Maximising your tax refund
There are a variety of strategies used to reduce your taxable income and increase your tax refund. The most common method is to reduce taxable income through the deductions that you are eligible to claim. Tax deductions are based upon costs incurred in relation to earning income. To be eligible for these deductions, you must be able to prove that you have incurred the cost. Furthermore, there needs to be a nexus between the expense and the income earned.
Tax deductions can range from basic work-related deductions such as uniform, home office, or stationery expense to the more obscure. On the one hand, claiming the work uniform will help with increase your tax refund. However, more can be done to ensure you maximise your tax claims to increase the tax refund.
Top 10 Deductions to increase the tax refund
I have outlined 10 different ways that individuals and businesses can reduce their taxable income. These strategies can assist to maximise your tax refund and ensure you are making your money go further:
- Travel Deductions for a higher tax refund
- Self Education Expenses
- Capital Allowances immediate deduction for individuals
- Capital gains tax 50% discount
- Offset prior years carried forward tax losses
- Depreciation instant asset write off for businesses
- Tax planning business expenditure
- Structuring of business
- Deferral of income
- Negative gearing to boost tax refund
I note that from the list above, not all of them may be applicable as some relate specifically to businesses. Please check the ATO website as to the eligibility of the claim. Alternatively, contact your accountant to discuss further. This list is not exhaustive nor does it consider your personal circumstances.
1. Travel Deductions for a higher tax refund
A travel deduction can be claimed where you use a vehicle for a work or business related purpose. These expenses must be incurred in performing your work duties. Examples include catching a car, taxi, bus train, or plane traveling from one work site to another. Meals and incidentals where you are required to stay the night may also be eligble. Ensure that receipts are kept and any private use is not included in the claim. For information see the travel deductions on the ATO website.
2. Self Education Expenses
Self education expenses are deductions that require a little more record keeping. You must be able to prove that the study was undertaken. Moreover, the study must directly relate to improving your ability in your current work. There must also be an uplift in income as a result of the study within your current work. You are unable to claim the first $250. I have included a summary of self education expenses from the ATO website.
3. Capital Allowances immediate deduction for individuals
Individuals may be able to claim up to $300 upfront for assets they use more than 50% of the time to produce income. Some examples include a briefcase, Ipad, phone, or computer. The deduction would need to be reduced for any private use of the asset. For further details and criteria see the capital allowances criteria.
4. Capital Gains Tax 50% discount
The Capital Gains Tax (CGT) discount is a great incentive to acquire new assets. For instance, if you hold a CGT asset for more than 12 months you could receive a 50% discount. To claim the discount you need to be an individual, trust, or superfund. I note that companies (aside from some insurance companies) are not eligible to receive the 50% CGT discount. There are some exceptions to the rule. Foreign residents are not able to receive the discount on gains relating to Australian taxable real property after 8th May 2012. If you are considering selling a property, Upside specialise in full-service property sales. Upside use experienced local agents for a fraction of the cost with award winning service and great results. For a detailed list of the CGT 50% discount criteria, refer to the CGT discount method.
5. Offset prior years carried forward tax losses
Prior year carried forward tax losses can be a great strategy to reduce current years’ income. Individuals are generally able to carry these forward indefinitely. However, if appliable, the losses must be applied straight away. If you operate a business with a loss ensure that you review the non commercial losses rules as they may impact whether you can claim the losses.
6. Depreciation instant asset write off for businesses
Businesses may be able to claim an instant asset write off where the asset is installed and ready for use. These provisions are contained under the simplified depreciation rules. Temporary full expenses were also introduced from 7.30 pm (AEDT) on 6 October 2020 to 30 June 2022. For a full breakdown, see the Instant asset write off criteria on the ATO website.
7. Tax planning business expenditure
When tax planning for the end of the financial year there are some cost effective measures. This includes a review on whether income can be deferred or expenses brought forward for the year. Prepaid expenses may be available for expenses incurred but completed later in an income year. Ensure that you review the prepayment rules as the timing to fall within the eligible service period.
8. Structuring of the business
The structure you choose to operate within will have a great impact on the overall tax position. Setting up the business as a sole trader, family trust, company or partnership can impact the tax claim. For instance, Personal Services Income (PSI) would be one factor when trying to determine if you can claim certain expenses. PSI relates to contracting income earned from your personal skills and efforts through labour or expertise. PSI can still apply when operating as a trust, company, or partnership. If you are operating a business, ensure that you are not diverting your tax obligations. Read the personal services income criteria within the ATO website.
9. Deferral of income
Income deferral is a strategy used during tax planning time. When to declare income depends on the method appropriate for your business. There are two methods to report income being cash or accruals basis. Cash is reported when for payments received in the year. Whereas accruals basis is reported based upon all the income earned for work done during the year. This would apply even if a payment is not yet received.
10. Negative gearing to boost tax refund
Negatively gearing is a practice used in property investing as a way to minimise the tax you pay. In particular, this strategy is used by investors to borrow funds against their property. The rental income earned from the property is less than the cost of managing the property generating a tax loss. This tax loss could be applied to other income from shares or salary reducing the overall tax position. Careful planning is required to ensure it suits your overall financial position as cash flow can be negatively impacted. To decide if it is an appropriate strategy ensure you speak with an accountant and financial advisor. For more tax tips read about the pros and cons of investing in or out of your super fund.
Information in this article is general in nature and not specific advice. Please speak with an accountant and financial advisor to ensure you are getting advice that considers your personal circumstances.
