Tax is something you should think about all year, not just on June 30 when you try to do it yourself on the lounge, watching the footy.
If you’re prepared to do some homework and seek good advice, then you can take advantage of some very generous tax breaks in the next few months, even if you’re on an average income.
The rewards are there, they just take some forward planning.
Lance Cheung, primary adviser at financial planning firm Parinity, recommends income protection insurance as high up on the list of big-ticket tax deductions.
“It’s tax effective, as well as protecting your most important asset – your ability to earn income,” he says.
Another useful tax deduction, but one that’s not well-known, is when you might be asked by your boss to use your own car for work every so often – for instance, to drop in some documents.
“You can use what’s known as the ‘per kilometre method’, which applies to car usage up to 5000 work-related kilometres, and does not require a logbook,” says Cheung.
He also recommends that salary and wage earners – particularly those who work for the government – take better advantage of salary packaging. That is, you can arrange with your employer to buy a work-related item using income before you pay tax on it.
“While it’s not a tax deduction as such, it’s still a tax reduction – in effect, your employer is buying an item for you, like an iPad, instead of paying you the extra cash, and you don’t pay for it with money that has already had tax taken out,” says Cheung.
“The only catch is that you have to use the equipment at least 50 per cent of the time for work purposes.”
A trickier task
Cheung warns that getting a tax deduction from negative gearing of investments – borrowing to buy a rental property and claiming the interest and expenses – has become a much harder task these days.
“We’re still finding [that] our clients are purchasing property, but with interest rates so low, to really get the most value from tax benefits you need to make sure your depreciation schedule is up to date and very detailed,” he says.
For this, Cheung recommends talking to a specialist quantity surveyor for a one-off report that lists all the items that can be claimed as tax deductions – carpets, light fittings, lampshades, and so on.
“We’ve had clients come in and seen them increase their tax deductions by up to two or three thousand dollars a year,” he says.
Robert Jackson, a partner and superannuation tax expert at big four accounting firm Deloitte, believes that negative gearing has somewhat fallen out of favour.
“There is less negative being arranged than we have seen in the past,” he says.
This is partly because people see superannuation as a far more effective way to fund their retirement than a rental property.
Another contributing factor is that salary sacrificing is much easier and more effective to arrange than finding and buying a rental property.
The best tax break in town
Making extra superannuation contributions offers “the biggest tax break in the system”, Jackson says.
He suggests that, if a worker earning $80,000 used a salary sacrifice arrangement to pay $10,000 extra into their super fund, then he or she would save $1,900 in tax overall.
“Secondly, once the money is in the account, any earnings on it are also taxed at 15 per cent,” he adds.
Peter Bembrick, tax partner at accounting firm HLB Mann Judd, agrees additional superannuation contributions represent one of the best tax breaks around.
“Every salary and wage earner – not just the high income earners – should be thinking of contributing extra superannuation,” he says.
“Most people are unaware of the limits, which this year have been increased to $35,000, up from $25,000 – and double that for couples. This is a particular advantage for people who are looking to build up their super in the run to retirement, although you will need to salary sacrifice, over and above what your employer is contributing.”
For people over 55 years of age whose cash flow doesn’t allow for this sort of salary sacrifice, the “transition to retirement” rules allow you to withdraw some of the money that’s already in your super fund and recontribute it to gain a tax advantage.
However, you’ll need serious professional tax advice to make this work for you.
For retirees, an investment strategy based on fully franked dividends is a tax effective option.
“With fully franked dividends, a company pays tax at 30 per cent and the shareholder gets that benefit. If their average tax rate is less than 30 per cent, the difference is refunded,” Jackson says.
“The attraction is that this reminds people of the times when they were working and claiming deductions, so could look forward to a tax refund.
“There’s something about the Australian psyche that likes a tax refund.”
Bernard Kellerman is an independent finance writer, bank-watcher and ex-accountant.