Tax Planning Tips

The end of the financial year is fast approaching, so there’s no time to lose if you are in a position to reduce your tax.

If you have deductible expenses such as repairs and maintenance on investment properties, try to bring them forward so that you will enjoy your tax deduction in this financial year.

You can bring forward expenses by prepaying 12 months interest on your investment loans or margin loans.  Pre-paying a year’s interest on a loan of $300,000 may cost you $15,000, but you may get as much as $7,000 back as a tax refund. This strategy will require negotiation with your lender – you can’t just bank the equivalent of a year’s interest into the loan account, because all the lender will do is take one month’s interest and credit the rest to the principal.

For capital gains tax purposes remember that the relevant date is the date the sales contract is signed.  Therefore just deferring signing a contract until after June 30th can change a situation so that the CGT is paid when you are in a lower tax bracket. It also gives you an extra year’s use of the money you owe the tax man.

Another strategy is to sell assets that will trigger a capital loss in the same year as you make the capital profit – the losses will reduce the CGT as they can be offset against the gains.   Just keep in mind that even though capital losses can be carried forward, capital profits can’t. Therefore, if you don’t take action to reduce capital profit before 30 June you’ve missed the chance to do it.

Anybody who is eligible to contribute to super could also reduce CGT by making a tax deductible contribution to offset the capital gain.

CASE STUDY

A person earns $50,000 a year including $5000 employer super. They sell an investment which triggers a $40,000 capital gain.  This will be reduced to $20,000 when the 50 percent discount is allowed for and CGT will be calculated by adding $20,000 to their taxable income.  They could contribute $20,000 to super as a concessional contribution which could create a tax deduction of $20,000 which will wipe out the capital gain.  The only tax is the 15% on the concessional contribution.

If you are trying to reduce a bigger capital gain in 2019/2020, be aware that the superannuation carry forward rules are now in force ,and it may be worth saving some of this year’s superannuation contribution in case you need it next year.  From 1st July 2019 we now have catch-up contributions. Provided your superannuation balance at 30 June 2019 is less than $500,000, and you have not use up all your $25,000 concessions cap (including employer contributions) in the 2018/2019 year, you could bring forward your own un-used contributions into 2019/2020.

For example, if your employer contributions are $5000 a year, you may be able to make total additional concessional contributions of $40,000 in the next financial year and claim a tax deduction for those contributions provided you have made no personal concessional contributions in the year previous to making the catch up contribution.

As always take advice – getting it wrong can be very costly.

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