With the end of the financial year fewer than two weeks away, NOW is the time to consider the ways you can manage your 2022 tax position. Imagine what you could do with money saved on tax:
- Reduce your home loan balance;
- Pay off debt;
- Top up your super fund;
- Go on a holiday;
- Make additional investments;
- Renovate your home or landscape your garden;
- Upgrade your car.
Whatever you’d ultimately like to do, the most important thing to keep in mind is that there is no point in spending money to get a tax deduction unless it’s going to result in a net benefit to you. The following are suggestions only and don’t take into consideration your specific circumstances, needs or objectives. For tailored advice, please contact us. We’re here to help.
It’s important to know what is possible when it comes to maximising your super balance and possibly reducing your tax bill at the same time.
Deductible Super Cap of $27,500 for Everyone
The tax deductible super contribution limit (or “cap”) is $27,500 for all individuals under the age of 75. Individuals need to pass a work test if over age 67. To save tax, consider making the maximum tax deductible super contribution this year before the 30th of June 2022 (ideally before the 25th of June 2022 to ensure your contributions don’t get caught up in any processing delays). The advantage of this strategy is that superannuation contributions are taxed at between 15% to 30% compared to typical personal income tax rates of between 34.5% and 47% (which include the Medicare Levy but not the Surcharge).
To qualify for your super deduction, you will need to lodge a Notice of Intent to Claim form with your super fund.
Carry-forward contributions are not a new type of contribution, rather they refer to the rules that allow super fund members to use any of their unused concessional contributions limit (or cap) on a rolling basis for five years. What this means is that if you don’t use the full amount of your concessional contribution cap you can carry-forward the unused amount and take advantage of it up to five years later. Any amounts unused after five years expire.
This year, the carry-forward contribution limit is calculated as follows:
$25,000 x 3 for the financial years 2019, 2020 and 2021 = $75,000
$27,500 for the 2022 financial year = $102,500
any concessional contributions that have already been made to your fund.
The Tax Office offers a couple of worked examples to illustrate how this works:
Example 1: Carry forward concessional contributions (one year)
Anna’s concessional contribution cap for the 2019/20 year is $25,000. Concessional contributions during that year, including her employer’s SG payments, were $15,000. Anna’s total super balance for the previous financial year was $328,000. (An important note since carry-forward capability is only available in instances where your total superannuation balance is under $500,000.)
Contribution cap = $25,000 less $15,000 Super Guarantee
= $10,000 carry forward amount
In 2020/21, Anna receives a company bonus of $10,000 which, as part of a valid salary sacrifice agreement, is paid into her super. Anna knows that she also will earn more in 2020/21 and that her employer contributions and her other salary sacrifice contributions will add up to $25,000 (the general concessional contributions cap for that financial year).
However, as Anna has a carry forward amount of $10,000 in unused concessional cap amounts from 2019/20 she will not exceed her cap for the 2020/21 year.
Example 2: Carry forward concessional contributions (no prior super)
On the 1st of July 2021, Sean:
- secures his first job;
- becomes a member of a super fund and his super fund starts receiving his first super guarantee (SG) contributions from his employer;
- is planning on making extra concessional contributions to his super fund;
- knows that there is an annual general concessional contribution cap of $27,500 in the 2021/22 financial year;
- knows he can access unused cap amounts from up to 5 previous years (starting from 2018/19); and
- knows he has a total super balance (TSB) of $0 in the 2020/21 financial year, which is less than the $500,000 cut-off balance.
If Sean’s employer contributes $8,000 of SG in 2021/22, Sean could contribute $94,500 extra concessional contributions (3 x $25,000 for the years 2019, 2020 and 2021 + $27,500 for 2022 less SG received of $8,000) if he has the money to do so.
During the 2021/22 financial year, Sean arranges with his employer to make salary sacrifice contributions of $22,000. His total concessional contributions subsequently amount to $30,000 ($22,000 salary sacrifice + $8,000 SG), requiring that he uses $2,500 of his cumulative unused cap amount of $94,500 ($30,000 contributions less $27,500 general cap = $2,500). As Sean has this carry forward balance available to him, he does not exceed his cap in the 2021/22 financial year.
Again, these carry-forward rules only relate to concessional contributions into super, not non-concessional contributions, as they have different caps and this carry-forward capability is only available in instances where your total superannuation balance is under $500,000.
Spouse Super Contributions
You can make super contributions on behalf of your spouse (married or de facto), provided you meet eligibility criteria and your super fund allows it. This is known as contribution splitting. Doing this not only helps to boost your spouse’s retirement savings, it can also help you save tax if your spouse has limited income. You may be eligible for a tax offset of 18% up to $540 on super contributions of up to $3,000 that you make on behalf of your spouse if your spouse’s income is $37,000 per annum or less (including reportable fringe benefits amounts and reportable employer superannuation contributions). The offset gradually reduces for income above $37,000 per annum and completely phases out at $40,000 per annum and above.
Additional Tax on Super Contributions by High Income Earners
The income threshold at which the additional 15% (‘Division 293’) tax is payable on super is $250,000 per annum. Where you are required to pay this additional tax, making super contributions within the cap is still a tax effective strategy. With super contributions taxed at a maximum of 30% and investment earnings in super taxed at a maximum of 15%, both of these tax rates are favourable when compared to the highest marginal tax rate of 47% (including the Medicare Levy and excluding the Surcharge).
If you are on a lower income, under the age of 71 and earn at least 10% of your income from employment or carrying on a business and make a “non-concessional contribution” to super, you may be eligible for a Government co-contribution of up to $500. In 2022, the maximum co-contribution is available if you contribute $1,000 and earn $41,112 or less and have a total super balance of less than $1.6 million. A lower amount may be received if you contribute less than $1,000 and/or earn between $41,112 and $56,112.
If you earn $37,000 or less a year, you may further be eligible to receive a Low Income Super Tax Offset payment, usually paid directly into your super fund. The maximum payment you can receive for a financial year is $500. The minimum is $10. If you’re eligible for less than $10, the Government will round the amount up to $10.
Moving Forward… Sacrifice Salary to Super
While it’s likely too late to implement this financial year, if your annual income is $37,000 or more, salary sacrifice can be a great way to boost your superannuation balance and pay less tax by putting pre-tax salary into super rather than having it taxed as normal income at your marginal rate. This strategy can be especially beneficial for employees nearing their retirement age. You can read more about how it all works on the ATO website here.
Review Your Investments
A longer-term tax planning strategy can be reviewing the ownership of your investments, however, any change of ownership needs to be carefully planned due to capital gains tax and stamp duty implications. You would need to seek professional advice prior to making any changes.
Instead of owning assets in your own name, investments can be owned by a Discretionary (‘Family’) Trust, for example, which offers the key advantage of providing flexibility in distributing income on an annual basis. There are limitations with trusts, however, and so we again recommend you seek professional advice before acting.
Property Depreciation Report
If you have an investment property, a Property Depreciation Report (prepared by a Quantity Surveyor) will allow you to claim depreciation and capital works deductions on capital items within the property and on the property itself. The cost of this report is generally recouped several times over by the tax savings in the first year of property ownership.
Pre-pay Expenses and Interest
Expenses relating to investment activities can be prepaid before the 30th of June 2022. You can prepay up to 12 months of interest before the 30th on a loan for a property or share investments and claim a tax deduction this financial year. Making an upfront payment into a loan account without first confirming the interest to be charged in advance will be seen as a repayment of principal, however, and so it’s important to note this is something you’ll need to organise with you bank. Also, not all loans will allow it and so, again, it’s important to double check with your bank.
Other expenses related to your investments including rental property repairs, memberships, subscriptions, and journals can also be prepaid before the 30th of June.
Realise Capital Losses
Tax is normally payable on any capital gains you make. You should consider if selling any non-performing investments you hold before the 30th of June to crystallise a capital loss and reduce or even eliminate any potential capital gains tax liability makes sense in your situation. Remember that unused capital losses can be carried forward to offset future capital gains.
Defer Investment Income and Capital Gains
If practical, you could arrange for the receipt of investment income such as interest earned on term deposits and/or the Contract Date for the sale of Capital Gains assets to occur AFTER the 30th of June 2022. The Contract Date (not the Settlement Date) is generally the key date for working out when a sale or purchase occurred.
Record Keeping is Key
A lot of the ways we can help you pay less tax rely on you keeping good records. The Tax Office has already highlighted that record keeping will be a focus of its 2022 tax season compliance activities. While it’s not our job to audit you, we might ask you to provide us with evidence of costs you incurred this year so that we can keep you on the right side of the law. (If we are in doubt about an expense or deduction, we will leave it out.)
Motor Vehicle Log Book
Applicable in situations where you use your car for work or business related purposes, an accurate and complete motor vehicle log book, kept for at least a 12-week period, can be an excellent way to recoup some of the costs associated with keeping you on the road. Keeping a log book entails regularly noting your odometer reading and keeping all receipts/invoices for your motor vehicle expenses including repairs and maintenance, fuel and oil and depreciation (in which case, you’ll need to know what you originally paid for the vehicle and what your work or business use % is). Once prepared, a log book can generally be used for a 5-year period provided your use of the vehicle for work or business purposes remains consistent.
An alternative to the log book method is to simply claim up to 5,000 business kilometres using the cents per kilometre method which is based on a reasonable estimate of your work or business related travel. This method relies on you ensuring that you can substantiate your travel in the event the ATO asks for the details (which they have indicated they might) and is only available for individuals; it is not relevant if you are operating a business through a company or trust.
Possibly your greatest financial asset is your ability to earn an income. Income Protection Insurance generally replaces up to 75% of your salary if you are unable to work due to sickness or an accident. If purchased outside of super, the insurance premium is normally tax deductible, plus you get the benefit of protecting your family’s lifestyle if you cannot work due to sickness or an accident. It’s a small price to pay for peace of mind. Like rental property interest, income protection premiums can also be pre-paid for 12 months to increase your deductions.
Remember to keep receipts and bank/credit card statements confirming the purchase of any work-related expenses you incurred throughout the year, including uniforms, training courses and learning materials, and tools and equipment, as these may all be tax-deductible. In addition, if you have worked from home this financial year, you should put together a record of your hours in the event you’re able to claim working from home expenses. It is important to note that you cannot double dip! If your employer or business has reimbursed you for an expense, you cannot claim that cost as a personal tax deduction.
Time is Ticking
If you have any questions or concerns about anything you’ve read here today – or if you’d like to work with us one-on-one to plan your 2022 tax position – please contact us as soon as possible by email to email@example.com or phone on (08) 9221 4100. We can also video chat, if that’s your preference. Just let us know!