BEING CLEVER:IT'S HARDER BUT CAN BE DONE
PART 1:
The Australian Taxation Office may have tightened its practices and closed loopholes but there are still ways to minimise tax.
Long-standing advice is that expenses should be brought forward to the current year by paying early for tax deductible items, while income should be deferred to later financial years.
Holding savings in tax-effective structures can also help. This does not mean buying into ostrich farms or trout fish farms, although some forestry/agribusiness investments can provide tax deductions and be extremely good investments.
Super has become more attractive, with the government's Simpler Super rules turning it into something of a tax haven, especially for those approaching retirement.
Taxpayers should also claim all the expenses and rebates they are entitled to. Many are available.
Work-related expenses such as professional subscriptions, travel and union fees can be claimed, as can some non-work related expenses such as premiums for income protection insurance.
Investments can be a source of deductions. Interest on loans taken out to buy shares or property can be claimed, for example.
Deductions are often subject to complex restrictions, and these should be checked thoroughly before making a claim.
Rebates may also help reduce tax. Some of these may be claimed through the tax return or via other channels so taxpayers should be careful not to double up on a rebate claim. Childcare rebates, for example, can be claimed on tax or through Centrelink. If you get assistance through Centrelink you can only claim your net expenses in the tax return.
Health fund rebates are often accounted for in the fund's fees and, if so, they cannot be claimed again through the tax return.
To claim deductions in tax returns lodged for this financial year, a taxpayer must have incurred the expense or qualified for the rebate this financial year. Deductible expenses that are not paid in time will have to wait another year to be claimed.
Advantage One says tax cuts announced in this year's federal budget make it more important to bring forward claims by prepaying where possible. From next year, the 30 per cent tax threshold will rise to $30,000 from $25,000. The 40 per cent tax threshold will increase from $75,000 to $80,000 and the 45 per cent threshold will rise from $150,000 to $180,000. This means less tax will apply at each income level.
Tax cuts are a double-edged sword when it comes to deductions. Cuts in tax rate and the tax burden are obviously good but if you're claiming deductions you are better off claiming them if you can when the tax rate is higher because you get a bigger advantage.
Superannuation (which is simply a concessionally taxed ownership mechanism) is still by far the smartest and best way to reduce tax.
Contributions to super are taxed at only 15 per cent instead of the marginal tax rate if the person contributing the funds had taken the cash.
Earnings made in super are also taxed at only 15 percent, while interest on money held outside of super is taxed at the investor's marginal tax rate.
For people over 60 year of age, or those who have started drawing a pension, earnings will be tax free from July 1.
Over 60s will also be able to withdraw their money tax free, while people retiring between 55 and 60 will have to pay only 15 percent tax on a private pension drawn from super.
Plenty of strategies are available to manage tax using superannuation but money stored in super cannot be accessed until age 55 at the earliest, so this may not suit everyone.
Money outside of super can also be held tax effectively.
Tax ownership is absolutely crucial to make sure you don't have any extra taxable income.
Couples can hold bank accounts or income producing assets in the name of the spouse who has the lower marginal tax rate, so interest earned will be taxed at a lower rate.
Franked Australian shares offer tax advantages due to franking credits, which are essentially credits for tax the company has already paid, although there are no franking credits on global shares.
Capital gains made on investments that have been held for more than 12 months are taxed at half the rate, so simply holding an investment will be more tax effective than trading regularly.
PART 2:
End of year and new financial year tax planning for small businesses is being shaken up by tax and superannuation measures announced in the past two federal budgets. It's been given new life.
Small business owners should always look for strategies that will improve their business and personal tax positions at the same time.
Here are seven tax and super strategies for business owners:
-
Defer the sale of business to save capital gains tax
Strategy: Owners should consider timing the pending sale of a small business until the new financial year if they are likely to exceed the asset threshold for the small business capital gains tax concessions.
These concessions, combined with the standard CGT concessions available to all taxpayers (except companies), can, depending upon the circumstances, completely eliminate CGT on a multimillion-dollar sale of a small business. (The concessions can be claimed by individuals, trusts, and partnerships.)
-
Contribute sale proceeds to super
Strategy: Owners of small businesses who are already eligible for the small business CGT concessions might consider trying to time the pending sale of their businesses to before the end of the financial year and contributing much of the proceeds to super. (This is a possible alternative to strategy one.)
A one-off opportunity exists to make an extraordinarily large after tax super contribution before June 30.
You will have to move quickly if you haven't already exchanged contracts on the sale though. This strategy would be most appropriate for a business owner who has lined up a purchase and is finalising the deal.
-
Contribute business property to super
Strategy: Business owners who contribute their privately owned business properties to their self managed super funds can gain multiple tax benefits - including potentially wiping out any CGT triggered by the transfer of ownership. Amongst solutions include tax effective investments such as forestry and agricultural managed schemes.
Self employed business owners - as distinct from those who operate through companies - can claim tax deductions for their personal contributions up to annual caps.
-
Pay dividends from cashed-up companies
Strategy: Small business owners could arrange for their private companies to pay full franked dividends by June 30 to their shareholders who are outside the paid workforce. In turn, the shareholders could contribute the money to super as deductible personal contributions.
This strategy is intended to overcome the problem of extracting money out of cashed up private companies in a high tax effective way.
-
Cut income tax on private company dividends
Strategy: As an alternative to strategy four, some private companies may decide that it suits the circumstances of their shareholders to receive dividends after June 30. Deferral of dividends until 2007 - 08 will mean that their shareholders pay less tax because of the latest round of tax cuts announced in the 2007 budget.
-
Don't overlook classic tax strategies
Strategy: The latest tax cuts from July should motivate business owners to accelerate their business and personal deductions in 2006-07 when tax rates are higher and to defer income to next financial year when tax rates are lower. And, as discussed, income splitting by holding assets in the name of a lower earning spouse will become more tax effective with cuts in taxes from July 1.
-
Take a pre-retirement pension and maximise contributions
Strategy: The strategy of taking a pre-retirement super pension while maximising salary sacrificed or deductible super contributions will become one of the more popular options among taxpayers in their last 10 years or so in the workforce. And the strategy will particularly appeal to small business owners because of their perhaps unequalled control over their salary packages.
Under one version of the strategy, a pre-retirement pension, which is only available to people aged over 55, is taken to cover living costs and then up to 100 percent of the taxpayer's salary is salary sacrificed into super.
Tony Martin and Don Blackwell - Directors
| 
Home
About Us
