How about a bigger tax return


Published in the rescu.com.au, June 2015 by Janine Cox

It’s almost tax time again, and depending on whether you expect to receive a tax bill or tax cheque may determine how you feel about doing all of that preparation to lodge your return. Now, if you find yourself a bit out of your depth when it comes to tax, then it is really important that you know the tax lingo, and I’m here to shed some light on some of the common terms and possibly help you maximise your chances of a bigger tax refund.

Some of you may have more than one return to prepare, particularly if you receive an income in your own name and perhaps hold assets in a trust, or company. For those who say that tax time is as easy as handing over their group certificate and bank statements, you are missing something important, you don’t invest. If you did, you would more than likely have dividends or capital growth considerations at tax time.

Making your tax return easy is one thing, but if you choose not to invest, every year that slips by is another wasted opportunity for you to get what it is you really want sooner. While you may have so much going on in your life it is really important that you dedicate some time each week to working on your goals and a plan to build sufficient wealth for a comfortable retirement.

Remember, it’s not your job that’s going to make you wealthy, it’s how you make use of the power of your income to build your wealth that really counts. So why let another year slip by without taking an active step to invest, even if it does mean spending a little more time on your tax return every year?

Let’s discuss how you can make your money work harder for you in a future article, for now, I will focus on the some tax terms that you may come across as you invest. The information I have provided below forms a good starting point for further research.

Withholding tax

In Australia, you pay a form of withholding tax called income tax or PAYG (Pay as you go), which you probably don’t notice as it is deducted from your wage/salary by your employer before being paid directly into government coffers.

If you are a smart investor who holds some big blue chip shares, you will receive dividend statements, and dividend payments will be deposited into your nominated bank account during the year – when you purchased the shares the share registry will have sent you a form requesting your banking details.

Depending on the stock you own, if most of the company’s earnings were generated in another country, say for example the US, your final dividend is likely to be calculated after withholding tax is removed. Tax will have been withheld from profits paid to shareholders by the company so as to pay the US government.

As an individual you can fill out a ‘W-8BEN’ form to claim this money from the US government. So check your dividend statements and use Google to locate the W-8BEN form and relevant information.

Tax refund

This is one we all like to talk about. On assessing your tax return, the Australian Taxation Office (ATO) will determine whether the income tax you have paid exceeds the level of income tax that you are required to pay based on your taxable income, or assessable income less allowable deductions. If it does you are likely to receive a refund, otherwise, you may have to pay the ATO any outstanding tax owed.

Franking /imputation credits

Firstly, a franked dividend is paid by a company from its after tax profits. You the investor must declare all dividend income, however, you are entitled to what is called an imputation credit on some shares, which effectively reduces the amount of income tax payable by the amount of the imputation credit.

Otherwise, without the imputation, both the company and you would be paying tax on the income, which means the government would be double dipping. For retirees, imputation credits can be a valuable source of income as they may constitute a tax refund.

To learn how the tax is calculated on the dividends received before the imputation credit is used to reduce the tax payable, I suggest you visit the ATO website.

Depreciation

Certain assets must be depreciated, or claimed as a deduction over a period of time, rather than in the year the cost was incurred. This could include things like a computer, where it is used for the purposes of generating an income.

Another example is when you buy new property, or build an investment property, you may be able to claim depreciation on the building and fixtures. 

In this case, I suggest that you employ the services of a company who specialises in creating depreciation schedules, then give this to your accountant. It may cost a little up front, however, it projects depreciation well into future years.

If ever you are in doubt, refer to your accountant for information on what can be depreciated against your income, and over what time frame.

Income and deductions/expenses

This is an obvious one. Come tax time you lodge your tax return, declare all income and include expenses that you incurred while earning that income, provided they are considered legitimate tax deductions by the ATO.

You can do some research on the ATO website to find out what constitutes a legitimate tax deduction. Alternatively, you can seek tax advice, and I’m sure your accountant would be happy to give you the information you need for a fee. Just make sure you are aware of the fee and prepare your questions thoroughly before the meeting.

If you study while earning an income you may be able to claim the cost of the course against your income, provided the study specifically relates to the income generated.

Another important area, if you are thinking about setting up a small business and would like to know how to set it up well, I strongly suggest that you seek advice from a good accountant, someone who has a focus on advising in this area, and preferably someone recommended to you.

Stamp duty

Is charged by the government in Australia for the transfer of land or property and may differ for someone who has never owned property to someone who already owns at least one property. The Money Smart website is a great place for many different calculators, including those for working out the stamp duty payable in different states. Always check the taxation payable before working out your budget for the purchase.

CGT) – If you sell assets for a profit you are likely to have to pay capital gains tax. An example might be a property investment, or shares. Let’s look at shares. You need to be aware of the ‘12 month rule’. If you buy and sell shares within twelve months for a profit, you will pay tax on all of the gains. Put simply, this is based on the total proceeds of the sale less purchase costs.

Capital gains tax (CGT)

If you sell assets for a profit you are likely to have to pay capital gains tax. An example might be a property investment, or shares. Let’s look at shares. You need to be aware of the ‘12 month rule’. If you buy and sell shares within twelve months for a profit, you will pay tax on all of the gains. Put simply, this is based on the total proceeds of the sale less purchase costs.

Whereas, holding your shares for more than 12 months means that you only pay tax on 50% of the gains. Now, this doesn’t mean that the shares will be trading at their highs in 12 months. So the way you manage them must depend on the goal you set for your portfolio, as well as the strategy chosen to buy and sell.

Therefore, you really need to do your research and educate yourself as much as you can about the share market, and trading shares, before you dip your toes into the market. I understand that it doesn’t always happen this way, and most people put the cart before the horse. However, the sooner you get the right knowledge and put a structure around how you run your portfolio, the more likely you are to make money and achieve your goals.

If you would like to learn more about how to create a powerful portfolio of your own I suggest that you read a book by Dale Gillham called ‘How to beat the managed funds by 20%’. In this book you will learn a lot of the basics about the share market, including a lot of the ‘how to’, so you can navigate your way safely around the share market.

The important thing when preparing your tax return is that you get some direction from a tax expert who knows what they are talking about. Most people tend to do this after they start investing, or after setting up a business, rather than beforehand, which can cost you, particularly if you set up the wrong tax structure. And, not all tax agents are experts in all areas, so make sure you check the person’s credentials.

Remember, even if you seek the advice of a tax ’expert’, do your own research before you meet with them, set a brief for the first meeting, and be clear about what it is you want to know. Failure to prepare could mean you don’t get your monies worth, and worse still, you could end up on the wrong tram.


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