2020 Tax Planning Guide for Individuals and Families
Now is the time to review what strategies you can use to responsibly minimise your tax before 30 June 2020.
It’s been a challenging start to the year for most of us, and any savings that you can make on your tax will certainly be helpful, whether you want to reduce your home loan, top up your super or just take some pressure off day to day living costs.
The most important thing to remember is that there is no point in spending money to get a tax deduction, unless it’s going to result in something useful for you.
While you might not be flush with cash now and able to put large amounts into superannuation, it’s important that you are aware of what is possible to maximise your super balance and possibly reduce your tax at the same time.
DEDUCTIBLE SUPER CAP OF $25,000 FOR EVERYONE
The tax deductible super contribution limit (or “cap”) is $25,000 for all individuals under age 75. Individuals need to pass a work test if over age 65, which requires working 40 hours in 30 consecutive days.
Consider, in conjunction with advice from a licensed financial planner such as UNICA Wealth, making the maximum tax deductible super contribution this year before 30 June 2020. The advantage of this strategy is that superannuation contributions are taxed at between 15% to 30% compared to typical personal income tax rates of between 34.5% and 47%.
Individuals who may want to take advantage of this opportunity include those who:
- work for an employer who doesn’t permit salary sacrifice
- work for an employer who allows salary sacrifice, but it’s disadvantageous due to a reduction in entitlements, and
- are salary sacrificing but want to make a top-up contribution to utilise their full CC cap
We recommend placing any contributions well before this date to ensure it is received in time.
CARRIED FORWARD CONTRIBUTIONS
Carry-forward contributions are not a new type of contribution, they are simply new rules that allow super fund members to use any of their unused concessional contributions limit (or cap) on a rolling basis for five years.
This means if you don’t use the full amount of your concessional contribution cap ($25,000 in both 2019 and 2020), you can carry-forward the unused amount and take advantage of it up to five years later.
Carry-forward contributions are calculated on a rolling basis over five years, but any amount not used after five years expires. These carry-forward rules only relate to concessional contributions into super, not non-concessional contributions, as they have different caps.
SPOUSE SUPER CONTRIBUTIONS
You can make super contributions on behalf of your spouse (married or de facto), provided you meet eligibility criteria and your super fund allows it. This is known as contribution splitting.
Doing this not only helps to boost your spouse’s retirement savings, it can also help you save tax if your spouse has limited income.
You may be eligible for a tax offset of up to $540 on super contributions of up to $3,000 that you make on behalf of your spouse if your spouse’s income is $37,000 p.a. or less.
The offset gradually reduces for income above $37,000 p.a. and completely phases out at $40,000 p.a. and above.
ADDITIONAL TAX ON SUPER CONTRIBUTIONS BY HIGH INCOME EARNERS
If your adjusted taxable income is over $250,000, you are required to pay an additional 15% tax on super contribution (‘Division 293’). The 15% tax is an addition to the 15% contribution tax already levied on entry to your superfund. This effectively brings the total tax on contributions for those affected to 30%.
Notwithstanding, making super contributions within the cap is still a tax effective strategy. With super contributions taxed at a maximum of 30% and investment earnings in super taxed at a maximum of 15%, both these tax points are more favourable when compared to the highest marginal tax rate of 47% (including the Medicare levy).
GOVERNMENT CO-CONTRIBUTION TO YOUR SUPER
If you are on a lower income and earn at least 10% of your income from employment or carrying on a business and make a “non-concessional contribution” to super, you may be eligible for a Government co-contribution of up to $500.
In 2020, the maximum co-contribution is available if you contribute $1,000 and earn $38,564 or less. A lower amount may be received if you contribute less than $1,000 and/or earn between $38,564 and $53,564.
10 WAYS TO REDUCE YOUR TAX
1 – OWNERSHIP OF INVESTMENTS
A longer-term tax planning strategy can be reviewing the ownership of your investments. Any change of ownership needs to be carefully planned due to capital gains tax and stamp duty implications. Please talk to us prior to making any changes.
Investments may be owned by a Family Trust, which has the key advantage of providing flexibility in distributing income on an annual basis and an ability for up to $416 per year to be distributed to children or grandchildren tax-free.
2 – PROPERTY DEPRECIATION REPORT
If you have an investment property purchased pre-9 May 2017, a property depreciation report (prepared by a Quantity Surveyor) will allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself.
The cost of this report is generally recouped several times over by the tax savings in the first year of property ownership.
For residential properties purchased post 9 May 2017, there are limits on depreciation deductions. The new rules prevent investors from claiming depreciation deductions for ‘previously used’ assets (i.e., plant & equipment) contained within second-hand residential properties. That is, if you have purchased a residential investment property after this date, that has plant & equipment already installed and currently being used, you can no longer claim a depreciation deduction for this equipment. You still however can claim a capital works deduction for any structural improvements pre-existing at the time of purchase.
Further you are no longer able to claim any deductions for the cost of travel relating to your residential rental property. As with prior years, the travel expenditure cannot be included in the cost base for calculating your capital gain or capital loss when you sell the property.
3 – MOTOR VEHICLE LOG BOOK
Ensure that you have kept an accurate and complete Motor Vehicle Log Book for at least a 12-week period. The start date for the 12-week period must be on or before 30 June 2020. You should make a record of your odometer reading as at 30 June 2020 and keep all receipts/invoices for your motor vehicle expenses. Once prepared, a log book can generally be used for a 5-year period.
An alternative (with no log book needed) is to simply claim up to 5,000 business kilometres (based on a reasonable estimate) using the cents per km method.
Let us know if you need a new log book and we can send a complimentary one out to you.
4 – SACRIFICE YOUR SALARY TO SUPER
If your annual income is $37,000 or more, salary sacrifice can be a great way to boost your superannuation and pay less tax. By putting pre-tax salary into super rather than having it taxed as normal income at your marginal rate you may save tax. This can be especially beneficial for employees nearing their retirement age.
5 – PREPAY EXPENSES AND INTEREST
Expenses relating to investment activities can be prepaid before 30 June 2020. You can prepay up to 12 months of interest before 30 June on a loan for a property or share investment and claim a tax deduction this financial year. Also, other expenses in relation to your investments can be prepaid before 30 June, including rental property repairs, memberships, subscriptions, and journals.
6 – INSURANCE PREMIUMS
Possibly your greatest financial asset is your ability to earn an income. Income Protection Insurance generally replaces up to 75% of your salary if you are unable to work due to sickness or an accident. The insurance premium is normally tax deductible, plus you get the benefit of protecting your family’s lifestyle if you cannot work due to sickness or an accident. It’s a small price to pay for peace of mind.
Like rental property interest, income protection premiums can also be pre-paid for 12 months to increase your deductions. Talk to the team here at UNICA Wealth to explore this further.
7 – WORK RELATED EXPENSES
Don’t forget to keep any receipts for work-related expenses such as uniforms, training courses and learning materials, as these may be tax-deductible.
Additionally, you can claim an immediate deduction for depreciating assets up to $300, provided it is used for work-related purposes.
8 – HOME OFFICE EXPENSES
The Australian Taxation Office (ATO) has introduced a temporary simplified (or shortcut) method due to COVID-19, making it easier for people to claim deductions for working from home.
You can claim a rate of 80 cents per hour for your running expenses, rather than needing to calculate costs for specific running expenses.
Multiple people living in the same house can claim this new rate i.e., a couple living together could each individually claim the 80 cents per hour rate. The requirement to have a dedicated work from home area has also been removed.
Claims for working from home expenses prior to 1 March 2020 cannot be calculated using the shortcut method, and must use the pre-existing working from home approach and requirements.
There are three ways that you can choose to calculate your additional running expenses for the year:
- claim a rate of 80 cents per work hour for all additional running expenses. Available for the period 1 March – 30 June, or
- claim a rate of 52 cents per work hour for heating, cooling, lighting, cleaning and the decline in value of office furniture, plus calculate the work-related portion of your phone and internet expenses, computer consumables, stationery and the decline in value of a computer, laptop or similar device, or
- claim the actual work-related portion of all your running expenses, which you need to calculate on a reasonable basis.
The golden rules for claiming deduction still apply:
- You must have spent the money yourself and not have been reimbursed,
- The expense must be directly related to earning your income,
- Must keep a record of the number of hours worked at home i.e., timesheets, diary notes or rosters,
- Must have a record to substantiate the claim.
9 – REALISE CAPITAL LOSSES
Tax is normally payable on any capital gains. You should consider selling any non-performing investments you hold before 30 June to crystallise a capital loss and reduce or even eliminate any potential capital gains tax liability. Unused capital losses can be carried forward to offset future capital gains.
10 – DEFER INVESTMENT INCOME & CAPITAL GAINS
If practical, arrange for the receipt of Investment Income (e.g. interest on term deposits) and the Contract Date for the sale of Capital Gains assets, to occur AFTER 30 June 2020.
The Contract Date (not the Settlement Date) is generally the key date for working out when a sale or purchase occurred.
If you would like further information or advice, contact us for a meeting before the 30 June 2020 to discuss how to best responsibly minimise your tax.
General advice disclaimer:
The information provided here is of a general nature only, in preparing it we did not take into account your investment objectives, financial situation or particular needs.