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Defer income until the new financial year, but don't fall foul of anti-avoidance rules, says a tax expert.
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H&R Block outlines strategies ahead of 1 July tax cuts
29 February 2024
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Tax advisers should be considering opportunities to delay taxable incomes of clients whose marginal tax rates will decrease in the coming financial year, said Mark Chapman, director of tax communications at H&R Block.
Stage 3 tax cuts mean different savings for different individuals. However, by delaying taxable incomes until the July 1 start date of the tax cuts, all can take advantage of a smaller tax bill.
“We would be recommending to you, as far as possible, that you shift your taxable income from this year into next year,” said Mark Chapman, director of tax communications at H&R Block.
“Obviously, that’s subject to the anti-avoidance provisions and it depends on whether you actually can do it,” he said, adding that the flexibility required will not be available for “most individuals on pay and pension.”
Anti-avoidance rules prevent individuals from delaying certain tax events. That said, there are many edge cases in which legal “grey areas” begin to emerge, said Mr Chapman.
“If you are a trader, say, and you are doing a job now. If you would usually issue the invoice in March and you decide to defer the issue of that invoice in July, it starts to look slightly suspicious,” said Mr Chapman.
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“On the other hand, if you normally would have issued the invoice on, say, the 20th of June, and instead you issue it on the 10th of July, that’s probably less suspicious.”
Mr Chapman said the key to avoiding falling foul of anti-avoidance provisions is getting “decent advice” before trying to defer your income.
That said, there are more accepted, less risky ways to take advantage of the stage three tax cuts by delaying taxable incomes.
For instance, Mr Chapman said many employees will be requesting to receive their bonuses after 1 July. This will come down to the willingness of an employer to comply with the request.
“If you’re part of a larger organisation that typically pays bonuses in June, you might not be able to persuade the HR department to defer it just for you,” he said.
“Whereas, if you’re with a smaller organisation where there’s a closer relationship between yourself and the employer, you might be able to ask for it to be delayed for a few weeks.”
Opportunities will also arise around capital gains tax, said Mr Chapman. Given CGT events occur when a contract is signed, taking advantage of the tax cuts is far simpler.
For many homebuyers, CGT is not an issue due to main residence exemptions. That said, other CGT events do stand to benefit from a delayed signing and might encourage, for example, individuals to hold off on selling shares until the new financial year.
Also beginning on 1 July, super caps will rise on both concessional and non-concessional contributions meaning individuals could direct some of their tax savings towards their new super allowances.
However, Mr Chapman said most individuals in the lower and middle-income tax range “by and large don’t have the spare cash” to do so.
“If you’re a higher income earner, obviously, you’re going to get a smaller tax cut than you were expecting, but you are still going to get a pretty decent cut ... that you could potentially use to pay into your super,” he said.
While for many, the potential savings under the stage three tax cuts are “significant,” Mr Chapman said the cuts “aren’t really addressing the big issues.”
“Do we keep or adjust negative gearing in any way? What is the future of the 50 per cent CGT discount? Or the mix of taxes between GST and income tax?”
“These are all sort of big questions lurking in the ether which nobody wants to go near for fear of the electoral impact,” he said.
The “relatively minor tweaking” of tax rates and thresholds in the form of the stage three cuts does little to address the more fundamental questions around Australia’s tax system which remain “in the too hard basket.”
“Broadly speaking, it is the same advice for everybody; if you can legitimately defer income into the next year, it is probably worth doing so,” he concluded.
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