Eight steps investors should take when reviewing their tax position

In the lead up to the end of the financial year, Bradley Eppingstall explains the eight steps investors need to consider when reviewing their tax position.

When it comes to reviewing a client’s tax position, it is important to consider these steps when implementing tax strategies as well as the fact that implementing any tax planning strategy needs to be done in line with your available cash flow.

1. Timing of income receipts

The income of an investor is generally taxable on receipt of the earnings.

The main exemption to this rule is in relation to distributions of income from trusts such as listed property trusts or managed funds where the income is taxable on entitlement to the income, despite the income being received in the next financial year.

Income can potentially be deferred into next financial year by investing in a product that will not derive any income until after June 30, such as a term deposit that does not rollover and pay interest until next financial year.

2. Prepay expenses

Expenses relating to investment activities can be paid before June 30, 2010. Where you have a geared investment in shares or property, the interest on the loan is generally tax deductible.

You can prepay up to 12 months of interest before June 30 and claim a tax deduction this financial year.

Alternatively, it may be possible to pay other expenses in relation to your investments before June 30.

This can include carrying out repairs before the end of the year on a rental property or paying memberships or subscriptions to journals or groups that are related to the investment operations before June 30.

3. Superannuation contributions

Investors may be able to make tax-deductible personal contributions to superannuation to reduce their taxable income.

The advantage of this strategy is that superannuation contributions are taxed at 15 per cent compared to personal income tax rates of between 30.5 per cent and 46.5 per cent.

Superannuation contributions are taxed at 15 per cent within the superannuation fund up to a limit of $25,000 per person, with a transitional limit of $50,000 for anyone over the age of 50 at the end of the financial year. Any contributions in excess of these limits can be potentially taxed at a rate of 93 per cent.

To be eligible to claim a personal superannuation contribution as a tax deduction you need to satisfy what is referred to as a 10 per cent test; that is less than 10 per cent of your assessable income from employment.

In determining if the 10 per cent test is satisfied, reportable fringe benefits and salary sacrificed superannuation contributions are included in the calculation of employment income.

4. Salary sacrifice

If you are an employee, an alternative to making personal deductible contributions may be to enter into a salary sacrifice arrangement.

This may involve instructing your employer to pay some of your wage directly to superannuation rather than as a wage.

To be effective, a salary sacrifice arrangement can only apply to future earnings, as such the strategy should be implemented as soon as possible to ensure the maximum benefits are obtained.

The advantage of this strategy is that the contributions made to superannuation will be taxed at 15 per cent in the superannuation fund rather than your personal marginal tax rate.

This strategy will not generally be tax effective if your personal taxable income is below $35,000 as your personal tax rate is the same as the superannuation fund tax rate.

Care also needs to be taken to ensure the superannuation contribution caps are not breached as it may result in a greater taxation cost.

5. Superannuation co-contribution

The superannuation co-contribution is where the Government matches personal contributions you make personally for up to $1,000 of contributions.

If your income is likely to be less than $31,920 for the year, your superannuation will receive the benefits dollar for dollar. The co-contribution phases out up to an income of $61,920.

For the purposes of this test, income is taxable income plus reportable fringe benefits and reportable superannuation contributions.

Reportable superannuation contributions include salary sacrificed contributions and personal deductible contributions.

A further requirement to be eligible is that you need to have at least 10 per cent of your income received from salary and wages or business operations.

6. Quantity surveyor report

If you have purchased an investment property this financial year a quantity surveyor report will allow you to claim depreciation and capital allowances on capital items within the property.

The quantity surveyor report will detail the value of the items you are able to claim depreciation on.

A quantity surveyor report does come at a cost, but the cost is generally recouped several times over by the tax savings in the first year of ownership of the property.

7. Realise capital losses

A capital loss on the sale of an investment can only be offset against capital gains.

Should you have realised capital gains on the sale of any investments this year or are expecting distributed capital gains from managed investments, it may be worth considering the sale of an investment at a capital loss.

Care needs to be taken in implementing this strategy.

The Australian Taxation Office may deny the capital loss in the event of the investment being repurchased soon after the sale that realises the capital loss. Professional advice should be sought before implementing this strategy.

8. Ownership of investments

A longer-term taxation planning strategy can be reviewing the ownership of your investments.

Any change in ownership of an investment needs to be carefully planned in relation to any capital gains tax and stamp duty implications.

Investments may be owned by a family trust, which has the key advantage of providing flexibility in distributing income on an annual basis and an ability for up to $3,000 per annum to be distributed to minor beneficiaries such as children or grandchildren tax free.

Another alternative may be for the assets to be owned by a self-managed superannuation fund (SMSF).

A SMSF may be beneficial as a part of your retirement plans and will generally be suited to retirees or those close to retirement.

The key advantage of a SMSF is a flat tax rate of 15 per cent on investment earnings, and once you commence withdrawing your benefits as a pension there is no tax on the earnings of the SMSF.

In reviewing the ownership structure of your investments, professional advice should be sought to ensure there are no unexpected taxation or other consequences of the change in ownership.

Bradley Eppingstall is principal at RSM Bird Cameron.