The time is fast approaching when we need to direct our thoughts to decisions that need to be made well before 30th June 2021 in order to minimize our tax liability or maximize our tax refund.
We also need to focus on getting our paperwork in order to ensure all assessable income is included and all allowable deductions are claimed.
For those of you who have entered the work force for the first time or earned income from investments for the first time or have exited from the work force or retired, your first step should be to determine whether you need to lodge a tax return.
Do I need to lodge a tax return?
Yes – if you had tax withheld from payments made to you irrespective of the amount of wage or salary income you earned, as you may be entitled to a tax refund.
Yes – if you received payments in the form of interest, dividends, distributions from investments or from a trust or partnership and your taxable income is more than:
- $18,200 and you were 18 years or older on 30 June 2021 and you were an Australian resident for tax purposes for the full year, or more than
- $416 and you were under 18 years old at 30 June 2021.
Yes – if you had a reportable fringe benefits amount or a reportable employer superannuation contribution on your Income Statement summary (previously called a PAYG payment summary).
Yes – if you were entitled to the private health insurance rebate but you did not claim your correct entitlement as a premium reduction.
Yes – if you carried on a business even if you made a loss.
Yes – if you sold property or investments resulting in a capital gain or loss.
2) Franking Credits
If you received dividends or distributions that included franking credits reflecting tax paid by the entity making the distribution and your taxable income was such that you would not otherwise be required to lodge a tax return you can claim a refund of your franking credits by downloading from the ATO website the form entitled “Application for Refund of Franking Credits for Individuals 2021” and lodge your claim either online or by mail.
3) Non-Lodgment Advice
If after reading the above you believe you are not required to lodge your 2021 personal income tax return, you may wish to complete a 2021 non-lodgment advice form available on the ATO website. This will avoid receiving a lodgment demand from the ATO if you have been in receipt of assessable income or have lodged tax returns in prior years.
Reducing your Tax with Concessional (Deductible) Super Contributions
Now is the time to consider making personal concessional contributions (CC), particularly if your taxable income is likely to be in excess of $45,000 where your marginal tax rates including the 2% Medicare levy are currently 34.5% up to taxable income of $120,000, 39% up to $180,000 and 47% over $180,000. Whilst CCs are taxed at 15% to your super fund, your net tax savings will be the difference between your marginal rate and 15%.
Example 1- Topping up to the $25,000 Concessional Contributions Cap
Bill is aged 55 and estimates his taxable income for 2021 before making a personal CC will be $165,000 including his employee salary of $140,000, net capital gains on share sales of $30,000 less work related deductions of $5,000.
Bill’s employer will have paid super guarantee contributions (SGC) at 9.5% totaling $13,300 by 30th June 2021. Bill could make a personal CC of $11,700 given his CC cap is $25,000 and thereby reduce his tax liability by ($11,700 x .39) = $4,563. Bill’s super fund will have received a total of $25,000 and paid tax at 15% totaling $3,750 resulting in a net increase in his super fund balance of $21,250. To achieve this outcome the net cash cost to Bill is only ($11,700 – $4,563) = $7,137.
Example 2 – Accessing the Catch-up Concessional Contributions Opportunity
New reforms effective from 1st July 2018 and applicable to the 2020 and subsequent income years provide for catch-up shortfalls to be added to a subsequent year’s concessional caps. To be eligible to access the catch-up shortfalls your total super funds balance (TSB) must be less than $500,000 on 30 June of the prior year and if aged 67 – 74 you will need to satisfy the work test having worked for at least 40 hours over any consecutive 30 day period.
Assume Bill had a TSB of $410,000 at 30/6/2020 and did not make any personal concessional super contributions (CC) in 2019 or 2020 and his employer’s SGCs each year were $13,300.
Bill would therefore have catch-up amounts of $11,700 remaining for each of 2019 and 2020 which would add a total of $23,400 to his 2021 cap making a total cap of ($23,400 + $25,000) = $48,400 for the 2021 tax year. After allowing for his employer’s SGC of $13,300 in 2021, Bill could make a CC totaling ($23,400+ $11,700) = $35,100 thereby reducing his taxable income to ($165,000 – $35,100) = $129,900 resulting in a tax saving of ($35,100 x .39) = $13,689.
This tax planning strategy when undertaken well before 30th June illustrates how funds from the sale of shares at a profit or any other capital assets can be transferred into your super fund by offsetting deductible super contributions against assessable net capital gains.
Disclaimer:
The content of this article is not intended to be used as professional advice and should not be used as such. It is advisable to contact your financial adviser and your super fund before committing to making both personal concessional and non-concessional super contributions.
Brian Spurrell FCPA, CTA, Registered Tax Agent, is Director of Personalised Taxation & Accounting Services Pty Ltd. PO Box 143 Warrandyte 3113. Mobile: 0412 011 946
Email: bspurrell@ptasaccountants.com.au Web: www.ptasaccountants.com.au