This information is only for general information and is not tailored for your individual circumstances. I am not providing financial or tax advice, and therefore accept no responsibility for anyone relying on this information. I strongly urge you, the readers, to consult a qualified accountant and registered Tax agent for your own personal benefits.
“In this world nothing can be said to be certain, except death and taxes”, the venerable Benjamin Franklin once said.
The fact that preparation of tax returns is a staple for all income-earning Australians every financial year should be enough to make everyone sit up and pay attention to tax time. While the discussion of tax isn’t exactly an interesting topic of matter, it’s really important to be aware of tax can-dos and can’t-dos. After all, getting it right will ultimately mean more money back into the wallet instead of to the tax-man.
Today’s post marks the 3rd straight year (#1 post, #2 post) since I started jotting down tax tips to remind myself of what’s important every July when tax time comes around. I’ve found that keeping these notes for myself and building on them year after year is particularly useful because it serves as an itemized checklist to ensure my yearly returns reflect maximum tax effectiveness.
Given that I’ve previously touched on how to maximize expense deductions, this year I’m going to focus on separating tax facts from fiction. So here are 6 tax myths you need to be aware before July.
Myth #1 – Capital gains tax (CGT) is payable on sale proceeds
Many people freak out about receiving a large tax bill because they assume that tax is payable on the total amount of funds received after an asset has been sold, which is incorrect. Tax is only payable on capital gains (ie profits) that has arisen from an asset sale. For example if I bought a parcel of Telstra shares $100 and subsequently sold it for $200, then the CGT payable would only be levied on $100, being the profits made on the sale. Furthermore, the tax office offers CGT relief for certain situations which could reduce the CGT payable. Check your eligibility here.
Myth #2 – Capital losses could be used to offset assessable income
A capital loss is incurred when the sale price of an asset exceeds the purchase price while assessable income are items like wages and interest revenue. People often incorrectly assume that capital losses can be used to offset against assessable income when working out taxable income, and that’s incorrect. The ATO specifically states that capital losses can only be used to offset capital gains, and if capital losses exceed capital gains then any remaining losses can be brought forward to offset future capital gains. Refer here for more details.
Myth #3 – Paying more tax is bad for you
I’ve come across individuals who are very adverse to paying tax, so much so that they avoid good money-making opportunities just so they could pay less tax. This baffles me a bit as I see that paying tax is generally a good thing because tax is only incurred as a result of making money. And since when is making more money considered bad? The only scenario where paying more tax is bad is if individuals are being tax inefficient and don’t work hard to maximize eligible deductions. There is a difference, so make sure you know what it is!
Myth #4 – Tax deductions include both loan principle and interest
As a real estate loving country, most adult Australians would be familiar with owning an investment loan. One of the most common mistake individuals make when completing their tax return is the inclusion of both principle and interest as an investment expense deduction. It is important to remember that only the interest component directly related to your loan is tax deductible, and not the principle amount. A tip to easily identify the interest paid is to look at your loan statement for an itemized breakdown of principle and interest; a feature that most banks will provide.
Myth #5 – Thinking that all accountants are the same
A reference back to my earlier post on the misconception that all accountants are the same; many individuals outside the accounting profession assume that a tax accountant is the same as an auditor or a management accountant. Well, they are definitely not the same. A tax accountant deals solely with tax matters and so has specific tax-related knowledge that other accountants don’t. It is only tax accountants that have strategies to maximizes tax effectiveness so the next time you visit your accountant, make sure to verify that they are indeed tax specialists. In other words, you wouldn’t visit a dentist to treat a cold would you?
Myth #6 – Tax is the main factor when considering merits of an investment
With the slowdown in apartment sales across Melbourne, I’ve noticed that real estate agents have started advertising tax benefits as a way to entice potential buyers to sign on the dotted line. Don’t be fooled by such slick marketing! The golden rule to investment is never to base your decision on how much tax you would be saving. Instead, focus on future capital growth potential and yield of your investments and let that drive your decision. Remember that tax deductions is just a beneficial consequence of your investment, and should not be considered as a determining factor.