End of financial year tax tips
As the end of the financial year approaches, here are some helpful tax planning tips that it’s important to be aware of.
Maximising allowable deductions
Expenses that are "incurred" in relation to your assessable income can reduce your taxable income. Consider any up and coming expenses and the value of incurring them before year end. For example, you may consider prepaying interest 12 months in advance before year end on your rental property or margin loan to get an immediate deduction.
Minimising Capital Gains Tax (CGT)
As we approach June 30, if you have made a capital gain and have an investment that is making a loss and is not likely to recover, consider selling that investment to offset the capital loss against capital gains that you have made in the year.
Remember also that the relevant taxing point for CGT purposes is the contract date. It may be advantageous to delay contracts until next year to defer your tax liability in relation to capital gains. We suggest discussing this with your adviser if you think it couldbe applicable.
Salary sacrificed superannuation contributions are a tax-effective way to save for retirement, as they are taxed at 15% for individuals with adjusted taxable income under $300,000 rather than your marginal tax rate which can be up to 45% (plus Medicare Levy). Adjusted taxable income for superannuation contribution purposes includes taxable income, reportable fringe benefits and net investment losses. For the 2014 financial year, taxpayers with adjusted taxable income under $300,000 will be able to contribute the following amounts into their superfund without having to pay any additional tax:
- $25,000 for taxpayers aged under 60 years old
- $35,000 for taxpayers aged 60 years old or over at 1 July 2013
Motor vehicle expenses
Individuals are able to claim a deduction for their motor vehicle using one of four methods.
- Cents per km deduction – You can claim a maximum of 5,000 work/business kilometres per year, which is calculated using a fixed rate provided by the ATO.
- The log book method – Expenses are claimed using a business use percentage which is based on a logbook kept over a 12 week period. This must be updated every 5 years.
- One third of actual car expenses – If your car has travelled more than 5,000 work/business kilometres during the year, you can claim one-third of all your car expenses, including private costs.
- 12% of the original value – If your car has travelled more than 5,000 work/business kilometres during the year you are able to claim 12% of the original cost of your car.
Detailed records will assist you gaining the best possible motor vehicle deduction in your return for the 2014 financial year.
Donations or gifts of $2 or more to approved organisations and charities are tax deductible. Ensure that you retain any receipts for donations you have made during the year.
Changes to the Medicare Levy Rate
From 1 July 2014, the Medicare levy will increase from 1.5% to 2% of taxable income. The additional funds raised from this increase will go into funding the National Disability Insurance Scheme. Due to this increase it is worth considering whether any assessable income expected in the 2015 financial year could be brought forward to the 2014 financial year. However, you should also consider that bringing income forward also means paying tax a year earlier so the cost of this might negate any tax saving depending on your individual circumstances.
Medicare Levy Surcharge/ Private Health Insurance Rebate
If you are not covered by private hospital insurance, you may be liable for the Medicare Levy Surcharge. The Private Health Insurance Rebate will also be reduced for high income earners. The table below sets out the relevant rates and thresholds for the 2014 financial year.
Be aware that the surcharge takes into account reportable fringe benefits, reportable superannuation contributions and investments losses.
If you do not currently have private hospital insurance and you are currently earning over the threshold amount, it would be worth considering taking out appropriate cover prior to 30 June 2014 to ensure that you will not be liable for the Medicare Levy Surcharge in the 2015 financial year.