Here’s my top ten mistakes that people make around tax time each year.
1. It’s all about timing
If you’re planning to incur expenses around June/July that will be tax deductible (such as a donation to a registered charity), if cash flow allows, spend the money before 30 June so you can claim the deduction in this financial year. Sounds simple but is often overlooked.
2. Poor records
This can bite hard down the track if you’re not careful. Do remember to keep all your receipts for any deductions you want to claim (unless you are claiming less than $300 in work related expenses). You may not be asked this year by the Tax Office, but generally they can go back 5 years if you ever get audited and interest and penalties can be applied if you can’t support the deductions you’ve claimed.
3. Car deductions: Sorry I don’t have a log book
If you use your car for business purposes (which excludes to and from your home and your usual place of business) and you haven’t claimed any costs back from your employer, you may want to consider keeping a log book; particularly if you travel more than 5,000 km per year on business.
It needs to be kept for 13 continuous weeks and is valid generally for 5 years. You can then claim your business use percentage of all your car costs; for some this can add up to thousands.
Remember though that you will always be better to get your expenses reimbursed from your employer if possible as this gives you broadly 100 cents in the dollar back whereas a tax deduction only returns you the amount equivalent to your marginal tax rate (the highest being 46.5 cents in the dollar including the Medicare levy).
4. Ignoring Super Contributions
Superannuation has copped some bad press in recent times with various government announcements reducing some of the existing benefits. The bottom line is that for most people a superannuation fund remains the most tax effective structure available by far.
Most people can contribute up to $25,000 into super from their pre-tax salary and pay tax a maximum tax rate of 15% (30% for those with income above $300,000). Get professional advice but do consider it.
5. Ignoring your super contributions: can they be prepaid?
Interest incurred on investments such as interest on loans used to buy an investment property or shares will generally be deductible. No new news there, but if cash flow allows, think about prepaying some of the interest pre 30 June to bring forward a tax deduction and reduce your taxable income this financial year.
6. Depreciation on investment properties often ignored
Many investment property owners ignore depreciation that they may be able to claim on their investment property (“capital works deductions”) or its contents (“capital allowances”). You’ll likely need a depreciation report to be prepared by a specialist provider but in most cases they more than pay for themselves in the first year.
7. Medical expenses tax offset ignored
This one is even more important this year out the back of the recent Federal Budget. If you don’t or can’t make a claim this financial year then most people will not be able to make a claim in future years.
Currently if you (or your direct family) incur more than $2,120 in out of pocket net medical expenses, you can claim a tax offset of 20% on the amount above the $2,120 threshold. A tax offset is better than a tax deduction as it comes off your tax otherwise payable at 100 cents in the dollar.
If your income is $84,000 for singles or $168,000 for couples, the threshold is $5,000 and the tax offset rate 10%.
8. Medicare levy surcharge ignored
If you earn above $84,000 for singles or $168,000 for families and you don’t have private health insurance, you will be hit with the Medicare levy surcharge.
The amount varies depending on your income but is between 1.0 % and 1.5% of your taxable income.
The government’s goal here is make it expensive enough that high income earners will be “forced” to take out the insurance cover.
9. Maybe I should have sold those assets?
It may make sense depending on your circumstances to sell a loss making capital asset such as shares or property to realise a capital loss before 30 June if you have capital gains you have already earned this year. Otherwise if you sell post 30 June at a loss you will need to wait until you make a capital gain in the future to utilise the losses.
Be careful though, there are “wash sale” rules that you don’t want to ignore: please see point 10!
10. No advice
The biggest mistake of all I see is people not seeking professional advice. Often when I see a new client, I wish I could turn back time and change decisions that have been made in the past.
The value of professional advice is important all year round, but never more so than just pre 30 June. Many decisions simply cannot be unwound once 30 June passes and it‘s time to complete your tax return.
For professional assistance: www.bellpartners.com
