29 May 2020
30 June 2020 is fast approaching so it’s time to consider how to best manage your tax affairs for the 2020 income tax year.
Tax laws are constantly changing, and this year, even more so. The tax issues you considered in previous years may no longer be relevant this year so it’s important to have a conversation with your adviser now, so you have a tax plan in place before the end of financial year.
When considering your tax position, you should consider as a starting point:
- How do you derive your income? Through trust distributions, dividends, salary or through personal services income?
- How can you maximise your superannuation contributions? For example, ensuring the contributions are received by the superannuation fund before 30 June 2020 and deductions are claimed.
- What deductions you can claim? For example, general deductions, work-related expenses, self-education expenses and working-from-home deductions.
On top of this, you’ll need to consider the raft of COVID-19 stimulus measures that have been introduced along with the general tax issues you should consider every year.
To assist, we’ve compiled a broad overview of ten important issues to consider that may affect your 2020 financial and tax position.
1. Coronavirus stimulus measures for individuals
Eligible income support recipients such as certain individuals on social security benefits or concession card holders, can qualify for two one-off economic support payments of $750.
The first payment will be made before 30 June and the second payment will be made after 30 June 2020. Certain individuals can also qualify for the Coronavirus supplement – a fortnightly payment of $550 for six months.
It is not necessary to apply for these payments – the amounts will automatically be paid to income support recipients that qualify.
An employee who qualifies for the JobKeeper payment will receive payment from their employer, who will be reimbursed by the Australian Tax Office (ATO).
The economic support payment is not taxable but the Coronavirus supplement and JobKeeper payments are taxable.
2. Coronavirus stimulus measures affecting an individual’s superannuation
Eligible individuals are able to withdraw up to $10,000 of their superannuation before 1 July 2020 and a further $10,000 from 1 July 2020 to 24 September 2020. This will apply to people who are:
- Had their work hours reduced by 20 percent or more after 1 January 2020.
- Are citizens or permanent residents of Australia or New Zealand.
Temporary residents are only allowed one withdrawal option of $10,000 up to 1 July 2020.
You do not need to pay tax on any withdrawals released early from superannuation and these amounts do not need to be included in your tax return.
To help retirees to keep more money in their superannuation as a nest egg, the minimum draw-down requirements for account-based pensions have also been reduced by 50 percent for 2020 and 2021.
3. Coronavirus simplified shortcut method for deducting working from home expenses
With many individuals working from home because of COVID-19 restrictions, from 1 March to 30 June 2020, you will be able to use a simplified method to claim your additional running expenses at a rate of 80 cents per work hour.
Additional running expenses include:
- Electricity and cleaning expenses associated with an individual’s work area (e.g. cooling and lighting).
- Phone and internet expenses and computer consumables (e.g. printer paper, ink and stationery).
However, you can’t claim a deduction for mortgage interest, rent and rates or the cost of coffee, tea or milk that an employer would have otherwise provided for the employee at work.
4. Removal of main residence exemption for non-residents
If you were a non-resident for tax purposes at the time you sold your home (i.e. when you signed the sale contract), you will no longer qualify for the main residence exemption. This means you will be required to pay capital gains tax on gains made on the sale of your main residence.
Some non-residents will still qualify for the main residence exemption if:
- They acquired the home on or before 9 May 2017 and sold the home on or before 30 June 2020; or
- Regardless of when the home was acquired, the home was sold after 9 May 2017, and at the time of sale the individual had been a tax non-resident for a continuous period of six years or less and certain life events have happened (e.g. the individual’s spouse or child under 18 has a terminal medical condition or dies or there is an asset distribution because of a divorce or separation).
This change is particularly relevant for Australian expatriates or people who have gone overseas for a work-secondment. Note, if you were a resident for Australian tax purposes at the time you signed the sale contract, you will qualify for the main residence exemption.
5. Changes to vacant land tax deductions
A new law has been introduced that will generally deny individuals tax deductions for costs incurred on holding vacant land.
Previously, you could only deduct for costs incurred for producing assessable income or carrying on a business. However, because it is difficult to determine exactly what purpose vacant land is being held for, the new law will generally deny tax deductions for costs incurred on holding vacant land from 1 July 2019, regardless of when the land was initially acquired.
Examples of such holding costs that may be denied under this new law and may instead be included in the cost base of the land for CGT purposes include:
- Interest or any other ongoing costs of borrowing to acquire the land.
- Land taxes.
- Council rates.
- Maintenance costs.
You may still be able to deduct holding costs on vacant land if:
- You are using the land (or your spouse, child, affiliate or connected entity) to carry on a business.
- The land is vacant because of a natural disaster or exceptional circumstances.
- The vacant land is being rented out by a primary producer.
- The vacant land is being rented out and it is being used to carry on a business.
6. Defer the derivation of income and capital gains and prepay expenses
If cash flow permits, you can defer the receipt of interest on term deposits (i.e. set term deposits to mature after 30 June 2020) and hold off on selling appreciating capital assets (i.e. sign the contract of sale) until after 30 June 2020.
Prepayments up to 12 months of interest on loans for any investment properties or share investments, your professional subscriptions, membership fees and rental property repairs, can qualify for a deduction in the 2020 income tax year.
7. Be wary of ‘wash sales’ pre-30 June 2020
The share market has dropped significantly in the wake of COVID-19 and you may be tempted to sell shares and realise a capital loss that can be offset against other capital gains.
If you were to sell shares prior to 30 June 2020, thereby realising a capital loss to be used to offset against capital gains for 2020, and then re-acquire those same shares shortly after 1 July 2020 (i.e. the next income year), you may be faced with some adverse consequences. Seek advice before making any short-term decisions.
8. Claim correct amounts of work-related expenses
To claim a work-related expense deduction, you must have actually spent the money (i.e. not have been reimbursed) and the expense must directly relate to the earning of income. It is also important to keep records to prove the expense was actually incurred.
9. Claiming deductions for personal superannuation contributions
You can claim a tax deduction for personal superannuation contributions made to your superannuation fund from after-tax income, provided:
- The amount does not exceed your concessional contributions cap for the year.
- The superannuation fund has physically received the contribution by 30 June 2020.
- The individual has given their fund a Notice of Intention to Claim document and the superannuation fund has acknowledged this document.
10. Other issues to consider
Further issues to consider when having a year-end planning discussion with your adviser, include:
- Are your investments held in the correct structure? There are different tax considerations depending on the investment structure used.
- Do you have a property depreciation report for your investment property? This will help when claiming depreciation and capital works deductions.
- Have you kept accurate and complete motor vehicle log books for at least a 12-week period? A proper logbook is necessary for claiming motor vehicle expenses.
- Do you have income protection insurance? The premium on income protection insurance is normally tax deductible.
- Have you considered salary sacrifice? Salary sacrifice can help boost your superannuation and help you to potentially pay less tax.
- Have you considered whether an SMSF is suitable for you? Now is a good time to speak to your adviser about whether it may be appropriate and beneficial to your circumstances to establish an SMSF.
Tax planning is not just something to be done in June and it is important to stay up do date with the frequent tax changes during the year and understand how such changes can affect you. Furthermore, tax planning is about identifying opportunities for you as well as managing your tax risks.
Please contact the Findex Tax Advisory team for more information or speak with your adviser.
Findex has developed a Government Stimulus Health Check and free Business Wellbeing Toolkit to help businesses manage potential risks and take full advantage of eligible stimulus assistance. Book your Health Check here.