Tax Planning for Individuals - Part 1
In this paper we talk about tax planning for individuals. There are two parts. In this post: Tax planning strategies to implement before 30 June. In our next post we will planning strategies that can be utilised at the time of preparation of your tax return.
Let’s now look at tax planning strategies that need to be put in place prior to the end of the tax year 30 June 2018.
Year-end Tax planning prior to 30 June 2018.
Be Planned and Prepared!
FIR S T - SUPERANNUATION STRATEGIES.
The maximum deductible superannuation that can be claimed in this tax year is $25,000 including the employers 9.5% superannuation guarantee. Consider Topping-up your super to maximum concessional $25,000 and claim the top-up deduction in your personal tax return. Note the age-based limitations from age 65 to 75. And of course, the super rules can be very complex so make sure you confirm with your Financial Advisor.
For 2018 year the super top up can be paid direct into your super fund. No need to involve your employer with ‘salary sacrifice’ as in prior years. This is a very positive change allowing greater flexibility.
Be aware that the super must be received by your super fund by 30 June - so allow four or five days at least for the transaction to be processed.
The $25,000 maximum concessional contribution includes your employer 9.5% super guarantee payments and amounts salary sacrificed (if any). So check on how much has already been paid into your super fund before topping up to the $25,000.
Spouse Super contributions Offset $540. New rules for 2018 year allow a full claim where the spouse assessable income (note not taxable income) is up to $37,000 (previously just $10,800). The $540 tax offset phases out for spouse income above $40,000. The maximum rebate is $540 (on a contribution of $3,000 to your spouse’s super fund), although the contribution can be more than $3,000. This is an excellent strategy for couples where the wife ceases working to have children, or a couple where one partner is out of the workforce for some time. The spouse contribution will not be subject to the 15% contributions tax or the super surcharge, and when withdrawn from the super fund as a lump sum it will be tax-free!
Government Co-contribution – up to $500 gift from the Government! This is applicable to taxpayers with total income (note not taxable income) below $36,813 – phasing out for total incomes up to $51,813. And you make a personal contribution of $1,000 or more to your superannuation fund. After lodging your tax return the Government will match your total income with your superannuation fund details and pay the $500 into your super fund.
But note Spouse super offset and Government Co-contribution cannot be claimed where the ‘total super balance’ exceeds $1.6 million. As you can see there are a few TRAPS with the above superannuation strategies so check with your Advisor or the Tax Office website if unsure www.ato.gov.au
INTEREST DEDUCTIONS. Consider pre-paying one year’s interest on an investment property or other deductible investment loans. Interest Pre-paid up to 12 months in advance can be deductible in the 2018 year. Note this has to be arranged with you bank or other lender. You cannot just pay a lump sum against you loan account. You must formally arrange the prepayment of interest with your lender.
Now let’s look at year-end tax planning for Capital Gains. If you have sold shares or property during the year;
CAPITAL GAINS / LOSSES
Review your realised capital gains and losses for the year. Do you have a net overall taxable capital gain?
If yes, review any unrealised capital losses that you may have. Note that capital losses can only be offset against capital gains. Not against ordinary income. So you may want to realise the capital loss in the same year as the gain.
The broad rule is to try and realise capital losses before or in the same year as capital gains. Not in a following tax year.
Note that a 50 % discount on the gain generally applies to assets and investments held for more than 12 months. So double check on the purchase date before selling eg. shares. For example, a share held for 11 months could be held for a further month before selling, to access the 50% CGT discount.
Note also the relevant sale date is the contract date. For example, for a property, the date of the contract of sale is the relevant date - not the date of settlement which can be on average 8 weeks later.
If you do have a substantial net Capital Gain, consider the superannuation and prepayment strategies previously covered to offset the gain, particular if they help you stay in a lower tax bracket.
How are Capital Gains Taxed? The net Capital Gain is included in your income tax return and gets added on to your other net taxable income. So the net Capital Gain is taxed at your highest marginal tax rate. This is why tax planning for Capital Gins can be so effective!
In our next post we look at strategies and practices that can be implemented after the end of the year, at the time of preparing your tax return.