It was a month of consolidation for the Australian share market, with the All Ordinaries Index gaining 0.1% to close the month of May flat at 5,474 points. International markets were stronger with the US Dow Jones Index gaining 0.8%, the London FTSE gaining 1.0%, the Hong Kong Hang Seng Index gaining 4.3% and the Japan Nikkei 225 Index gaining 2.3%.
Interest rates again remained on hold, with the RBA cash rate at 2.50% per annum and expected to remain at this level for the foreseeable future. The Australian Dollar gained in May and is currently buying 93.11 US cents.
While recent discussions have been dominated by the Federal Budget (which impacts next finanical year and beyond), as we enter the last month of this financial year, I have put together a few tax planning strategies that could help effectively manage your tax position in the lead-up to June 30....
Firstly, if you are looking to reduce your taxable income, you could consider making a concessional contribution to super. To be eligible to contribute to super you must be below 65 years of age (or below 75 years of age and meet the work-test) and ensure that you do not exceed the applicable concessional contribution limit ($25,000 in the 2013/14 financial year, unless you are over 60 years of age whereby the limit is $35,000).
To be eligible to claim a tax deduction for monies contributed to super, you must be either self-employed or have no more than 10% of your total assessable income from employment income (e.g. you can be an employee but your employment income may be no more than 10% of your total assessable income when including a capital gains). If you do not meet either of these conditions, you must salary sacrifice to super via your employer to obtain a tax benefit.
Secondly, another option to reduce your taxable income could be to pre-pay interest on an investment loan (e.g. investment property mortgage and/or investment portfolio loan). Individuals are able to pre-pay up to 12-months interest on their investment loans and claim a tax-deduction in the year the interest is paid. In order to pre-pay interest, you must usually fix the rate on your loan for 12-months.
While this strategy can maximise tax-deductions, be aware that this really only amounts to tax deferment, not tax reduction. A person is only bringing forward a tax deduction by one year, not reducing overall tax in the long run (especially when considering that the Medicare Levy will increase by 0.5% from 1 July 2014).
Nevertheless, pre-paying interest can be highly attractive for people who know that their taxable incomes in the 2014/15 financial year will be reducing (e.g. clients entering retirement, relocating overseas and/or taking maternity leave).
Thirdly, if your taxable income is less than $33,516 you could consider making an after-tax contribution to super of $1,000 to be eligible for the maximum $500 payment under the government's co-contribution scheme. The co-contribution is paid by the government into your super fund. To qualify for the co-contribution you must meet certain conditions such as age, income thresholds and lodge an income tax return.
The co-contribution scheme was designed to allow low-to-middle income earners to boost their super balance. However, it can be used by anyone provided the income limits are not breached (i.e. persons working part-time, or working for only part of the financial year).
A final tip for those who own an investment property.... now is a good time to ensure that you have a Tax Depreciation Schedule from a quantity surveyor. This will ensure that you are claiming all possible deductions against your investment property.
For more information please contact Ryan Love on 1300 856 338 or e-mail ryan.love@apexpartners.com.au.
This article is general information only and is not intended to be a recommendation. We strongly recommend you seek advice from your financial adviser as to whether this information is appropriate to your needs, financial situation and investment objectives.