Tax time handy hints 2008

CPA Australia has developed the following list of handy hints to help Australians prepare their individual tax returns, and maximise tax deductions, offsets and other entitlements, for the year ended 30 June 2008.

Defer income and bring forward deductions
It usually makes sense to defer the receipt of income and bring forward deductions such as interest payments, subject to the operation of the prepayment rules, before the end of the financial year. In view of the personal tax changes, which commence 1 July 2008 for low and middle income earners (see table below), there may be an added incentive to defer taxable income before 30 June 2008. 

Interest and dividends, government payments and employment income
The ATO follows up any discrepancies in interest and dividends, as well as government payments and employment income received by individuals. For 2007 / 2008 the ATO will match income details with third-party data on more than 50 million transactions to ensure that income has been correctly included in returns. The ATO identified 257,200 income and benefits discrepancies in 2006 / 2007 which raised around $144 million in additional tax revenue.

You should note that you also have to include any franking credit in your assessable income as well as any dividend income received. A credit for this amount will be available to be offset against your tax payable.

Income derived from carrying on a hobby is not required to be included in your tax return whilst any related expenses are non-deductible. If you are unsure as to whether you are carrying on a business or hobby, then you should consult your CPA or the ATO as there are no hard and fast rules available for making such a determination.

Reduce capital gains on investments
Capital gains on the sale of shares, property and other investments can be reduced by ensuring all eligible items are included in the cost base of the assets sold including the purchase price, capital improvements, stamp duty, legal costs, advertising expenses and commission fees, and by applying any available capital losses. You may be able to further reduce any net gain under the general 50 per cent discount where the asset sold has been owned for more than 12 months.

The ATO is concerned that capital gains are not being included in tax returns. It has therefore significantly expanded its data-matching in the property and share areas by obtaining data on asset sales from all State / Territory Land Title and State Revenue Offices, the Australian Stock Exchange, share registries and managed funds. The ATO has also advised that it will examine around 6,000 at-risk cases this year including gains on sales where funds were later invested in superannuation. Hence, you should keep buy / sell contract notes for shares and all other purchase and sale agreements and receipts.

The ATO has also announced that it will deny capital losses where the loss on an asset has been applied to reduce some other capital gain, and thereafter the asset sold is either wholly or substantially re-acquired by that person.

Claim all work-related expenses
Take the time to find out what work-related expenses you can claim. While up to $300 of work-related expenses can be claimed without receipts, the claims must be for items necessary for your work and you must have incurred the expenditure. Typically, these expenses would include 'normal' employee claims for expenses, such as uniforms, business telephone costs, subscriptions and union fees.

Special rules apply to laundry, home office and self-education expenses.

Laundry claims up to $150.00 do not need to be substantiated, even if your total tax deductions exceed $300. The deduction is only allowed for the laundering and dry-cleaning of protective clothing, compulsory uniforms, registered non-compulsory uniforms and occupation-specific clothing.

You may be able to claim a deduction for some home office costs such as heating, cooling, lighting and depreciating your office equipment or professional library. To claim the deduction you must have kept a diary for at least four weeks of the hours you worked at home. This amount is then used to work out your total hours worked for the year and a deduction claimed at a rate of $0.26 cents per hour.

You can also claim self-education expenses if you are undertaking study directly related to your current work; but not if the study is to help you obtain new qualifications in a different field. There are special rules regarding the first $250.00 of self-funded education expenses, so check with your CPA or the ATO. Higher Education Contributions (HECS) / Higher Education Loan Program (HELP) repayments cannot be claimed.

Claims in excess of $300.00 have typically require receipts to prove the purchase, but the ATO has now adopted a more practical approach to recognise a wider range of documents, such as bank and credit card statements. Make sure you have all relevant receipts and other records in order, as the ATO is also expected to conduct around 15,000 reviews or audits of at-risk cases.

Maximise your motor vehicle deduction
Where you have used your motor vehicle for work-related travel, and your claim for  kilometers travelled for the year does not exceed 5,000 kilometers, you can claim a deduction for your car expenses on a cents per kilometer basis to the extent you have used your car for work. The allowable rate for claims changes from year to year, so check with your CPA or refer to the 2008 Tax Pack for this year's rate. You should ensure that any claim for work-related travel is based on reasonable estimates. 

Alternatively, if you have used your motor for a significant amount of work related travel you may be able to claim a deduction for your total car running expenses to the extent you have used it for work. However, such claims are only available where you have the required log book, odometer readings and receipts.

On the other hand where business travel exceeds 5,000 km, it may be possible to claim one-third of actual car expenses or 12 per cent of the original value of the vehicle without a logbook.

You may wish to compare which of the above four methods gives you the maximum deduction.

Work-related travel includes travel between two places of work or employment, or travel to shifting places of employment. It may also be available where you have to carry bulky tools or equipment with you to work. 

Identify all eligible depreciable tools and equipment
Some depreciable items can be claimed in full if they cost $300.00 or less or will last for less than three years, and are used predominantly to gain assessable income other than business income. Eligible items include tools, calculators, briefcases, computer equipment and technical books. Any deduction claimed should be reduced to the extent it is used for private purposes, but there is no need to pro rate the deduction for such equipment if it was acquired part way through the year. More costly items such as personal computers may be written off over several years. You should consult your CPA or the ATO to ensure you use the correct depreciation rates. 

List all rental property deductions
Rental property owners can generally claim deductions for advertising, bank charges, body corporate fees,  cleaning, council rates, electricity and gas, gardening, insurance, interest on loans, land tax, lease preparation costs, legal costs, pest control, postage and stationary, property agent fees and commissions, repairs, secretarial and bookkeeping fees, security patrol fees, telephone calls and water rates. You may also be able to write off the cost of certain buildings, depreciating assets and borrowing costs over time.  However, the ATO is carefully scrutinising rental losses claimed because rental expenses increased by around 11 per cent in 2005 / 2006, yet rental income only increased by approximately 9 per cent. Consult a CPA or the ATO to ensure you identify all your entitlements.

Deduct all non-work related expenses
The fees you pay a registered tax agent to prepare your return or to manage your tax affairs are allowable in the year the fee is paid. On-going management fees paid to a financial planner are also deductible where the advice relates to income producing assets.

Bank charges and any interest payments on funds to finance the purchase of shares and other income producing investments are generally allowable. Donations to charities and other gift deductible recipients should also be claimed.

Optimise your tax offsets  
Tax offsets directly reduce your tax payable and can add up to a sizeable amount, so it pays to know all the offsets you are entitled too. Eligibility for offsets will generally depend on your income level, family circumstances and satisfying specific conditions for each rebate.

Long standing examples of tax offsets include the dependant spouse rebate, low-income rebate, mature aged worker rebate, the senior Australian tax offset and the rebate for superannuation contributions made on behalf of a low income spouse.

In addition, significant offsets are available for private health insurance, medical expenses and an entrepreneur's rebate for micro businesses.

A general 30 per cent refundable tax rebate can be claimed on the cost of health insurance premiums paid by individual taxpayers. However, the rebate is not available where the benefit is taken in the form of a direct payment or reduced premiums. Higher level income earners, without adequate health cover, are liable for an additional 1 per cent Medicare levy surcharge. Higher rebates can be claimed by older persons, for persons aged from 65 to 69 years, the rebate is 35 per cent, and a 40 per cent rebate applies for those 70 and over.

You can claim a 20 per cent rebate on net medical expenses over $1,500 'Net medical expenses' is the difference between medical expenses incurred by you or your dependants, less any refund you may have already received from Medicare or a private health insurance provider. Not all medical expenses can be counted; for example, chiropractors or psychologists, unless you can show that you were receiving therapeutic treatment. Some dental expenses are included. You should keep all your medical receipts to support your claim.

Additionally, there is a 25 per cent entrepreneur's tax rebate if you have elected to enter the small business entity system and your business income for the year does not exceed $50,000. The rebate reduces for every dollar on business income in excess of $50,000 and phases out completely where income exceeds $75,000. The rebate is not means tested for the 2007 / 2008 year.

You should see a CPA to find out whether you are eligible for any of the tax offsets available.

Consider making tax effective superannuation contributions
Following recent changes a self-employed taxpayer will be able to claim all their contributions to a complying superannuation fund as fully tax deductible up to age 75.

However, such contributions may not be deductible if 10 per cent or more of a person's assessable income or reportable fringe benefits is attributable to their employment as an employee. Employers are also able to claim deductions for employee superannuation contributions made to complying superannuation funds provided the employee is under 75. However, any excess contributions made by a self employed person or by an employer in respect of an employee will be taxed at a rate of 46.5 per cent (rather than 15 per cent) if the contributions made during the year exceed $50,000 (or $100,000 for persons aged 50 or more at 30 June 2008).  

Contributions made from a person's after tax income to a complying fund will not be deductible or included in the fund's assessable income. However, the amount of such contributions cannot exceed $150,000 for the 2008 year, (or $450,000 if contributions for the 2009 and 2010 years are brought forward) as any after tax contributions made in excess of these limits will be taxed in the hands of the individual  taxpayer at 46.5 per cent. Special rules apply to exclude certain personal contributions from these limits. Low-income earners may also be able to access the government co-contribution where the government makes a contribution of 150 per cent of any personal contributions made by a taxpayer. Thus, if a taxpayer makes a personal contribution of $1,000 there will be a matching government co-contribution of $1,500. To be eligible the taxpayer's total earnings must not exceed $28,980 for the 2007 / 2008 year. However, the co-contribution is reduced where the taxpayer's total earnings exceeds $28,980 and is fully phased out where total earnings exceed $58,980. Earnings includes reportable fringe benefits for the purposes of the co-contribution which can now be accessed by both employees and self employed taxpayers.     

Review your salary package
If your employer offers salary packaging, this can be an effective way to obtain tax savings, particularly if you are on the top marginal tax rate. Some of the most common and tax-effective items that can be salary packaged include superannuation and motor vehicles.

Special care should be taken when packaging to ensure that you only select fringe benefits which provide you with some after-tax savings. Typically this will only occur where the benefit is concessionally taxed or is FBT exempt.

For example, the amount of tax savings on packaging a car will vary for each taxpayer, depending on the cost of the car, the total work versus private kilometres travelled and the car's annual running costs. Further, the potential tax saving available may have reduced in recent years as tax rates have been progressively cut, and less taxpayers are in the highest income bracket. Your CPA can advise you on any tax benefits that may be available.

Following the 2008 / 2009 Federal Budget employees will no longer be able to obtain laptops, briefcases, mobile phones, personal digital assistants and similar items as exempt FBT items each year unless they are acquired primarily for work-related purposes. This new rule applies to all such items acquired after 7.30 pm on May 13 2008. Given this change you may wish to contact your CPA to see how you should structure your salary package in the future.

Your employer will include the reportable fringe benefit amount on your payment summary, which must be reported in your tax return and may affect your entitlement to certain benefits.

Obtain medicare levy and medicare levy surcharge relief
Increases in the Medicare levy thresholds for low-income individuals, families and certain pensioners announced in the 2008 / 2009 Federal Budget can be claimed in this year's return. From 1 July 2007, the Medicare levy low-income threshold will increase to $17,309 for individuals and $29,207 for families. The family threshold will increase by $2,682 for each dependent child. The Medicare levy low-income threshold for pensioners below pension age increased from 1 July 2007 to $22,922.

An additional one per cent surcharge may also apply to married or de facto couples with a combined income in excess of $100,000 if they do not have adequate private health insurance cover. Both partners and any dependants must be fully covered under the policy for the whole of the income year, otherwise both partners will be subject to the surcharge, unless the low income threshold or some other exemption applies. The income threshold also varies where there are dependants, or the parties are separated.  The surcharge also applies to single individuals without similar cover where an individual's income is in excess of $50,000. For surcharge purposes income will also include reportable fringe benefits. Consult your CPA on how you can reduce any future liability for the surcharge.

For further information visit the ATO website.

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