Max your tax rebate

By Gillian Bullock, ninemsn Money
June, 2008

There are a number of strategies you can employ to get the most out of your tax rebate this year.

Pre-pay interest

One strategy is to pay your interest on investment borrowings a year in advance.

If you have borrowed money to invest in shares or property, in most cases you will be able to claim any interest that you have paid on your borrowings. But here's the rub. If you borrowed the money to invest in speculative shares that don't pay any dividends, you can't claim any interest.

This is because you can only claim if the money borrowed is used to earn assessable income. No dividends mean no income, so no deduction.

But if the money borrowed is for dividend-paying stocks, it can be worth your while to pay the interest a year in advance. This is particularly attractive if you are about to move into a lower tax bracket in the next financial year as a result of the tax changes, as you will save more money by making the claim in the current year when your tax rate is higher.

Investment expenses

Claim a deduction on your investment expenses, such as ongoing financial advice and account-keeping or management fees. This will reduce your income tax liability in the current year and your PAYG instalment rate for 2008-09.

Capital gains and losses

With the current volatility of share markets, you might consider selling some under-performing investments and taking a capital loss. This is a good strategy if you have already accumulated some capital gains earlier in the year, as you can use the loss to offset any gain. However, the government has clamped down on what it terms 'wash sales'. These are where you sell an asset specifically to realise a capital loss and then within a short period of time you buy it back.

If you have a capital gain with no loss to offset it, then hopefully you held that asset for at least 12 months before you sold it. If not, you will be up for tax on the entire capital gain. However, if you owned the asset for more than 12 months, you will only pay your marginal tax rate on 50 percent of the gain.

If you have losses and no capital gains, you can carry your losses forward into future years. However, it's worth noting that if you do this for too many years, inflation will diminish the value of the loss. A $50,000 loss carried forward would be worth a lot less in 10 years time.

Franked dividends

If you don't earn enough to submit a tax return but you own shares that pay dividends, then you may miss out on franking credits. These credits are paid so there is no double taxation when a company has already paid tax on the dividends you receive. If the franking credit is greater than your income, you will receive a cash refund.

Property depreciation

If you have an investment property which has been built since 1979, you may be able to claim 2.5 percent a year depreciation allowance of the construction cost. This is not the same as the purchase price. You can also claim other expenses in connection with your earning assessable income from the property, such as repairs, maintenance and banking costs.

Medical rebate

If you spend more than $1500 a year on net medical expenses, you can claim a 20 percent tax offset. So for every $1 you spend over that amount, you will get a 20 cent offset. There is no maximum amount, although there are some exclusions, such as cosmetic surgery.

Salary sacrifice super

You are running out of time to salary-sacrifice money into super before the end of this financial year. That's because salary sacrifice is only allowed prospectively, which means you cannot have earned the money already and then opt to have your employer make a concessional contribution on your behalf.

So now is a good opportunity to set in place a salary sacrificing arrangement for the 2008-09 financial year. However, there may be an opportunity for any bonus you may be awarded at the end of the financial year, as long as you nominate the action before you know the quantum of the bonus.

Co-contributions

If you are earning less than $58,980 this financial year, you might consider making an after-tax contribution to super of up to $1000. The government will then make a co-contribution of up to $1500 if you earn $28,980 or less. This amount then reduces by 5 cents for every dollar extra you earn, cutting out at $58,980. The ATO has a calculator on its website to work out your co-contribution entitlement. According to AMP financial planner Phil Pilgrim, to receive your maximum entitlement you may not need to contribute the full $1000.

While there may be tax breaks, you still need to act within the law and advise the taxman of all your income. The Tax Office has indicated that it is expanding its use of data-matching to identify under-reporting of capital gains and dividends.