As we near the end of the financial year, it’s timely to consider the decisions which can be made that influence your tax position. At New Leaf Advisory, we continuously assess our clients’ tax positions and explore ways to minimise their tax liabilities throughout each financial year. We don’t consider tax planning an ad-hoc process or one where you make quick decisions to generate potential tax advantages. We consider tax planning a meaningful, well-considered and tailored process for each taxpayer entity and/or group.
With the above in mind, Part 1 of our tax planning series outlines some of the simple yet effective and practical tax planning measures that can make a difference to your tax position this financial year. Despite these strategies being general in nature, you need to consider your individual circumstances and requirements when considering their potential application.
1. Contribute to your superannuation – a sensible tax arbitrage.
Making additional contributions to your superannuation before the end of the financial year can help reduce your taxable income and boost your superannuation fund’s balance.
A. Concessional contributions:
There are several ways you can contribute to super, however the most commonly used method, as far as having an immediate tax benefit, is through concessional contributions.
Concessional contributions are contributions made to your superannuation fund from your before-tax income. These contributions are taxed at a rate of 15%, which is generally lower than an individual’s marginal tax rate. Generally, taxpayers can contribute up to $27,500 in concessional contributions for the 30 June 2023 financial year. Note that you must consider contributions made by your employer during the financial year as these are included in the $27,500 limit.
It is important to note that any superannuation amounts contributed must have cleared into your superannuation fund on or prior to the 30 June 2023 deadline to generate a tax deduction.
Salary sacrifice contributions (a form of concessional contributions)
If you make salary sacrifice contributions to your superannuation, you can reduce your taxable income by the amount of the contribution. This means you pay less income tax because you are taxed on a lower amount of income.
B. Government co-contributions
If you are a low or middle-income earner and make personal contributions to your superannuation, you may be eligible for a government co-contribution. The government will match a portion of your personal contributions, up to certain limits, which can help boost your superannuation balance while reducing your taxable income.
C. Spouse contributions
If your spouse earns a low income or is not working, you can make contributions to their superannuation and claim a tax offset of up to $540 per year. This can help reduce your taxable income and save you tax.
It is important to note that there are limits to how much you can contribute to superannuation each year, and contributions may be subject to additional taxes or fees depending on your circumstances. It is always best to seek advice from a financial planner or tax expert to ensure that contributing to superannuation is the right strategy for your financial goals and circumstances.
2. Prepay Expenses
Consider prepaying certain expenses, such as insurance premiums or interest payments before 30 June to claim the deduction in the current financial year. Prepayments can be claimed as a tax deduction in the income year in which the goods or services are actually provided, or within 12 months of the end of the income year in which the prepayment was made, whichever is earlier.
3. Deferring Income
Deferring income can be a legitimate tax planning strategy for some individuals or businesses. You may be able to defer invoicing customers until after the end of the financial year in order to pay tax on these earnings in the next financial year.
As an individual, you may be able to delay receipt of income until after the end of the financial year. For example, if you are entitled to a bonus payment, you may be able to request that the payment is deferred until after 30 June.
4. Utilising Depreciation Deductions
Temporary full expensing is available to small business entities (those with a turnover less than $50 million) that allows them to immediately deduct the full cost of eligible depreciating assets in the financial year they are purchased and installed ready for use. This includes second-hand assets, if they are new to the claiming entity.
These full expensing rules were initially available for assets purchased and installed ready for use between 6 October 2020 and 30 June 2022. However, the government has extended the programme for an additional year until 30 June 2023. After 30 June 2023 only assets purchased with a value of less than $20k can be immediately deducted. For all other assets post 30 June 2023, the pooling rules will apply which depreciates assets over several years.
Summary
In summary, the above tax planning strategies can help taxpayers reduce their taxable income and ultimately save tax this financial year. We consider these strategies generally appropriate each financial year and ones that we advocate to our clients in a measured and considered process It’s important to speak to a financial advisor or accountant to determine the most suitable strategies for your individual circumstances. By acting now, you can ensure you maximise your tax benefits before the end of the financial year.
Stay tuned for part 2 of our blog series, coming soon, where we delve into the intricacies of more sophisticated year-end planning, particularly when you have trusts and companies (and potentially other complex structures) as part of your group tax structure.
