With the Tax season approaching fast, everyone is worried about tax but
let’s face the reality, tax is inevitable if you are earning income.
But there is no reason that one should overpay and it’s never too late to think about some strategies to save tax.
At the outset, it is very important to understand the difference between Tax Minimization and Tax Avoidance. Many people get muddled with these two terms.
Tax minimization is when you legitimately arrange your tax affairs to reduce the amount of tax you pay. You are entitled to minimize your tax liabilities through Investment activities and to receive the benefits provided for under the law.
Tax avoidance or a tax scheme is an artificial or contrived arrangement to avoid or defer tax obligations. Schemes often involve a series of complex transactions. They typically move funds through several entities, such as trusts, in order to avoid or minimize tax otherwise payable. Schemes may also involve distorting the way funds are being used to enable a taxpayer to claim deductions they are not entitled to.
Taxpayer obligations:
Following are some of the Obligation of Taxpayers in Australia:
Under Australia’s self-assessment tax system, you are responsible for declaring all your assessable income such as Wages & Salary, Business Income, Investments including dividends, distributions, rents, interest etc.
Claims you make in your tax return are usually accepted without adjustment and an assessment notice is issued. However, under the laws of self-assessment, the Tax Office can review your claims and increase or decrease the amount of tax payable for up to five years after you lodge your return. In some circumstances, anti-avoidance provisions of the law may extend the period of review up to seven years.
You are responsible for the correctness of your tax return and are encouraged to investigate claims of tax benefits before claiming a tax deduction.
Following are some tips for saving tax:
Ascertain your income for the financial year 2019-2020:
Gather information from all sources of income including Wages, Business income, Investments and Interest received from Bank. One of the ways to save tax in current year is to either defer your income or bring forward deductions, provided action is taken by 30 June 2019.
Following are the income tax rates (Excluding Medicare Levy) for the 2019
– 20 financial year:
Residents
These rates apply to individuals who are Australian residents for tax purposes.
Resident tax rates 2019–20
| | |
| Taxable income | Tax on this income |
| 0 – $18,200 | Nil |
| $18,201 – $37,000 | 19c for each $1 over $18,200 |
| $37,001 – $90,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $90,001 – $180,000 | $20,797 plus 37c for each $1 over $90,000 |
| $180,001 and over | $54,097 plus 45c for each $1 over $180,000 |
Resident tax rates 2018–19
| | |
| Taxable income | Tax on this income |
| 0 – $18,200 | Nil |
| $18,201 – $37,000 | 19c for each $1 over $18,200 |
| $37,001 – $90,000 | $3,572 plus 32.5c for each $1 over $37,000 |
| $90,001 – $180,000 | $20,797 plus 37c for each $1 over $90,000 |
| $180,001 and over | $54,097 plus 45c for each $1 over $180,000 |
The above rates do not include the Medicare levy of 2%.
The above rates include changes announced in the 2018-19 Federal Budget.
Foreign residents
These rates apply to individuals who are foreign residents for tax purposes.
Foreign resident tax rates 2019–20
| | |
| Taxable income | Tax on this income |
| 0 – $90,000 | 32.5c for each $1 |
| $90,001 – $180,000 | $29,250 plus 37c for each $1 over $90,000 |
| $180,001 and over | $62,550 plus 45c for each $1 over $180,000 |
Source: https://www.ato.gov.au/rates/individual-income-tax-rates/
Claim all work related deductions:
The mission of gathering all work-related deductions may appear intimidating especially given the need to collate all the required tax invoices and receipts for any significant claims. This task can be made easy by understanding what work-related expenses are potentially deductible and can save you considerable cost. One of the easiest and most practical ways is to pay all your expenses through a single bank account or credit card so you can easily locate the relevant costs and any associated receipts.
In the event you don’t have the necessary receipts you can still claim up to $300 of work-related expenses provided the claims relate to outgoings you have incurred in your job or business.
Some of the common work-related expenses that are allowable include uniforms, Laundry, business mobile & telephone costs, subscriptions and union fees.
Self-education expenses are also deductible in certain circumstances where the study is directly related to either maintaining or improving your current occupational skills or it is likely to increase your income from your current employment. If the study is to obtain new qualifications in a different field the expenses will not be allowable.
Home office Expenses: Claim a deduction for the costs you incur in running your home-office
More and more people these days are doing work at home especially during the COVID-19 pandemic but not many are aware that they can claim a deduction for costs you incur in running your home office, even if a room is not set aside solely for work-related purposes. At an absolute minimum keep a diary of your time that you work from home. Whilst you can use the ATO’s shortcut method of 80 cents per hour (from 1 March 2020) it will probably be significantly less than actual deductions for the work-related portion of home telephone, internet, stationery, printers, computer equipment and consumables together with the 52 cents per hour claim for electricity, gas and depreciation of home-based furniture
under the fixed costs method. This is one claim that will skyrocket in 2019/20.
Keeping a car logbook could increase your refund by
$$$$$$$:
In the event you use your car for work, keep a logbook AND keep all your expenses for the year. It will allow you the option of selecting the best method of claiming the cost of running your vehicle – rather than just the easiest method. Work-related travel expenses include travel between two places of work or employment, or travel to shifting places of employment. It may also be available where you must carry bulky tools or equipment with you to work. It does not, however, include direct travel between a person’s home and a place of work.
Although it probably hasn’t been used as much during COVID-19, if you use your car for work purposes and keep a logbook for 12 weeks then the deductions can be in the thousands. Make sure that you keep all costs associated with the running of your car (such as petrol, insurance, registration, servicing and lease payments) for the whole year, not just the period that you kept the log book. Remember that the ATO motto
is no receipt = no deduction so you could be costing yourself $$$ by not keeping those dockets!
Penalties and fines are not allowable.
Keep track of Interest
The general misconception people have is that interest earned on their savings is not income and hence they do not declare the interest earned in their tax returns. All the interest earned on your saving is your income and therefore part of your assessable income. Keep track of your interest and provide tax file numbers to your bank so that you don’t have tax deducted until you file your return.
Tax Effective Superannuation Contributions:
Superannuation provides great tax saving benefits. Salary sacrificing and contributing to your low-income earning spouse’s fund can give great tax benefits. A self-employed taxpayer will be able to claim their contributions
to a complying superannuation fund as fully tax deductible up to the age of 75. It is surprising how few people take advantage of some free money from the Government. If your income is under $38,564 and you contribute $1,000 post tax into super the government will match it 50 cents in the dollar. Whilst this incentive gradually phases out above this figure at $53,564, it’s free money! Also, if you earn less than $37,000 then your spouse can put up to $3,000 into your super fund and they will receive an 18% rebate ($540) on tax via the spouse super contribution rebate.
Salary sacrificing into superannuation is one of the best, and legitimate, ways to minimise your income tax bill. You can contribute up to $25,000 per year into super (which includes the compulsory 9.5% employer contributions) which is only taxed at 15 per cent instead of your marginal tax rate (potentially 49 per cent). PAYG employees can make a lump sum contribution at the end of the financial year to take them up to the
$25,000 cap and claim as a tax deduction. For those that don’t have excess cash lying about there are not many pay packets left to do it this tax year, so keep in mind to start putting extra away when 1 July arrives.
Instant Write-off – Buy a new business asset for under
$150,000 and claim it as a tax deduction this year
There have been some great tax concessions over the past few years for small businesses with none greater than the immediate write-off available for the purchase of new business assets that cost less than
$150,000. Apart from motor vehicles (where it is limited to the business portion of the car limit of $57, 581), there is no limit to the amount of assets that you can purchase under this concession but beware that you are only getting a percentage back and your cashflow will suffer. If your business is registered for GST, the threshold is effectively $165,000 as you can claim the 10% GST credit (up to $15,000) and get an immediate write-off for the balance in this year’s tax.
Interest and Expenses on investment property:
Prepay the interest on your investment property so that you can claim the deduction now. Regardless of whether the property is positively or negatively geared, rental property owners can generally claim deductions for advertising, bank charges, body corporate fees, cleaning, council rates, electricity and gas, gardening, insurance, interest on loans, land tax, lease preparation expenses, legal costs, pest control, postage and stationery, property agent fees and commissions, repairs, secretarial and bookkeeping fees, security patrol fees, telephone calls and water rates.
You may also be able to write off the cost of certain buildings, depreciating assets and borrowing costs over time.
Non-work-related deductions:
The fees you pay a registered tax agent to prepare your return or to manage your tax affairs are allowable in the year the fee is paid. Bank charges and any interest payments on funds to finance the purchase of shares and other income producing investments are generally allowable.
Utilise capital losses
In the current economic downturn, many investors may have incurred capital losses from the disposal of investments. But there is a way to turn bad news into better news. Any such loss can be offset against any current capital gains you may have made or be carried forward to be applied against any future capital gains.
Further, a capital loss on an investment can be applied against any other capital gain other than for special rules relating to gains on collectables such as artworks and antiques and certain personal use assets. It is nice to know that even in these tough times, a loss is still worth something.
Income Protection Insurance:
If you have income protection insurance, the ATO allows you to claim this as a work-related expense.
Keep your receipts
With the need to get back as much as you can whilst things are financially tough during COVID-19, not to mention the ATO continuing ramping up audit activity yet again it is important to keep your receipts.
The ATO motto is no receipt = no deduction so you could be costing yourself $$$ by not keeping those dockets! The ATO have a great app called MyDeductions which is an easy way to keep your receipts for year end.
Income expected to be lower next year? Bring forward some 2020/21 expenses into this year
If you are expecting that you will have a lower income next year – due to factors such as maternity leave, redundancy, a smaller or no bonus or perhaps cutbacks to overtime – then why not try to bring forward your deductions into this tax year.
Stocking up your home office with stationery, laptops and printers or prepaying subscriptions and interest for up to 12 months in advance are just some of the simple ways to reduce your income before 30 June.
Plan for future (2020-21):
Plan before it is too late and Look at ways to reduce your taxes in the financial year ahead. Consult a Qualified Accountant and Registered tax agent for your end of year tax planning.
Further Information:
In the event you have any queries or need further information on your Tax Affairs please contact SSK Accountants at 03 – 8759 0629 or at 0413 708 740.
Important Disclaimer:
This information has been taken from different sources (ATO and In The Black Magazine) and Neither the writer nor the firm accept any responsibility for anyone relying on this
information. Therefore, we strongly urge the readers to consult a qualified accountant and registered Tax agent before relying on this information.
Source: ATO Website (ato.gov.au), In the Black Magazine