Many tax-planning activities don’t require complex strategies. In fact, you may find some of the simplest plans to implement for your clients can help minimise tax, while matching their overall objectives.
Take for example income deferral. One strategy your clients could use is to defer income until next year, but claim expenses this financial year, so that tax is deferred for another year. Again, this must fit with your clients’ overall goals.
This article explores some of the items to review before the end of the financial year and others that may be worth considering for next year, including superannuation contributions and structuring of the ownership of assets.
As mentioned, a normal strategy at this time of year is to review personal income to see if it should be postponed to the following tax year in order to access a lower tax bracket. With tax rates staying unchanged for next year, however, this strategy may be less valuable. Nonetheless, if income levels are expected to change next financial year – for instance, due to a change in job or hours worked – it is still worthwhile to consider delaying income for a few months.
Couples should consider their level of taxable income, and tax rates applicable to each person. For instance, if a person’s spouse is in a lower tax bracket, investments can be acquired in the lower-income spouse’s name (except where the investment is negatively geared).
Small-business owners should consider what business structure is most appropriate to their needs and circumstances. For example, the tax rate of a company is capped at 30 per cent (27.5 per cent for small business entities), whereas a discretionary trust will offer more flexibility. Small-business owners should keep in mind, however, the personal services income (PSI) rules, which apply to a business operating through a structure such as a company or trust with only one or two clients. People in this situation should look closely at the various tests available under the PSI rules, otherwise they may encounter problems with the ATO.
Those with a trust, either for investment purposes or to run a business, can use this structure to split income among eligible beneficiaries and generate tax benefits. Those with family trusts should be aware that tax losses can become trapped in the trust.
Capital gains and losses
Assess whether to defer selling assets or signing the contract until after June 30, as capital gains are assessable in the tax year that the contract of sale is signed.
For instance, if capital losses have been realised during this financial year, this can help offset capital gains. But if capital gains have already been made, then it may be best to postpone any additional capital gains where possible.
Keep in mind that assets held by an individual for more than 12 months qualify for a 50 per cent discount on capital gains, so it may be worthwhile to defer selling assets where possible. Investments held in a company will not be eligible for a CGT discount when sold, whereas the beneficiary of a trust may be eligible for the discount, if it is an individual.
To help minimise tax, consider who holds the investments. If a spouse is on a lower income tax rate, it may make sense for them to hold any income-earning or capital growth assets.
Another type of investor loss to consider is revenue loss – a loss that reduces income. For example, if a client has made a long-term investment in an equity but then sells out at a loss, this incurs a capital loss and it can be offset only against any capital gains. This would reduce current year CGT. However, if the client is someone whose intention is to buy and hold stock short term and realise a profit, they are a trader and the loss could affect taxable income.
Therefore, someone who regularly buys and sells shares with the intention of making a profit can argue they are a share trader. This is likely to be accepted if shares are turned over within a reasonably short time and there is a reasonable volume of trades within a year.
Investors who have frequently changed their holdings this year could put forward an argument that they have been trading. It is also possible for investors to claim some shares are held as a long-term investor, and other shares as a trader but, in this situation, records must make the distinction clear. Investors should understand that the ATO is likely to question a split that seems subjective or designed to give a beneficial tax outcome.
The aim should always be to pay down non-deductible debt before deductible debt, where possible, if a choice needs to be made. For instance, those who have obtained interest-only loans for investment purposes may prefer to retain this debt compared with, say, paying off a mortgage.
It can be beneficial to restructure debt, for a number of reasons, but beware of any such restructuring that is purely tax-driven, as the ATO could apply anti-avoidance legislation.
Superannuation remains the most tax-effective way to build wealth for retirement, and the change in the caps coming into effect on July 1 mean that people should be thinking about putting more money into super now.
Some considerations include: Salary-sacrificing bonuses or other lump-sum payments are liable for tax at 15 per cent, rather than the marginal income tax rate. However, it is necessary to have an effective salary-sacrifice arrangement in place prior to the payment being made.
If selling assets before June 30, consider re-investing the proceeds as a personal after-tax super contribution, so the earnings are taxed at 15 per cent, not personal tax rates Those who earn less than 10 per cent of their income from eligible employment can reduce income by making personal super contributions and claiming a deduction.
26 May 2017