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Blog

June 14th, 2013
Year End Tips by Daniel Martinez

Hi there

With 30 June fast approaching now is the perfect time to give some financial year end tips.

Before I start, I’d like to remind you that 30 June falls on a Sunday this year, so superannuation contributions and other matters must be finalised no later than Friday, 28 June 2013.

1. Make the most of superannuation

Superannuation remains a highly tax-effective structure through which to hold investments. Caps on how much you can contribute into super means that planning ahead is the best way to maximise the benefits of superannuation.

The concessional contribution cap for the 2012/13 financial year is $25,000. Contributions are counted against the relevant caps in the year in which they are received by your superannuation fund and credited to your super account. Additional tax of 31.5 per cent applies if this cap is exceeded. There is a once only opportunity to have excess concessional contributions refunded and taxed at your marginal tax rate provided the excess amount is no more than $10,000. If you don’t get the excess refunded the excess will count towards your non-concessional contributions cap as well.

Salary sacrifice (employer) contributions

If you have surplus income and are looking to build your retirement nest egg, salary sacrificing into superannuation may be an appropriate strategy. If your remuneration package includes potential discretionary bonuses, you may wish to have bonuses sacrificed into superannuation. The election to do this must be made before any income and/or bonus is derived in order for it to be an effective salary sacrifice arrangement. Therefore, while it may be too late for this financial year, it is never too early to start planning for next year.

Issues to consider
• It is crucial to check your superannuation contributions for the year to date to ensure that caps are not exceeded. This is particularly the case for clients aged 50 or over, given that their contribution cap is half that of last year.
• If your superannuation contributions are paid by two or more employers, make sure you take into account contributions from all employers when determining how much to salary sacrifice.
• Generally, it is not tax effective to salary sacrifice contributions when your taxable income will end up being below $20,542.
• Ensure a reduction in salary and wages will not detrimentally affect other employee benefits such as defined benefit, redundancy, termination or insurance arrangements.
• Ensure the salary sacrifice arrangement includes a requirement for the employer to continue to pay Super guarantee contributions known as SG contributions on the original salary amount.

.
Personal deductible contributions

If you derive less than 10 per cent of your income from employment, you may claim a tax deduction for your superannuation contributions.

Personal superannuation contributions claimed as a tax deduction are counted towards your concessional contributions cap.

The amount of personal contributions that can be claimed as a tax deduction is limited to your taxable income. Contributions in excess of your taxable income can’t be claimed as a tax deduction and will count towards your non-concessional contributions cap.

If you intend to claim a tax deduction you need to notify your super fund. You must also receive an acknowledgement from your fund by the earlier of:
• the date you lodge your income tax return for the income year in which the contribution was made;
• the end of the income year following the income year in which the contribution was made;
• before a payment is made from the fund (e.g. by way of rollover, lump sum withdrawal or pension commencement). Any of these events will partially or fully invalidate a later notice of intention to claim a tax deduction.

Issues to consider
• If you are also receiving employer superannuation contributions, make sure you take these into account when determining how much to claim as a personal tax deduction.
• A valid notice cannot be revoked or withdrawn. It may be varied to reduce the amount stated (including to nil), so long as it is within the timeframes set out above.
• Sole traders intending to claim a tax deduction for personal superannuation contributions should contribute the funds as a member contribution for which a tax deduction is being sought rather than an employer contribution.
• Contractors need to consider whether they are an ‘employee’ for SG purposes. If a contractor is an employee for SG purposes then this may make you ineligible to claim a tax deduction for personal superannuation contributions.

Personal non-concessional contributions

Individuals are subject to caps on the amount of non-concessional contributions that can be made without incurring penalty tax. Non-concessional contributions within the cap are not taxed in the receiving fund.

Individuals under age 65 on 1 July of the relevant financial year have the opportunity to make non-concessional contributions of up to $450,000. Note that if the contribution is made after your 65th birthday, you need to satisfy the work test to be eligible to contribute to super. Those age 65 or more (but less than 75) on 1 July who haven’t triggered the ‘bring-forward rules’ can make non-concessional contributions of up to $150,000 each financial year, subject to satisfying the work test.

Issues to consider

• For individuals who are approaching age 65 and wish to maximise the amount that they can contribute to superannuation, careful planning needs to be done in relation to triggering a bring-forward period.

Government co-contribution

If you make a personal non-concessional contribution and you derive 10 per cent or more of your income from employment and/or carrying on a business you may be eligible for the government co-contribution.

The co-contribution income thresholds for this financial year are outlined in the table below:
Financial year – 2012/13

Maximum entitlement – $500

Lower income threshold – $31,920

Higher income threshold – $46,920

Issues to consider

• While the co-contribution amount for the 2012/13 financial year has halved from that of last financial year, the low income superannuation contribution (LISC) means that clients with an adjusted taxable income of up to $37,000 per annum may receive an LISC up to a maximum of $500. The LISC effectively refunds the contributions tax on concessional contributions for individuals on $37,000 or less.

Spouse contributions

A tax offset of up to $540 is available for spouse contributions of $3,000 where the receiving spouse’s assessable income plus reportable fringe benefits plus reportable employer superannuation contributions is less than $10,800.

The offset reduces once the receiving spouse’s total income exceeds $10,800, cutting out completely once the receiving spouse’s income exceeds $13,800.

Contribution splitting

Members who hold an accumulation interest in a superannuation fund are able to split their concessional contributions (including personal deductible, employer SG and salary sacrifice contributions), provided the fund offers this facility. Only certain contributions may be split with a spouse. Other qualifying conditions must be met.

Members can make a valid contribution splitting application in:
• the financial year immediately after the financial year in which the contributions were made; or
• the financial year in which the contributions are made, if the entire benefit is being withdrawn and/or rolled over before the end of the financial year.
The main reasons for contribution splitting are to:
• split to a younger spouse under Age Pension age to shelter against the Centrelink assets test
• split to an older spouse for earlier access to tax-free benefits
• access to two tax-free thresholds for those that have reached preservation age but are less than age 60. This effectively doubles the amount that may be withdrawn as a tax-free lump sum to $350,000 in the 2012/13 financial year ($175,000 x 2)
• it will be more tax effective if the spouse on the higher marginal tax rate makes the salary sacrifice or personal deductible contributions (subject to the concessional contributions cap) and splits part of this to the lower income spouse
• given the proposed super changes announced in April 2013, splitting superannuation entitlements between spouses to reduce the risk of incurring tax on earnings on superannuation income stream assets.

Issues to consider

• To split contributions made in 2011/12, a request must be made to the relevant fund by 30 June 2013. Once the member has made this application, they cannot make another one for the same contribution period.

In specie superannuation contributions

Depending on the superannuation fund, it may be possible to make an in specie contribution of shares, managed funds or other assets such as real property instead of cash. This may provide an opportunity to get investments into superannuation so that future growth will be in a low or no tax environment.

Issues to consider

• Transferring assets such as shares and managed funds into a superannuation fund will generally constitute a capital gains tax (CGT) event.
• When an individual realises a capital gain, the assessable part of the capital gain is included in his or her assessable income. When eligible, a tax deductible super contribution may assist with reducing taxable income and therefore assist in reducing the tax payable. Individuals that are not eligible to make tax-deductible super contributions may instead consider entering / increasing a salary sacrifice arrangement to reduce taxable income and therefore the tax payable on overall income. .
• Personal in specie contributions (which may be either concessional or non-concessional) are subject to the contribution caps.

Life insurance premiums through superannuation

It can be beneficial to have life insurance within superannuation. The cost of insurance cover may be lower where premiums for life insurance are being funded through concessional superannuation contributions. This is because the premiums have effectively been paid from pre-tax income and the premium is tax deductible to the fund.

Issues to consider

• Whilst it can be tax effective to pay for premiums through superannuation, you need to be aware that extra tax may apply when your super fund pays the insurance benefit to you.
• For Total and Permanent Disablement (TPD) insurance, there may be difficulties in accessing the benefit from the fund.
• Insurance premiums paid through super reduce your retirement savings. In some cases, due to the contribution caps, it may not be possible for the member to make extra contributions to offset this reduction.
• From 1 July 2014, insurance cover inside super will only be allowed where it is consistent with the death, terminal medical condition, permanent incapacity, and temporary incapacity conditions of release definitions. That is, trauma cover and ‘own occupation‟ TPD insurance will not be permitted. Importantly, the changes will not apply to members who joined the fund before 1 July 2014 and who were covered in respect of these types of insured benefits before 1 July 2014.

2. Pension drawdown

Minimum payment amounts for account-based pensions are reduced by 25 per cent for 2012/13. From 1 July 2013, the pension drawdown relief ceases and the minimum drawdown reverts to the prescribed percentage.

If a pension is commenced after 1 June, no pension drawdown is required for that financial year.

Issues to consider

• If you are receiving a pension from a super fund, especially from an SMSF, you need to ensure that the fund pays the minimum pension before 1 July 2013.

3. Opportunities to manage tax more effectively

Manage capital gains tax

Review potential capital gains from asset sales and/or fund distributions. Where there is a potential capital gains tax liability, it may be appropriate to sell another asset to crystallise a loss to offset the capital gain. At the same time, this strategy may allow you to offload a low-quality, under-performing asset that has little likelihood of recovering in the short to medium term and to invest in a quality asset.

Another strategy for those eligible is to offset the capital gain is to make a personal deductible contribution.

Issues to consider

• The ATO may look unfavourably if you decide to sell a loss making asset and immediately buy it back. The ATO may define this is a ‘wash sale’. Should the ATO deem the transaction a ‘wash sale’ it may disregard the loss created by the sale of the asset.

Prepay deductible expenses

A tax deduction may be claimed for up to 12 months worth of prepaid interest on an investment loan. This could also be a good strategy if you believe that interest rates are likely to rise in the near future as pre-paying interest effectively fixes the interest rate for the next 12 months.

In addition, the payment of other deductible expenses, such as professional memberships or prepaying income protection insurance by 30 June 2013 will reduce taxable income.

Private health insurance

From 1 July 2012, individuals and families may not be eligible for the full 30 per cent tax offset in respect of their private health insurance premiums.

In conjunction with the reduced rebate, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover may increase from 1 July 2012 depending on the level of income. Individuals/families with incomes above the Medicare levy surcharge threshold without private health insurance may be liable for the Medicare levy surcharge of up to 1.5 per cent for any period without adequate cover. The 2012/13 threshold is $84,000 for singles and $168,000 for families with up to one child (the threshold increases by $1,500 for each child after the first child).

Issues to consider
• It may be more cost effective for affected families and individuals to take out qualifying private health insurance than to pay the Medicare levy surcharge.

Gearing

A gearing strategy involves borrowing money to make an investment. The ultimate objective of a gearing strategy is for the total after-tax return from the investment to be greater than the after-tax cost of the finance.

The interest and other costs associated with obtaining finance to gear are usually tax deductible. The purpose of the loan must be for investment income production (i.e. not loans used for personal purposes or your home mortgage). The borrower and the recipient of the investment returns should be the same legal entity.

Issues to consider

• There are many types of gearing facilities, each suiting a different purpose and client need. It is essential that the right type of gearing facility is used.
• Remember that gearing magnifies returns, both upwards and downwards.
• Issues such as cash flow and insurance need to be considered.
• Due to the possible tax deductions available, negative gearing is usually a more effective strategy for those on higher marginal tax rates.

Happy EOFY!
This blog contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.

Bye for now

Dan’s Corner

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