Year end tax planning tips
The following four steps will help you to get ready to do your tax return for the 2005 tax year, which ends on 30 June:
- get all your records together
- declare all your assessable income
- maximise your deductions
- make the most of tax offsets
You will need to put together all the relevant records from which you can prepare your tax return. This will include things like evidence of:
- your income (e.g., Payment Summaries for your salary and wages, dividend and interest income statements); and
- your allowable deductions (e.g., invoices, receipts of expenditure).
Work related deductions
If you are going to claim more than a total of $300 worth of work-related deductions, you will need to be able to substantiate how you worked out the full amount. If the total amount of your work related expenses is $300 or less, you don??t need written evidence to prove your claim ?? but the ATO can still ask you how you worked it out!
2. Declare all your income TopDon??t forget to disclose all your assessable income. Keep in mind that your total assessable income could well be more than just your salary. If you have investment income (like interest or dividends) or cash income (like tips and gratuities), make sure you also disclose them in your return.
DID YOU KNOW?
In addition to matching your salary against Payment Summary records and checking your interest and dividend income with banks and companies, not many people are aware that the ATO also:
- maintains data matching facilities with other Federal and State departments, e.g., with Centrelink from which it can determine undeclared property assets and income and with State Revenue Offices from which it can track disclosure of payroll payments; and
- gets information from a range of private sources like various industry associations, e.g., details about property transactions from companies that track movements in the property market.
Here??s a checklist of some of the more common types of assessable income, including some tips about things the ATO is on the look out for this year:
- Salary and wages - be careful if you work in what the ATO regards as a cash economy industry because it will be carefully checking your income receipts.
What??s considered a cash economy industry?
Motor vehicle retailing and wholesaling, tourism and hospitality, fishing, gold bullion, antiques and art dealing, horse racing and exports, property, building and construction, restaurants, cafes and takeaways, licensed hotels and registered clubs, and barter.
- Tips, bonuses and gratuities - if you??re employed in some industries (like the hospitality or taxi industry) the ATO is likely to expect you declare some tips or gratuities.
- Interest income - e.g., from banks, building societies, credit unions, term deposits.
- Dividends - watch out for things like dividend reinvestment programs where you get extra shares instead of actually receiving a dividend. The value of the amount of any dividend reinvested is still taxable.
- Allowances provided by your employer ?? e.g., for meals, travel or for your car.
- Pensions or annuities - e.g., taxable pensions and annuities paid by your superannuation fund.
- Lump sum payments made to you by an employer if you have terminated a job during the year - e.g., payments for your unused annual leave or long service leave.
- Capital gains ?? this is high on the ATO??s audit hit list, particularly if you have made any gain on the sale of shares or you have made a gain on any investment property you may have sold throughout the year.
- Personal services income - this may be relevant if you are a contractor or a consultant operating your business through your company, partnership or a trust because the personal services income rules may apply (sometimes referred to as the contractor??s tax ).
What impact does this have?
Even if your clients originally paid you for your services through your company, partnership or trust, if these rules apply:
- you may need to include this income in your personal tax return; and
- the types of deductions you can claim may also be affected.
Reduce your CAPITAL GAINS tax
If you have made a capital gain on any asset sold during the year, if you owned it for at least 12 months you can reduce the amount of any capital gain by 50% before it is taxed.
3. Claim all relevant deductions TopAs an employee, you may be able to claim a range of work related expenses, as well as some non-work related items like donations of more than $2 to an approved charity.
Tsunami donations
For Tsunami donations to be tax deductible, the individual or organisation receiving your donation must be endorsed as a deductible gift recipient (DGR) by the Tax Office or be listed by name in tax law. You will also need to keep a receipt or other evidence such as a deposit slip or cheque stub showing the amount being claimed.
If you made donations other than cash, you should get advice about whether this cost is deductible as a donation.
Work related deductionsHere??s a checklist of some of the more common work-related deductions:
- Special work clothing ?? e.g., the cost of buying and maintaining protective clothing and occupation specific clothing is usually deductible.
- Subscriptions and union dues ?? including things like membership fees for a relevant professional association.
- Self education expenses ?? e.g., tuition and course fees for something relevant to your current employment, as well as the cost of textbooks, stationery and possibly some travel expenses.
- Work related travel expenses ?? you can claim some types of travel expenses directly connected with your job (but not the cost of travelling to and from work).
- Home office expenses ?? if your employer lets you work from home, you may be entitled to claim deductions for a proportion of running expenses like electricity and heating, but not for expenses like your mortgage interest or rent (to claim these your home would also have to be a place of business).
RECEIVED ANY ALLOWANCES?
- Allowances for meals, travel, or for a car can be a trap ?? some people think you can automatically fully expense the allowance without substantiating your claim.
- If you receive one of these allowances, don??t assume you can automatically claim deductions against it. You must still keep written evidence of any allowable deductions to prove any claim you make, regardless of the amount involved.
The Tax Office is finding that many taxpayers are still not taking advantage of a number of rebates (now called ??tax offsets??) and other concessions.
Tax offsets reduce any tax you may have to pay on your taxable income and can in some instances even result in a refund.
Make sure you are not overlooking an offset that may be of benefit to you, e.g., Medical expenses offset
If medical expenses you have paid for yourself, your spouse and your dependants exceed $1,500 (net of any rebates to which you are entitled from Medicare or your private health fund), then you can claim a rebate of 20% of the excess over $1,500.
A FACE LIFT may COST YOU MORE!
With effect from the 2005-2006 income year, purely cosmetic procedures are to be excluded from the medical expenses offset. However, if you have to pay for cosmetic procedures for legitimate medical needs, such as skin grafts and reconstructive surgery, you will still be able to include these costs in your total medical expenses for the purposes of this offset.
SUPER CHOICE FOR EMPLOYEES TopThere??s an important change just around the corner that may impact on your current superannuation arrangements.
From 1 July 2005, as an employee you may have the right to choose the superannuation fund into which your employer pays your superannuation guarantee contributions.
WHO CAN CHOOSE?
Generally, you are eligible if you are paid under a Federal award or your superannuation contributions are not covered by an industrial agreement or a State award.
Here??s answers to some common questions employees are asking about super choice:
What do I have to do?
If you are eligible to choose under these new rules, your current employer should give you a standard choice form before 29 July 2005. If you start a new job on or after 1 July 2005, your new employer should give you a standard choice form within 28 days of when you start.
This is a form produced by the ATO that captures all the necessary information to enable you to choose your super fund. It has sections that both you and your employer should complete.
What information do I need to provide? Top
If you decide to choose your super fund, it??s your responsibility to give your employer sufficient information to implement your choice.
The standard choice form sets out the information you need to provide, which includes:
- your chosen fund??s name, Australian Business Number (ABN) if it has one, and contact details;
- evidence the fund will accept your employer??s contributions;
- your super account details, including account name and membership number;
- information on how contributions may be made to the fund (e.g., electronically or by cheque) and details such as your bank??s BSB and account numbers or postal address; and
- a written statement that the fund is complying, including a written statement from a trustee or from someone on behalf of the trustee.
You should be able to get most of this information from the trustee of your chosen fund.
CAN I CHOOSE A ??DIY?? FUND?
- Yes, you can choose to nominate a self managed superannuation fund (sometimes referred to as a ??DIY?? fund).
- But if you do, you will also have to attach to the standard choice form the required documentation from the ATO confirming your chosen DIY fund is a regulated fund.
Do I have to choose?
No. You are under no obligation to exercise your right to choose.
What happens if I don??t choose?
If you do nothing (or you don??t make a valid choice e.g., by not providing the required information), your employer will still have to make compulsory superannuation guarantee contributions on your behalf. These will be made into a fund that the employer is required to nominate on the standard choice form.
Will I have to change funds?
Some employees entitled to super choice are under the misconception that they must change funds. This is not the case .
Whilst you may have the right to choose your super fund, you don??t have to exercise that right or you can in fact choose to nominate your existing employer super fund. Whatever happens, it??s up to you.
How often can I choose?
You can choose a fund at any time, but you can??t require your employer to change your fund more than once a year.
What happens if I choose?
Once you have made a valid choice, it may not be acted upon straight away - your employer generally has 2 months to get ready to make contributions to your chosen fund.
FEDERAL BUDGET TAX round up TopHere??s a brief run down on some of the main changes to expect on the personal tax front:
Personal tax cuts
If the Government gets its way, from 1 July 2005:
- the top 47% rate will cut in at $95,001 (it currently cuts in at $70,001); and
- the 17% rate will be reduced to 15%.
Then from 1 July 2006:
- the top rate will cut in at $125,001.
It??s now only a question of time as to when these changes, as well as proposed adjustments to the other personal tax thresholds, will take place.
PLANNING TIP
With the proposed shift in tax brackets, you may need to review any salary packaging arrangements you have with your employer ( particularly if you??re earning between $63,000 and $95,000 ) to see if your current package is still tax effective.
Family Benefit Tax changes
From 1 July 2006, a family will now be able to earn $37,500 each year before its Family Benefit Part A benefit starts to reduce.
And for families who have been unwittingly caught in the past with a family assistance debt, it??s also proposed that from 1 July 2006 you will be able to offset this debt with tax refunds and family assistance reconciliation top-up payments.
Abolition of the superannuation surcharge Top
The Government announced that it proposes to do away with the unpopular superannuation surcharge from 1 July 2005.Currently, the present surcharge rate of 12.5% will reduce to 10% from 1 July 2005. But now the Government is proposing to do away with the surcharge altogether from this date.
Disclaimer
Taxwise® News is distributed quarterly by professional tax practitioners to provide information of general interest to their clients. The content of this newsletter does not constitute specific advice. Readers are encouraged to consult their tax adviser for advice on specific matters.