The end of the financial year will ring in many changes to superannuation and personal allowances while ringing out popular concessions for property investors and home buyers.
Adrian Raftery, an associate professor in tax, financial planning and superannuation at Deakin University, says now more than ever it’s crucial for individuals and small business owners to take ownership of the upcoming changes.
“With a raft of changes coming into play on July 1, a lack of attention now may cost you tens of thousands of dollars down the track, ” he warns.
“Overlooking compliance would be understandable given all the changes being considered,” says SMSF Association chief executive John Maroney. “But it’s imperative members are across all the changes.”
Specialists also warn the Australian Tax Office is targeting taxpayer abuse of generous work-related expenses covering travel, meals, clothes, phones and use of internet.
Some temporary concessions, such as a $20,000 instant write-off by June 30, enable small businesses to purchase computers, furniture, cars, even art.
Ken Fehily, director of tax specialist Fehily Advisory and champion of local artists, says: “Art improves the feel of your work environment for you and customers, helps artists and provides a tax deduction.”
Raftery says tax planning should be a 365-day per year exercise, not one merely carried out in the last few weeks before June 30.
While it’s important to make the most of the next five working days, Rafferty says it’s vital to start planning from the first day of the new financial year.
“It always surprises me when people think that tax planning only occurs in June each year. Well, it may for those who are either not very organised or perhaps have been swayed by some savvy retailers who make us think that the end of the financial year is when it all happens. But if you want to save as much as legitimately possible on your largest expense (tax), I encourage you to start tax planning on the first day of July each year.”
From July 1, a property investor can no longer claim a tax deduction for visits to residential rental properties.
“If you were planning to inspect your rental property, do it before June 30,” says Mark Chapman, director at H&R Block.
Bradley Beer, chief executive of BMT Tax Depreciation, says property investors can claim depreciation on items such as hot water systems, dishwashers, carpets, blinds and curtains, light shades, ovens, furniture, range hoods, smoke alarms and cook tops.
“Plant and equipment items are basically items that can be ‘easily’ removed from the property as opposed to items that are permanently fixed to the structure of the building,” says Raftery, author of 101 Ways to Save Money on your Tax Legally (Wiley).
They include carpets, blinds and light fittings. They are usually written off over five to 10 years.
The 2017-18 federal budget proposed a limit on depreciation deductions on residential rental properties to only those investors who actually purchased the plant and equipment.
Treasury is still finalising how the new rule will work.
In Victoria, off-the-plan stamp duty concessions will no longer be available for investors. That means an investor in a $2 million off-the-plan apartment in Melbourne might have to pay another $110,000. Some concessions have been switched to regional Victorian investors.In Queensland and Tasmania, first home buyers’ grants will revert back to $15,000 from $20,000 for new properties.
The cap on concessional contributions – which are made before income tax is deducted — falls from $30,000 (or $35,000 if you’re 50 or over) to $25,000 from July 1.
“If you’re able to make additional contributions to super, do it by June 30 to take advantage of the higher cap,” says Chapman.
If you salary-sacrifice into super, make sure your salary-sacrifice agreement with your employer reflects the new reduced $25,000 cap from July 1 to avoid breaching the cap.
The cap on non-concessional contributions, which are payments from after-tax income, is also falling $180,000 to $100,000.
“If you have spare cash, take advantage of the higher cap and pay some extra into your super by June 30,” says Chapman.
“If the super balance at June 30 is greater than $1.6 million, you will no longer be able to make non-concessional contributions in future years,” says Tim Mackay, principal of Quantum Financial, an independent financial adviser.
“If you want to take advantage of the bring-forward rule, this also drops from $540,000 over three years to $300,000 over three years. If your balance exceeds $1.6 million, you can no longer utilise the bring-forward rule,” says Mackay.
Making the contribution a day late could result in exceeding the new limits.
“It’s crucial you crunch the numbers correctly because any contributions made that exceed the cap will be taxed at 46.5 per cent rather than 15 per cent concessional tax rate,” Mackay says.
Spouse contributions to a fund have to be made on or before June 30 to claim a tax offset. The maximum tax offset is 18 per cent of non-concessional contributions up to $3000, or $540.
From July 1, the income threshold for spouses will increase from $10,800 to $37,000 in a financial year to receive the full tax offset. The cut-off threshold for spouses will also increase from $13,800 to $40,000.
Also from the new financial year, the super co-contribution will be available only to those with a total superannuation balance less than $1.6 m at the end of the previous financial year.
It will also not be available to those who have reached non-concessional cap for the year.
Nearly half of SMSF members are drawing a pension, a 7 per cent increase in the past five years.
“Do not overlook withdrawing a minimum pension for the 2016-17 financial year,” warns the SMSF Association’s Maroney.
For new pensions, the minimum pension amount is calculated as a percentage of the pension balance on the date it starts. For continuing pensions, it’s the balance on July 1 of the current income year.
Failing to take the minimum means you will be deemed not to be in retirement phase for the entire financial year, which means loss of the tax exemption status.
“Those in transition-to-retirement must take care not to exceed the maximum payment,” adds Maroney.
Mackay points to the potential for capital gains tax rollover relief if you move assets from pension to accumulation phase to stay under the new $1.6 million cap.
“If you are in pension phase at June 30, you may be eligible for capital gains tax rollover relief. This resets your cost base to June 30, 2017 but you need to speak to your advisor now and take action before the end of the financial year. This will ensure you don’t pay more tax than you need,” he adds.
Use this opportunity to update what happens to your assets when you die, particularly since the new super rules will force a rethink on how children inherit your retirement savings.
“We can say from years of experience the most important thing is to have an up-to-date will and enduring power of attorney (EPOA),” says Donal Griffin, a director of Legacy Law, which specialises in estate planning.
An EPOA is someone who makes financial and personal decisions on your behalf if you become unable to make your own decisions.
“It should refer to superannuation because changes to superannuation law over the last 10 years mean that there may be considerable tax payable on superannuation balances paid to children who are, by now, over 18.”
A properly drafted EPOA will allow a trusted person to take legitimate steps to reduce tax, he says.
Kath Anderson, Australian Taxation Office assistant commissioner, says the ATO is comparing taxpayers with others in similar occupations and income brackets to identify higher-than-expected claims related to expenses on vehicles, travel, internet, mobile phone and self-education.
“It is important to know what you’re eligible to claim before lodging your tax return and to make sure you don’t claim more than you’re entitled to,” Anderson says.
“One, you have to have spent the money yourself and can’t have been reimbursed. Two, the claim must be directly related to earning your income. Three, you need a record to prove it,” she says.
For example, deductions for work uniforms are a common mistake.
“It’s a myth that you can claim everyday clothes — for example, black pants and a plain white shirt — even if you only wear them to work, and your employer says you have to. To legitimately claim your uniform, it needs be unique and distinctive, such as a uniform with your employer’s logo, or be specific to your occupation and not for everyday use, like chef’s pants or coloured safety vests.”
Raftery says that those who use their car for work or business purposes can start their logbook before June 30 and complete it in the new financial year.
“If you use your car for work purposes and keep a log book for 12 weeks, then the deductions can be in the thousands,” he says.
“Make sure that you keep all costs associated with the running of your car (such as petrol, insurance, registration, servicing and lease payments) for the whole year, not just the period that you kept the log book.”
Raftery says that unless you are a small business (and can immediately write off the purchase of new business assets that cost less than $20,000), it is pointless buying a tax-deductible asset that costs more than $300 at the end of the financial year.
“This is because depreciation of these assets is pro-rata for the number of days that you own them during the financial year, resulting in a $1000 outlay on June 30 producing a measly $1 deduction at tax time,” says Raftery.