Make Haste Or Waste Tax Savings

Newcastle Herald

Thursday May 31, 2007

Noel Whittaker

THE end of the financial year is fast approaching so act quickly if you want to save tax.

The upper limit for the 15 per cent band will rise from $25,000 to $30,000 on July 1 so, if you are changing tax brackets, try to defer income until after June 30 where it will be taxed at a lower rate. If you have deductible expenses, try to bring them forward so that you will enjoy your tax deduction at the higher rate.

If you have an investment loan, talk to your lender about pre-paying 12 months' interest. The tax saved may be nearly half the amount you pay and you'll be giving yourself a valuable safety buffer too. Pre-paying a year's interest on an investment loan of $300,000 may cost you $24,000, but you could get up to $11,160 back in your tax-refund cheque. Put this in a savings account and you're well on the way to creating a fund to pay another year's interest in 12 months' time. This strategy will require negotiation with your lender you can't just bank the equivalent of a year's interest into the loan account, because all the lender will do is take one month's interest and credit the rest to the principal.

This is an ideal time to minimise capital gains tax. If you have any realised capital gains, analyse your portfolio to see if you can find an asset that is carrying an unrealised capital loss. Selling now will enable you to trigger a capital loss that can be used to offset your capital gain. You can always buy them back later.

Keep in mind that CGT is calculated using the date you signed the contract, not the date of settlement. Therefore, if you have assets that carry an unrealised capital profit, try to defer signing the sales contract until after June 30. This will give you an extra year's use of money that will have to be paid to the Tax Office and may also enable you to take advantage of next year's lower tax rates.

You can also reduce CGT by making a tax-deductible contribution to super, but take advice before you do it. You will be refused the tax deduction if an employer has made contributions for you in the current financial year.

Think about a couple who are retired but not yet 65. They are eligible to contribute to super as they are under 65, and can claim part of the contribution as a tax deduction because no employer is making contributions for them. They sell a property for $600,000 and trigger a capital gain of $400,000 that will reduce to $200,000 when the 50 per cent discount is taken into account. As the property was in joint names, the profit will be split between them, and CGT will be calculated by adding $100,000 to each person's taxable income. They could contribute a large portion of the proceeds into super and claim a tax deduction of $100,000 each. This would wipe out the CGT and the only cost would be a contributions tax of 15 per cent of $100,000.

The concessions for investment property are complicated. That's why smart landlords invest around $500 to have a quantity surveyor prepare a report on the property and advise precisely what can be claimed in building allowance and depreciation. You've only got to do it once because the quantity surveyor will prepare a schedule for the next 20 years it will pay for itself right away as you'll save accounting fees and also discover a swag of deductions you may never have realised.

Would you like to earn an easy 18 per cent? Provided your spouse earns less than $10,800 a year, you can make a super contribution of $3000 on their behalf and get a fast $540 back in your tax refund. If your spouse's income is between $10,800 and $13,800, the $540 is reduced by 18 cents for every additional dollar earned over $10,800. Obviously this strategy will only work if you are paying tax yourself, as the $540 is paid by way of a tax rebate.

Many Australians will find themselves eligible for the aged pension for the first time when the rules change in September. The gifting rules changed several years ago from pension year to financial year, so it's now possible to increase your aged pension by making a gift of $10,000 prior to June 30 and a further gift of $10,000 after that date.

Noel Whittaker is a director of Whittaker Macnaught Pty Ltd, AFSL Number 246519, email noelwhit@gil.com.au. This advice is general in nature and readers should seek their own expert advice before making financial decisions.

© 2007 Newcastle Herald

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