3 July 2008
Let's be honest, tax time is a tedious time. But as the saying goes, 'if something is worth doing, it's worth doing right'. Especially when this time of year can make such a difference to your bank balance.
And let's face it, preparing your tax return correctly is much better than the alternative…the possibility of a detailed investigation by the Australian Taxation Office (ATO)!
How they'll be keeping an eye on the rich
You will be pleased to know that your hard-earned tax dollars are being well spent and that the ATO has recently ramped up its resources and expanded their audit team.
On the top of the ATO's most wanted list this year are the super-rich and high-income earners.
Tax Commissioner Michael D'Ascenzo made the ATO's intentions very clear when he singled out Australia's wealthiest individuals, stating that "…they are responsible for what they report in their tax returns, irrespective of who prepares the return and the advice they get".
The ATO was even kind enough to send the 1,200 high-income earners with more than $30 million in personal assets a letter, informing them that they will be under the microscope.
And to help them out, the ATO provided them with a 60 page instruction booklet titled "Wealthy and Wise - a tax guide for Australia's wealthiest people"…lucky them!
How they'll be keeping an eye on the rest of us
Since most of us don't operate offshore accounts, it's unlikely we'll become victims of the ATO's 'Project Wickenby'.
Nevertheless, the preparation of your tax return is a delicate balance between tax minimisation and savings maximisation - and deliberate tax evasion is a criminal offence which is heavily penalised.
As a member of the OECD Forum on Tax Administration the ATO uses the world's best practices and sophisticated data cross-referencing techniques to look for unusual financial behaviour, as well as a host of other non-conventional methods designed to keep us all honest.
Hanging out the washing
The 'golden rule' of taxation and investments is that capital losses can only be used to offset capital gains, not income or dividends.
The ATO recently made 'wash sales' illegal and will be carefully scrutinising tax returns in light of recent sharemarket volatility.
Wash sales refers to the practice where investors crystallise losses on an asset to offset it against capital gains, then buy it back at a lower price, before usually transferring the re-purchased asset into a family or discretionary trust.
Since the ruling, the only occasion in which this practice may be permissible is where the re-purchased asset is transferred into a super fund, where more favourable treatment may be possible.
Lump sum interest pre-payments
Pre-paying interest on borrowings for shares, managed funds and property is also another popular method of reducing tax. But it's important to realise that this is principally a tax deferral mechanism, and that the interest deduction cannot be claimed until the following year.
There are some occasions in which pre-paying interest might be more appropriate than others, and they will normally include instances where you intend to earn less income in the coming year, or in the event of substantial tax cuts.
Before pre-paying any interest, make sure that your leverage facility can cater for 13 months of interest payments in advance.
The recent Federal Budget announced that after 1 July 2008, any deduction would be calculated at 9.25%, so also keep in mind that most margin loan facilities typically charge between 10% and 14%.
You will also need to be mindful of the impact that the interest rate differential might have.
It's also important to consider the fundamental principles of investing, and avoid throwing good money after a bad investment.
Remember, the value of the asset still needs to appreciate over time for it to be a worthwhile financial commitment.
Instalment warrants can provide cost effective exposure to the sharemarket, as well as the opportunity to accrue an asset over time. One of the principle benefits of warrants is that the investor is entitled to receive ordinary dividends and interest, which may be tax deductible.
When investing in managed funds in under-performing markets, keep in mind the funds potential to convert your invested capital into capital gains as a result of previous trading activity.
Monitoring the historical portfolio management behaviour of the fund manager during previous volatile financial years can sometimes be a reasonable rule of thumb.
Most importantly, beware of fraudulent tax schemes that promise to show you a way of beating the tax system. What looks too good to be true, usually is.
So always ensure that the scheme is properly structured and registered, meets basic regulatory and industry standards, and is accompanied by a current tax product ruling from the ATO.
Those with investment properties should also remember to claim depreciation where possible. Make sure you keep receipts and a schedule of costs for any renovations and improvements made. You may also be eligible to claim up to 12% on depreciable assets for any improvements made after 26 February 1992. So keep accurate records.
Keeping it in the family
The Family Trust will also be closely watched by the ATO this year after the definition was narrowed to only include 'lineal descendants'. Other Trust aspects under scrutiny include the improper use of family company money for personal use and the payment of financial incentives and bonuses, for example paying a family member an un-franked dividend, which is not in turn taxed.
Sacrilegious!
Salary sacrificing is also becoming more restricted, but superannuation contributions and car leasing may still be worthwhile for some. It's worth discussing these issues in more detail with your employer and accountant if you think you could be eligible.
Receipts for family medical expenses can also be offset if the total annual expenses exceed $1,500. Some may be eligible for an offset of up to 20%, which is handy if you are caring for elderly family members or have young children.
Superannuation
Superannuation continues to be one of the most effective means of improving ones tax position. However, it's worth noting the relatively recent changes to deductible super contributions, implemented under the Government's 'Simpler Super' scheme.
Effective 1 July 2007, those under 50 may make concessional contributions up to a maximum of $50,000 a year.
Those over 50 may make concession contributions up to a maximum of $100,000 a year.
Most importantly, if these amounts are exceeded, even accidentally, you will be penalised at the hefty rate of 46.5%.
Don't look a gift-horse in the mouth
If you earn less than $58,980 in income in a year, the Federal Government will generously contribute up to a maximum of $1,500 a year for every $1,000 contributed under the co-contribution scheme.
Income
When it comes to minimising income, it appears that deferral is still the most popular method. And with a reduction in tax rates scheduled for next financial year, deferring both asset sales and the maturity of investments until then might prove a sensible option for some.
Splitting income on jointly owned assets to the lower paid spouse or partner, and making deductible charitable donations, are also reasonable steps to reduce your annual taxable income.
Seek professional advice
If you are comfortable doing it yourself, you can complete and lodge your tax return online via the ATO's 'e-tax' website portal. And if you need a little guidance, the ATO website provides a lot of very useful help advice.
If your financial affairs are a little more complicated, choose a suitable accountant. Only deal with a Certified Practicing Accountant (CPA) or Chartered Accountant (CA). And if you operate your own business, it's especially important that you find an accountant who understands what your business does.
Finally, make sure you keep your financial records for seven years just in case the ATO comes knocking, and keep yourself up-to-date and refer to the ATO website for notifications and alerts.
Wishing you all a very happy return.