Date issued: 31 May 2007

CPA Australia has developed the following list of handy hints to help Australians prepare their individual tax returns, and maximise tax deductions, offsets and other entitlements, for the year ended 30 June 2007.

Timing of income/deductions:

It usually makes sense to defer the receipt of income and bring forward deductions such as interest payments, subject to the operation of the prepayment rules, before the end of the financial year. In view of the personal tax changes, which commence 1 July 2007 for low and middle income earners (see table below), there may be an added incentive to defer taxable income before 30 June 2007.

Work-related expenses:

Take the time to find out what you can and cannot claim or you could be missing out on claiming work-related expenses back.

While up to $300 of work-related expenses can be claimed without receipts, the claims must be for items necessary for your work and you must have incurred the expenditure. Typically, these expenses would include ‘normal’ employee claims for expenses, such as work travel, uniforms, subscriptions, union fees and self-education.

Claims in excess of $300 have typically required receipts to prove the purchase, but the ATO has now adopted a more practical approach to recognise a wider range of documents, such as bank and credit card statements.

Make sure you have all relevant receipts and other records in order, as in 2005/06 the ATO contacted more than 15,000 taxpayers employees to substantiate work-related claims. The ATO is also expected to conduct around 15,000 reviews or audits of at-risk cases.

Self-education expenses:

You can claim for self education expenses if you are undertaking study directly related to your current work; but not if the study is to help you obtain new qualifications in a different field. There are special rules regarding the first $250 of self-funded education expenses, so check with your CPA or the Tax Office. Higher Education Contributions (HECS) cannot be claimed.

Laundry expenses:

Claims up to $150 do not need to be substantiated, even if your total tax claim exceeds $300. The deduction is only allowed for the laundering of specific clothing, including protective clothing, compulsory and non-compulsory uniforms and occupation-specific clothing.

Motor vehicle expenses for work-related travel:

Claims under the log book method can be based on a reasonable estimate of business kilometres. To avoid the log book, the cents per kilometre method can be used, but claims will be limited to 5,000 km of travel. 

The allowable rate for claims changes from year to year, so check with your CPA or refer to the 2006 Tax Pack for this year’s rate.  Where business travel exceeds 5,000 km, it may be possible to claim one-third of actual car expenses or 12 per cent of the original value of the vehicle.

Depreciation claims:

Some depreciable items can be claimed in full, but only if they are used to gain assessable income other than business income, such as tools, computer equipment and technical books, which cost $300 or less or will last for less than three years. 

Larger items such as personal computers may be written off over several years. The depreciation rules and rates have changed in the last year so consult the ATO or a CPA on the current rates. 

Business or hobby:

Income derived from a hobby is not required to be included in your tax return, and expenses incurred in gaining that income cannot be claimed as a tax deduction.  If you are unsure as to whether you are carrying on a business or hobby, then you should consult the ATO or a CPA as there are no hard and fast rules available for making such a determination.

Interest and dividends, government payments, PAYG summaries etc.

The ATO follows up any discrepancies in interest and dividends, as well as government payments and employment income received by individuals.

For 2006/07 the ATO will match income details with third-party data on more than 48 million transactions to ensure that income has been correctly included in returns.

The ATO plans to contact 250,000 individuals about such discrepancies this year and anticipates that this will raise around $120 million in additional tax revenue.

Property/shares:

The ATO remains concerned about the level of non-compliance regarding capital gains.  It has significantly expanded its data-matching in the property and share areas by obtaining data from all State/Territory land title and State Revenue Offices, the Australian Stock Exchange, share registries and managed funds.

The ATO has also foreshadowed the sending of educational letters to 28,000 individual taxpayers.

When financing such investments, bank charges and any interest payments are typically deductible in the year in which they are paid so retain records to substantiate your claim, such as buy/sell contract notes for shares and all other purchase and sale records for other transactions, such as property.

Rental Properties:

Rental property owners can generally claim deductions for advertising, bank charges, pest control, body corporate fees, property agent fees and commissions, cleaning, repairs, council rates, secretarial and bookkeeping fees, electricity and gas, gardening, insurance, interest on loans, land tax, water rates and stationary.

You may also be able to write off the cost of certain buildings, depreciating assets and borrowing costs over time. 

However, the ATO is carefully scrutinising rental losses claimed because rental expenses increased by around 15 per cent in 2004/05, yet rental income only increased by approximately 9 per cent.

Consult a CPA to ensure you identify all your entitlements.

Superannuation:

As part of the Federal Government superannuation reforms, limits will now be placed on the amount of superannuation contributions employees and self employed persons can make to a superannuation fund from their after-tax income.

Individuals may be able to make non-deductible, after-tax contributions to a superannuation fund up to $1 million between 10 May 2006 and 30 June 2007. However, from 1 July 2007, most taxpayers will only be able to make contributions up to $150,000 annually (or $450,000 in a year if no contributions are made in the subsequent two years). 

Advice should be sought from a CPA on how to optimize these rules, especially regarding 'topping up' after-tax contributions before 30 June 2007.

Low and middle income employees can take advantage of the co-contribution arrangements.  If your income is $28,000 per annum or less, each dollar you personally contribute to superannuation (i.e., out of after-tax income and separate from your employer’s compulsory super guarantee contributions) will be matched by $1.50 from the Federal Government, up to a maximum co-contribution of $1,500.

For those earning more than $28,000, the co-contribution will be gradually reduced, phasing out completely when earnings reach $58,000 or more a year.

The Federal Government announced in the 2007-08 Budget that taxpayers eligible for the co –contribution in the year ended 30 June 2006 will receive double the amount of their co-contribution for that year.  Thus, if you were entitled to a $1,500 co-contribution in 2006, you will now receive a Government co-contribution of $3,000 in total for that year.

A spouse rebate of up to $540 applies where a taxpayer contributes to a superannuation fund on behalf of a low income/non-working spouse. The spouse must be earning less than $10,800 to receive the full rebate and it cuts out when the spouse earns more than $13,800.

Earnings for the purposes of  both the co-contribution and the low-income spouse rebate also include reportable fringe benefits.

If you are substantially self-employed, you can claim a deduction on any superannuation contributions made on your own behalf with a full deduction of up to $5,000 and a deduction of 75 percent of amounts above this. The maximum deduction available is equal to your aged-based limits.

Salary packaging and fringe benefits:

If your employer offers salary packaging, this can be an effective way to obtain tax savings, particularly if you are on the top marginal tax rate.  Some of the most common and tax-effective items that can be salary packaged include superannuation, laptop computers and motor vehicles.

Special care should be taken when packaging to ensure that you only select fringe benefits which provide you with some after-tax savings. Typically this will only occur where the benefit is concessionally taxed or is FBT exempt.

For example, the amount of tax savings on packaging a car will vary for each taxpayer, depending on the cost of the car, the total work versus private kilometres travelled and the car’s annual running costs.  Further, the potential tax saving available may have reduced in recent years as tax rates have been progressively cut, and less taxpayers are in the highest income bracket. 

A CPA registered tax agent will be available to advise you on the specific tax benefits that may be available.

Your employer will include the reportable fringe benefit amount on your payment summary, which must be reported in your tax return and may affect your entitlement to certain benefits.

Accounting fees:

The fees you pay to a registered tax agent to complete your tax return are deductible in the year they are paid. 

Tax offsets:

Tax offsets directly reduce your tax payable and can add up to a sizeable amount, so it pays to know all the offsets you are entitled too.  This will generally depend on your income level and your family circumstances.

Examples of tax offsets available, subject to satisfying certain criteria, include private health insurance, medical expenses, dependant spouse rebates, child-care rebates, low-income rebates and the senior Australian tax offset.

Also, if you are a mature-aged worker of 55 or older, you may be eligible for an additional non-refundable rebate of up to $500.

Additionally, there is a 25 per cent entrepreneurs’ tax rebate  if you have elected to enter the simplified tax system and your business income for the year does not exceed $50,000.  The rebate reduces for every dollar on business income in excess of $50,000 and phases out completely where income exceeds $75,000.

Further details on some of these offsets are provided below and you should see a CPA to find out more about  the full range of available rebates and tax offsets.

Child care:

Child-care costs are not an allowable deduction, but a rebate of 30 per cent is available for out-of-pocket child-care costs. The rebate claimable in your 2007 tax return is based on net child-care costs incurred for the year ended 30 June 2006, and you are allowed a 30 per cent rebate of up to $4,000 for each child. 

The Government also announced in the 2007 Federal Budget that the Child Care Rebate for approved child-care costs incurred for the year ended 30 June 2007 (and subsequent years) will be converted from a tax offset administered by the ATO to a payment made directly by the Family Assistance Office to parents.  Thus, a taxpayer with out-of-pocket child care expenses for both the 2006 and 2007 years will effectively receive two rebates following the lodgment of the 2007 tax return.

A CPA registered tax agent can provide further information on the benefits available.

Medical expenses:

You can claim a 20 per cent rebate on net medical expenses over $1,500.

‘Net medical expenses’ is the difference between medical expenses incurred by you or your dependants, less any refund you may have already received from Medicare or a private health insurance provider.

Not all medical expenses can be counted; for example, chiropractors or psychologists, unless you can show that you were receiving therapeutic treatment. Some dental expenses are included.

You should keep all your medical receipts to support your claim.

Private health insurance:

A general 30 per cent refundable tax rebate can be claimed on the cost of health insurance premiums paid by individual taxpayers. However, the rebate is not available where the benefit is taken in the form of a direct payment or reduced premiums. 

Higher level income earners, without adequate health cover, are liable for an additional 1 per cent Medicare levy surcharge. Higher rebates can be claimed by older persons – for persons aged from 65 to 69 years, the rebate is 35 per cent, and a 40 per cent rebate applies for those 70 and over.

Tax shelters:

These may include primary production, film schemes or other tax-effective financing arrangements. Taxpayers should ensure the promoters have obtained a product ruling from the ATO for their particular product. This will provide some certainty that the expected deductions will actually be available, provided the project does not deviate from the original proposal in the prospectus. 

The onus is on the taxpayer to seek independent advice to ensure the proposed scheme is financially viable.  Separate advice from a CPA should also be sought on the implications of the tax rules relating to losses and prepayments for non-commercial activities.

Family assistance:

Most eligible taxpayers will receive Family Assistance payments as direct fortnightly payments from the Family Assistance Office, or as reduced child care fees. 

A taxpayer may also apply to have reduced PAYG amounts withheld from salary or wages in lieu of the other options.  Alternatively, the family tax benefit (FTB) can be obtained on lodgment of a tax return.  But make sure you don’t ‘double dip’.

Families who have had a baby or gained legal responsibility for a child after 30 June 2001 and before 1 July 2004 may, depending on their circumstances, be able to claim up to $2500 (or a minimum of $500) per year for the first five years after the date of birth of their new baby up  until 30 June 2014 under the government’s former baby bonus (or first child tax refund) scheme.

For more information, go to the ATO website or see your CPA.

Details of other family assistance benefits (such as enhanced maternity allowance payments on the birth of a child) may be obtained directly from the Family Assistance Office.

Income alienation:

The tax rules on alienation may impact on contractors deriving personal services income but not carrying on a personal services business (PSB). In this event, income of a personal services entity may be subject to the PAYG withholding rules and needs to included in the individual's return. 

PSBs also need to be aware of the ATO’s strict approach to income retention and income splitting  (with some exceptions such as for standard ‘mum and dad’ partnerships) and should seek advice from their CPA.

Medicare levy:

Increases in the Medicare levy thresholds for low-income individuals, families and certain pensioners announced in the recent Federal Budget will apply in 2006/07 and can be claimed in this year’s returns.

From 1 July 2006, the Medicare levy low-income threshold will increase to $16,740 for individuals and $28,247 for families. The family threshold will increase by $2,594 for each dependent child. The Medicare levy low-income threshold for pensioners below pension age increased from 1 July 2006 to $21,637.

Medicare levy surcharge:

An additional one per cent surcharge may apply to married or de facto couples with a combined income in excess of $100,000 if they do not have adequate private health insurance cover. Both partners and any dependants must be fully covered under the policy for the whole of the income year, otherwise both partners will be subject to the surcharge, unless the low income threshold or some other exemption applies.

The income threshold also varies where there are dependants, or the parties are separated. The surcharge also applies to single individuals without similar cover where an individual’s income is in excess of $50,000. 

For surcharge purposes income will also include reportable fringe benefits.

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