The end of the financial year (EOFY) is fast approaching, which means it’ll soon be time to prepare your tax return. Here we outline some key deductions you may not be aware of and strategies to help you start the new financial year more organised.
The first step should always be to gather up all relevant records and receipts. Make sure that throughout the year you collect them in one spot, such as a folder on your computer, so you don’t waste hours looking for them when you need them. Types of documents include your employment payment summary, records of any sales or purchases of shares or properties, interest or dividend receipts, and details of work-related expenses.
The Australian Tax Office calculates if you’re eligible for a tax refund based on your income and the deductions you can claim so it’s important to keep records. And remember you may also be eligible for certain tax offsets that directly reduce the amount of tax you pay.
Many of us have been working from home over the past year because of COVID-19 and you may be able to claim deductions for the portion of expenses related to this. Just make sure you’re keeping detailed records to support any claims.
An easy way to work out your ‘working from home’ deduction is to use the Shortcut method that the ATO introduced in 2020, which lets you claim a deduction of 80 cents for each hour that you worked from home. If you don’t want to use this method, you can use the Fixed Rate or Actual Cost methods.
There are also some work-related expenses you can claim for even if you’re not working from home. The expenses must directly relate to you earning an income and must not be reimbursed by your employer. Some typical expenses include: tools and equipment, self-education, vehicle and travel, and laundry.
If you’re claiming work-related expenses, you will need to have already spent the money and if your claim is for more than $300, you will need to show proof.
There is still time to make an after-tax contribution into your super fund to claim a tax deduction in this year’s tax return.
You’re allowed to claim a deduction for the amount you make of any super contribution up to your concessional contribution limit, which for the 2020-21 financial year is $25,000 ($27,500 from 1 July 2021). This contribution is taxed at 15% in your super fund rather than at your marginal tax rate. There are eligibility requirements and you need to inform your super fund by sending them a Notice of intent to claim form. The notice of intent to claim form must be submitted before commencing an income stream, or making a rollover or withdrawal with the contributions. It must be submitted before you lodge the income tax return for the year the contributions were made but no later than the end of the next financial year. The contributions do have to be received by the super fund in the relevant financial year for you to be able to claim a deduction.
If your partner earns less than $37,000 and you contribute $3000 into their super fund, you may be eligible for a tax offset of $540. You could also be eligible for a partial super spouse tax offset if your partner earns between $37,000 up to $40,000. The contribution not only boosts their super account but reduces the amount of tax you pay.
If some of your income comes from investments such as shares or property, you can claim a deduction for those expenses that you incur while earning that income. This could be the interest charged on the money that you borrowed to buy the investment, or, for example, in the case of an investment property, the expenses related to finding tenants.
While some of your investments may be for the long term, there may be others you’re considering selling. One thing to be aware of is the timing of when you sell as this may affect the amount of tax you pay in a particular financial year. For example, if you sell some shares, managed funds or an investment property for more than you bought them for, all or part of the gain is added to your taxable income and could place you in a higher tax bracket. Alternatively, if you have an investment that has fallen in value, you could sell it and use the capital loss to offset against any gains you made in those investments that performed well.
Because timing the sale of investments can be complicated, it’s best to speak to your accountant or financial adviser about the best strategy for you.
If you have tax deductible expenses that you can prepay, such as income protection insurance, you may consider paying them in the current financial year to bring forward the tax deduction and potentially boost your tax refund – especially if you know your income will be lower in the next year.
You can claim the cost of your income protection insurance premiums against your income if you hold the policy outside your super. You can’t claim for premiums paid for any life insurance, trauma or critical care policies.
Be aware that if you earn above a certain income level and don’t have the appropriate private patient hospital cover, you may be liable for the Medicare levy surcharge, which is in addition to the 2% Medicare levy. You may want to avoid the levy surcharge by taking out eligible private health insurance with an approved fund.
If you have received payments from the government – such as the carer’s allowance – you don’t include them in your tax return as income. The ATO classifies these payments into three categories: Exempt income; Non-assessable non-exempt income; and Other amounts. You can find more information about these payments here.
Other income sources that you don’t generally pay tax on include child support and spouse maintenance payments and inheritances.
One strategy which may help you in a better financial position if you have a number of loans, is debt consolidation, where you bring all your existing non-deductible debts into one loan that charges a lower rate. While this won’t make much of a difference to this year’s tax return, it should hopefully help you reduce the amount of interest you’re paying and set you up for a debt-free future much earlier.
Tax time can be confusing so it’s important to work with your adviser who can highlight where you can claim deductions. Advisers can also help you set up strategies that will have you hitting the new financial year running with a list of goals and achievements – whether this is working out a budget, setting up a savings plan, or contributing more to your super.