Year-End Tax Planning Toolkits for Individual Taxpayers

As we enter June 2024 proves to be a pivotal year for general taxpayers, property investors, and business owners. With inflation hitting hard, a vast majority of Australians are struggling to afford basic necessities, let alone save money. The Reserve Bank’s ongoing battle against inflation has led to frequent interest rate hikes, resulting in substantial interest expenses for property investors and business owners. These relentless rate increases over the past couple of years have left investors feeling numb, shifting their focus from the rates themselves to maintaining cash flow amidst various financial pressures. The challenges include soaring grocery costs, rising interest rates, escalating electricity and insurance bills, and more.

This guide is a small yet powerful initiative from Investax Group, designed to arm our clients with the knowledge needed to improve cash flow and reduce their tax burden. In these challenging times, we understand the importance of strategic financial planning and efficient tax management. Our goal is to provide you with practical tools and insights that can help you navigate the complexities of the current economic climate, ensuring that you are well-prepared to make informed financial decisions.

This is the first article in our three-part series aimed at helping you manage your finances and optimise your tax strategy before the end of financial year. If you need immediate assistance or personalised tax planning advice before June 30, please feel free to contact an Investax Group tax specialist today. Now, let’s dive into the tax planning guide for individual taxpayers.

Individual Taxpayers 

Many individual taxpayers have reached out to us, believing that their tax liability would be significantly lower this year due to the anticipated Stage 3 tax cuts. However, it is important to note that the Stage 3 tax cuts will be implemented starting from July 1, 2024, which falls under the 2025 financial year. Below is the comparison of the marginal tax rate –

Australian resident individual income tax rates 

2024 income year		From the 2025 income year
Tax rate	Thresholds	Tax rate	Thresholds
0%	$0 – $18,200	0%	$0 – $18,200
19%	$18,201 – $45,000	16%	$18,201 – $45,000
32.5%	$45,001 – $120,000	30%	$45,001 – $135,000
37%	$120,001 – $180,000	37%	$135,001 – $190,000
45%	$180,001+	45%	$190,001+

Now that we have clarified this misconception, let’s explore a few tax planning strategies to help reduce your tax burden.

Income Protection Insurance 

Income protection insurance is an essential tool for maintaining financial stability, and the good news is that it is tax-deductible. This type of insurance provides critical support by ensuring cash flow continuity if you lose your job or need to take extended time off work due to illness. The importance of income protection insurance has become even more apparent post-COVID, as many individuals suffering from long COVID have benefited from this coverage. While employers typically offer only a few weeks of paid sick leave and annual leave, income protection insurance steps in to cover the gap, allowing individuals to recover without the added stress of financial hardship.

If you pay for your income protection insurance premium before June 30th, the entire amount is tax-deductible against your wages. This means that not only are you safeguarding your financial future, but you are also reducing your tax burden. By taking advantage of this deduction, you can ensure that you are better prepared for unexpected health challenges while optimizing your tax situation. Investing in income protection insurance is a prudent decision, providing both peace of mind and tangible financial benefits.

Note: If your superannuation fund pays for the income protection insurance, it is not tax-deductible under your name.

Super Contribution 

The Australian Taxation Office (ATO) has made it easier for individuals to make tax-deductible or concessional super contributions. Unlike in the past, you no longer need to coordinate with your payroll department to arrange salary sacrifice. Now, you can simply make additional contributions on top of your employer’s super guarantee contributions to reach the concessional contribution limit.

For instance, John’s employer contributes $20,000 to his superannuation as part of the employer superannuation guarantee. John has some additional cash and wants to reduce his tax liability. To achieve this, he decides to contribute an additional $7,500 to his superannuation. John then completes a Notice of Intent form to claim a tax deduction for his personal contribution.

If you make any personal contributions to your superannuation and wish to claim a tax deduction, you must complete a Notice of Intent form. This form informs your super fund of your intention to claim a tax deduction for personal contributions.

The concessional contributions cap is the maximum amount of before-tax contributions you can make to your super each year without incurring extra tax. 

Note: Starting from July 1, 2024, the concessional contributions cap is set at $30,000. For the period from July 1, 2021, to June 30, 2024, the cap was $27,500 per year. 

Carry Forward Super Contribution 

A lot of taxpayers are not aware that the ATO allows individuals to catch up on their unpaid concessional or tax-deductible contributions. If you have unused concessional cap amounts from previous years, you may be able to carry them forward to increase your contribution caps in future years. You are eligible to do this if you meet both of the following conditions:

• You have a total super balance of less than $500,000 at 30 June of the previous financial year.

• You have unused concessional contributions cap amounts from up to five previous years.

The amount you can carry forward depends on your contributions from previous years, starting from the 2018–19 financial year. You can carry forward unused cap amounts for up to five years, even if you were not a member of a super fund during those years.

Unused cap amounts are available for five years and expire after this period. For example, any unused cap amount from the 2019–20 financial year must be used by the end of the 2024–25 financial year, or it will expire.

Note: The oldest available unused cap amounts are carried forward first. For instance, unused cap amounts from 2019–20 will be applied to increase your cap before any unused amounts from 2020–21.

Private Health Insurance 

We’ve frequently encountered situations where either taxpayers or their inexperienced tax accountants mistakenly include incorrect Medicare Levy Surcharge information in the tax return (M2 Section), leading to a substantial tax burden when the ATO identifies the error a few years later. For instance, we have seen taxpayers without the appropriate level of private health cover incorrectly claim 365 days in the M2 section under “Number of days you do not have to pay the surcharge.” This mistake can result in significant additional taxes and penalties.

To avoid this, it’s crucial to ensure accurate reporting of your private health insurance status. If your income exceeds the specified threshold and you do not have adequate private health cover, it is generally more cost-effective to pay for private health insurance than to incur the Medicare Levy Surcharge (additional tax).

Investment & Capital Losses 

If you are considering selling shares or other investments, it is wise to first sell those that are currently in a loss position. This strategy can help you maximise your tax benefits because only capital gains can offset capital losses. Other types of income, such as salary or rental income, cannot be used to reduce capital losses.

When you realise a capital gain in a financial year, you will be required to pay tax on that gain. However, if you incur a capital loss in a financial year, this loss can be carried forward to future financial years. 

For example, if you incur a capital loss this financial year and realise a capital gain in the next financial year, the carried-forward capital loss will offset the capital gain, thereby reducing the amount of tax you need to pay on that gain.

Note: By strategically managing the timing of your investment sales, you can effectively minimise your tax liability and make the most of your investment portfolio.

Charity & Donations 

Charity and donations play a crucial role in supporting and uplifting the community, providing essential resources and services to those in need. Beyond the profound positive impact on society, charitable donations can also offer financial benefits to the donor through tax deductions. By donating to a DGR-endorsed organization, you not only contribute to meaningful causes but also reduce your taxable income, making it a win-win situation for both the community and your financial health.

For instance, at Investax, we have encountered a wide variety of tax situations. A unique case we observed last year involved a client who received an income of $400,000 and chose to donate the entire amount to a registered charity, effectively reducing her tax liability to zero.

Note: To qualify for a tax deduction, the charity must be registered and hold Deductible Gift Recipient (DGR) status.

Prepayments 

Prepaying certain expenses can be an effective strategy to reduce your tax liability. For example, prepayments of accounting fees, income protection insurance premiums, and loan interest for investments are all tax-deductible. By making these payments in advance, you can bring forward your tax deductions into the current financial year, potentially lowering your taxable income. This approach not only helps in better tax planning but also provides a clear picture of your future financial obligations, allowing you to manage your cash flow more efficiently. It’s a proactive measure that can yield significant tax savings and improve your overall financial health.

Note: You can prepay up to 12 months of fees in June to claim a tax deduction.

Asset Purchase 

If you purchase any plant and equipment over $300, it is not immediately tax-deductible for employees. Instead, it falls under the category of a depreciating asset. At Investax, we have often seen taxpayers purchase work-related items such as phones or laptops before June 30, assuming they can claim the full amount against their income. While it’s beneficial to buy these assets if you need them for work and can take advantage of end-of-financial-year sales, it is important to understand that you cannot claim a large depreciation or full expense unless you are a sole trader or business owner. Employees must depreciate these assets over their effective life, spreading the tax deductions over several years.

Note: Assets over $300 will be claimed via a depreciation schedule.

Motor Vehicle Expenses 

To claim a deduction for car expenses, your vehicle must meet the definition of a car, and you must own or lease it, excluding arrangements like salary sacrifice or novated leases. The expenses must be for work-related trips, such as traveling between workplaces or performing work duties, but not for commuting between home and work, except in limited circumstances. Below are a few strategies to minimize the tax on your motor vehicle: 

Note: Travel between home and work, and vice versa, is not considered work-related travel. It is classified as personal in nature.

Logbook 

If you use your vehicle for work-related travel, it is essential to keep a logbook if you want to claim actual expenses such as fuel, insurance, registration, and depreciation. The logbook helps determine the business percentage of your vehicle-related expenses, ensuring accurate and compliant claims.

If this is the first year you are using the logbook method, you must keep a logbook for at least 12 continuous weeks during the income year.

Note: Each logbook you keep is valid for five years. However, you can start a new logbook at any time if you need to update your records or change your vehicle.

Cents per kilometre method

If you travel for work but find it cumbersome to keep all the invoices and receipts for fuel, registration, insurance, etc., you can choose to use the Cents per Kilometre method for your work-related travel. Using this method means you don’t need to keep receipts, but you must be able to prove that you own the car and show how you calculated your work-related kilometres. For example, you can keep a record of your work-related travel in a diary. Additionally, if your tax return is picked up for an audit, your manager might receive a call from the ATO to confirm that you use your car for work.

Note: The rate for 2024FY is 85 cents per Kilometre

If you and another person both jointly own the car and use it for different work purposes, each of you can claim up to 5,000 kilometres for work-related travel.

Electric Vehicle 

If you are thinking of purchasing a vehicle, consider purchasing an electric vehicle. Apart from the positive environmental impact, it also offers significant tax savings. Check with your employer to see if they are willing to include it under their Fringe Benefits Tax (FBT) scheme. Electric vehicles are exempt from FBT if they meet the following criteria:

1. It is a:
   • Battery electric vehicle
   • Hydrogen fuel cell electric vehicle
   • Plug-in hybrid electric vehicle (until April 2025).
2. It is a car designed to carry a load of less than 1 tonne and fewer than 9 passengers (including the driver).

Since your employer is exempt from FBT, the tax savings are typically passed on to you. This means your novated lease after-tax repayments for an electric vehicle will be much lower compared to a fuel-powered car.

If you would like to know more about this, please feel free to read our article “Fringe Benefits Tax and Electric Vehicles.”

Note: Motorcycles and scooters are not cars for FBT purposes and do not qualify for the exemption, even if they are electric.

Pay As You Go (PAYG) Instalment 

Generally, business owners pay PAYG (Pay as You Go) instalments because they may receive dividends from a company or profit distributions from a trust. Employees may also be required to pay PAYG instalments if they had a tax liability in the previous financial year. This can occur due to insufficient tax withholding by the employer or positive investment income.

As the end of the financial year approaches in June, if you anticipate that your income will be lower compared to the previous year, you may consider varying your last quarter PAYG instalment. Adjusting this instalment can help improve your cash flow by ensuring you are not overpaying tax based on last year’s higher income. It’s a proactive measure to manage your finances more effectively and ensure you have adequate cash flow for your current needs.

Note: Consider varying your last quarter PAYG instalment only if your income is lower this year. 

Consider Investing Through Investment Structures 

As an employee or individual taxpayer, there are limited ways to reduce your tax liability. Often, employees need to incur expenses to qualify for tax deductions. Since there are fewer tax-saving opportunities for employees, you might consider implementing tax strategies for your investments. If you are investing a large sum in a share or property portfolio that generates positive income, you may want to consider investing through a company or trust structure.

Advantages of a Company Structure:

• The company pays 30% tax on investment income and assets.
• It offers limited liability.

Advantages of a Trust Structure:

• The trust itself pays no tax.
• It can distribute profits to different beneficiaries.
• Provides asset protection.

Note: Consider using a company or trust structure for your investments to benefit from tax advantages and asset protection.

Conclusion 

In conclusion, navigating the complexities of tax planning can be challenging, especially in an economic climate marked by inflation and rising costs. By implementing strategic tax planning and leveraging available deductions, you can significantly reduce your tax burden and improve your financial health. From understanding the benefits of different investment structures to making informed decisions about Super contribution, prepayments and vehicle expenses, every action you take can make a substantial difference.

This guide is part of our commitment at Investax Group to support our clients with practical tools and insights for the 2024 financial year. A great tax planning tool should be used proactively. If you need further assistance or personalized tax planning advice that transcends the 2024 financial year, don’t hesitate to reach out to an Investax Group tax specialist. We’re here to help you minimise your tax liability and optimise your financial strategy.

Reference

ATO – Notice of Intent 

ATO – Medicare Levy Surcharge

ATO – Using Capital Losses to Reduce Capital Gain

ATO – Electric Vehicle