According to Peter Bembrick, a tax partner at HLB Mann Judd, there are a number of core facets to tax of which self-employed people should be aware.
“As a general rule, the approach should be to pay any tax-deductible expenses now, so the deductions can be made this year to reduce taxable income, and put off any non-deductible costs to the next tax year where possible,” he said.
And getting in earlier with your taxes if a refund is expected is particularly important, he added, noting that not only will this see you receive your refund sooner, but it can also help to reduce ongoing quarterly tax payments.
These moves can dramatically help a business’ cash flow in the lead up to the busy Christmas shopping season.
Mr Bembrick suggested paying particularly close attention to the following six mistakes:
Mistake #1: Ignoring/overlooking the new superannuation rules
Changes to the superannuation rules, effective from 1 July 2017, mean that PAYG earners will now be able to claim a tax deduction for their personal superannuation contributions.
And, because these measures are new, it is all too easy to overlook them, Mr Bembrick suggested.
“For those with income levels above $87,000 and in the 39 per cent tax bracket (including Medicare levy), the tax benefit of the contribution is 24 per cent, but the individual personally receives the 39 per cent benefit,” he said.
“Apart from the tax deduction, super contributions are becoming the great tax planning tool.
“With negatively geared loans not providing as much of a loss with the lower interest rates, and a question mark over the viability of other strategies such as agri-tax schemes, it is difficult to claim large tax deductions elsewhere.”
Mistake #2: Not splitting income
“This strategy may be an oldie but it’s still a goodie,” said Mr Bembrick.
“Couples should consider making investments in the name of the lower earning spouse to minimise the tax payable on income distributions and capital gains. The exception to this is negatively geared investments, which work to best advantage when the highest earning spouse holds ownership.
“Another option is to hold investments in a family trust, with adult children as beneficiaries. Children aged 18 or over are entitled to the full adult tax thresholds, which can be very handy during the years when they are in full-time study.
He added: “Investments in discretionary family trusts offer maximum flexibility and this strategy can allow the trust to distribute income from its investments in a way that provides significant tax savings.”
However, Mr Bembrick warned against using trusts for negatively geared investments, as this generates tax losses that can be trapped in a trust.
Mistake #3: Confusing/overlooking the difference between deductible versus non-deductible debt
While paying down non-deductible debt should generally be a priority from a tax point of view, Mr Bembrick cautioned that using interest-only loans for income-producing assets and investments can sometimes catch the ire of the taxman.
“This is a sensible strategy, and perfectly acceptable to the ATO when set up properly,” he said.
“However, beware of debt restructuring that appears tax-driven as the ATO could apply anti-avoidance legislation.”
“No investment should be taken out purely because it receives favourable tax treatment, but by the same token, it is important to be aware of the taxation implications of the investment structure.
Mistake #4: Letting expenses rollover into the new financial year
While we are all familiar with “end of financial year sales”, Mr Bembrick said it can still be easy to overlook the pre-payment of deductible expenses.
“Individuals who are employees can claim up to 12 months of prepaid expenses, for example, interest on investment loans and management fees,” he said.
“More generally, people should aim to make any tax-deductible payments, such as donations, subscriptions and income protection insurance premiums, before 30 June to ensure that they make it into this year’s tax return.”
However, leaving these things until June 30 can lead to disappointing results.
“For instance, a donation to a charity is recorded as the date it is received, not the date it is sent, so any cheques or payment forms should be sent a week or two before 30 June to make sure they count in this financial year, not next,” said Mr Bembrick.
Mistake #5: Doing the dodgy on your deductions
It has been well publicised that the ATO is taking an increasingly hard-line stance on deductions — both on the types of deductions made as well as their value. As such, keeping all records so as to justify deductions is a wise move.
“Firstly, be aware that under legislation applying from 1 July 2017 it is no longer possible to claim travel expenses for inspecting a residential rental property unless you are carrying on a business of property investing. Many people may not be aware of this change to the rules,” Mr Bembrick noted.
“More generally, the ATO is still concerned that taxpayers are claiming more work-related expenses than they are entitled to, and this remains a key focus area.”
Mistake #6: Making private health insurance decisions based solely on tax purposes
As Mr Bembrick points out, the Medicare levy surcharge of an extra 1 per cent applies for singles earning over $90,000 and couples earning over $180,000. Where incomes surpass $140,000 for individuals and $280,000 for couples, this rate increases up to 1.5 per cent extra.
Yet he said it is a mistake to look at private health insurance solely from a tax perspective. Instead, examine health insurance policies and whether you will even take out private cover with the wider financial and, of course, health considerations in mind.