As we move towards the end of the 2021/22 financial year, there are a number of year-end income tax planning opportunities that may be available to optimise your tax position.
Temporary full expensing
Are you contemplating asset and equipment purchases? If so, consider getting in before 1 July to take advantage of temporary full expensing (TFE).
TFE supports businesses and encourages investment, as eligible businesses can claim an immediate deduction for the business portion of the cost of an asset in the year it is first used or installed ready for use for a taxable purpose in your business (rather than depreciation deductions being spread out over a number of years). This improves cashflow which can be a big problem for small businesses in particular.
Eligible assets include most business-related assets including new or second-hand equipment, furniture, computers, machinery, vehicles etc. (note however that vehicle claims may be capped by the car limit). Ineligible assets include certain primary production assets and buildings or other capital works.
You’ll be able to claim in 2021/22 if the asset is first used or installed ready for use between 7.30pm AEDT on 6 October 2020 and 30 June 2022. Any business with an aggregated turnover of less than $5 billion is eligible to use TFE.
Crystalise capital losses
Have you made capital gains in 2021/22? If so, in consultation with your advisors, it may be worth considering crystalising any capital losses you are currently sitting on. For background, if you have made a capital gain from your investments, it will be added to your other income and taxed at your marginal tax rate which could be as high as 45% if you hold the asset personally.
However, capital losses can offset capital gains and in doing so reduce your tax liability. This strategy may be considered for example where you are holding underperforming CGT assets which you and your advisors consider have little prospect of growth moving forward.
By contrast, if an underperforming asset has good potential for future growth, then you may not be inclined to sell it. Each scenario should be judged on its own merits in consultation with your advisors. By no means should tax be the sole driver of your investment decisions. Keep in mind that for CGT purposes a capital gain/loss generally occurs on the date you sign a contract, not when you settle on a property purchase.
If there is no contract of sale, the gain or loss occurs usually when you stop being the asset’s owner. For example, if you sell shares, the gain or loss happens on the date of sale. Knowing which financial year the gain/loss will be attributed to is important when tax planning.
Write-off bad debts
Businesses should review their aged debtors to determine if any debts are not recoverable. If so, by writing them off as bad debts before 1 July 2022, you may be able to claim a tax deduction for the full amount of the debt in 2021/22. For a debt to qualify as ‘bad’, there must be little or no likelihood of recovery. Records should be kept to demonstrate that you have taken reasonable steps to recover the debt prior to writing it off.
Six super strategies to consider before 30 June
With the end of financial year (EOFY) fast approaching, now is a great time to boost your superannuation savings and potentially save on tax. Below are six superannuation strategies to consider before 30 June 2022.
Tip 1 – Use the carry forward concessional contribution rules
If you want to make up for lost time and make extra contributions to top up your superannuation balance, you may be able to use the carry forward concessional contribution rules (otherwise known as “catch-up concessional” rules) to make large concessional contributions this year without exceeding your concessional contribution cap.
This strategy can allow you to carry forward any unused concessional contribution cap amounts that have accrued since 2018/19 for up to five financial years and use them to make concessional contributions in excess of the general annual concessional contribution cap (currently $27,500 in 2021/22).
You can then make a concessional contribution using the unused carry forward amounts this financial year provided your total superannuation balance (TSB) at 30 June 2021 was below $500,000.
Tip 2 – Make a personal deductible contribution
Carry-forward contributions may also provide you with an opportunity to make higher amounts of personal deductible contributions in financial years where you may have a higher level of taxable income, for example, due to assessable capital gains.
But if you’re not eligible to use the carry forward rules to make a larger contribution, you can still boost your superannuation by making a personal deductible contribution up to the general concessional contribution cap.
It’s important to note that personal deductible contributions are only deductible if you meet all of the following conditions:
You make the contribution to a complying superannuation fund
You are at least age 18 when the contribution is made (unless you derived income from carrying on a business or from employment related activities)
You make the contribution within 28 days after the month in which you turn 75
You notify your superannuation fund trustee in writing of your intention to claim the deduction
The trustee of your superannuation fund must acknowledge receipt of the notice, and you cannot deduct more than the amount stated in the notice.
The notice must be given by the earlier of:
when you lodge your income tax return for the year the contributions were made, or
the end of the financial year following the year the contributions were made
Tip 3 – Spouse contribution splitting
You can split up to 85% of your 2020/21 concessional contributions before 30 June 2022 to your spouse’s superannuation account if your spouse is:
Less than the preservation age, or
Between preservation age and age 64 (and you must declare they do not satisfy the 'retirement' condition of release).
This is an effective way of building superannuation for your spouse and can assist to manage your TSB which can have several advantages, including:
Equalising balances to make best use of both of your transfer balance caps (TBC), which can maximise the amount you both have invested in tax-free retirement phase income streams
Optimising both of your TSBs to:
Access a higher non-concessional contribution (NCC) cap
Allow access to use the carry-forward concessional contribution rules
Utilise the work test exemption
Qualify for a government co-contribution
Qualify for a tax offset for spouse contributions
Boosting Centrelink entitlements by transferring funds into a younger spouse’s accumulation account if your spouse is under age pension age.
Tip 4 – Superannuation spouse tax offset
If your spouse is not working or earns a low income, you may want to consider making an NCC into their superannuation account.
This strategy could benefit you both by boosting your spouse’s superannuation account and allowing you to qualify for a tax offset of up to $540.
You may be able to get the full offset if you contribute $3,000 and your spouse earns $37,000 or less pa (including their assessable income, reportable fringe benefits and reportable employer superannuation contributions).
A lower tax offset may be available if you contribute less than $3,000, or your spouse earns between $37,000 and $40,000 pa.
Tip 5 – Maximise non-concessional contributions
Another way to boost your superannuation is to make an NCC with some of your after-tax income or savings.
The general NCC cap for 2021/22 is $110,000 and eligibility to utilise the cap depends on your TSB.
Although NCCs don’t reduce your taxable income for the year, you can still benefit from the low tax rate of up to 15% that is paid in superannuation on investment earnings. This tax rate may be lower than what you might pay if you held the money in other investments outside superannuation.
Tip 6 – Receive the government co-contribution
If you're a low or middle-income earner earning less than $56,112 in 2021/22 and at least 10% is from your job or a business, you may want to consider making an NCC to superannuation before 1 July 2022. If you do, the Government may make a ‘co-contribution’ of up to $500 into your superannuation account.
The maximum co-contribution is available if you contribute $1,000 and earn $41,112 pa or less. You may receive a lower amount if you contribute less than $1,000 and/or earn between $41,112 and $56,112 pa.
Like the superannuation spouse tax offset, the definition of ‘total income’ for the purposes of the co-contribution includes assessable income, reportable fringe benefits and reportable employer superannuation contributions.
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