Caution on tax warranted ahead of 30 June
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Another financial year is almost over, and with just two weeks until 30 June, now is the time to get your tax affairs in order. This may include some extra managing of your share or superannuation holdings.
Some financial advisers have been recommending strategies to clients to boost their tax refunds, but two planners offer some words of caution.
One common way to boost your tax refund is to bring forward tax-deductible expenses into this financial year, such as interest costs on an investment loan taken to buy shares or property. This is a practice recommended by many financial advisers and tax accountants.
But Bruce Brammall of Bruce Brammall Financial says this doesn’t apply to all tax payers.
"The first question a person should ask is whether they will earn more this year or next financial year and if so, if they’ll move into a higher tax bracket. If they are going to be earning more next year, then it might make sense to defer expenses until then.
"So if, for example, someone expects a salary increase to $90,000 in 2016-17 and they are currently earning $75,000, then their marginal tax rate (including Medicare levy) will rise to 39 cents in the dollar, up from 34.5 cents, so it may make sense to delay incurring expenses deductions until next fiscal year," says Brammall.
"However, if they aren’t likely to move into a lower tax bracket in 2016-17, then it makes sense to pay expenses now so you can potentially claim a bigger tax deduction and get your money back faster by incurring costs this financial year when your marginal tax rate is higher,” he says.
Potential negative gearing changes
Andrew Lord, director of wealth management, HLB Mann Judd, also expresses caution for individuals considering prepaying investment loan interest for up to 12 months.
"We are mindful of possible alterations to negative gearing policy, so we are encouraging clients to prepay any interest, but making them aware that we could see a 50 basis point lowering in variable interest rates in the next three to six months, so any prepaid tax benefit may be more than offset by interest savings which taxpayers could gain if they paid interest at the time it is incurred, that is, next financial year," Lord said.
In terms of how to claim tax losses, if you’ve made a capital gain on an investment property, shares or any other investment this financial year, taxpayers could consider offsetting the capital gain tax this year by selling an asset where a loss would be incurred.
Wash sale rules
Brammall says this make sense, but emphasises that share investors need to be mindful of the Australian Tax Office’s (ATO) "wash sale" rules.
This is a term used to describe the quick sale and re-purchase of securities. The ATO has previously said it will look unfavourably at sale transactions or arrangements that create a tax loss which delivers a tax benefit that ordinarily would not be available.
In particular, where a tax payer sells an asset to incur a loss then buys the same asset back in the same amount shortly later, then the ATO may think of those transactions as a way to avoid tax.
"Under wash sale rules, the ATO may say that the sale was just a way for someone to reduce their tax, so if you are incurring a capital loss in June by selling a parcel of shares to offset a capital gain, then planning to shortly buy back those shares, the ATO ay question the transaction and you may still be up for the same tax payable as if you hadn’t incurred the loss," says Brammall.
Proposed new super caps
In terms of superannuation, some rearranging or rejigging of pensions may also be warranted, says HLB Mann Judd’s Lord.
In the recent Budget, the Government introduced a cap on the total size of a super account to $1.6 million.
This will limit the amount of super that can be transferred to the tax-free retirement or pension phase. So if you have an existing super pension account that exceeds the above amount, you will need to reduce that balance below the cap by 1 July, 2017 to avoid tax penalties.
For this reason, Lord suggest clients "commence pensions this financial year, even if they are still in the accumulation stage, and roll back pensions next year if possible to stay within the $1.6 million cap".
The Government has also lowered concessional super caps to $25,000 per year from 1 July 2017, so it may make sense to maximise your super contributions before this date. Currently, the concessional super contributions cap is $30,000 for individuals under the age of 49. For those who are 49 years of age or older, the current cap of $35,000 remains in place until next financial year.
Lord also suggests investors avoid buying assets because of the 30 June timing, and not because of their intrinsic value.
As for investors in listed property, if properties have been purchased through a SMSF using a limited recourse borrowing arrangement, Lord says: "You should allow plenty of head room for reduced rental income or leasing period, or a larger equity contribution in the event of a lower bank valuations where settlement is to occur."
Nicki Bourlioufas is a journalist and/or Morningstar contributor. This is a financial news article to be used for non-commercial purposes and is not intended to provide financial advice of any kind.
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