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Tax time demands action now

Nicki Bourlioufas  |  29 Jun 2022Text size  Decrease  Increase  |  
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Another financial year is almost over, and with just days until 30 June, now is the time to get your tax affairs in order to maximise your personal tax deductions. Financial advisers have listed some key actions investors can take before June 30 to minimise any hit from the taxman and also maximise their superannuation savings. But don’t delay, you’ve only got two days.

Use losses to offset capital gains

If you’ve sold shares during the financial year for a profit, you’ll need to pay capital gains tax (CGT). It is not a separate tax, but forms part of your income tax. Selling assets such as property, shares or managed fund investments is the most common way you make a capital gain or loss.

The good news is that you can claim any losses on your shares to offset any capital gains - and plenty of share investors will be feeling the pain after the fall in share markets this year. Any unused losses can be carried forward to offset capital gains in future years, without a limit on how long they can be carried forward. You can't use any capital loss from shares to reduce your taxable income, just the capital gains you declare.

Felicity Thomas, senior private wealth adviser with Shaw & Partners, says investors should consider selling underperforming shares to trigger a capital loss. “If you have any other investments such as shares that you no longer want to hold for the long term, it is a good time to look at selling these shares before 30 June, in particular if you have trigged any gains this financial year,” says Thomas.

Scott Keely, senior financial adviser with Wakefield Partners agrees, but cautions investors to be selective about which shares they sell. “Whether it’s QBE, AMP or Telstra, many portfolios have an underperformer that can finally be of some use.

“Assessing shares that have fallen in value does not result in a blanket decision to sell. Some shares that have fallen in value still may still be important in portfolios if they provide regular sustainable income, or if their future prospects are promising.”

Beware of the wash sale rule

Share investors organising their tax affairs and buying and selling shares to minimise tax need to be aware of the Australian Tax Office’s (ATO) ‘wash sale’ rule. This describes the quick sale and re-purchase of securities to reduce tax.

“The sort of transactions that the ATO is watching closely are those that generate a tax benefit where a benefit would not have ordinarily been available if the transaction wasn’t entered into in the first place,” says Brett Evans, Managing Director of Atlas Wealth Management.

“For example, if you were unlucky enough to own a lot of Telstra shares, and were to sell some or all of your holdings down due to the company’s underperformance and in turn created a taxable loss then this wouldn’t be classified as a wash sale.

“However, if you were to sell these Telstra shares and then repurchase the same or similar amount back in a short period of time then it can be argued that the reason for the sale was not because you wanted to reduce your position in Telstra but to crystallise a capital loss otherwise you wouldn’t have re-entered the position,” says Evans.

Any attempt to implement a wash sale strategy carries an extreme risk, and it will only be a matter of time before the ATO catches up with you, adds Keeley.

Make a super contribution

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Concessional contributions are contributions that are made into your super fund before tax. They are taxed at a rate of 15 per cent. From 1 July 2021, the concessional contributions cap is $27,500 and the and the non-concessional cap is $110,000. Concessional contributions include contributions made before-tax, such as salary sacrifice, or those that reduce your tax payable, such as personal deductible contributions. Any contributions you make over the cap will be taxed at your marginal rate, less a 15 per cent tax rebate. You may also be charged interest.

If your superannuation balance is under $500,000 you can use catch-up concessional contributions. According to Shaw & Partner’s Thomas, 2018-2019 was the first financial year you could accrue unused cap amounts. Unused cap amounts can be carried forward for up to five years before they expire. “If you haven't put any money into superannuation since FY2019, you could be eligible to contribute up to $77,500 this financial year as a personal deductible contribution,” she says.

This is a popular option, says Keeley. “This year, we are seeing many people who have realised gains throughout the year really making use of past year’s unused concessional contributions, so instead of only claiming $27,500, I’ve got some that are claiming $50,000 to $75,000 because they haven’t used previous year’s caps fully.”

Don’t forget about the super co-contribution

If your total assessable income is less than $56,112 in the 2021-22 financial year and you make a voluntary after-tax contribution, you may be entitled to a Government Co-contribution payment. You could receive up to 50c for every dollar you pay into your super account, up to a maximum of $500.

Consider making a spouse contribution

If your spouse is not working or earns an income below $37,000, you may want to consider making an after-tax contribution of up to $3,000 into their super account. This strategy could potentially benefit you both as your spouse’s super account gets a boost and you may qualify for a tax offset of up to $540. “If your spouse earns between $37,000 and $40,000 you can qualify for a partial amount of the tax offset benefit,” says Thomas.

Spouse superannuation splitting may also make sense. This strategy involves giving your spouse some of your concessional superannuation contributions. You can split up to 85 per cent of your concessional contributions each year. Couples may want to implement this strategy if one spouse is older, so the younger one can potentially gain access to their super sooner and it may help to equalise superannuation balances, says Thomas. “Contributions for the 2020-2021 financial year have to be split by 30 June 2022 by completing the appropriate form for your super fund.”

Deduct what you can to manage your investments

Where you pay ongoing management fees or retainers to investment advisers or accountants, you will be able to claim that expense as an allowable deduction. Note that you can’t claim a deduction for a fee paid to an adviser for drawing up an initial investment plan.

If you borrowed money to buy shares, you would be able to claim a deduction for the interest incurred on the loan, provided it is reasonable to expect that dividends will be derived from your investment in the shares (that is, the interest expense is incurred to produce an income), according to the ATO.

is a Morningstar contributor.

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