Run through our list of tips to make the most of your tax deductions in the next few days. Whether you're in business, an employee, a property investor, share trader or Bitcoin enthusiast - there could be something here for you to look into.
1. SUPERANNUATION CONTRIBUTIONS – PAY BY 26 JUNE!
Whether you are self-employed or an employee, the tax benefits of investing surplus funds into super are hard to beat if you want to reduce tax on a higher income in 2018. The differential between a high-income earner’s marginal tax rate and superannuation fund tax rate of (generally) 15 per cent can mean a saving of over 30c in every dollar contributed.
Be mindful, however, of the contribution limits, excess contributions tax and Division 293. See our superannuation tax planning article for more information.
If you are an employer, an early June payment of your quarterly superannuation guarantee obligations that are due 28 July can save tax in your 2018 business tax return.
Important – the super fund must actually receive the contributions by 30 June, so ensure you pay no later than Tuesday 26 June to allow time for the money to reach the fund. The clearing houses can take longer than bank transfers.
2. PRE-PAID INTEREST AND LOW-COST ASSET WRITE-OFFS
This strategy can be particularly helpful to investors who expect to be taxed on a large capital gain. Individuals not in business are able to prepay interest on loans used to purchase income-generating assets such as investment properties and shares that pay dividends. Paying up to 12 month’s interest in advance can greatly reduce taxable income. Individuals can also write off expenditure on small asset acquisitions costing less than $300 outright that relate to those income-earning activities.
3. PREPAY DEDUCTIBLE EXPENSES
Individuals who are not in business can claim up to 12 months of prepaid expenses, for example, interest on investment loans and management fees.
If operating a small business, bringing forward deductions can be achieved. If reporting on a cash basis the timing of your deduction is based on the date paid rather than the date you were invoiced, anyhow. Cast your eye over last year’s Profit and Loss Statement. Which expenses do you expect to pay in the coming months that you could afford to pay within the next week, i.e. before 30 June?
Consider office supplies, insurance, subscriptions, rent, lease payments, interest, travel bookings, advertising and maintenance contracts where the relevant services will be wholly provided within twelve months of the date of the expenditure. However, the effect on the business cashflow needs to be considered
Note: It’s never a good idea to invest or pay more for what you don’t really need simply to get a tax deduction.
4. IMMEDIATE DEDUCTION FOR SMALL BUSINESS ASSETS COSTING UNDER $20,000
Small businesses are able to immediately deduct purchases of eligible assets costing less than $20,000 if first used or installed ready for use by 30 June 2018. So, if you’re planning to buy that computer or vehicle soon anyhow, consider acquiring it this week if possible.
It’s also worth noting that the small business general depreciation pool can be immediately deducted if the balance is less than $20,000 on 30th June 2018. Check last year’s general pool balance (in your 2017 tax return depreciation schedules) and be aware of the effect of adding any assets costing $20,000 or more to the general pool in 2018.
For example, if a small business taxpayer purchased a new custom fitted van for $20,000 in the 2017 tax year which was used 100% for business use: The asset would have been allocated to the SBE general business pool resulting in a deduction of $3000 ($20,000 x 15%) with a closing pool balance of $17,000 on 30 June 2017. If no other assets were added to the general small business pool from 1 July 2017, the $17,000 would be deductible in 2018.
5. MATCHING CAPITAL LOSSES AND CAPITAL GAINS
Where you make a capital loss on the disposal of an investment, you are able to offset that capital loss against capital gains in the current year or in future years. You cannot offset a capital loss against other income – it’s carried forward.
Note: Capital gains tax also applies to disposals of shares and Bitcoin holdings that were held as investments. Note, the tax treatment of gains and losses from carrying on a business as a share trader or crypto trader is quite different. See below.
Timing is everything – if you have an investment that you are about to sell that will give rise to a capital loss, you need to consider whether it is better to sell it pre- or post-30 June, based on whether it can be used to offset current year capital gains. If you have a current year capital gain, and you sell a capital loss generating asset after 30 June, you will not be able to use that loss to offset the current year capital gain.
It is important to understand the tax consequences of whatever you are considering. There are many conditions that need to be satisfied before certain tax benefits apply, so you should seek advice where appropriate.
Don’t let the tax tail wag the investment dog. The best advice is usually to base your decisions on investment merit, not on trying to save tax.
6. GET YOUR BITCOIN AND SHARE TRADING RECORDS IN ORDER
Prepare good records, including dates and dollar figures, of all transactions including purchases, trades and sales, with details of what was traded and when. Some people use cryptocurrency portfolio tracking tools, such as Cointracker and Delta, to get transactional data from exchanges to analyse and prepare reports. Otherwise, export your trade history from your exchange into a spreadsheet to look over (we can import CSV files into our tax software).
Trading cryptocurrency creates a taxable event each time you dispose of one for another. For tax purposes, with each exchange both a sale and a purchase is recorded and valued in Australian currency to calculate the taxable gain, like the tax treatment of bartering.
Identify any original acquisitions that you made with a private or long-term investment intention, as any profits from these may be tax free or qualify for a 50% capital gains tax discount if held for more than 12 months. Prepare good evidence of your original intentions for each parcel.
However, if you bought Bitcoin etc speculatively for short to medium term gains, and your activities are regular, then your profits may be fully taxable (no 50% discount). It’s important to determine whether you were crypto trading (carrying on a business) or investing (capital gains/losses) in relation to the original acquisitions.
The tax treatment of selling trading stock and selling investment assets is quite different and should factor into your tax planning. For more information – see our article: Are you a share investor or a share trader?
Capital losses cannot be offset against other income to reduce taxable income, whereas net losses from business may be. The ATO is likely to check on people who recharacterise their activities from being an investor to a trader. Typically, these people will have claimed the 50% capital gains discount on their crypto gains in previous returns but now, realising losses, want to be able to claim an immediate deduction on revenue account for a better tax result.
7. WASH SALES WARNING
Be careful of selling and immediately buying back the same investments without any significant market risk or any variation that has the same effect. The ATO refers to these as ‘wash sales’ and has specifically said it may deny access to any capital losses in these circumstances.
Do not forget to do some tax planning for next year – the earlier strategies are put in place, the better.
8. VALUING TRADING STOCK
Both SBE and non SBE taxpayers have the option of valuing trading stock on 30 June 2018 at the lower of actual cost, replacement cost, or market selling value. Furthermore, this valuation can be applied to each item of trading stock. For example, where the market-selling price of stock items at year-end is below the actual cost price, the taxpayer can generate a tax deduction by simply valuing the stock at market selling value for tax purposes. In situations where stock has become obsolete at year-end (for example, fashion clothing or worthless shares), the taxpayer may elect to adopt a lower value than actual cost, replacement cost, or market selling value.
9. START YOUR ENGINES - I MEAN LOGBOOKS - NOW!
If you haven’t done your 12-week car logbook to substantiate your business or work-related car expenses deductions, you’d better start filling one out this week. Provided that your continuous 84-day record starts in the 2018 tax year, it can be relied upon for your 2018 tax return once completed. Otherwise, your only option may be the cents per km method which may result in a much smaller deduction, especially if you purchased a new business vehicle for example.
See the ATO’s website for instructions on maintaining a valid 12-week logbook for tax. Paper logbooks can be found at most newsagents and are quite reliable. Be careful using apps.
A business owner’s logbook should briefly describe all business and private journeys. For employee logbooks, worked-related travel can include driving between two places of employment, or travel to shifting places of employment. Direct travel between home and a place of employment is private unless you have to carry bulky tools or equipment which cannot be securely stored at the workplace. The ATO is expected to scrutinise car expenses in 2018, so see their website for guidelines.
10. PAY ALL WORK-RELATED DEDUCTIONS
Check what you claimed last year in case there’s something you might as well pay before 30 June. Typical allowable work-related expenses include uniforms, mobile phone costs, subscriptions, research and reference items, computer equipment and union fees. Paying all of your expenses from a single credit card or debit card makes it easier to locate all the deductions and cross check associated receipts
Self-education expenses can be claimed provided the study is directly related to either maintaining or improving your current occupational skills or it is likely to increase your income from your current employment. If the study is to obtain new qualifications in a different field then the expense will not be allowable as a deduction. Typical self-education expenses that may be potentially available include course fees, textbooks, stationery, student union fees and the depreciation of assets such as computers and printers.
It should be noted that any Higher Education Loan Programme (HELP) – repayments are not deductible. However, post-graduate tuition fees are sometimes tax deductible even if paid by a government loan (i.e. FEE-HELP).
11. CLAIM ALL ELIGIBLE NON-WORK-RELATED DEDUCTIONS
Should any outstanding fees be paid before 30 June? The fees you pay a registered tax agent to lodge returns and advise you are allowable in the year paid. Ongoing management fees paid to a financial planner are also deductible where the advice relates to income producing assets. Bank charges and any interest payments on funds to finance the purchase of shares and other income producing investments are generally allowable. Income protection insurance premiums are also tax deductible, and may be paid annually.
12. ARRANGE TO CLAIM DEDUCTIONS FOR EXPENSES NOT PAID AT YEAR END
Both SBE and non-SBE taxpayers are entitled to an immediate deduction for certain expenses that have been “incurred” but not paid by 30 June 2018 including:
Salary and wages. A tax deduction can be claimed for the number of days that employees have worked up to 30 June 2018, but have not been paid until the new financial year.
Directors’ fees. A company can claim a tax deduction for directors’ fees it is “definitely committed” to at 30 June 2018 and has passed an appropriate resolution to approve the payment. The director is not required to include the fees in their taxation return until the 2019 year when the amount is received.
Staff bonuses and commissions. A business can claim a tax deduction for staff bonuses and commissions that are owed and unpaid at 30 June 2018 where it is “definitely committed” to the expense.
Repairs and maintenance. A deduction can be claimed for repairs undertaken and billed by 30 June 2018 but not paid until the next income year.
13. WRITE OFF BAD DEBTS
Where a business taxpayer accounts for income on an accrual basis and has previously included the amount in assessable income, a deduction for a bad debt can be claimed in 2018 so long as the debt is declared bad by 30 June 2019.
The business will need to show that it has made a genuine attempt to recover the debt by year-end to prove that the debt is bad. It is preferable that this decision is made in writing (for example, a board minute).
Businesses can also claim back the GST paid on debts that have been written off as bad, or where not written off as bad, the debt has been outstanding for 12 months or more.
14. VARY YOUR JUNE PAYG INCOME TAX INSTALMENT
To assist with your cash flow in July after paying all these expenses in June, make sure you don’t overpay the ATO for this quarter’s instalment. PAYG income tax instalment obligations should be reviewed and consideration given to varying the instalment for the June 2018 quarter where the estimate of business income tax payable for the year is less than the instalments raised by the ATO.
We hope these tips were helpful. Please contact our office or the ATO for further information.
Disclaimer: This information is general in nature and is not intended to be taken as advice. Before acting on the information above you should consider the appropriateness of the information to your individual circumstances, having regard to your objectives, tax position, financial situation and needs. You should seek professional tax advice and financial advice before making any decisions. Discovery Accountants & Advisers do not accept liability for any damages or losses that arise as a consequence of you relying upon any of these tax tips.