Ten commandments of tax

Avoid the annual scramble with this handy guide

THE end of financial year comes around at the same time every 12 months but always seems to catch unprepared. Tax time is always a mad scramble.

Naturally, as good citizens, we don’t mind paying the right amount of tax but we are damned if we are going to pay a dollar more than we have to. The problem is that tax is so complicated many of us have given up trying to understand what we can and can’t do.

So here are our Ten Commandments of tax to think about now to make sure you make the most of tax time.

1. SPLIT YOUR INCOME

It’s easy. Put all the bank accounts and other incomeproducing investments in the name of the spouse on the lower income tax bracket. With joint accounts the Tax Office splits the interest earned and applies the tax rate of each individual partner to their share. The partner on the highest tax bracket pays the most tax on their interest.

Income splitting is very attractive in a family where there is one primary income earner because the other spouse can earn up to $1820,000 tax free.

2. HAVE YOUR TAX ADJUSTED

If you think you are paying too much tax, apply to have it adjusted. With interest rates at record lows many people, particularly retirees, have seen their interest income cut sharply. You can approach the tax office for a variation of tax.

Talk to your accountant and tax agent or check out the forms on the ATO website.

3. SELF EDUCATION

As a rule of thumb, you can claim a tax deduction for the costs of self-education, provided it’s related to your income earning activities.

Generally self-education is associated with courses run by schools, colleges and universities which end up in you gaining an award like a degree or a diploma. But you don’t necessarily have to come out with a bit of paper to claim a deduction. You’ve just got to be able to prove the skills or knowledge you gained are sufficiently related to your job.

4. KEEP ACCURATE RECORDS

The reason you receive your tax refund so quickly is because the Australian Taxation Office takes your word for it. Hard as it may seem, the tax office accepts your calculations at face value and pays the refund.

All your calculations are matched against the average of other taxpayers like you but the tax office computer will put a red flag next to you if you’re out step. Then they come knocking.

So make sure your records are right to avoid any penalties.

5, DELAY INCOME UNTIL NEXT FINANCIAL YEAR

Every dollar we earn, whether it be from wages or investments, is taxed at our marginal rate. But if you expect to earn less next financial year, and so be on a lower tax bracket, delay receiving things like investment income, dividends, money from a side hustle or contract work until July. Illustration: JOHN TIEDEMANN

6. TOP UP YOUR SUPERANNUATION

Before-tax superannuation contributions (up to $25,000 a year) reduce your taxable income, so less money goes to the tax man and more goes to your super savings. After-tax contributions (up to $100,000 a year) are also worthwhile because returns are taxed at a maximum 15 per cent, not your regular income tax rate.

7. OFFSET CAPITAL GAINS WITH LOSSES

Profits on selling investments like shares, property or managed funds purchased after 1985, will be charged capital gains tax. While calculating CGT can be complex, it is roughly based on your marginal tax being applied to 50 per cent of the gain. But any losses made on these types of investments can be offset against profits.

So if you have made a big profit on one investment, sell some of your disasters.

8. PRE PAY ELIGIBLE EXPENSES

Talk to your accountant about pre-paying eligible expenses into this financial year to reduce taxable income. For example, interest on an investment loan attached to a property to can be paid 12 month in advance. Investment property owners should also be getting those maintenance jobs done, and paid for, now to be claimed in this year’s return.

9. WORK OUT ANY NEGATIVE GEARING IMPLICATIONS

Australians seem to have a passion for negative gearing. We think the advantages are exaggerated by most people.

Negative gearing is where you borrow to invest and if the loan repayments are more than the income generated from the investment, the difference can be claimed as a tax deduction.

Negative gearing works best at a time of high income tax rates, high inflation and high interest rates. But today we have lower tax rates, inflation is low and interest rates have dropped. For most people now, negative gearing simply does not stack up in this economic environment.

That is not to say, don’t borrow to invest, but do it because of the investment potential, not just for tax.

10. CLAIM WORKRELATED EXPENSES

Many jobs demand spending money on unusual items which are a necessity to earning an income. The cost of these items can be claimed against tax as work-related expenses. But you must keep receipts and the expenses must directly relate to earning an income.

Check out the tax office website (www.ato.gov.au) resource centre which lists the eligible work deductions for a whole range of occupations.