Tax planning shouldn’t be left until the last few weeks and days of the financial year. Forward planning is the best way to ensure an optimal outcome.
Below are some handy tax strategies for individuals and families that apply for the 2014 tax year.
Maximise deductible super contributions
The maximum concessional (deductible) superannuation contribution limits for the 2013/14 year are:
– Individuals aged 60 and over on 30 June 2014 – $35,000 contribution limit.
– Individuals aged 59 and under on 30 June 2014 – $25,000 contribution limit.
Note that super guarantee and salary sacrifice amounts are included in these contribution limits.
For a couple this amounts to a combined limit of at least $50,000 and perhaps $70,000, so don’t forget to contribute for your spouse, if they have enough taxable income to make use of the deduction.
Employees who wish to salary sacrifice super contributions need to speak with their employer to allow plenty of time for the arrangements to be made before 30 June.
If you are self-employed and making a personal superannuation contribution, ensure you obtain the correct documentation from your superannuation fund to substantiate claiming the deduction before lodging your tax return.
The ATO is very strict on this point and failure to have the right paperwork can result in loss of the tax deduction.
Consider income splitting
Couples should consider making investments in the name of the spouse with the lower income to minimise the tax payable on income distributions and capital gains.
It’s important to be aware, however, that this strategy may not be the best approach for negatively geared investments.
Children aged 18 or over at 30 June 2014 are entitled to the full adult tax thresholds, which can be very tax effective during the years when they are in full-time study. So consider investing in their name, especially for relatively short-term investments.
Alternatively, a better strategy may be to hold investments in a family trust, whereby all family members become potential beneficiaries of the trust. The trust is then able to distribute the income to low income family members each year in a way that provides significant tax savings.
A family trust is not usually an effective structure for holding negatively geared investments as the losses remain trapped in the trust.
Where you operate a service based business from a company or trust structure and are splitting the income with family members, you need to be aware of the personal services income (PSI) rules where you have one main client during the year and no other employees servicing clients.
Deferring capital gains tax
Realising a capital gain after 30 June 2014 will defer tax on the gain by 12 months and can also be an effective strategy to access the 50% general discount which requires the asset to be held for at least 12 months.
The “date of the contract” (and not settlement date) is the realisation date for capital gains tax purposes.
Review deductible versus non-deductible debt
The aim is generally to pay down non-deductible debt where possible. It is common to take out an interest-only loan for investment purposes, and then make all principal repayments against the home loan and any other non-deductible debt.
This is a sensible strategy, and perfectly acceptable to the ATO when set up properly.
It may also be worth looking for ways to restructure debts, but beware of debt restructuring that appears tax-driven as the ATO could apply anti-avoidance legislation.
Also remember that tax deductibility depends on the use to which the money was put, rather than the security provided for the borrowing.
For example, you may take out an investment loan to buy shares, using the spare borrowing capacity on your home mortgage to secure the loan against your family home and keep the interest rate down. The interest on the investment loan in that case is still tax-deductible.
By contrast, you need to be very careful about using redraw facilities or using the security of unencumbered investment assets if the funds are used for private purposes. The test for interest deductibility is what the funds are used for rather than the assets used for security.
Prepay up to 12 months of deductible expenses at 30 June
Individuals who are not in business can claim up to 12 months of prepaid expenses, for example, interest on investment loans and management fees.
You should also make any tax-deductible payments (such as donations, subscriptions and income protection insurance premiums) before 30 June to ensure that they can be claimed in this year’s tax return.
Private health insurance rebate
The Medicare levy surcharge (MLS) is an additional 1 to 1.5% that is imposed on higher income earners who do not have at least the appropriate level of private hospital cover with an approved health fund. The Medicare levy surcharge is means tested and calculated on “adjusted taxable income” as follows:
| Adjusted Taxable Income for Medicare levy surcharge purposes | Medicare levy surcharge |
| Singles less than $88,000 Couples/families less than $176,000 |
0.0% |
| Singles $88,001 – 102,000 Couples/families $176,001 – 204,000 |
1.0% |
| Singles $102,001 – 136,000 Couples/families $204,001 – 272,000 |
1.25% |
| Singles more than $136,001 Couples/families more than $272,001 |
1.5% |
Adjusted taxable income equals taxable income, plus reportable fringe benefits and reportable superannuation contributions, and total net investment losses.
The Australian Government provides an income tested private health insurance offset to help people meet the cost of private health insurance.
The amount of the rebate is calculated as follows:
| Base Tier | Tier 1 | Tier 2 | Tier 3 | |
| Singles | $88,000 or less | $88,001 – 102,000 | $102,001 – 136,000 | $136,001+ |
| Families | $176,000 or less | $176,001 – 204,000 | $204,001 – 272,000 | $272,001+ |
| Under 65 | 30% | 20% | 10% | 0% |
| 65-69 | 35% | 25% | 15% | 0% |
| 70+ | 40% | 30% | 20% | 0% |
Note: Single parents and couples (including de facto couples) are subject to the family tiers. For families with children, the thresholds are increased by $1,500 for each child after the first. The Lifetime Health Cover (LHC) component of a premium is not eligible for the private health insurance rebate.
The private health insurance offset (PHIO) starts at 30% of the premium for singles under age 65 with an adjusted taxable income of $88,000 or less, and couples of $176,000 or less, falling to 20% and 10% and phasing out completely for singles over $136,000 and couples over $272,000.
The current thresholds have reduced the incentive to take out private health insurance and many would have reduced or dropped their cover.
As with all investment decisions, your approach to private health insurance should consider the likely financial (and in this case medical) impact of making particular choices, and not be ruled entirely by tax considerations.
It is still important however, to consider the implications of both the MLS and the PHIO, and how they apply to your specific circumstances, both now and in the future.
An important point is that to avoid paying the MLS the whole family must be covered, a common trap for a couple having their first child. If they previously had “couples” cover, this won’t automatically extend to any children and it is recommended that they switch to a “family” policy before the child is born.
Often people don’t find this out until preparing their tax return when it is too late, and the entire family income may be subject to the MLS for that year.
