Expert tax tips for the end of financial year
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July is just around the corner which means it’s time for businesses and individuals alike to get their end of financial year finances in order. RateCity has gathered some of the best financial experts and professionals from around the country to impart some of their best tax tips.
Whether you’re an individual or a business, read on to find out how to make the most of your finances this 2018 EOFY.
Matthew Prouse – Xero head of industry
Not asking for help
The biggest mistake small business owners make at tax time is burying their heads in the sand and not asking for help. Going it alone when lodging your business tax return can be a recipe for disaster when you’re unclear or unsure of your obligations.
Not understanding regulation
One of the most common traps we see small business fall into at tax time is not understanding regulation relevant to their business or keeping up with the latest laws. This struggle to stay informed on regulation often catches businesses off guard and can lead to serious errors and potential fines come tax time.
Get informed about the regulation relevant to your business. The ATO is a good place to start, or speak to your qualified accountant or bookkeeper.
Poor documentation habits
Not keeping business receipts or the poor organisation of them throughout the year will create a nightmarish tax time. We often see small businesses falling short by June 30 having spent hours frantically searching for receipts and coming up empty.
Using outdated manual practices
Small businesses leveraging outdated manual practices are wasting time and resources, and are ultimately missing out on vital opportunities to run their businesses more efficiently.
Opting for pen and paper reporting or manually entering data into spreadsheets is not only a time-waster, it often results in errors being made which can be dire come tax time.
Not keeping a business diary
One critical mistake small businesses often make when starting out is not keeping a business diary. This can be painful come tax time as businesses without business diaries can struggle to discern between personal and business spending.
John Powell – ME Bank general manager of deposits
Reduce debt stress
Paying down debt is a great strategy as it reduces an ongoing cost, freeing up your monthly budget. Start with higher-rate debt first, like credit cards.
While a home loan has one of the lowest rates of any type of debt, it’s also a long-term affair and any lump sum you tip in today can knock years off the term and save you a bundle in interest along the way. Using an offset account is a good way to do this.
Add to your super
Using a tax refund to grow your retirement savings is also a smart move. Given the power of compounding returns, the more you contribute now to super the more you’ll have for retirement.
A tax refund is a great opportunity to establish or bolster your emergency savings.
Ideally, you’d have reserves to cover at least six months of expenses. But even having a small stash of cash can help you weather life’s unexpected events or outlays.
A tax refund can also be a good opportunity to maintain assets like your home, car or health, which can postpone bigger expenses in the future.
If you just leave it in a transaction account, it’s too easy to dip in, even unintentionally, for nonessential expenses. Consider locking it away in a separate savings account or term deposit to help build savings for a goal, or rainy day savings to cushion you from an unexpected financial emergency.
Marcus Roberts – Brighter Finance director
EOFY is a busy time for everyone, but small business owners should pay particular note to the $20,000 instant asset write-off that the ATO has in place, so that you can claim an immediate deduction for your tax return this coming year.
Essentially, if you purchase an asset of less than $20,000, the business portion of that asset can be written off in your 2018 return. This may be the right time to look at upgrading computers or any mobiles or other technology that you’ve been holding off on, and so long as the business turnover is less than $10 million and that you use or install it prior to July 1, the company can claim each asset.
As an example, if you run a business with five staff members, and each gets a new laptop, you could claim each of the five laptops as an instant write-off. Larger items such the main office printers, reception room screens, etc can also be claimed, so long as they fall under $20,000. So if you are thinking about upgrading the assets, these next few days might be the perfect opportunity! Make sure to ask your accountant if you have specific questions regarding your eligibility.
Brad Turville – BJT Financial director & business growth specialist
Undertake a tax planning exercise with your accountant in the lead-up to 30 June. They know infinitely more tax strategies than the average small business owner, which can potentially reduce or defer a significant amount of tax. In many cases the accounting fee will be far outweighed by the tax savings.
Thinking that because you have a business you can pile in whatever expenditure they want as a deduction – it doesn’t work like that and the ATO aren’t silly, and if you are audited the penalty and tax consequences will far exceed any small tax perk you received. Especially of late, the ATO have announced they will be going hard and I’d expect to see a large amount of ATO reviews and audits being actioned.
If you are looking to sell an investment resulting in a capital gain, consider pushing this forward until July, being a new financial year, and you get an extra year to pay the tax on the capital gain. On the flip side, if you are looking to have lower income this year and higher income next year, it would make sense to have the capital gains event occur this financial year.
The $20,000 small business asset write off is still in play, so if you need to upgrade or purchase new equipment it would make sense to action the purchase before 30 June. This deduction also applies if you make the purchase using finance, so essentially you seek lending to make the purchase (i.e. not draining your cash reserves) plus you can claim the purchase in full as a deduction.
An all-too-common mistake is taking drawings from a company and not correctly treating prior to 30 June. This contravenes a very nasty section of the tax act resulting in significant tax issues. It is easily the most common issue I see with small businesses trading via a company structure.
A very simple strategy for the month of June is bring forward purchases to this month and push out raising any unnecessary invoices to July.
Andrew Aravanis – Aravanis registered trustee
As a registered bankruptcy trustee, I have many clients who’ve incurred large tax debts due to running a business and not provisioning for GST and personal income tax.
If you’re self-employed and haven’t been on top of your taxes for this financial year, now’s the time to get organised.
Use this return as an opportunity to plan for next year so you’re not hit with a massive bill next August.
One strategy is to put tax money aside every week – but in reality, this doesn’t work for everyone. When unexpected expenses pop up, we often see people dip into their tax money in order to get by. A few years of this can easily spiral out of control.
You can talk to your accountant about how to ‘pay as you go’ – and, in some cases, you might even benefit from having someone manage your tax for you.
If you’re in a situation where you already owe a large amount to the ATO – don’t ignore the problem any longer. Get organised and get advice.
In a lot of cases, the ATO will work with you to resolve the debt. If this isn’t possible, you may need to consider speaking to a liquidator or a registered bankruptcy trustee.
Bottom line: the sooner you take action, the more options you may have at your disposal.
Stacey Price – Healthy Business Finances founder
EOFY approaches quicker than Santa on his sleigh, so to be prepared there are several things you should be looking at now to make 30th June a breeze.
Where should you be spending? Buying items that you don’t need to get a tax deduction is just a waste of money. However, if you can prepay expenses now that you would have spent in July or August, this will reduce your current year profit in a meaningful way.
Wages & bonus payments. Any wages or bonuses physically paid on the 1st July, even if the period worked is June, is not a tax deduction this financial year. So have a think about when your last pay run is processed and if you should be paying yourself any extra wages or bonuses to reduce profit levels (although be aware or tax and super consequences).
Superannuation is not a dirty word. In fact, making additional super contributions up to relevant caps is a great way to get an additional deduction AND plan for your financial future.
Employers know your obligations. Annual payment summaries are due to staff by 14th of July. You should be reconciling wages, tax and super prior to this date. Simply publishing the payment summaries in your software without a review is a recipe for disaster.
Are there gremlins in your balance sheet? Most business owners don’t run this report anywhere near frequently enough. Surprises in your financials is never a good thing. Look for clearing accounts, suspense accounts, prepayments accounts – anything you don’t understand may be an error and require fixing.
Michael Beresford – OpenCorp director
My number one tip for anyone investing in property is to make sure they are claiming everything that they are entitled to. Depreciation is a powerful tax benefit because it can be claimed without having to part with any cash upfront, but unfortunately between 50% and 90% of investors fail to do so.
To maximise tax returns, it’s important to keep accurate records of all expenditure throughout the year. It sounds simple but many miss out because they forget to keep receipts from the beginning of the year and can’t remember purchases from 11 months ago.
Having a tax variation form in place is another key way to maximise tax returns. This allows investors to receive their tax benefits month to month in their take home pay, without having to part with extra cash throughout the year before receiving a lump sum in their tax return. It’s simple to set up and eases cash flow through the year, leaving more money available to invest.
Jack Kouzi – Learn to Trade director of strategy
Over even just one year’s worth of trading, you may make thousands of different trades. Unfortunately, the ATO may demand evidence of those transactions and thus pertinent record-keeping is a must.
At a minimum you should keep details of:
- The instrument traded
- Purchase and sale dates
- Commission or brokerage
You may find that many broking platforms keep all this relevant data for you; they may even prepare end of financial year reports to make your life simpler. However, it is not their obligation to provide this data, so please ensure you either have access to this or can keep good ledgers yourself.
Trader or investor?
Tax consequences will vary on your FX trading depending if you’re classified as an investor or a trader in the eyes of the ATO. Luckily, the ATO has prepared guidelines to ensure that traders/investors know which category they would fall into.
Investors typically make ad hoc trades/investments where there is no regularity in their decision making. The motivation is usually to build long-term wealth through price appreciation rather than to provide an income.
Your gains or losses will fall under the capital gains tax regime, which means any gains on assets held less than 12 months will be fully assessable at your marginal tax rate. For assets held over 12 months, only half the gain will be assessable. Losses are carried forward to offset future gains.
Traders typically make short-term regular trades which aim to provide for a regular flow of income. The ATO classification of trader is best described as one where your activity resembles that of running a business. The ATO has provided guidance and examples which can be found here.
The tax treatment of shares depends on whether you’re considered to be holding shares as an investor or carrying on a business as a share trader.
For traders, gains are taxable as income, however an advantage of being classified as a trader is that losses may be tax-deductible rather than needing to be carried forward.
Taxation can be a tricky minefield to navigate, so ensure that you get the best outcome by speaking to your adviser or accountant.
Samuel Lee – Atlas Chartered Accountants director
Planning is the key. Most people are retrospective when they deal with their tax affairs. What people don’t realise is there are many tax-effective adjustments which can only be done before the end of the financial year or while the transaction is being processed or negotiated.
Engaging an accountant from the beginning would allow you to plan for most business situations raised by the ATO, ASIC and other regulatory bodies specific to each industry. By setting up business structures which effectively protect business and personal assets, but also balancing tax effectiveness, you would be better placed to focus on your business.
We can help minimise your current and future tax liabilities on a yearly basis by deferring income, prepaying expenses and finding deductions, which most people don’t realise is deductible for them if done right.
We work in a business and regulatory environment where the ATO don’t always correctly interpret the tax laws they administer for us. Dealing with other regulatory bodies and financial institutions can be hard when dealing with them the first time, but is easy for accountants who have assisted other clients who went through the same issue previously.
When we are asked to assist on transactions and agreements, we accumulate a knowledge base which is invaluable for other clients. An accountant quickly becomes a tome for avoiding and correcting unfavourable business and tax situations.
Guy Pearson – Practice Ignition CEO
Superannuation: Employer and/or self-employed superannuation contributions must be paid and received by 30 June to claim a deduction (processed by Monday 25th June).
Instant Asset write-off (extended to 30 June 2019): Assets first used or installed ready for use by 30 June costing under $20,000 can be immediately deducted for SBE taxpayers. This also extends to general pool balances under $20,000 at 30 June.
Bad debts: To be deductible, they must be written off in your accounts before 30 June.
Prepaid expenses: Small businesses with turnover less than $10 million can claim expenses prepaid up to 12 months in advance.
Personal super contributions: Deductions for personal super contributions are now allowed for all individuals. If you are considering this one, give us a call before you do so we can check your contribution caps.
Capital gains: Consider realising capital gains if you have unused capital losses or you expect a substantially higher income in 2019 compared to 2018.
Beware of gimmicks: Remember, only purchase a work-related item before 30 June if you actually need it. The tax deduction only equates to a cash benefit of a portion of what you will actually outlay. Avoid falling for those pesky retail marketing ‘tax time’ campaigns.
Angela Thompson – Sharesight digital marketing manager
When it comes to investment-related EOFY tax tips, online portfolio tracker Sharesight has a few suggestions.
With EOFY, the first thing to do is to review your portfolio and decide whether to leverage a tax loss selling strategy to help offset any capital gains you may have incurred this year. Sharesight has a handy tool that figures it out for you.
Next, if you work with an accountant, you can save a lot of time and money by doing some of the tax prep yourself. While you could do this in a spreadsheet, when you load your holdings into Sharesight, all your dividends will be automatically suggested for you. So all you need to do is review and confirm them, and then run the taxable income and capital gains tax reports. You can then share secure access with your accountant so they’ll have everything they need to quickly and efficiently complete your tax return.
Finally, you should ensure you keep your investment-related records as per ATO rules. This includes your buy, sell and dividend statements.
Alex – ATO virtual assistant
Alex, ATO’s virtual assistant solution, powered by Nuance’s ‘Nina’ artificial intelligence customer service solution, is a useful tool in the lead up to EOFY/tax time. Alex provides tailored responses to customer tax-related queries using natural language understanding, conversational dialogue and advanced resolution techniques to answer hundreds of commonly asked questions across a range of categories.
Since its implementation, Alex has been in service 24/7, and has become an embedded client service offering. The AI technology’s ongoing growth in content and understanding has helped visitors to ato.gov.au with the information they need. Alex provides an always-on support tool, designed to understand their needs using natural language, and responding in a manner they can easily consume.
To date, Alex has had over 2.7 million conversations with a first contact resolution rate of 89 per cent (FYTD), exceeding the industry benchmark of 60-65 per cent. The implementation of Alex resulted in 81 per cent (FYTD) of customer enquiries resolved without the intervention from the contact centre. Alex’s ability to evolve and hold contextual conversations with clients continues to expand as more people interact with Alex.
Luke Henry – LDB partner
Saving for your future retirement whilst reducing your current income tax debt
Previously, contributions into your super fund could only be deductible in your personal tax return if less than 10 per cent of your total income was from a salary or wage source.
That meant for a majority of individuals who earnt their main source of income from salary or wages, adding additional amounts into their super fund would not result in additional deductions.
From 1 July 2017, the tax office removed this 10 per cent test – meaning that for the 2018 income year and onwards, should you wish to contribute more funds into super, you will be able to claim a deduction for this contribution in your own personal tax return, which will help reduce taxable income and therefore your tax payable.
Please note there are some important things to remember when making deductible superannuation contributions (also known as concessional contributions), which include a limit of $25,000 per year.
Should you wish to take advantage of this ability for extra deductions, you will need to act fast as the funds must be received by your super fund’s bank account by 30 June 2018.
Maximising your investment property benefit in your tax return
Taxpayers with investment properties can take steps to maximise the benefits in their tax returns by ensuring all property expenses currently coming up for payment are paid before 30 June 2018.
This may include ensuring any repairs and maintenance which need to be done are undertaken before 30 June and rates or taxes are paid, including choosing an annual option rather than a quarterly option to ensure the full amount of the deduction within the 2018 financial year.
One thing to be wary of, though, is not to rush off and inspect that interstate property with the hopes of claiming the associated travel costs – from 1 July 2017, the tax office removed the ability to claim travel costs associated with inspecting rental properties, so unfortunately that’s one area you will no longer be seeing benefits from.
Courtney Goudswaard – Budget Direct digital PR manager
Budget Direct Home Insurance has taken the hassle out of insurance at tax time by compiling Australian Tax Office information about insurance costs into an easy Q&A.
Is my home insurance tax deductible?
Maybe. Is part of your home a place of business? If yes, you may be able to claim part of your home insurance as an ‘occupancy expense’ tax deduction.
Is my home insurance on investment properties tax deductible?
Yes! You can claim insurance on your rental property for the period your property was rented in the year you incurred the expenses.
Is my car insurance tax deductible?
Maybe. Do you use your own car for work, business or ride-sharing services? If yes, you need to establish what your ‘business use’ percentage is to determine how much car insurance you can deduct. Note: your daily commute is considered private, and therefore is not tax deductible.
Is travel insurance tax deductible, if my trips were for business?
No. Travel insurance policies cover items generally private in nature, such as illness, loss of baggage and theft. These are private in nature and not deductible.
Is my income protection tax deductible?
Yes! You can claim the cost of the premiums you have paid for insurance against the loss of your income. Losses include the tax on your income.