Here are 12 simple strategies guaranteed to put cash back in your pocket before the changes come in for the next financial year, writes Annette Sampson.
Another financial year done and dusted. Well, almost. With a little more than four weeks to go until June 30, it is high time to get in some last-minute tax planning.
Budget changes and the upcoming tax cuts have made it more important than ever to get your finances in order for the end of the tax year.
Money asked the experts for their top year-end tax tips.
TIP 1 TWEAK THE NEW TAX RATES
If you are earning less than $80,000, the good news is you can look forward to a tax cut next year. From July 1, the tax-free threshold will be trebled from $6000 to $18,200, resulting in tax cuts of up to $600 for lower-income earners.
Along with changes to the low-income tax offset, the IPAC Securities head of technical services, Colin Lewis, says this means lower earners will be able to earn up to $20,542 next year before they pay any income tax.
However the downside is that the current 15 per cent and 30 per cent marginal tax rates will increase (see table) to ensure the tax cuts only go to those on lower-income levels.
The head of technical services for MLC, Gemma Dale, says traditional end-of-year strategies such as deferring income until the new year and bringing forward deductible expenses need to be looked at carefully, as their effectiveness will depend on your personal situation.
"If you're a lower-income earner you may not even have to lodge a tax return next year, so if you can postpone receiving income until then it may be worthwhile," she says.
Lewis says people earning less than $80,000 will be paying higher marginal tax rates (though less tax overall) from July 1 and so will get more "value" for deductions next year but for most, she says, any timing benefits are marginal.
An HLB Mann Judd Sydney tax partner, Peter Bembrick, says the flood levy will no longer apply for higher-income earners so they will pay marginally less tax on income received next year. But the main benefit in deferring income and bringing forward expenses is timing. You get the tax deductions now and may be able to defer tax for another year.
TIP 2 PREPAY PRIVATE HEALTH INSURANCE
Lewis says if you're likely to be hit by the new means test on the tax rebate for private health insurance, you should consider prepaying next year's premium before June 30.
"The Tax Office put out a ruling in 2004 that says you get the benefit of the rebate in the year you pay the premium," he says. "So if you pay now, you should still be eligible for the full rebate."
From July 1, the full rebate will only apply for singles earning up to $84,000 and couples earning up to $168,000. A reduced rebate will apply for those earning between these amounts and $130,000/$260,000, with higher earners missing out altogether. An increased Medicare surcharge will apply to those earning more than $97,000/$194,000 who don't take out private health insurance.
The head of technical services at Colonial First State, Deborah Wixted, says if you're likely to get a lower rebate next year or miss out, prepaying is well worth considering.
For a family with one child paying a premium of $231.90 a month (or $2782.90 a year including the current 30 per cent tax offset), prepaying now could save between $397.55 and $1192.70 next year, depending on which income bracket they fall into.
Wixted says while there are three ways of claiming the rebate (through reduced insurance premiums, claiming a lump sum from Medicare, or claiming the rebate in your tax return), your best bet is to opt for lower premiums.
Health insurers are confident they can pass on the rebate in the form of lower premiums for prepayments but Wixted says both Medicare and the Tax Office have indicated they have not yet confirmed how they'll handle prepayments in light of the new legislation. She says some insurers are even offering the ability to prepay for up to 18 months.
TIP 3 MAXIMISE MEDICAL EXPENSES
Peter Bembrick says if you've incurred a lot of out-of-pocket medical expenses this year, it would be worth stocking up on pharmaceuticals or getting that dental work done before June 30.
The net medical-expenses rebate, which currently allows you to claim a 20 per cent tax offset on out-of-pocket medical expenses above $2000 (for you and your family), will be means-tested from July 1 - so you may find it harder to access next year.
The means test will apply to people with adjusted taxable incomes in excess of $84,000 for singles and $168,000 for couples (the same income levels where you're hit with the Medicare levy surcharge if you don't have private health insurance).
For these taxpayers, the offset next year will only be available on out-of-pocket expenses in excess of $5000 and it will be reduced to 10 per cent.
Louise Biti from Strategy Steps uses the example of Carol, who lives in an aged-care facility and pays annual fees of $22,000. (Most aged-care fees can be claimed through the offset.) She has another $1400 of net medical expenses.
Biti says this year she can claim a tax offset of $4280 (20 per cent of $21,400). But next year that offset will be reduced to just $1840 (10 per cent of $18,400).
TIP 4 MAXIMISE CONCESSIONAL SUPER CONTRIBUTIONS
If you have the cash flow, Wixted says it makes sense to look at making deductible or concessional super contributions before June 30, especially if you're over 50 or earning more than $300,000. From July 1, the limit on concessional contributions for those aged 50 or more will halve to $25,000 and people earning more than $300,000 will pay 15 per cent extra tax on their concessional contributions, lifting their contributions tax rate to 30 per cent.
"If you're over 50 it may be your last chance, at least for a while, to make a $50,000 contribution," she says.
"A lot of people also don't realise that the $50,000 depends on your age at June 30, not the start of the year. So even if you're just about to turn 50, you can still contribute up to $50,000."
Dale says the self-employed and people who earn less than 10 per cent of their income from employment can make a personal deductible contribution any time between now and June 30 (though it must be in your fund by June 30). "You just have to make sure you don't exceed the [existing] caps and you have the income to offset the deduction against," she says.
"We've seen examples where people have contributed $50,000 and they've only ended up with income of $40,000, so they've lost the tax benefit of the full deduction."
For employees, Wixted says loading up your super before June 30 is more difficult. You can ask your employer to increase or start salary-sacrifice contributions on your behalf but the arrangement can only apply to income you're not yet entitled to.
She says if you are expecting a bonus but haven't yet had the amount confirmed, sacrificing part or all of it may be possible.
Wixted says anyone making extra contributions should ensure they don't exceed the current caps of $25,000 for those under 50 and $50,000 for those aged 50 or over. Any extra is treated as an excess contribution and taxed at the top marginal rate, though you may be eligible for a one-off refund of excess contributions up to $10,000.
Lewis says if you're on the top marginal tax rate, making excess contributions is less of an issue and may even be beneficial, if you don't exceed the cap on non-concessional contributions as well. "You'd pay the top marginal rate on the money anyway," he says. "And by putting it into super, you have it in an environment where the earnings are taxed at just 15 per cent."
Dale says employees over 50 should also review their salary-sacrifice arrangements for next year to ensure they'll stay within the new caps.
TIP 5 BRING FORWARD ELIGIBLE TERMINATION PAYMENTS
Changes to the treatment of termination payments from July 1 provide a strong incentive for many people faced with redundancy to take the money before June 30, Wixted says.
Transitional rules relating to employment contracts that were in place in May 2006 currently allow you to roll the payment into super or be taxed at lower rates. Those rules end on July 1.
The government also announced tougher tax rules for "golden handshakes" from July 1 that provide a big incentive to take these payments before then.
However, Lewis says if you're due for a genuine redundancy payment and you're not eligible for the transitional rules, it might be better to wait until July.
From July 1, the amount of the payment taxed at lower rates will be indexed from $165,000 to $175,000. "Anything over that cap will be taxed at 46.5 per cent, so you're losing $4650 if you take the payment this year," he says.
TIP 6 GET THE SUPER
This year is your last chance to get up to $1000 of free money from the government if you make a non-deductible super contribution and claim the government co-contribution, Dale says. Next year, the maximum co-contribution is being halved to $500.
Wixted says many middle-income earners will also miss out on the benefit next year.
At the moment, she says, you can claim the full $1000 co-contribution if you earn up to $31,920 and a partial co-contribution if you earn up to $61,920.
But next year that upper-income limit will fall to about $46,920.
TIP 7 OTHER SUPER STRATEGIES
If your spouse earns less than $13,800, Lewis says you might want to consider making a spouse contribution to their super. You can claim a maximum rebate of $540 on a $3000 contribution if they earn less than $10,800 (the rebate phases out after that). Lewis says part of the money could also be used to buy insurance for them in a more tax-effective way than buying it direct.
Wixted says splitting super with your spouse is "the unsung hero of super strategies". You can split by asking your fund to transfer up to 85 per cent of your concessional contributions in the previous year to your spouse's account.
Some investors are using this strategy to stay below the proposed $500,000 maximum account balance that will apply when (and if) the government reintroduces the $50,000 cap on concessional super contributions in 2014. But Wixted says there are other benefits. If you have an older spouse, she says, transferring your concessional contributions to them could allow them to start a transition-to-retirement pension and have the money in a tax-free environment.
Alternatively, if your spouse is younger and you want to be able to claim an age pension, Wixted says it may be worth transferring your concessional contributions to them, as super held by a spouse below pension age is not included in the Centrelink means tests.
If you're thinking of starting a super pension, Lewis says there is a small advantage in doing so before June 30, as there is no minimum drawdown required this financial year if the pension is started after July 1.
"You can get your money into a tax-free environment and you don't have to make a drawdown until June next year," he says.
TIP 8 PRE-PAY EXPENSES
Dale says while end-of-year gearing strategies are no longer popular, if you have a geared investment it is worth considering pre-paying next year's interest to gain an immediate tax deduction - especially if you're paying the flood levy this year.
Wixted says you can also get a deduction now by pre-paying next year's income protection insurance premiums. "Many people don't even realise income-protection insurance is deductible," she says (see also page 10).
TIP 9 MANAGE CAPITAL GAINS
If you've made a capital gain this year, review your portfolio to see whether it is worth realising a capital loss to offset the gain, Bembrick says.
"You can't carry losses back. So if you've made a capital gain, you may want to trigger a loss to offset it against."
However, he warns you can't just sell an asset to trigger a loss, then buy it back. The Tax Office regards this as a form of tax avoidance - known as a wash sale - and has been focusing on picking such sales up in recent years.
Lewis says if you own managed funds, it is also important to remember that they may include realised capital gains in their distributions.
"People also try to treat themselves as share traders for tax purposes when they have losses [to get more favourable tax treatment]," Bembrick says.
"But the Tax Office's view is, it starts from the position that you're not a share trader and you have to prove you are. Even then there are still rules on non-commercial business losses, which may mean you can't offset the losses against your other income anyway."
Lewis says if you are eligible to make concessional contributions to super, the tax deduction can also be used to reduce your capital gains tax. This is a popular strategy with people nearing retirement who may want to shift the proceeds from assets such as investment property into super. However, Lewis says you need to remember you can only claim a deduction up to the concessional caps.
Wixted says if you have a self-managed super fund, you can currently make an in-specie transfer and receive the same benefits without having to sell the asset (see story, right). She says this may be your last chance to transfer assets such as shares from your own name to the fund, as the government has said it will ban off-market transfers from July 1. However, she says there is currently no legislation for this ban.
TIP 10 MAXIMISE CARBON TAX COMPENSATION
Lewis says retirees, in particular, should do some tax planning to try to qualify for the carbon-tax compensation.
He says the compensation will be paid to self-funded retirees who are eligible for the Commonwealth Seniors Health Card. He says singles earning up to $50,000 and couples earning up to $80,000 are eligible.
The card has plenty of benefits in its own right but Lewis says there's now even more incentive to make sure you qualify. Simple strategies such as maximising tax deductions may get you over the line if you're close to the limits.
TIP 11 CONSIDER INSURANCE BONDS
If your taxable income is more than $80,000, Lewis says it might be worth looking at insurance bonds as a tax-effective investment once you've contributed to super. Insurance bonds are a tax-paid investment and the insurance company is taxed on earnings within the bond at 30 per cent.
You don't have to declare the bond's earnings in your tax return and you can cash it in tax-free after 10 years.
"I would argue that if you're on the top marginal rate, it's still better to pay tax at 46.5 per cent on your income and put the money into super," he says. "But if you're on the 38.5 per cent rate, it may be better to have the money in an insurance bond."
TIP 12 PREPARE NOW
The Taxation Institute of Australia tax counsel, Stephanie Caredes, says it is important to get your paperwork together and consult your tax adviser before June 30. Their fees will be tax-deductible and there may be further measures you can take now to reduce the bill when tax time comes.