2021 Tax Planning Guide for Individuals and Families
Now’s the time to review what strategies you can use responsibly to minimise your tax before 30 June 2021.
While you might not be flush with cash and able to put large amounts into superannuation, it’s important that you are aware of the different ways to maximise your super balance and possibly reduce your tax at the same time. The below is general in nature and as always, before acting please seek professional advice from a licensed financial planner, such as UNICA Wealth.
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 67. Note the Federal budget announced that the age is to be lifted to 74 years from 1 July 2022 (this measure has yet to be passed by Parliament).
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 2021. 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 arrangements
• work for an employer who allows salary sacrificing, but it is disadvantageous due to a reduction in entitlements, and
• are salary sacrificing but want to make a top-up contribution to utilise their full concessional contributions cap.
Note from 1 July 2021 the concessional contribution cap increases to $27,500 and the non-concessional contribution cap increases to $110,000.
CARRIED FORWARD CONTRIBUTIONS
Carry-forward contributions allow you to use any of your unused concessional super contributions 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 2019, 2020 and 2021), you can carry-forward the unused amount and take advantage of it up to five years later. To access these rules, you have to meet certain requirements such as having a total super balance under $500,000 at the end of 30 June of the previous financial year.
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. Before acting on any of the above, it is important to obtain specialist financial advice around these complex rules.
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, but 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.
SACRIFICE YOUR SALARY TO SUPER
If your annual income is $45,000 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.
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 contributions (‘Division 293 tax’). The 15% tax is in 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 the additional tax, making super contributions within the cap can still be 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 2021, the maximum co-contribution is available if you contribute $1,000 and earn $39,837 or less. A lower amount may be received if you contribute less than $1,000 and/or earn between $39,837 and $54,837.
HOME OFFICE EXPENSES DURING COVID-19
If you have been working from home due to COVID-19, the ATO allows you to claim for your home office using the “Shortcut Method” for the 2021 year. 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 under this method.
You can choose one of three ways to calculate your additional running expenses due to working from home during the year:
• claim a rate of 80 cents per work hour covering all additional running expenses; or
• claim a rate of 52 cents per work hour covering heating, cooling, lighting, cleaning and the decline in value of office furniture, plus 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 deductions still apply:
• You must have spent the money yourself and not have been reimbursed.
• The expense must be directly related to earning your income.
• You must keep a record of the number of hours worked at home i.e., timesheets, diary notes or rosters.
• You must have a record to substantiate the claim.
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.
OWNERSHIP OF INVESTMENTS
A longer-term tax planning strategy can be reviewing the ownership of your investments to ensure they are in the most tax effective and protected structure. 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. We are in the process of working with clients at present on year end trust resolutions.
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 2021. You should make a record of your odometer reading as at 30 June 2021 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 work related 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.
PREPAY EXPENSES AND INTEREST
Expenses relating to investment activities can be prepaid before 30 June 2021. 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.
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 is 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. Let us know if you would like us to put you in touch with one of the team from UNICA Wealth for a no obligation meeting. They specialise in a range of different policies from income protection, life insurance, total and permanent disability (TPD) and trauma insurance.
REALISE CAPITAL LOSSES
Tax is normally payable on any capital gains. If you have any accrued capital gains this year, subject to advice from your financial planner, you could consider selling any non-performing investments you hold before 30 June 2021 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.
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 2021.
The Contract Date (not the Settlement Date) is generally the key date for working out when a sale or purchase occurred.
TALK TO YOUR WLF ADVISOR
Talk to us before the 30 June 2021 deadline for assistance to reduce your tax.
We will be discussing these opportunities with many of our clients as part of year-end tax planning. If you would like further information or to book an appointment to discuss the impact on your personal situation, please contact us.
General advice disclaimer:
The information provided is of a general nature only, in preparing it we did not take into account your investment objectives, financial situation or particular needs.