5 Tax tips to maximise your refund
Here are a hand full of strategies that may help you maximise your tax refund in the upcoming financial year:
1. Maintain good records throughout the entire financial year
This may sound simple, but you would be surprised how many clients fail to keep a copy of their receipts for a whole year, missing out on valuable claims.
Trying to search for receipts at the end of the year when it is time to do your tax can be a nightmare. Not only that but you are likely to not remember all the tax-deductible items you purchased.
With the increase in ATO audit activity, bank statements have proven to be a poor substantiation reference, so don’t rely on a bank transaction alone.
The easiest solution – Keep It Simple! Literally just keep a plastic pocket or folder in the glove box of your car. Every time you purchase something simply put your receipt in here and forget about it until the end of the financial year, as easy as that. You have most likely traveled to the location to buy an item so your car will be the most central storage location.
Receipts will often fade or blacken when exposed to high heat and sunlight, so keep the folder stored away after your receipts are inserted.
There are obviously much more organised methods but if you are not good in this department already, it is unlikely that you will maintain a more time intensive practice throughout an entire year. Just do this to start and elaborate on it in the proceeding financial year.
You can then just take all the receipts to your accountant to review and categorise. That is what you are paying for, so no point in you spending time sorting through it all. Just make sure that the date ranges and years are correct – 1st July – 30 June of the following year.
2. Keep a logbook for all your work-related motor vehicle travel
Again, this may sound simple, but less that 1% of my clients would action this prior to being told to do so. Keep this regardless of the amount of Km’s you travel (even though you are not required to). It will serve as a great tool in the event of an audit despite what motor vehicle method you use.
If they have travelled more than 5,000 Km for work related purposes (but settle for the set rate method/5,000 Km, they could be missing out on substantial deductions – see below.
You must only maintain the logbook for 12 weeks (not the entire year) and it last for a 5-year period. Try to do this at the start of the financial year (1st July) to cover you but it is the best outcome if you maintain it during a period, you know you will be doing lots of work-related travel.
The logbook is only used to determine the work related/business percentage and that is it, so you want to try to maximise your work travel over the 12-week period you are maintaining your logbook.
You can buy a logbook from your local newsagency or simply just keep the records on a note pad. The ATO app I believe has a logbook function also if you prefer a digital approach.
What you need to do is firstly is write down your opening odometer reading prior to starting. From here, simply record your business use travel only during the 12-week period (not private travel) with the date and a brief description of the travel type (note that to-and-from work is often not tax deductible unless you are carrying bulky equipment in your vehicle – refer to our motor vehicle expense are for clarification in this area). For example, 12/07/20XX – 95km – Travel to construction site at XXXXX from factor.
After the 12 weeks, write down your closing odometer reading to conclude your logbook. To make things a bit easier in your appointment to your accountant, add up the total business use Km’s.
Deduct the closing odometer reading from the opening odometer reading to get the total km’s you travelled for the 12-week period.
You then want to get your total business Km’s and divide this by the total Km’s travelled to get your business use percentage.
For example – At 1st July your opening odometer was 55,000 Km’s. After the end of the 12-week period, your closing odometer was 72,000 Km’s – so the total Km’s you traveled for 12 weeks was 17,000 km’s.
When you totalled all the business use Km’s from your logbook, this added up to 10,200 Km’s. Simply divide this figure by the 17,000 and this will give you the percentage you require (10,200/17,000) = 0.60 or 60%. Ideally, if your business use is 70% and above, this will get the most optimal result.
It is not mandatory to keep all your fuel receipts, so you don’t have to get too caught up on this. If you have a good basis for your calculation and bank statements, this would be one of the few receipts that you will not typically require. From here, all the other costs of the motor vehicle are easy for your accountant to determine. Your registration is standard, insurance fees and services costs will be easy to track down also. If you have a copy of the original receipt for the motor vehicle purchase, it may be helpful to take this into your appointment as your accountant will be able to calculate if you have any depreciation remaining on the vehicle.
Total up all your motor vehicle costs and multiply this by your business use percentage to calculate your deduction:
- Fuel – $3,000
- Rego – $780
- Insurance – $1,000
- Depreciation – $5,000 (Check this with your accountant)
- Repairs/services – $700
- Total – $10,480
3. Don’t do your own tax return – seek professional assistance from an accountant
With the increase in technology and marketing by the ATO, they are trying to push for the individual to do their own tax return. The reason for this is (in my opinion) is that it is far better for the ATO as their will be less tax deduction claims overall saving the ATO millions in revenue loss.
Tax law in complex and forever changing so although it may seem like you can do this yourself, a professional tax agent will have more knowledge to help maximise your return and can almost guarantee that they will save you more that what their accounting fee is. It is not only the tax law around your claim’s but also access to tax offset or other strategies that can make a big difference.
Your accounting fee and typically event the travel to and from the appointment is also tax deductible, so you are not even losing out on the full amount.
Not only have you claimed back the fee but have also typically gained a higher return that you would have. Even if the result in not necessarily better, I can almost guarantee that it is more accurate, which is worth it’s weight in gold anyway (in my opinion)
I am noticing every year as technology gets better that the ATO is increasing its audit activity through simple data matching and averaging (as it is much easier for them to do). It is far better to have the support of a professional accountant in the event you are targeted for an audit that being left on your own to deal with this – believe me when I say this can be a stressful event.
4. Ensure you are having the correct amount of tax withheld from your wages
This also may seem simple, but you would be shocked on the amount of returns I see where the client has a payable amount owning due to a simple and avoidable issue that could have been dealt with earlier.
A common issue is not notifying your employer if you have a HECS/HELP or Trade Support Loan. If they don’t know about this, they cannot update the payroll software to calculate the additional amounts that will be owning (assuming you are over the repayment threshold). This could save you a tax bill of multiple thousands. Although they are taking extra tax out of your pay throughout, they year, it is far better for cash flow to have this done, that being surprises with a $3,000 tax bill at the end of the financial year.
If you work more than one job, ensure you are claiming the tax-free threshold only on one of the employers (the highest paying one) and not on the others. It should be noted that this is only typically an issue when working more than one employer at the same time, not if you finish one job and move onto another (in that case, it is the right thing to claim the threshold for both jobs).
5. Invest in tools of trade/equipment as early as possible in the financial year
I often see (non-business) clients get fooled into buying a heap of equipment on the 30th June. This is only a good strategy for singular items under $300.
If a single item cost more than $300, it needs to be depreciated or written down over its useful life (i.e. they item may have to be claimed over 3-5 years).
In addition to this, depreciation in the first year is calculated on a pro-rata basis from the first day of purchase to the end of the financial year. If you buy an item over $300 on the 30th June (and not a small business), you will only get a tax deduction for 1 days’ worth of depreciation which would be extremely smally. Although you will get a good claim in the following years (as the total claim will still work out to be the same), the entire reason you purchased it was to help get you an immediate benefit and not have to wait another 12 months.
Let’s look at an example with two different scenarios (assumption is that the items are used exclusively for work related purposes, depreciation method is diminishing value and it is not a leap year).
Scenario 1 buying an item > $300 on 30th June
Josh buys a new drill on 30th June XXXX for a total price of $950. As the time is more than $300, it will need to be depreciated (with an assumed useful life of 4 years). As he bought it on 30th June, he is only eligible for 1 day’s work of depreciation in year 1 (((2/4) x $950) x 1/365) = Total claim in year 1 of $1.30.
(don’t get too confused by the formula, they key thing to note is the 1/365, which is 1 day divided by a full year = 0.2739% as opposed to 100% if you bought it on 1st July in the prior year.)
Scenario 2 buying an item > $300 on 1st July
All the facts are the same as above apart from the purchase date. The formula is simply adjusted to 365/365 = 1 or 100%.
(((2/4) x $950) x 365/365) = Total claim in year 1 = $475