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"Secrets Of Legally Slashing Your Tax
Which Could Save You Thousands...”

Printed 30-06-2010.

  • Has your Accountant told you that your Life Insurance Policy is a private expense and therefore NOT tax deductible? Find out how you can claim a deduction for you life insurance policy.
  • How to get 18% return overnight government guaranteed. Simply by contributing to your spouses superannuation!
  • Buying Equipment verses Leasing Equipment. Find out how you can best reduce your tax.
  • What you absolutely MUST find out about your concessions as a Small Business Entity. You get simpler depreciation rules, immediate deduction for certain prepaid expenses, simpler trading stock rules, and a bonus save 25% off your business income tax.
  • Do you pay tax on your personal income yet you are carrying forward losses from your business activities? You may be entitled to offset these losses against your ordinary income!
  • Discover how Companies, Trusts and Partnerships who's owners have personal debt, can pay off their personal loan off sooner. That saves you thousands off you home loan or you can use it to further expand your business or go on that well deserved holiday!
  • Discover how you can claim your Company's or Trust's losses in your personal tax return. This can be claimed if you have personal Services Income.

Life Insurance Policies are normally a private expense and therefore NOT tax deductible.
I was asked by Witold an Electronics repairer (electronic and musical equipment repairs), so let us look at his example; 

Witold had an income insurance which has a life insurance cover provided, every year his Accountant was required to dissect the premium and not claim the portion applicable to the life insurance. So I advised Witold, that this requirement to dissect the premium does not apply if it is through a superannuation policy.

So as Witold is self employed he qualifies to claim a deduction for his superannuation contributions. All Witold has to do is contact his superannuation fund and get them to provide him with life insurance, and the increase in the premium is just as deductible as the superannuation contribution.

If Witold was an employee he could have salary sacrificed into superannuation to cover the life insurance and if he was a low income earner, he would not get the tax deduction for his superannuation contributions but they would count towards the governments $1,500.00 co-contribution.

18% return overnight government guaranteed
I spoke with James a Painter & Decorator who was not sure how he could get a deduction for contributing to his spouse's super. The rebate for making super contributions for your spouse is $540.00 if you contribute $3000.00, providing your spouse's assessable (not taxable) income is under $10,800 (shading provisions apply after that). If you spouse is retired from the workforce and over 55 years of age, she will be entitled to draw all that money straight back out. Effectively netting you an 18% return $540.00/$3000.00 on an overnight investment. So if James made a $3000.00 contribution for his spouse on the 30th June, James' spouse can then withdraw the money from her super on the 1st July because she is retired. So James will still have his money plus another
$540.00 when he does his tax return.
Note if James' spouse had never held paid employment she would have to wait until she turned 65 years of age. Spouse super contributions can only be made until the spouse reaches 65 years of age. The rebate is only available to offset tax so if James' spouse's taxable income is too low to pay tax this would not benefit them.

Buying Equipment verses Leasing Equipment
I have a lot of clients asking me what would be the best situation for them tax wise so I have decided to include this in the report, lets look at an example;
A Signage Designer, John wanted to purchase a printing press in May and asked me whether he should lease this equipment or buy, under normal circumstanes there is not much benefit in buying it at the end of the year because depreciation claimable is apportioned over the year and life of the item so the deduction would be minimal. If John were to lease the printing press he could access the small business entity concessions and could make 12 months lease payments in advance. John would get a full deduction for those prepayments. This would only work if John crunched the numbers and found that the leasing was a more affordable option than buying outright! 

What you absolutely MUST find out about your concessions as a Small Business Entity
Tara a Sole Trader Bookkeeper approached me with the question about how the recent changes to the concessions for small business would affect her, lets look at her example; Recent changes to eligibility have made it even easier for a range of small businesses as eligibility is based on a single $2 million turnover test. Tara meets this turnover test and is classified as a 'small business entity'.
You get simpler depreciation rules, which means that Tara can receive an immediate deduction for assets the business has purchased costing less than $5,000 and most other assets would be pooled. 

Tara prepaid professional indemnity insurance on the 1 September of $2,500. This covers 1December to 31 December , 12 month period. Tara satisfies the 12-month rule because it is a period of service of 12 months or less that ends the next year. Tara can claim an immediate deduction of $2,500 in the current financial year. Other expenses Tara could prepay are subscriptions to professional associations, rent and lease payments made in advance. If the expense was less than $1,000, a payment of salary or wages under contract or service or required by court or law (workers compensation), then these expenses are an immediate deduction in the year in which they are paid. Provided the expense is not private, domestic or capital in nature. This applies even if the period of service is more than 12 months. Simpler trading stock rules, Clients who had a difference of $5,000 or less between the year
opening stock and closing stock values, would not have to do a stocktake or account for changes in their trading stock.

The key difference with the way these concessions now work is that clients can use the specific
concessions which suit their businesses. They no longer have to use all the STS concessions as a package.

The 'small business entity' changes also affect the capital gains tax concessions for small business. These concessions are also available to more clients now as the threshold has increased to $6 million (previously $5 million) for the maximum net asset value test from 2007-08. In addition, clients who exceed the $6 milliion maximum net asset test can now use the $2 million turnover test as an alternative way to access the CGT concessions.

How to pay off your home sooner. Aldona a Graphics & Web Designer has a mortgage over her home, which is personal debt she has contributed over time capital to her business which she structured in a trust. The trust owes Aldona money as it has borrowed from her. Aldona could request the trust to pay her back, the trust would take out a loan and in turn claiming the interest
expense as a tax deduction. 

Aldona has got good and bad debt. Good debt is borrowed to acquire income producing assets and is therefore tax deductible. If Aldona is in the maximum tax bracket and wants to pay $1000 off her home mortgage she would have to earn $1869.16, even more if she had child support liability or was subject to the Medicare surcharge. So one of the most tax effective tools is to change her non deductible debt to tax deductible debt. This option is only available to Companies, Trusts and Partnership. It is not available to Sole Traders. See Roberts and Smiths case July 1992 Federal Court. The ATO interpretation of this is in TR95/25.

Do you pay tax on your personal income yet you are carrying forward losses from your business activities? You may be entitled to offset these losses against your ordinary income! Lets look at some examples; 

Daniel a Conveyancer is considering partnering with another business so Daniel will have other partnership income. Daniel has asked me whether he will be able to offset his non-commercial business losses from his Sole Trader Conveyancing business against his partnership other income. I have mentioned to Daniel that all he has to do is pass any (1) test below to offset his carried forward losses against other income;

If Daniel had a loss from primary production, or professional arts business and his gross assessable non primary production income was less than $40,000, the loss maybe offset against other income. Note the $40,000 does not include capital gains or fringe benefits. If the other income is from a partnership then only Daniel's share of the net profit of the partnership is added to his assessable income if the partners are natural persons. This means forming a
partnership is a very attractive option even if alienated personal services income requires you to return the net profit as 100% yours as oppose to sole traders who would show their total sales before deductions! The assessable income from Daniel's Sole Trader Conveyancing business activity was at least $20,000. Note you will need to pass the income test before you can consider this option You will meet the income requirement if the total of the following amounts is less than $250,000: taxable income (ignoring any business losses), total reportable fringe benefits, reportable superannuation contributions, total net investment losses - including financial investment losses and rental property losses.

The sales is after removing the GST and sales is per partnership and not per partner. So this includes sales plus increase in stock – closing stock less opening stock. Purchasing more trading stock will increase your assessable income. Note the trading stock must be on hand, you can not just order it and bring it into account as creditors. Buying and selling will also increase assessable income. There are also concessions for the first year of trading. If a reasonable estimate would conclude that had you been trading a full year you would have made $20,000 worth of sales plus closing stock (no opening stock in the first year) then you are considered to have turned over $20,000. This also applies to the last year of trading but you will have opening stock. If Daniels' business has produced a taxable profit in at least 3 of the last 5 years including the current year. (This is profit before deducting any carried forward losses from previous years). The value of Daniel's real property used in carrying on the business is at least $500,000. The value of Daniel's other assets used in carrying on your business is at least $100,000. (See ATO Div 35).

Discover how you can claim your Company's or Trust's losses in your personal tax return. This can be claimed if you have Personal Services Income. If you can fail the alienated personal services income test then you can consider the following; If you company or trust made a loss you will be permitted to offset the loss against your personal income if the loss is in regard to personal services income caught by the alienated personal services legislation. Your advantage over other taxpayers operating through a company or trust is that their losses are quarantined until that company or trust makes a profit and satisfies other requirements. 


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