losses to be offset against other income if it would be unreasonable. To apply for the Commissioner’s discretion, a private ruling request has to be lodged detailing the exceptional circumstances. If you are in this situation, it would be pertinent to start working on the various evidence and information required for the application. The length of time involved in the Commissioner’s deliberations may impact on the preparation of your tax return and the payment of your tax liabilities.
I hope that these tips help you to pay the right amount of tax. Please remember that this article has been written prior to the 2013 Federal Budget.