Managing your tax and super leading up to 30 June
By Colin Lewis
With the end of the financial year fast approaching, it’s time to get your ‘financial house’ in order. There will be many ‘behind the scene’ strategies your adviser will be considering for you, but here are some of the more common year-end strategies they will be looking at.
COMMON YEAR-END STRATEGIES
Reviewing capital gains and losses: It’s important to identify any capital gains made during the financial year so as to consider crystallising capital losses to help reduce your tax liability. In doing this, you cannot sell and re-purchase the same asset as the Australian Taxation Office (ATO) may deem this to be a ‘wash sale’ and disallow the loss.
Pre-pay interest on investment loans: If you have an investment and/or margin loan, you can pre-pay the interest for the year in advance and claim a tax deduction this financial year.
Super vs non-super: For many older Australians, it’s possible to invest substantial funds outside superannuation without being subject to tax, due to the relevant effective tax-free threshold applying after the Seniors and Pensioners Tax Offset and using franking credits.
If you are impacted by the new transfer balance cap (TBC) – the limit on the amount you can move from superannuation’s taxable accumulation phase to the tax-free retirement phase – then it may be better investing in your personal name or in other non-super investment structures if the tax rate is lower than remaining in the accumulation phase.
Your adviser will also be looking at alternative investment structures, e.g. discretionary (family) trusts and/or insurance/investment bonds, where you’ve maximised the contribution caps.
If you’re a member of a couple, your adviser will be considering whose name to make new investments in to benefit from income splitting.
Pre-pay deductible premiums: Premiums for income protection can be pre-paid in advance for the next 12 months to increase the tax deduction available in the current year.
Aged care expenses
The Net Medical Expenses Tax Offset (NMETO) can be claimed for aged care expenses. So, if you have a loved one in aged care who has assessable income and still lodging tax returns then they should use the NMETO to reduce their tax liability as most residential care fees qualify for this offset.
By making a tax-deductible donation to a charity or non-profit organisation, you may be able to offset income and/or a capital gain made during the year. Compared to a one-off donation, setting up a charitable trust may be a better solution for you, your family or your business and generally offers long-term tax advantages. A charitable trust provides a sustainable gift that grows over time to keep giving in perpetuity, allowing you to leave a lasting legacy for the community.
It’s at this time of the year that your adviser will be considering your superannuation position, specifically in relation to the contribution caps as it’s important not to exceed those caps.
For 2017-18, the pre-tax, concessional contributions (CCs) cap is $25,000.
Unfortunately, the after-tax, non-concessional contributions (NCCs) cap has become overly complicated and this is where quality advice is critical.
For 2017-18, the NCCs cap is $100,000, but you can only make an NCC if your total superannuation balance (TSB) – the total amount you have in the superannuation system – is less than $1.6 million at 30 June 2017. If you’re under age 65 anytime during the year, it may be possible to trigger the ‘bring-forward’ rule. This is determined by your TSB.
However, if you triggered the bring-forward rule in the past two years and did not fully utilise the bring-forward amount of $540,000 by 30 June 2017 then the following transitional rules may apply.
Thus, if you wish to make an NCC, it is imperative to check both your TSB as at 30 June 2017 and contribution history since 1 July 2015.
You must meet the work test if you are aged 65 to 74 and wish to contribute.
- If you’re a salary earner, it’s important to ensure your employer’s compulsory Superannuation Guarantee (SG) contributions, any voluntary employer contributions, including salary sacrifice, and now any personal deductible contributions you make, do not exceed the CCs cap. Be aware of SG contributions on bonus payments.
- If your employer pays the super fund’s administration expenses and/or insurance premiums for cover in the fund, these payments are also counted towards the CCs cap.
- If you’re claiming a tax deduction for a personal contribution then the paperwork supporting your claim is critical and must be done before making a withdrawal, commencing a pension or rolling over benefits to another super fund.
- Before 30 June 2018, you can split up to 85% of your CCs made in 2016-17 to your spouse’s super. You may wish to do this to even up entitlements to maximise the amount you can both get into the tax-free retirement phase given the TBC, or to move entitlements from a younger to older spouse for earlier access to tax-free benefits, or from a spouse at or over Age Pension age to a younger spouse to shelter from Social Security means testing.
- If your spouse’s total income is less than $40,000 then you may be eligible for a tax offset up to $540 when making a spouse contribution of up to $3,000. You’re ineligible for this tax offset if your TSB is $1.6 million or more.
- If your total income is less than $51,813 then you may be eligible for a government co-contribution in respect of a personal NCC. Again, you’re ineligible for a co-contribution if your TSB is $1.6 million or more. The maximum co-contribution is $500. This may be appealing to a low-income earning spouse, or a means of kick-starting the super savings of children who work and are eligible to contribute.
- If your children are saving for their first home, they should consider contributing under the First Home Super Saver Scheme before 30 June 2018. This is because the earning amount able to be withdrawn later will be calculated from 1 July 2017, meaning a greater amount may be withdrawn along with the contribution(s).
- Remember, a contribution is taken to be made and counts towards your contribution cap in the year the super fund receives it. Allow sufficient time for funds to be transferred by 30 June 2018 if using electronic payment methods. This year, 30 June falls on a Saturday.
Managing your self-managed super fund (SMSF)
Click HERE to read more about SMSF tips for 30 June 2018.