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Top Tax Tips

As Australia is dragged into its worst recession in decades it has never been more important for Australian employees and self-employed workers to make every dollar count.

Accordingly, it is timely to consider the current tax regime to recap what opportunities are available to reduce personal tax liabilities, highlight key changes that apply from the 2008-09 tax year, and identify potential tax planning strategies for the future.

These 10 tips for tough times, while not exhaustive, are designed to alert employees and self-employed people to the most important issues they should consider in preparing their income tax returns for the year ending 30 June 2009.

1.  Defer income and accelerate deductions

Personal tax rates are about to drop for the 2009-10 tax year, so there are simple tax savings to be made wherever you can either defer assessable income or bring forward deductions, provided action is taken by 30 June 2009.  Essentially, the 30 cents in the dollar tax rate will only apply next year when taxable income is $35,000 or greater rather than the $34,000 threshold that applies for the 2008-09 year.  Further, the current 40 cents in the dollar tax rate for individuals will be reduced to 38 cents in the dollar next year.

It should also be remembered that every Australian tax payer benefits from these cuts given the way our sliding tax scales work, and it makes sense to explore any opportunities to fully leverage any legitimate tax arbitrage savings available.

2.  Claim all work related deductions

The task of compiling all work related deductions may appear daunting especially given the need to collate all the required tax invoices and receipts for any significant claims.  However, taking the time to understand what work-related expenses are potentially deductible can save you considerable cost.  You may wish to consider billing all your expenses to a single credit card or debit card so you can more readily locate the relevant costs and any associated receipts.

Where you don't have the necessary receipts on hand you can still claim up to $300 of work-related expenses provided the claims relate to outgoings you necessarily incurred in your job or business and you have claimed the necessary expenditure.

Typical work-related expenses that are allowable include uniforms, business and mobile telephone costs, subscriptions and union fees.

Laundry and self-education expenses are also deductible in certain circumstances.  A deduction for laundry costs is allowable where the relevant clothing is protective clothing, a compulsory uniform, a non-compulsory uniform or certain occupation-specific clothing.  Laundry claims of up to $150 do not have to be substantiated even if your total income tax deductions exceed $300.

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 the expense will not be allowable.

One key trick in calculating such costs is to disallow $250 of self-education expenses as being non-allowable.  You may wish to attribute such costs to amounts which are not ordinarily deductible such as child care costs.

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.  However, it should be noted that any Higher Education Contributions Scheme (HECS) or Higher Education Loan Program (HELP) - repayments are not deductible.

3.  Identify eligible home office expenses

When part of your home has been set aside primarily or exclusively for the purpose of doing work from home, costs such as heating, cooling, lighting and depreciating your office equipment or professional library may be allowable.  To claim the deduction you must have kept a diary for at least four weeks of the hours you worked at home.  This amount is then used to work out your total hours worked for the year and a deduction claimed at a rate of $0.26 cents per hour.

However, no deduction is available for occupancy expenses such as mortgage interest, rent, insurance and rates unless you conduct a business from your home.

4.  Maximise motor vehicle deductions

Where you have used your car for work-related travel, and your claim for kilometres travelled for the year does not exceed 5,000 kilometres, you can claim a deduction for your car expenses on a cents per kilometre basis.  The allowable rate for such claims changes annually so you may need to obtain this year's rate from the ATO website. Any such work-related travel claims must be based on reasonable estimates.

Alternatively if you have used your car 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 readings and receipts.

Where business travel exceeds 5,000km, it may be possible to claim one-third of actual car expenses or 12 per cent of the original value of the vehicle without a log book.

You may wish to compare which of the above 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.  It does not, however, include direct travel between a person's home and a place of work.

Penalties, fines and car toll fees are not allowable.

5.  List all rental property deductions

Rental property owners should take extra care this year as the ATO is concerned that rental income is being under-reported and rental deductions over-claimed.  In the 2006-07 tax year rental income totalled $19.4 billion whereas rental deductions totalled $25 billion, reflecting an 11.8 per cent increase in aggregate rental deduction claims.

 Irrespective of whether the property is positively or negatively geared, rental property owners can, however, 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 expenses, legal costs, pest control, postage and stationery, 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, depreciating assets and borrowing costs over time.

6.  Claim all non-work related deductions

The fees you pay a registered tax agent to prepare your return or to manage your tax affairs are allowable in the year the fee is 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.

7.  Deduct any eligible depreciation or investment allowance deductions

Where specific tools or equipment are used for work by an employee, but the cost of these assets is not reimbursed by the employer, then they may be depreciable under the capital allowances regime.

Some items can be claimed in full if they cost $300 or less, or will last less than three years, and are mainly used to gain assessable income other than business income.

These items can include tools, calculators, briefcases, computer equipment and technical books purchased by an employee.  Any deduction claimed should be reduced to the extent it is used for private purposes, but it doesn't need to be prorata if it was acquired part way through the year and was wholly used in deriving salary and wages income.

Self-employed taxpayers should also note that the Australian government has announced a temporary investment allowance break for an additional tax deduction of 50 per cent of the cost of certain depreciating assets acquired by a small business from 13 December 2008.  To obtain this additional 50 per cent deduction for the 2008-09 tax year the small business must incur $1,000 on the acquisition and installation of the plant before 30 June 2009.

8.  Optimise your tax offsets

Tax offsets directly reduce your payable tax 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 dependent spouse rebate, low-income rebate, mature aged worker rebate, the Senior Australian Tax Offset, the Net Medical Expenses Offset, the Private Health Insurance Offset and the offset for superannuation contributions made on behalf of a low income spouse.

Additionally, there is a 25 per cent entrepreneur's tax offset if a sole-trader has 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.  This offset will not be means tested for the 2008-09 tax year.

An education tax offset is available for families who receive Family Tax Benefit Part A for 50 per cent of the cost of items such as educational software, home computers and associated costs, home internet connections, laptop computers, printers, school texts, stationery and trade tools used in school.  The maximum amount of the rebate is $375 for each child in primary school and $750 for each child in secondary school.

9.  Consider tax-effective superannuation contributions

A self-employed taxpayer will be able to claim their contributions to a complying superannuation fund as fully tax deductible up to the age of 75.  However, they will not be deductible if 10 per cent or more of a person's assessable income or reportable fringe benefits is attributable to their employment.

Employers can also claim deductions for employee superannuation contributions provided the employee is under 75.  Any excess contributions made by the self-employed or by an employer in respect of an employee will be taxed at a rate of 46.5 per cent rather than 15 per cent if the contributions made during the year exceed $50,000 or $100,000 for those aged 50 or more as of 30 June 2009.

10.  Utilise capital losses

In the current economic downturn many investors may have incurred capital losses from the disposal of investments. But there is a way to turn bad news into better news.  Any such loss can be offset against any current capital gains you may have made, or be carried forward indefinitely to be applied against any future capital gains.

Further, a capital loss on an investment can be applied against any other capital gain other than for special rules relating to gains on collectables such as artworks and antiques and certain personal use assets.  However, it is nice to know that even in these tough times, a loss is still worth something.

Beware however of what are termed share wash schemes, as the ATO could see them as tax avoudance and impose penalties.

Source: IN THE BLACK, CPA Australia, June 2009, volume 79:05, p 42-46