Tax time around the corner
JUNE 30th is just a few short weeks away – a wake up call to think about ways to reduce your tax.
Tax cuts are in the offing with the upper limit for the 15% personal income tax band rising from $35,000 to $37,000 on July 1, and the rate for the $80,001 to $180,000 band dropping from 38% to 37%.
Even though these are relatively small tax cuts, keep in mind that a basic principle of tax planning is to try to defer income to future years while, bringing forward expenses to the current financial year. Therefore, if you have money sitting in the bank and are prepared to lose access to it for a few weeks place it on a term deposit with all interest maturing after June 30th. The interest will then be taxed next year when your marginal rate may be lower.
Conversely, 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 at the higher rate.
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 $24,000, but you could get up to $11,160 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.
CGT can take a chunk of any investment profits, but 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.
Anybody who is eligible to contribute to super but who does not have an employer making contributions for them, could also reduce CGT by making a tax deductible contribution to offset the capital gain.
CASE STUDY – A couple are retired and in their early sixties. They sell an investment which triggers a $200,000 capital gain. This will be reduced to $100,000 when the 50 percent discount is allowed for and CGT will be calculated by adding $50,000 to the taxable income of both. They could contribute $200,000 each to super from the proceeds and apportion it $50,000 concessional and $150,000 non concessional. This will create a tax deduction of $50,000 each which will wipe out the capital gain. The only tax is the 15% on each of the $50,000 concessional contributions.
As always take advice but don’t delay - when the clock strikes midnight on Wednesday 30th June it will be too late.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is firstname.lastname@example.org.
Question: My wife and I are both aged 65. We are retired with about $1.5m in two account based pensions, we own our home worth about $650,000, and have no other significant assets and no debt. We do not receive any government benefits. If we were to sell our home and use the sale proceeds plus most of our super to buy a new fantastic home worth about $1.75m, and then each couple of years thereafter downgrade to a slightly less valuable home, we would receive a full age pension and associated benefits - but would the transaction costs be more than the government benefits generated by this "gradual downsizing" strategy?
Answer: You would have to do the sums because costs of buying a home vary from state to state but I would imagine the overall costs of what you are thinking of could be in excess of $100,000. A better option may be to seek advice about a Commonwealth Seniors Health Card. Eligibility is based on taxable income which should be very small if you have most of your money in account based pensions. This should give you the benefits you are seeking without the cost.
Question: At present I am a pensioner who earns around $300 in interest. My husband died in October last year and previously I disclosed the interest in his tax return. Will I have to do an income tax return myself now?
Also, next month I am to get $100,000 from my husband’s estate. I will have to contact Centrelink. Can I give my two sons $20,000 each to help them as they have a large mortgage each?
Answer: Thanks to the Senior Australian Tax Offset (SATO), a single person of pensionable age does not have to pay tax if their income is less than $29,867 a year. Therefore there would be no need for you to prepare a tax return if your income is relatively small. You are required to advise Centrelink of any material changes in your circumstances but I recommend that you do not make gifts of more than $10,000 a year in total because the money will be held as a deprived asset for five years. A further complication is that you cannot give away more than $30,000 over five years. Your best strategy might be to give your sons $5,000 each every year for the next three years.