With just a few weeks to 30 June, have you prepared financial year end? What changes do you need to know about? And what opportunities can you take advantage of? Here are 19 tips for things you could do to potentially improve your wealth before 30 June.
1. Boost your salary sacrifice: You may want to boost your salary sacrifice to super before 30 June – either by pre-electing to pay all or part of your salary (in the remaining pay runs) or bonus into super. Please ensure that you set up the salary sacrifice of a year-end bonus before your bonus entitlement is confirmed by your employer. Do remember that your employer contributions – which could include super guarantee on a bonus and employer-paid insurance premiums – are also included in the concessional contribution caps. This financial year the cap is $30,000 or $35,000 if you were aged 49 or older at 1 July 2015.
2. Make a personal deductible super contribution: If you earn less than 10% of your income from eligible employment (typically you’ll be self-employed or not employed), and are eligible to contribute to super, this can help you reduce tax in the current financial year. Again, the caps are $30,000 or if you were aged 49 or older at 1 July 2015, then $35,000. Remember if you intend to claim a tax deduction for your personal contributions, you need to provide a tax deduction notice to the fund. It is particularly important to do this before you commence a pension, make a partial or full withdrawal from super, or rollover your super to a new super fund – otherwise you won’t be eligible for the tax deduction.
3. Use super contributions to offset a capital gain: You may also be interested in making a salary sacrifice or other concessional super contribution if you want to offset a large capital gains tax liability, perhaps from selling an investment property, managed funds or direct shares. This includes a capital gain if you have transferred assets from your personal ownership to a Self Managed Super Fund as an in-specie super contribution. Please note that the market value of the transferred asset counts to your relevant contribution caps.
4. Consider after-tax contributions to super: This can be an effective strategy to move assets into a lower tax environment. However, with the recent Federal Budget proposal to apply a lifetime cap of $500,000 (back-dated to 1 July 2007) on these contributions, this strategy is a whole lot trickier. Under the current legislation, the cap for after-tax contributions is $180,000, and also allows you to bring forward two future years of contributions to make a total contribution of $540,000. However, you may want to ensure that any after-tax contributions stay within the proposed cap arrangement, assuming it becomes legislation. We strongly recommend you seek advice before making any after-tax contributions.
5. Collect the Government super co-contribution: Are you or your partner eligible for the co-contribution? Is this is a better option than a salary sacrifice contribution? If you are working and earn $50,454 or less, you could be eligible for a co-contribution of up to $500.
6. Receive the low income super contribution: If you earn less than $37,000 this financial year, 10% or more of your total income comes from business and/or employment, and you or your employer makes pre-tax contributions (such as employer contributions or salary sacrifice contributions) into your superannuation fund, you may be eligible to receive a payment of up to $500 directly into your superannuation account. This “low income super contribution” (LISC) is calculated at a rate of 15% of your pre-tax contributions for the year and the maximum payment is $500. The LISC is different from the co-contribution so you may be eligible to receive one or both.
7. Receive a spouse contribution tax offset: If you contribute a minimum of $3,000 to your non-working or low income partner’s super before 30 June you could receive a tax offset of up to $540. If your spouse earns less than $13,800, you can contribute to superannuation for them and receive a tax offset of up to $540. The tax offset starts to reduce if your spouse is earning more than $10,800, and cuts out when your spouse earns $13,800 or more per year.
8. Superannuation split: If you have a spouse with a much lower superannuation balance than yourself, you may want to consider splitting 85% of your prior year’s concessional (pre-tax) contributions to them. You still get a tax break on your contributions and your spouse gets a larger super benefit. Remember, you can only split contributions made in the previous year and your spouse must be under the age of 65 and not retired.
9. Update your SMSF Investment Strategy: If you’re the Trustee of a Self Managed Super Fund, now is a good time to review and update your Investment Strategy and ensure all investments have been made in accordance with it, and the fund’s deed.
Transition to Retirement pensions
10. Ensure you meet the minimum pension: If you have an SMSF with a Transition to Retirement or allocated pension, you need to ensure that you have drawn at least the minimum amount required before 30 June. The minimum is 4% of your commencing balance (and the maximum 10%) if you are aged 64 or younger. It then increases to 5% from age 65 to 74 and increases again for individuals aged 75 plus.
11. Opportunity to access additional retirement savings: Transition to retirement (TTR) pensions are subject to a maximum annual pension payment – which is 10% of the pension account balance. This maximum is not pro-rated, so if you needed to access additional funds, a TTR pension established before 30 June may allow you to access up to 10% of retirement savings in a short period.
12. Review your investments: This is a good time to review your investments to determine if you have assets that are no longer appropriate or in which you are over- or under-weight for your optimal asset allocation. You may have investments that have losses that it makes sense to sell – or perhaps you have carry-forward capital losses – to help you minimise net capital gains. Remember that if you receive managed fund distributions, you may receive realised capital gains – as well as income – as part of the overall distribution amount. You are liable to pay tax on these regardless of whether you reinvest the distribution or receive it as cash. You can apply any capital losses you may have to reduce these capital gains. When making changes to your investments, be wary of ‘wash sales’. A wash sale is the sale and immediate repurchase of the same investment, with the intention being to either crystallise a capital loss or re-set the cost base of the investment. The tax office warns that this is tax avoidance and significant penalties will apply to such arrangements.
13. Consider timing of new managed fund investments: If you are planning on investing in managed funds, you may want to delay this until after 30 June to avoid receiving part of your money back immediately as a distribution – which is taxed as income.
14. Claim investment expenses: Expenses incurred by an investor in the course of earning assessable investment income may be tax deductible. This can reduce your tax liability this financial year and reduce your PAYG instalment rate for the next financial year. It is a good idea to confirm which fees are tax deductible and can be claimed.
15. Calculate whether to pre-pay or defer investment loan interest: If you have borrowed money for an investment, or plan to do so before 30 June 2016, you need to determine whether pre-paying an investment loan is beneficial – or if you are better off deferring until next financial year. Where your borrowing is used for investments that will generate assessable income, you can claim a tax deduction for the interest payable on your loan. By pre-paying the interest for FY2017 on your investment loan now, you can bring forward your claim for a deduction into the current tax year. This could be helpful if you have an unusually large tax liability in the current financial year – for example, from the sale of an asset where you have realised a capital gain. Do be aware that pre-paying effectively locks you into your loan for 12 months – if you reduce or repay the loan before the year is over, there is no refund of interest. There may also be break costs if you want to change your loan arrangements.
General tax deductions
16. Determine whether to pre-pay income protection premiums: Protecting your income is the foundation of building wealth. As your income protection premiums are tax-deductible, you may wish to pre-pay your premium for the next 12 months before 30 June to reduce your income tax this financial year.
17. Reduce capital gains tax (CGT): If you have sold an asset – like shares or an investment property – in the last financial year and made a capital gain you will be taxed on 50% of the gain at your marginal tax rate (assuming you have owned the assets for 12 months or more). You may want to consider strategies to reduce capital gains tax. As discussed above, maybe you have poorly performing assets that you could sell before 30 June and use this loss to offset your gain, reducing the CGT payable. Or perhaps you have a capital loss that you’ve ‘carried forward’ from a prior year. You can also reduce tax payable by pre-paying deductible interest or arranging a pre-tax contribution to superannuation as this will reduce your assessable income.
18. Maximise your deductions: Make sure you claim all potential work related expenses. These may include mobile phone costs, subscriptions, seminars, computer equipment, calculators, briefcases and technical books. Note that you can make a total claim of up to $300 of eligible work related expenses without receipts. You may be able to claim travel expenses you incurred for meals, accommodation and incidentals while away overnight for work. Self education expenses can also be deducted provided your study is directly related to maintaining or improving your current skills or is likely to increase your income from current employment. Fees paid to a registered tax agent to prepare your tax returns are allowable in the tax year the fee was paid, along with certain bank and ATM fees. Ongoing financial advice fees may also be deductible.
19. Tax deductible gifts and donations: Many people forget about the tax deductible gifts or donations they have made during the year. Dig out your receipts and have them on hand for tax return time. Alternatively, if you are thinking about making a donation, make sure you do so before 30 June 2016.
Seek advice from professionals
Whenever it comes to matters relating to superannuation, investments and taxation, advice from professionals can help – whether it’s your financial adviser or tax accountant, it’s a good idea to discuss your financial year end planning with an expert.