The strategy To lock in some extra tax deductions by prepaying expenses before June 30.
Can I do that?
In many instances, yes. One of the most popular tax strategies being touted at this time of year is to prepay interest on investment loans. So long as you make the prepayment before June 30, you can claim your tax deduction in this year's tax return - getting the benefit a year early. If you've been paying interest as you go this year, that effectively means you can get two years' worth of interest deductions in one - though the drawback is that you won't be able to claim next year's interest next year.
Can everyone do it?
Your loan has to be structured to allow prepayments. The ability to prepay interest is common with products like margin loans, but less common in the mortgage market, where variable interest rates are the norm. However, some lenders do offer prepayments to property investors. Paul Brassil, a personal financial services partner with PricewaterhouseCoopers, says lenders will often allow investors to fix the rate on part or all of their loan for a year and offer a discount for paying in advance. But as with any fixed interest rate, you don't benefit if interest rates fall in the coming year.
Can I prepay any other expenses?
CPA Australia's senior tax counsel, Paul Drum, says personal taxpayers (as opposed to businesses) can prepay most expenses. He says service agreements are one area where prepayments may be possible - you might want to lock in a year's contract for something like the lawnmowing or security service on your rental property, for example. Brassil says insurance contracts, by their nature, are paid in advance and there's limited scope for other prepayments, but it's worth a look.
Can I pay my bills early to claim a tax deduction now?
Brassil says personal taxpayers should also consider accelerating payment of deductible expenses. If a bit of repair and maintenance is needed on your rental property, for example, you can get a faster tax deduction by getting the work done (and paying for it) before June 30. Ditto with that income protection insurance you've been putting off buying. Outstanding rates, insurance, and other costs can also be paid this financial year. Brassil says now is also the time to make any charitable donations you've been considering. And if you've been considering investing in some new "tools of trade" - maybe a calculator, an investment software program, or even a new briefcase - it's worth knowing that items costing $300 or less each can be written off this tax year.
Does that apply if I'm self-employed?
Brassil says the $300 write-off applies only for items that produce "non-business income". If you're a small business, says Drum, the items must be depreciated, although there's a $1000 write-off available to businesses using the simplified tax system.
Is there any benefit in maximising my deductions this year, rather than leaving them until next year, when the tax cuts come in? Because the tax cuts are so small, says Drum, any advantage is minimal. If you're close to one of the existing tax thresholds (and will pay a higher rate of tax if you exceed it), there may be some benefit in maximising your deductions to keep your taxable income below the threshold.
Another idea is to look at your out-of-pocket medical expenses for the year. If money spent by you (and your dependents) is more than $1500 you are entitled to a 20 per cent tax rebate on expenses over that level. So if you're over, or close to that threshold, it might be a good idea to bring forward that visit to the dentist or new pair of spectacles.
