2007/08 Financial Year Tax Tips

The following tax tips are only guidelines. Here are some main points you need to consider, while not exhaustive, when you are preparing your income tax returns for the 2007/08 financial year:

Record keeping - Records are normally required to be retained for tax purposes for at least 5 years, but special requirements apply in some areas. For example, in case of capital gains tax and the substantiation rules, records have to be held for longer period.

Work-related expenses - ATO compliance program for 2008 focuses on over-claiming of employee’s work-related expenses. Such expenses typically include employee clams for expenditure incurred on items such as travel, uniforms, subscriptions and self-education.

Rental properties - The types of things the ATO looks out for are repairs versus improvements, ensuring the property was really a rental property and not just your weekender and that interest on any property loans has been correctly claimed.

Dividends and interest - To ensure that interest and dividends are correctly declared by taxpayers, the Tax Office matches information provided in tax returns with information from external sources. The best way to avoid trouble here is to include all such income in your return and retain supporting documents such as bank and company dividend statements.

Capital gains - In 2008 ATO compliance program, ATO will closely scrutinise asset transactions. In particular, it has expanded its data matching projects to ensure that there is no underreporting of capital gains as it now has access to data on asset sales from state title and revenue offices, securities exchanges and share registries as well as reports from managed funds. Therefore, you should keep all relevant records to support the details provided in your return.

Aggressive tax planning - Taxpayers should continue to be cautious about year-end tax schemes, and carefully consider all the information in the market on this type of higher-risk investment. This includes product rulings and taxpayer alerts issued by the Tax Office.

Salary packaging and fringe benefits - This can be a useful way to obtain some tax savings, particularly if you are on the top marginal tax rate and your employer offers it.

Family tax benefit - FTB is available to eligible families (including sole parents) with children. You can claim the FTB as a direct payment from Centrelink or as a lump via your tax return or periodically through reduced PAYG withholding payments.

Rebates - Tax rebates or offsets can reduce your tax bill, so it pays to know what you are entitled to.

Stocktake - Each year you need to include a value in your accounts of stock in hand and work-in-progress at 30 June. Closing stock can be valued at cost, replacement or market value or less if obsolete, but you have to document which method you use.

Company loans - It is important to ensure that private company loans that extend beyond the end of the income year are properly documented, to ensure that a tax liability is not triggered under the tax rules set out under Division 7A. Adequate annual repayments of a properly documented loan are also required.

Bad debts - Consider writing off any bad debts prior to year end.

Review your assets - It’s too easy to carry assets on your books that have no real value, are obsolete or have been scrapped. The only way to get a write-off deduction for them is to review your asset register and take necessary action before June 30.

Prepayments - Most business taxpayers must pro rata the deduction for prepaid expenses over the period to which the expenses relates. However, individual non-business tax payers and SBEs can prepay some expenses up to 12 months in advance.

Superannuation - Employers must ensure they have made sufficient superannuation contributions currently 9% for all of their employees on a quarterly basis throughout the financial year to avoid the risk of incurring a penalty under the superannuation Guarantee Charge (SGC) regime. Eligible superannuation contributions for the June quarter must be paid by 30 June 2008 to be tax deductible.

Personal services income (PSI) - The PSI measures are designed to limit the level of deductions available to certain contractors, whether they are operating as a sole trader or through a company, trust or partnership, and to also extend the PAYG withholding rules in such cases. A taxpayer that meets certain specified tests such as the “results” test will be treated as carrying on a personal services business and will be able to claim wider range of deductions. But such taxpayers need to be aware of the Tax Office’s strict approach to income retention and income splitting.

Non-commercial losses - For a business to be commercial under these rules, it needs to meet certain prescribed tests. If the tests are not met, any losses arising from the activities will have to be carried forward and offset in a year later, against future income of the same type or source.