With just a few savvy moves, you could lower your tax bill or perhaps give your annual refund a nice boost, writes David Potts.
No glory without sacrifice, as the saying goes, but as a taxpayer, sacrificing brings nothing unless it’s your salary into super. Still, there are a few things you can do to bump up this year’s refund, or if that’s too optimistic, at least cut your tax bill.
Fortunately, the budget nasties don’t start until the new financial year – or the one after that in the case of the lower caps on salary-sacrificed super contributions for funds of more than $500,000.
You can even buy yourself more time by registering with a tax agent, which will delay your tax bill until at least May next year.
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The abolition of the low-income offset on investment income for children kicks in on July 1. So there’s still time to make the most of income splitting and even longer to bump up your super – the top two ways of cutting your tax bill.By the same token, the reduced penalty for first offenders for salary sacrificing too much to super isn’t available until next year.
Speaking of savings, although the 50 per cent discount off tax on interest or dividend income doesn’t start until July 1 either, you can take advantage of it immediately.
Just roll over any term deposits into the new financial year or, if you’ve got savings in a cash account, whip them over into a one- or two-month term deposit.
“Instead of an online cash-management trust you could put the money in a short-term term deposit that rolls over into the year,” the director of tax services at RSM Bird Cameron, Con Paoliello, says. “Although you’ll have to pay more tax because of the flood levy, you’ll be better off because of the 50 per cent discount.”
The discount on interest up to $1000 also applies to bonds, debentures and annuities.
By the way, next year the discount will reduce the “adjusted taxable income” used for qualifying for government goodies such as social security, the family tax benefit or the seniors health card.
Mind you, even better than a 50 per cent discount would be no tax at all.
Now I’m talking – but how? Move your money into the names of your children or a lower tax-paying spouse.
True, the budget abolishes the low-income tax offset on a child’s unearned income from July 1. But that still leaves $416 in dividends and interest tax-free for each child. Also, when negative gearing, an asset in the lowest-income-earning name is better if you plan to one day sell.
Although the annual tax breaks won’t be as great, this will be more than made up for by the much lower capital gains bill.
What’s more, if you’re getting franked dividends, the 30 per cent tax credit will generate a refund in the hands of a family member in the 15 per cent or zero tax brackets.
Since the low income tax offset still applies this year for children, a family trust should distribute income before the end of the month.
It can also pay to split your super.
You still have to stick to the caps but salary sacrificing some of your super to a partner will generate two tax-free thresholds when drawing out a lump sum and get near the $500,000 fund size limit from 2012-13. Oh, and don’t forget the spouse rebate. Contribute $3000 to the super of a spouse or live-in partner earning less than $13,800 and you get a $540 rebate.
Even better than co-habitation is co-contribution. So long as you’re working and earn less than $31,920, the government will match up to $1000 you put in super, so long as it isn’t salary sacrificed. This phases down as you earn more, cutting out altogether at $61,920.
This year’s tax dodge du jour is all about next year – minimising the flood levy, which begins on July 1. The surcharge is 0.5 per cent of whatever you earn between $50,000 and $100,000, or 1 per cent (plus $250) of anything over $100,000.
Rather than postponing income and spending sooner, this year do it the other way around.
Bring forward income, such as advance leave pay or a bonus and push back expenses so this year’s income is higher than next year’s.
Don’t get too carried away though. Since the levy on an income of $100,000 is $250, if you have more than $675 in expenses that could be claimed this year by pre-paying, such as subscriptions to trade journals, you may as well do that and not worry about the levy. Otherwise, you would be paying more in tax now than you’d be saving later. On higher incomes though, it could well pay to avoid the levy. On earnings of $300,000, for example, it costs $2250.
If you have a geared investment, you need to weigh up the immediate benefit of pre-paying the next 12 months interest against a double deduction for 2012-13 when you can claim 2011-12 plus a pre-payment for the following year.
The other way of minimising the levy is by salary sacrificing into super, especially if you’re on the border between tax brackets.
Say you earn $80,000 a year, which would put you in the 37 per cent tax bracket. Salary sacrificing $1000 into super will bring you down to the 30 per cent bracket, plus your contribution will be taxed at only 15 per cent.
The other frontiers are $16,000 (taking the low-income tax offset into account) above which you pay tax at 15 per cent; $37,000, where the rate rises to 30 per cent; and $180,000, where it goes from 37 to 45 per cent.
Reshuffling a share portfolio can pay, er, other dividends aside from reducing the flood levy.
It’s possible to make the interest on your debt tax deductible.
Here’s how. You sell your shares – the way the sharemarket has been going you’re not likely to have many capital gains to worry about – and pay down the mortgage.
Then borrow again, although keep it in a separate account, and restart your share portfolio.
Oh, were you thinking of donating to a good cause?
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