As the stage three tax cuts in Australia approach, it’s crucial for individuals and accountants to explore strategies that maximise the benefits for their clients. These tax cuts, which will be implemented on 1 July 2024, bring significant changes to personal income tax rates and thresholds. They remove the $120,000 to $180,000 tax bracket, increase the top tax bracket to $200,000, and reduce the marginal rate of tax for individuals earning between $45,000 and $200,000 to 30%. However, it’s important to consider the broader tax system and stay updated on potential developments that may impact these tax cuts. Listed below are some strategies to help navigate these upcoming changes and optimise tax savings.
Bringing forward deductions
One strategy for accountants is to bring forward eligible future tax deductions into the current year. By accelerating deductible expenses or prepaying certain items, individuals can reduce their taxable income for the current financial year, especially if their marginal tax rates are expected to be lower in the next financial year.
Utilising superannuation contributions
Clients with a total super balance below $500,000 and stable incomes between $120,000 and $200,000 across both the 2023-24 and 2024-25 financial years should consider utilising their carry-forward unused concessional contributions cap amounts. Making additional personal deductible contributions or salary sacrificing additional amounts to super can be more tax-effective due to the higher marginal tax rate.
Reserving strategy for sole traders and partners
Sole traders, partners in partnerships, or individuals with passive investments can adopt a reserving strategy. This involves making an additional personal super contribution in June 2024 and lodging a valid notice of intent with the super fund. By doing so, they can claim the contribution as a tax deduction in the 2023-24 tax return, taking advantage of the higher marginal tax rate.
Bringing forward expenses
Accountants may advise clients to bring forward certain future expenses into the 2023-24 financial year. By doing this, clients can maximise their tax deductions by claiming them in a year when their marginal tax rates are higher. For example, clients with investment properties could undertake repair and maintenance work or prepay deductible expenses such as interest on outstanding investment loans.
Delaying taxable events
Clients may consider delaying events that would result in increased taxable income until 2024-25 or later. By postponing the sale of capital gains tax (CGT) assets or delaying retirement to reduce the tax on accrued annual leave and long service leave payments, individuals can take advantage of potentially lower tax rates in the future.
Utilising tax savings
With the stage three tax cuts resulting in increased disposable income for many individuals, it’s important to consider how to best use or invest these tax savings. One option is to make additional contributions to superannuation, which can provide long-term benefits for retirement.
It’s crucial to stay informed about potential changes to the tax cuts. While the stage three tax cuts have already been legislated, there is a small risk that the government could introduce changes to scale back or abandon the changes before 1 July 2024. Therefore, it may be prudent to delay implementing strategies until after the May 2024 Federal Budget, when any potential changes would likely be announced.
As always, it’s advisable to consult with a qualified tax professional or financial advisor for personalised advice based on individual circumstances. These professionals can provide guidance on the most suitable strategies to optimise tax savings and navigate the evolving tax landscape.
If you need assistance in navigating the upcoming tax cuts in Australia and implementing strategies to maximise your benefits, Regency Partners is here to help. Our team of experienced accountants and tax professionals can provide personalised advice tailored to your specific financial situation. Contact us today to schedule a consultation and ensure that you make the most of the stage three tax cuts.