18 Jun Tech Talk: How to (legally) reduce your tax bill
The end of the financial year is fast approaching and there’s a great way to help you save on tax while boosting your super plus a few other handy tips.
For most, the 2019/2020 financial year has been tough. Incomes and spending have been impacted by drought, fires, and the COVID-19 pandemic, prompting the Australian Tax Office (ATO) to introduce new claims and support options. Some old offsets have also made a comeback.
Initiatives introduced to support taxpayers in the wake of COVID-19
There are already two ways in which you can claim working from home deductions. Those who are home office veterans will know of the flat rate of 52 cents per hour, in which you can claim additional items like phone or internet usage, or the method in which you claim a deduction on actual costs incurred, which involves keeping more paperwork and additional calculations.
Knowing that capturing this detailed paper trail may be difficult for some remote workers, the ATO has introduced a third option, the shortcut method for those working from home. This option allows taxpayers to claim a deduction of 80 cents for every hour worked from home due to COVID-19.
Under this method you can claim a deduction of 80 cents for each hour you work from home due to COVID-19 as long as you are:
- working from home to fulfill your employment duties and not just carrying out minimal tasks such as occasionally checking emails or taking calls,
- incurring additional deductible running expenses as a result of working from home.
The shortcut method rate covers all deductible running expenses, including:
- electricity for lighting, cooling or heating and running electronic items used for work (for example your computer), and gas heating expenses
- the decline in value and repair of capital items, such as home office furniture and furnishings
- cleaning expenses
- your phone costs, including the decline in value of the handset
- your internet costs
- computer consumables, such as printer ink
- the decline in value of a computer, laptop or similar device.
You do not have to incur all of these expenses, but you must have incurred additional expenses in some of those categories as a result of working from home due to COVID-19.
If you use the shortcut method to claim a deduction for your additional running expenses, you cannot claim a further deduction using any other method.
Under the shortcut method, you only need to keep a record of the hours you worked at home. If you use the other methods, you must also keep a record of the number of hours you worked from home along with records of your expenses.
Smart super strategies for this EOFY
1. Add to your super – and claim a tax deduction
If you contribute some of your after-tax income or savings into super, you may be eligible to claim a tax deduction. This means you’ll reduce your taxable income for this financial year – and potentially pay less tax. And at the same time, you’ll be boosting your super balance.
How it works
The contribution is generally taxed at up to 15% in the fund (or up to 30% if you earn $250,000 or more). Depending on your circumstances, this is potentially a lower rate than your marginal tax rate, which could be up to 47% (including the Medicare Levy) – which could save you up to 32%.
Once you’ve made the contribution to your super, you need to send a valid ‘Notice of Intent’ to your super fund, and receive an acknowledgement from them, before you complete your tax return, start a pension, or withdraw or rollover the money.
Keep in mind that personal deductible contributions count towards the concessional contribution cap, which is $25,000 for this 2019/20 financial year. Although you may be able to contribute more than that without penalty, if you didn’t use the whole $25,000 cap in 2018/19 and are eligible to make ‘catch-up’ contributions.
Concessional contributions also include all employer contributions, including Superannuation Guarantee and salary sacrifice – make sure to speak to your financial adviser to find out more.
Here’s an example:
Bob is 55 years of age and earns $80,000 pa, so his marginal tax rate is 34.5% (including the Medicare levy). He’s paid off his mortgage and plans to retire in 10 years – so he wants to contribute more to his super.
He makes a personal super contribution of $10,000 and claims the amount as a tax deduction – reducing his taxable income. This means he pays $3,450 less tax in his tax return. Meanwhile, tax of 15% ($1,500) is deducted from the contribution in the fund.
So, by using this strategy, Bob increases his super balance and makes a net tax saving of $1,950 (that is, $3,450 less the $1,500 tax he paid within his super fund).
2. Get more from your salary or a bonus
If you’re an employee, you may be able to arrange for your employer to direct some of your pre-tax salary or a bonus into your super as a ‘salary sacrifice’ contribution. Again, you’ll potentially pay less tax on this money than if you received it as take-home pay – generally 15% for those earning under $250,000 pa, compared with up to 47% (including Medicare Levy).
How it works
Ask your employer if they offer salary sacrifice. If they do, it can be a great way to help grow your super tax-effectively because the contributions are made from your pre-tax pay – before you get a chance to spend it on other things.
Remember salary sacrifice contributions count towards your concessional contribution cap, along with any superannuation guarantee contributions from your employer and personal deductible contributions. Also, you may be able to make catch up (extra) contributions if your concessional contributions were less than $25,000 last financial year.
3. Boost your spouse’s super and reduce your tax
If your spouse is not working or earns a low income, you may want to consider making an after-tax contribution into their super account. This strategy could potentially benefit you both: your spouse’s super account gets a boost and you may qualify for a tax offset of up to $540.
How it works
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 super 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.
4. Get a super top-up from the Government
If you earn less than $53,564 in the 2019/20 financial year, and at least 10% is from your job or a business, you may want to consider making an after-tax super contribution. If you do, the Government may make a ‘co-contribution’ of up to $500 into your super account.
How it works
The maximum co-contribution is available if you contribute $1,000 and earn $38,564 pa or less. You may receive a lower amount if you contribute less than $1,000 and/or earn between $38,564 and $53,564 pa.
Be aware that earnings include assessable income, reportable fringe benefits and reportable employer super contributions. Other conditions also apply – your financial adviser can run you through them.
If you’re thinking about investing more in super before 30 June, talk to us. We can help you decide which strategies are appropriate for you.
Important information and disclaimer
The information provided in this document is general information only and does not constitute personal advice. It has been prepared without taking into account any of your individual objectives, financial solutions or needs. Before acting on this information you should consider its appropriateness, having regard to your own objectives, financial situation and needs. FinPeak Advisers does not provide personal tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction. You should read the relevant Product Disclosure Statements and seek personal advice from a qualified financial adviser. From time to time we may send you informative updates and details of the range of services we can provide.
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