Tax planning - why pay more than you have to?

You're probably aware that under the income tax laws capital gains tax provisions, profits are only assessable when realised - paper profits don't count. You may also be aware that losses on the disposal of capital assets are only deductible against capital gains and not against other income. So while capital losses can be carried forward without time limits, if you can, it makes sense to have the gains and losses in the same year.

Forward planning for capital gains

If you've realised a gain during the year ending 30 June 1998 and there are paper losses on other shares, give consideration to selling those shares. While you may otherwise wish to hold onto the shares for the longer term, the loss can be realised by transferring the shares to a spouse for example. To reduce the cost of transferring the shares, use a discount broker before 30 June 1998.

Rather than a spouse, another relative or a related entity can be used. This means you can realise the capital loss but still have an interest in the shares through a third party.

Even where there are no losses realised, it may be opportune to realise a profit in a particular year, especially where there is little or no other income. This is because you may be on a lower tax rate, in which case the capital gains tax payable will be levied at a lower rate too.

Don't loose your franking credits

When selling shares beware of the 45-day rule. When shares are sold within 45 days of purchase, the franking credit on any dividends paid in that period will be lost. Basically, the rule applies for shares acquired after 1 July 1997. A note of caution - if you're planning to sell any shares from which you have recently received a dividend, make sure 45 days have lapsed before you do or you'll loose your franking credits.

How to defer a tax payment

You may also want to defer the payment of tax from one year to the next. This can have almost a triple effect. Not only is the 1998 tax reduced, provisional tax is also reduced for the 1999 year, and for taxpayers paying provisional tax by installments, the following 3 quarters for the 2000 year are reduced as well.

Tax is payable on interest when it is either received or credited. It is therefore better to receive interest on 1 July rather than 30 June, thus delaying the payment of tax by one year. This may not apply to the income from a cash management trust, which is income from a trust and not interest. The time the income is derived depends on the balance date of the trust rather than when received by the investor.

Pre-pay expenses

Pre-paying expenses is also a good way of deferring tax. Expenses can be pre-paid for up to 13 months and are deductible when incurred. Examples include such things as your subscription to The Intelligent Investor, investment books, stationary, association membership fees and investment seminar fees.

When a computer is used for producing assessable income such as maintaining investment records and strategies etc., the costs are deductible. The cost of the computer itself can be depreciated.

For capital items costing $300 or less such as calculators or electronic organisers, expenses are deductible in full. For items over $300, deductions are allowed by way of depreciation. However, the cost of software is deductible when incurred, regardless of its price.

You may have borrowings where interest is pre-paid each year. Such interest is deductible on the basis that by pre-paying, a reduced rate of interest is obtained, rather than obtaining a tax advantage, which might otherwise be considered a tax avoidance scheme.

A tip for next year

From 1998/99, individual taxpayers will be able to claim a rebate on savings and investment income on up to $3000 of that income. For 1998/99 there is a rebate of 7.5% (up to $225.00), rising to 15% for 1999/2000 (up to $450.00). Start planning now to make sure that all family members are able to take advantage of this rebate.

John Stevens – Consulting Tax Specialist and Chartered Accountant.