Tax Planning Strategies – Complete Guide
Posted on 12th May, 2017
With the end of the 2017 financial year rapidly approaching, now is the time to get your tax planning in order. With that in mind, we’ve put together a list of our top tips to legally, legitimately reduce your income tax liability for the 2017 financial year.
Please note, the below is intended as general information only. Please consult your accountant and/or financial planner before taking action on any of the points listed below.
1. If you are an employee, you may want to consider making salary sacrificed superannuation contributions. Making pre-tax superannuation contributions can be an excellent way to reduce your taxable income. The contributions will typically be taxed in your superannuation fund at a rate of 15%, which is significantly lower than the marginal rates for individuals. However, before making additional contributions, it is important that you speak to your accountant and/or financial advisor, as penalties can apply if you exceed your superannuation contributions caps for the year.
2. Consider the timing of asset disposals.
a. Individual taxpayers will be eligible for a 50% discount on capital gains, provided that the asset was owned for at least 12 months. We would recommend timing the sale of an asset to ensure that the 50% discount can be accessed, as this can result in significant tax savings.
b. Consider realising capital losses to offset your capital gains. For example, if the value of one of your investments has declined significantly and shows no signs of recovery, it may be worth disposing of the investment and offsetting the loss against your capital gains.
c. If you expect your income to be significantly lower in FY18 than it has been in FY17 (for example, you are retiring or going on unpaid leave), consider delaying the realisation of capital gains until the 2018 financial year, when you will be in a lower tax bracket.
d. If you expect your income to be significantly higher in FY18 than it has been in FY17 (for example, if you will be returning to work or anticipate selling several assets), consider bringing forward the realization of capital gains.
3. Consider the timing of tax deductible expenditure. For example, if you expect your income to be higher in FY17 than it will be in FY18, you should consider bringing forward your tax-deductible expenditure. Conversely, if you expect your income to be lower in FY17 than it will be in FY18, it may be worth delaying your expenditure.
4. If you intend to make charitable donations together with your spouse, make the donations in the name of the higher earning spouse to reap the maximum tax benefit.
5. If you’re planning on purchasing some income-generating assets together with your spouse (such as shares, rental properties, etc.), give some consideration to whether the asset will be positively or negatively geared. It can be beneficial to make positively geared investments in the name of the spouse with the lower income, as the income will be taxed at a lower rate. Conversely, purchasing negatively geared investments in the name of the higher earning spouse can reduce that spouse’s taxable income, resulting in tax savings.
6. If you are a primary producer and you expect a permanent reduction in income, consider withdrawing from the income averaging system. Please note that the decision to withdraw from the system generally cannot be revoked.
Small Business Entities
1. From 1 July 2016, businesses with turnovers of less than $10 million will be able to access a range of concessions which were previously only available to businesses with turnovers of less than $2 million. For example, immediate deductions are available for assets costing less than $20,000. This concession has been extended until 30 June 2018.
2. Consider bringing forward business expenses, such as superannuation. Although superannuation for the June quarter isn’t due until 28 July 2017, paying your superannuation liabilities before 30 June 2017 will allow you to deduct the amount in the 2017 financial year. Please note, the super funds must receive the contributions before 30 June 2017 for the amount to be tax deductible in FY17.
3. Prepay expenses. If you’re running a small business, your prepaid expenditure may be immediately deductible if the prepayment is for a period of less than twelve months, ending no later than the last day of the income year following the year in which the expenditure was incurred. An example of this would be prepaying interest on any business debt.
4. If your business is run on a Cash basis, consider paying any outstanding invoices before 30 June 2017. This will bring the deduction into the current year. You may also want to delay issuing sales invoices until after 30 June 2017.
5. If your business is run on the Accruals basis, consider ordering supplies in late June instead of early July. Also consider deferring invoices for sales made in late June to early July.
6. Review your trade debtors for uncollectable amounts. If a debt is genuinely unrecoverable, it should be written off before 30 June 2017.
7. If your tax group includes a discretionary trust, make sure that the distribution resolutions have been made by 30 June 2017. We also recommend that you ensure that a Family Trust Election has been made if the trust has unrecouped losses, or has beneficiaries whose total franking credits for the 2017 year exceed $5,000.
8. If your small business is run through a company, a lower rate of tax will apply. The rate for the 2017 financial year is 27.5%. However, any dividends paid by your company can still be franked at 30%.
9. If your family members are employed in your business, make sure that their salaries are reasonable for the work they have performed. Please note that if you are running a Personal Services Business, amounts paid to your family members may not be deductible.
10. Consider the valuation of your trading stock. If there is a difference of $5,000 or less between the value of your stock at the beginning and end of the financial year, there is no need to do a stock take or account for any changes in value. However, if the difference is more than $5,000, you must perform a stocktake. An increase in the value of stock will be assessable, whereas a decrease in value will be deductible. Stock can be valued either at cost price, market value or replacement value. Best practice is generally to value stock at the lower of cost or market value. This can result in a deductible adjustment.
1. The concessional contributions caps for 2017 are as follows:
a. Individuals under 49 years of age – $30,000
b. Individuals 49 years of age and older $35,000
From 1 July 2017, these caps will reduce to $25,000 for all ages, so it may be worth bringing forward any scheduled contributions to maximise the caps.
2. The non-concessional contributions caps for 2017 are as follows:
a. Individuals under 65 years of age – $540,000 over a three year period
b. Individuals older than 65 but younger than 75 – $180,000 per annum
From 1 July 2017, these caps will reduce to $100,000 per annum (with the option to bring forward two years worth of contributions for individuals under the age of 65), so it may be worth bringing forward any scheduled contributions to maximise the caps.
3. From 1 July 2017, the Division 293 threshold will reduce from $300,000 to $250,00. Under Division 293, the concessional super contributions made by high income earners are taxed at 30% instead of 15%.
4. Individuals with superannuation balances below $500,000 will be allowed to make additional concessional contributions provided they have not reached their concessional caps in previous years, with effect from 1 July 2017.
5. From 1 July 2017, a deduction will be allowed for individuals under the age of 75 making after-tax contributions to their superannuation funds. Previously, deductions for personal contributions were restricted. Therefore, if you are planning on making any personal contributions, you should consider delaying the contribution until after 1 July 2017.
6. From 1 July 2017, the Government will introduce a $1.6 million transfer balance cap. This limits the amount that can be transferred into the pension phase of superannuation and receive the benefit of the 0% earnings tax. For pensions that commenced prior to this date, the pension amount will be reset. Any excess over the cap may be rolled back into the accumulation phase of superannuation or taken as a lump sum withdrawal. Excess transfer balance tax may apply.
If you’d like to know more about our tax planning services, please contact our office.