PLANNING TO PAY LESS TAX
Some judicious planning now could trim your tax bill later in the year and, indeed, in the year after that.
Remember, we are already into March, Easter will soon have come and gone and, before we know it, June 30th and the end of the tax year will be upon us.
The sad truth is, many of us end up paying more tax than we really have to because of poor planning, or no planning at all.
Timing is a central feature of tax planning. It is about timing the receipt of income and the payment of deductible and rebateable expenses in a manner that minimises your ultimate tax liability. It is often about deferring a tax liability and, in some circumstances, tax deferred is tax reduced.
True, most wage and salary earners do not have much influence over the timing of their income, it arrives in predetermined weekly or fortnightly increments.
Many households, however, will have other sources of income, say from savings and investments, or perhaps from the part-time or casual earnings of a spouse. This income can often be received in a tax-effective manner.
For example, if you have money on term deposit with a bank, arrange for the deposit to mature after June 30th. By doing this you will defer the interest received on the deposit into the 2003-2004 tax year.
But beware, there is a trap here. The Australian Tax Office deems interest to be taxable when it is credited to your account, even if the interest is not accessible until the deposit matures. Thus, if interest is credited monthly or quarterly, you will have to pay tax on the interest credited during the current tax year. The way around this is to choose a deposit in which interest is credited only on maturity.
Even minor changes in the amount of your taxable income can be important in other ways.
Take, for instance, family tax benefit. It provides up to $4,190 a child a year, so it is certainly worth claiming. Family tax benefit is means tested. As such, the benefit for a single dependent child under 18 years cuts out when family income exceeds $83,184 a year.
If your anticipated income is going to exceed this limit by only a small amount, it will pay to get it below the limit, perhaps by reducing the part-time hours worked by a spouse, or by finding additional tax-deductible expenditures.
Capital gains tax is another area in which timing can be critical. If, for example, you plan the sale of an investment property on which CGT will be payable, consider deferring the sale until after June 30. This defers payment of CGT for 12 months. The potential benefit is enhanced if your income will be substantially lower in 2003-2004, perhaps because you are retiring or reducing your workload.
Note, however, that CGT crystallises when the sale takes place, not when payment is received.
Capital losses cannot be claimed against income, but they can be set off against realised capital gains. So CGT on the sale of your investment property could be reduced by selling another investment (for example, shares) that produces a capital loss. In the case of shares, you could even repurchase them at the start of the next tax year.
So-called salary sacrifice (in which pretax income is diverted into, say, additional superannuation) is another means by which wage and salary earners can reduce taxable income.(see separate article and example ).
It requires a co-operative employer and, because of the technicalities involved, should only be undertaken after seeking appropriate professional advice.
Of course, tax minimisation should not be an end in itself, but simply part of a broader strategy to maximise financial wellbeing. In this regard, tax effective investments and superannuation are other options. Superannuation is more of a long term investment, while tax effective products are generally required to fix a current year tax problem.
Remember, a bad investment is still a bad investment, even if it is tax effective.
Don Blackwell - Associate and Taxation Specialist; Advantage One
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