Tax Tips to help boost refunds
Taxpayers could be missing out on money they are entitled to claim when
lodging their tax returns, according to CPA Australia
With the end
of the financial year looming, CPA Australia is encouraging the 14
million individual Australians that will lodge income tax returns for
the current financial year to be vigilant in identifying what they are
able to claim.
Knowing what to claim can be difficult for many
people as the taxation system can be daunting and difficult to
understand. To help tax payers claim what is rightfully theirs, CPA
Australia has produced Tax Time Handy Hints which provides easy to
understand advice and information on how to maximise tax deductions,
offsets and other entitlements.
Knowing what to claim is essential
to lodging a good income tax return and getting a deduction for relevant
costs and expenses that have been incurred throughout the financial
year. Some of the handy tips that tax payers should consider when
preparing their tax return include:
Claiming all work related expenses: Take the time to work out what
work related expenses you can claim. While up to $300 of work related
expenses can be claimed without a receipt, the claims must be for items
necessary for your work and you must have incurred the expenditure.
Consider making tax effective superannuation contributions:
Following recent changes, a self-employed tax payer will be able to
claim all their contributions to a complying superannuation fund as
fully tax deductible up to the age of 75. Low-income earners may also be
able to access the government contribution where the government makes a
contribution of $1.50 for every dollar of personal contributions made by
eligible taxpayers.
Reviewing your salary package: If your employer offers salary
packaging, this can be an effective way to obtain tax savings,
particularly if you are on the top marginal tax rate. Some of the most
common and tax effective items that can be salary packaged include
superannuation and motor vehicles.
CPA Australia President, Alex Malley, said that every extra dollar that
taxpayers can successfully claim will help them cope with the rises in
living costs each year.
"One way that individuals and families can boost their income is by
making sure that they check what they are entitled to claim. Tax Time
Handy Hints will help taxpayers to prepare their tax returns by
providing easy to understand information and advice and reduce confusion
about what they can claim."
"Taxpayers should also consider the changes in taxation policy announced
in the recent budget to help prepare their tax returns for this
financial year and to help them plan and organise their finances for the
next financial year," Mr Malley said.
Tax Time Handy Hints 2008
Defer income and bring forward deductions: It usually makes sense to
defer the receipt of income and bring forward deductions such as
interest payments, subject to the operation of the prepayment rules,
before the end of the financial year. In view of the personal tax
changes, which commence 1 July 2008 for low and middle income earners
(see table below) there may be an added incentive to defer taxable
income before 30 June 2008.
Interest and dividends, government payments and employment income:
The ATO follows up any discrepancies in interest and dividends, as well
as government payments and employment incomes received by individuals.
For 2007/2008 the ATO will match income details with third-party data on
more than 50 million transactions to ensure that income has been
correctly included in returns. The ATO identified 257,200 income and
benefits discrepancies in 2006/2007 which raised around $144 million in
additional tax revenue.
You should not that you also have to
include any franking credit in your assessable income as well as any
dividend income received. A credit for this amount will be available to
be offset against your tax payable.
Income derived from carrying on
a hobby is not required to be included in your tax return whulst any
related expenses are non-deductible. If you are unsure as to whether you
are carrying on a business or a hobby, then you should consult your CPA
or ATAO as there are no hard and fast rules available for making such a
determination.
Reduce capital gains on investments: Capital gains on the sale of
shares, property and other investments can be reduced by ensuring all
eligible items are included in the cost base of the assets sold
including the purchase price, capital improvements, stamp duty, legal
costs, adverting expenses and commission fees, and by applying any
available capital losses. You may be able to further reduce any net gain
under the general 50 per cent discount where the asset sold has been
owned for more than 12 months.
The ATO is concerned that capital
gains are not being included in tax returns. It has therefore
significantly expanded its data-matching in the property and share areas
by obtaining data on asset sales from all State/Territory Land Title and
State Revenue Offices, the Australian Stock Exchange, share registries
and managed funds. The ATO has advised that it will examine around 6,000
at-risk cases this year including gains on sales where funds were later
invested in superannuation. Hence, you should keep buy/sell contract
notes for shares and all other purchase and sale agreements and
receipts.
The ATO has also announced that it will deny capital
losses where the loss on an asset has been applied to reduce some other
capital gain, and thereafter the asset sold is either wholly or
substantially re-acquired by that person.
Claim all work-related expenses: Take the time to find out what
work-related expenses you can claim. While up to $300 of work-related
expenses can be claimed, without receipts, the claims must be for items
necessary to your work and you must have incurred the expenditure.
Typically, these expenses would include 'normal' employee claims for
expenses, such as uniforms, business telephone costs, subscriptions and
union fees.
Special rules apply to laundry, home office and
self-educated expenses.
Laundry Claims up to $150 do not need to be
substantiated, even if your total tax deductions exceed $300. The
deduction is only allowed for the laundering and dry-cleaning of
protective clothing, compulsory uniforms, registered non-compulsory
uniforms and occupation-specific clothing.
You may be able to claim
a deduction for some home office costs such as heating, cooling,
lighting and depreciating of your office equipment or professional
library. To claim the deduction you must have kept a diary for at least
4 weeks of the hours you worked at home. This amount is then used to
work out your total hours worked for the year and deduction claimed at a
rate of $0.26 cents per hour.
You can also claim self-education
expenses if you are undertaking study directly related to your current
work; but not if the study is to help you obtain new qualifications in a
different field. There are special rules regarding the first $250 of
self-funded education expenses, so check with your CPA or the ATO.
Higher Education Contributions (HECS)/ Higher Education Loan Program
(HELP) repayments cannot be claimed.
Claims in excess of $300 have
typically required receipts to prove the purchase, but the ATO has now
adopted a more practical approach to recognise a wider range of
documents, such a bank and credit card statements. Make sure you have
all relevant receipts and other records in order, as the ATO is also
expected to conduct around 15,000 reviews or audits of at-risk cases.
Maximise your motor vehicle deduction: Where you have used your
motor vehicle for work-related travel, and your claim for kilometers
traveled for the year does not exceed 5,000 kilometers, you can claim a
deduction for your car expenses on a cent per kilometer basis to the
extent you have used your car for work. The allowable rate for claims
changes from year to year, so check with your CPA or refers to the 2008
Tax Pack for this year's rate. You should ensure that any claim for work
related travel is based on reasonable estimates.
Alternatively if
you have used your motor for a significant amount of work related travel
you may be able to claim a deduction for your total car running expenses
to the extent you have used it for work. However, such claims are only
available where you have the required log book, odometer reading and
receipts.
On the other hand where business travel exceeds 5,000
kms, it may be possible to claim one-third of the actual car expenses of
12 per cent of the original values of the vehicle without a log book.
You may wish to compare which of the above four methods gives you
the maximum deduction.
Work-related travel includes travel between
two places of work or employment, or travel to shifting places of
employment. It may also be available where you have to carry bulky tools
or equipment with you to work.
Identify all eligible depreciable tools and equipment: Some
depreciable items can be claimed in full if they cost $300 or less or
will last for less than three years, and are used predominantly to gain
assessable income other than business income. Eligible items include
tools, calculators, briefcases, computer equipment and technical books.
Any deductions claimed should be reduced to the extent it is used for
private purposes but there is no need to pro rate the deduction for such
equipment if it was acquired part way through the year. More costly
items such as personal computers may be written off over several years.
You should consult your CPA or the ATO to ensure you use the correct
depreciation rates.
List all rental property deductions: Rental property owners can
generally claim deductions for advertising, bank charges, body corporate
fees, cleaning, council rates, electricity and gas, gardening,
insurance, interest on loans, land tax, lease preparation costs, legal
costs, pest control, postage and stationary, property agent fees and
commissions, repairs, secretarial and bookkeeping fees, security patrol
fees, telephone calls and water rates. You may also be able to write off
the cost of certain buildings, depreciation assets and borrowing cost
over time. However, the ATO is carefully scrutinizing rental losses
claimed because rental expenses increased by around 11 per cent in
2005/2006, yet rental income only increased by approximately 9 per cent.
Consult a CPA or the ATO to ensure you identify all your entitlements.
Deduct all non-work related expenses: The fees you pay a registered
tax agent to prepare your return or to manage your tax affairs are
allowed in the year the fee is paid. On-going 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.
Donations to charities and other gift
deductible recipients should also be claimed.
Optimise your tax offsets: Tax offsets directly reduce your tax
payable and can add up to a sizeable amount, so it pays to know all the
offsets you are entitled too. Eligibility for offsets will generally
depend on your income level, family circumstances and satisfying
specific conditions for each rebate.
Long standing examples of tax
offsets include the dependant spouse rebate, low-income rebate, mature
aged worker rebate, the senior Australian tax offset and the rebate for
superannuation contributions made on behalf of a low income spouse.
In addition, significant offsets are available for private health
insurance, medical expenses and an entrepreneur's rebate for micro
businesses.
A general 30 per cent refundable tax rebate can be
claimed on the cost of health insurance premiums paid by individual
taxpayers. However, the rebate is not available where the benefit is
taken in the form of a direct payment or reduced premiums. Higher level
income earners, without adequate health cover, are liable for an
additional 1 per cent Medicare levy surcharge. Higher rebates can be
claimed by older persons- for persons aged 65 to 69 years, the rebate is
35 per cent, and a 40 per cent rebate applies for those 70 and over.
You can claim a 20 per cent rebate on net medical expenses over
$1,500 'Net medical expenses' is the difference between medical expenses
incurred by you or your dependants, less any refund you may have already
received from Medicare or private health insurance provider. Not all
medical expenses can be counted; for example, chiropractors or
psychologists, unless you can show that you were receiving therapeutic
treatment. Some dental expenses are included. You should keep all your
medical receipts to support your claim.
Additionally, there is a 25
per cent entrepreneur's tax rebate if you have elected to enter the
small business entity system and your business income for the year does
not exceed $50,000. The rebate reduces for every dollar on business
income in excess of $50,000 and phases out completely where income
exceeds $75,000. The rebate is not means tested for the 2007/2008 year.
You should see a CPA to find out whether you are eligible for any
of the tax offsets available.
Consider making tax effective superannuation contributions:
Following recent changes a self-employed taxpayer will be able to claim
all their contributions to complying superannuation fund as filly tax
deductible up to age 75. However, such contributions will not be
deductible if 10% or more of person's assessable income or reportable
fringe benefits is attributable to their employment as an employee.
Employers are also able to claim deductions for employee superannuation
contributions made to complying superannuation funds provided the
employee is under 75. However, any excess contributions made by a self
employed person or by an employer in respect of an employee will be
taxed at a rate of 46.5% (rather than 15%) if the contributions made
during the year exceed $50,000 (or $100,000 for persons aged 50 or more
at 30 June 2008).
Contributions made from a person's after tax
income to a complying fund will not be deductible of included in the
fund's assessable income. However, the amount of such contributions
cannot exceed $150,000 for the 2008 year, (or $450,000 if contributions
for the 2009 and 2010 years are brought forward) as any after tax
contributions made in excess of these limits will be taxed in the hands
of the individual taxpayer at 46.5%. Special rules apply to exclude
certain personal contributions from these limits.
Low-income
earners may also be able to access the government co-contribution where
the government makes a contribution of 150 per cent of any personal
contributions made by a taxpayer. Thus, for every $1,000 personally
contributed by such a taxpayer there will be a matching government
co-contribution of $1,500. To be eligible the taxpayer's total earnings
must not exceed $28,980 for the 2007/08 year. However, the
co-contribution is reduced where the taxpayer's total earning exceeds
$28,980 and is fully phased out where total earnings exceed $58,980.
Earnings includes reportable fringe benefits for the purposes of the
co-contribution which can now be accessed by both employees and self
employed taxpayers.
You should consult you CPA or check the ATO's
website, http://www.ato.gov.au for further details.
Review your salary package: If your employer offers salary
packaging, this can be an effective way to obtain tax savings,
particularly if you are on the top marginal tax rate. Some of the most
common and tax-effective items that can be salary packaged include
superannuation and motor vehicles.
Special care should be taken
when packaging to ensure that you only select fringe benefits which
provide you with some after-tax savings. Typically this will only occur
where the benefit is concessionally taxed or is FBT exempt.
For
example, the amount of tax savings on packaging a car will vary for each
taxpayer, depending on the cost of the car, the total work versus
private kilometers travelled and the car's annual running costs. Further
the potential tax saving available may have reduced in recent years as
tax rates have been progressively cut, and less taxpayers are in the
highest income bracket. Your CPA can advise you on any tax benefits that
may be available.
Following the 2008/2009 Federal Budget employees
will no longer be able to obtain laptops, briefcases, mobile phones,
personal digital assistants and similar items as exempt FBT items each
year unless they are acquired primarily for work-related purposes. This
new rule applies to all such items acquired after 7.30pm on May 13 2008.
Given this change you may wish to contact your CPA to see how you should
structure your salary package in the future.
Your employer will
include the reportable fringe benefit amount on your payment summary,
which must be reported in your tax return and may affect your
entitlements to certain benefits.
Obtain Medicare levy and Medicare levy surcharge relief: Increases
in the Medicare levy thresholds for low-income individuals, families and
certain pensioners announced in the 2008/2009 Federal Budget can be
claimed in this year's return. From 1 July 2007, the Medicare levy
low-income threshold will increase to $17,390 for individuals and
$29,207 for families. The family threshold will increase by $2,682 for
each dependent child. The Medicare levy low-income threshold for
pensioners below pension age increased from 1 July 2007 to $22,922.
An additional one per cent surcharge may also apply to married of de
facto couples with combined income in excess of $100,000 if they do not
have adequate private health insurance cover. Both partners and any
dependants must be fully covered under the policy for the whole of the
income year, otherwise both partners will be subject to the surcharge,
unless the low income threshold or some other exception applies. The
income threshold also varies where there are dependants, or the parties
are separated. The surcharge also applies to single individuals without
similar cover where an individual's income is in excess of $50,000. For
surcharge purposes income will also include reportable fringe benefits.
Consult your CPA on how you can reduce any further liability for the
surcharge.
Tax Time Handy Hints is available on CPA Australia's homepage under
'Latest News' at www.cpaaustralia.com.au
Consult the Australian Taxation office website for further information
on tax matters at www.ato.gov.au
