No more Budget repair levy

The Budget repair levy of 2% on the part of an individual's taxable income that exceeds $180,000 no longer applies in 2018. Therefore, the top marginal rate for 2018 (including the 2% Medicare levy) will be 47%, as opposed to 49% in the 2017 income tax year. The FBT rate is also 47% for the 2018 FBT year.

Review salary packaging arrangements

Review any salary packaging arrangements (eg for motor vehicles) to ensure they were entered into before the services have been performed by employees or before salary review time, so that they will be effective.

With the lowering of the concessional superannuation contributions cap to $25,000 for everyone from 1 July 2017 (as opposed to either $30,000 or $35,000 for the 2017 income tax year, depending on the age of the individual), ensure that salary sacrifice agreements are reviewed to ensure there are no excess concessional contributions in 2018.

Manage exposure to CGT

Individuals may consider delaying the exchange of contracts to sell an appreciating capital asset until after 30 June 2018. That way, the capital gain will only be assessable in the 2019 income tax year.

If a capital gain has already been made this year, it may be possible to crystallise capital losses (eg by selling shares that have declined in value) to reduce the capital gain. However, when adopting this strategy, taxpayers must take care to ensure they are not engaging in "wash sales", where shares are sold shortly before 30 June solely to realise the capital loss and then bought back shortly after 30 June.

A capital gain realised in 2018 will be eligible for the 50% CGT general discount to the gross gain if the asset was held for at least 12 months before it was sold (ie before the CGT event occurred).

Deduct work-related expenses

Although a myriad of tax law considerations are involved when claiming work-related expenses, there are three main rules:

  • Only claim a deduction for money actually spent (and not reimbursed).
  • The work-related expense must directly relate to the earning of income.
  • An employee must have a record to prove the expense.

For example, a claim for work-related expenses will not be allowed if deductions are claimed for private expenses (eg travel from home to work and not required to transport bulky equipment), reimbursed expenses (eg an employee is reimbursed for the cost of meals, accommodation and travel) or if no records are kept.

Taxpayers who are overclaiming deductions for work-related expenses such as vehicles, travel, internet and mobile phones and self-education are on the ATO's hitlist. Taxpayers must keep evidence to substantiate such claims.

Other practical issues to consider when claiming work-relates expenses include the following:

  • When claiming work-related expenses relating to a vehicle, travel, internet, self-education or a mobile phone, taxpayers should ensure that the amount claimed for these expenses is reasonable and verifiable. The ATO is using real-time data to compare deductions claimed by taxpayers in similar occupations and income brackets, so it can identify higher-than-expected or unusual claims.
  • When claiming deductions up to $300 (allowable without a receipt), taxpayers must still be able to substantiate the deductions claimed if they are questioned by the ATO.
  • When claiming deductions for work uniforms, taxpayers should ensure they only claim for uniforms that are unique and distinctive (eg with the employer's logo and specific to the taxpayer's occupation) and not clothing for everyday use (eg plain suits worn by office workers).

Taxpayers working from home may be able to deduct a pro rata portion of water and electricity costs as well as depreciation for office equipment, provided they keep a diary of the hours worked at home to substantiate their claims.

An individual may claim the amount incurred on self-education expenses as a tax deduction, provided the expenses were incurred to maintain or improve the individual's skill or knowledge necessary to perform the individual's current job (as opposed to securing a new job). For example, an accountant attending an accounting seminar, conference or workshop to stay up to date with the latest accounting developments could claim the expenses as a deduction.

Make donations count for tax

Donations of $2 or more to deductible gift recipients are tax deductible. Donations of property to such recipients may also be tax deductible. However, donations to overseas charities may not be tax deductible.

Use negative gearing where appropriate

An investment property is negatively geared if the rental income is less than interest and other costs of maintaining the property. In such a case, the loss on the investment property can be offset against other income to reduce taxable income.

Because individuals on higher tax rates will gain a greater tax benefit from the loss deduction compared to individuals on lower tax rates, a possible strategy (provided CGT consequences and other circumstances have been considered as well) with married couples is to have the negatively geared property in the name of the spouse who earns the highest income. Of course, the benefit of this strategy reverses when the property yields a net income. Therefore, investment properties that are positively geared (ie when rental income exceeds the costs associated with the investment property) may be held in the name of the spouse with the lower taxable income. This also applies for interest-bearing deposits such as term deposits.

Pay superannuation contributions before 30 June

From 2018, both employees and self-employed individuals can claim a tax deduction annually to a maximum of $25,000 for personal superannuation contributions, provided the superannuation fund has physically received the contribution by 30 June 2018 and the individual has provided their superannuation fund with a "notice of intention to claim" document.

Taxpayers must be aware of exactly how long a superannuation contribution takes to reach a superannuation fund – for example, if a superannuation contribution is made one day before 30 June, but the payment is received in the superannuation fund's bank account two days later (ie after 30 June), no tax deduction will be allowed in the 2018 income tax year.

If the employer is utilising the ATO small business clearing house, their super guarantee contributions are counted as being paid on the date the clearing house accepts them (provided the fund does not reject the payments).

An easy way to prevent any late payment issues is to pay superannuation contributions at the beginning of June each year.

Take note of 1 July 2017 superannuation changes

Fundamental changes to the superannuation landscape have occurred from 1 July 2017 (ie for the 2018 income tax year).

The following table gives a short summary of the most important superannuation rates and caps that apply.

 CGT cap for non-concessional contributions $1.445 million
Concessional contributions cap $25,000
Non-concessional contributions cap $100,000 (or $300,000 under the three-year bring forward rule)
Superannuation guarantee 9.5%
General transfer balance cap $1.6 million
Total superannuation balance threshold $1.6 million

Because the ability to contribute money to superannuation is severely curtailed from 1 July 2017, individuals may wish to consider alternative investment strategies outside of superannuation (eg family trusts, innovation companies, etc).

Innovation incentive

From 1 July 2016, some investors in certain small Australian innovation companies will basically qualify for two incentives for investments made on or after 1 July 2016:

  • when they make the investment, a 20% non-refundable carry-forward tax offset on their investment (capped at $200,000); and
  • when they dispose of the investment, a CGT exemption if the disposal occurs after holding the investment for more than one year but less than 10 years.

Regarding the $200,000 cap: there is no limitation on the amount sophisticated investors (ie investors with net assets of at least $2.5 million or gross income for each of the last two financial years of at least $250,000) may invest, although the maximum amount of offset will remain at $200,000. However, non-sophisticated investors (eg "mum and dad" investors) may only invest a maximum of $50,000 a year in such companies.