Personal tax reforms need action before June 30. Tony Fittler examines the main points.
A series of new reforms to taxation laws and policies has made personal tax planning more important than ever. Some areas to consider include:
New tax rates
The incentive for tax planning has become greater as the thresholds for marginal tax rates changed significantly from July 1, 2006.
The new resident tax rates are:
|
Taxable Income Range ($) |
Tax Rate ( percent) |
|
0 – 6,000 |
Nil |
|
6,001 – 25,000 |
15 |
|
25,001 – 75,000 |
30 |
|
75,001 – 150,000 |
40 |
|
150,000+ |
45 |
Income splitting
This is one of the simplest forms of tax planning. The increase in the thresholds means income earned by one partner may be taxed at much lower rates than that earned by the other partner. Ensure that income-producing investments are held by the person with the lowest tax rate.
Superannuation
Tax planning must include superannuation considerations. All Australians under the age of 65 (and working people over age 65) will be entitled to make tax deductible superannuation contributions, either through salary sacrifice for those still working, or personal contributions for those whose income from working is less than 10 percent of their assessable income.
Additional superannuation contributions make sense provided taxable income after deductions is more than $21,600.
Salary sacrificing is a good opportunity to pay less tax and save for the future. There is no fringe benefits tax payable on the amount of salary that is sacrificed. Instead, it is taxed at 15 percent rather than the normal income tax rate.
The amount of deduction, however, is subject to Age Based Deduction limits. The 2006-07 figures are:
|
Age |
Employers’ deduction limit |
Personal contribution required to obtain deduction limit ($) |
|
Under 35 |
15, 260 |
18, 680 |
|
35 to 49 |
42, 385 |
54, 847 |
|
50 and over |
105,113 |
138, 484 |
A person not employed, or whose income from working is less than 10 percent of assessable income, may still be entitled to a tax deduction for superannuation contributions made.
These people can claim deductions for contributions to their super fund, provided they meet certain criteria.
Also, look at ways of getting as much money as possible into super before June 30, particularly non-deductible contributions, when lower contribution limits will be introduced.
Other deductions
People often overlook legitimate deductions and tax rebates, such as:
Some expenses relating to income production that have a service period of 12 months or less, such as building and contents insurance relating to income-producing property.
Donations of $2 or more are deductible when paid to a deductible gift recipient. Don’t forget to ask for a receipt.
The tax rebate of 20 percent for net medical expenses (including dental and optical) in excess of $1,500.
Income deferral
Deferring income to the next financial year may prove beneficial. For example, interest received is assessable in the year of receipt, i.e., the interest on a term deposit that matures on July 1, 2007 is payable next financial year. With term deposits, those approaching retirement should consider whether spare cash should be contributed to super, either as deductible or non-deductible, before June 30, 2007.
Capital gains
Defer the realisation of capital gains where commercially prudent. It’s worthwhile working out whether you will qualify for the 50 percent discount for assets held for more than 12 months. If capital gains have been realised, ensure any unrealised capital losses are also realised prior to June 30.
Retirement income
Retirees and pre-retirees should plan for the new superannuation and pension rules from July 1, where income paid from super is tax-free. This presents many opportunities for self-funded retirees who can structure their affairs so they no longer pay income tax.
From July 1, 2007, retirees aged 60 years and over can claim super benefits tax-free if they are paid from a taxed super fund.
Those approaching retirement should consider investing in interest-bearing funds via a superannuation fund rather than in their own name to obtain the benefit of the fund’s lower tax rate. This would require a contribution to a superannuation fund which, if deductible, would also reduce tax.
Negative gearing
The reduction in tax rates means that negative gearing is not as attractive for taxpayers on lower levels of income. However, it can still be a good strategy for taxpayers with high marginal tax rates.
* Tony Fittler is a tax partner with accountants and business and financial advisers HLB Mann Judd Sydney.
Revisiting STS
Neil Wickenden checks out changes that make the Simplified Tax System more attractive to small business.
Since its introduction, the Simplified Tax System has been the poor cousin in tax planning for small business. Its stringent eligibility criteria and limited benefits meant it appeared unattractive to most small business owners, but a number of recent amendments make it worth revisiting.
The main benefits of STS are that small businesses can account on a cash rather than an accruals basis, claim outright tax deductions for prepayments up to 12 months, and immediately write off any depreciating assets purchased for less than $1,000. In addition, businesses don’t have to account for changes in the value of trading stock on hand, or carry out stocktakes at year-end.
Eligibility for STS will be relaxed from July 1, 2007. The maximum annual turnover limit will increase from $1 million to $2 million per annum, and the $3 million depreciable asset limit will be removed, meaning that more small businesses will qualify for STS.
Most businesses have a four-year period within which the Taxation Office can audit or amend their assessments. Businesses using STS are subject to a reduced period of two years. As a result, those using STS only need to wait two years for that year’s assessment to generally become statute-barred from amendment by the Taxation Office.
Businesses using STS are eligible for the small business CGT relief provisions without having to satisfy the net assets threshold test normally required. These provisions allow for a complete exemption from CGT on the sale of businesses owned for 15 years or more. They also allow for a 50 percent reduction in the taxable capital gain on sale of businesses held for less than 15 years, as well as concessional tax treatment of the balance of capital gains on the sale of small businesses.
One of the key prerequisites for eligibility for these provisions in the past was that the net value of the taxpayer’s assets did not exceed $5 million. From July 1, this threshold will be $6 million.
Small businesses using STS are no longer limited to accounting on a cash basis, and now have a choice of accounting either on a cash or the more usual accruals basis which recognises trade debtors and creditors at year-end.
* Neil Wickenden is a tax partner with accountants and business and financial advisers HLB Mann Judd Sydney.
