End of financial year planning tips May 2014

Transcription

1 End of financial year planning tips May 2014 With the end of the financial year fast approaching, it is a good time to review financial planning strategies with a view to optimising your outcomes. This letter provides some tips and considerations when reviewing superannuation and taxation aspects of your financial arrangements. There is a lot of content here and not everything will apply to every client. If you are in any doubt as to how any of this relates to you and your circumstances then please contact us for assistance to consider these issues in more detail. While the following tips focus on financial planning strategies that may be relevant around this time of year, it is not a full checklist of opportunities and tasks for the end of the financial year. Clients, particularly those involved in small and medium businesses, will also need to consult with us about taxation and reporting matters. Especially making personal super contributions for which a tax deduction will be claimed, finalising trust distributions, fringe benefits arrangements, claiming asset write-offs etc. Don t leave things to the last minute. For example, as super contributions are generally allocated in the year in which they are received by the fund, you need to allow at least a couple of business days for contributions made by bpay or similar method to reach the fund. Note that the 30th of June falls on a Monday this year. So act on this sooner rather than later. I recommend no later than the 23 rd of June given the 30 th falls on a Monday this year. 1. Make the most of superannuation Super remains a highly tax-effective structure through which to hold investments. However, current contribution caps mean that planning ahead over the longer term is the best way to maximise the benefits of super. GOOD NEWS -The concessional contributions caps are changing from 1 July For the 2013/14 financial year, the concessional contributions cap is $35,000 for anyone aged 59 or more as at 30 June For all others, the concessional cap is $25,000. BUT For the 2014/15 financial year, the concessional contributions cap will be $35,000 for anyone aged 49 or more as at 30 June For all others, the concessional If these caps are exceeded, the excess, once identified by the Australian Taxation Office (ATO), will be taxed at the member s marginal tax rate with an allowance for the 15% contributions tax already withheld by the super fund and an interest charge will apply. The excess also counts towards the member s after-tax, non-concessional contributions (NCCs) End of Financial Year planning tips 2014 Page 1

2 cap unless the member acts upon a release authority provided by the ATO and withdraws up to 85% of the excess contributions from their super fund. Salary sacrifice (employer) contributions For employee clients who have surplus income and are looking to build their retirement savings, salary sacrificing into super may be an appropriate strategy. If their remuneration package includes potential discretionary bonuses, they may wish to have bonuses sacrificed into super. However, 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. Where possible, start an automated process of salary sacrifice as early in the financial year as possible to maximise your concessional contributions cap. - It is important to check your super contributions for the year to date to ensure that the concessional cap is not exceeded, and/or modify existing salary sacrifice arrangements to limit any excess contribution that may occur (eg check the date of receipt by the super fund). - Performance and some other bonus payments will attract Superannuation Guarantee (SG) contributions, so be aware of these when considering the level of salary sacrifice contributions. If you are unsure, contact us and we can advise you as to how you are situated. - Ensure that you have considered employer s payment of SG and / or salary sacrifice contributions to the super fund for the April June quarter for concessional contributions planning for current and next financial year that is, whether the employer makes the payment in this financial year or the next. - If super contributions are paid by two or more employers, make sure these are taken into account when determining how much to salary sacrifice. - Generally, it is not tax effective to use salary sacrifice contributions to reduce taxable income below $20,542 (the effective tax-free threshold in 2013/14 before the 19% marginal tax rate applies, including the Low Income Tax Offset (LITO)). - Ensure a reduction in salary and wages (eg by salary sacrifice to super or by swapping salary for fringe benefits) will not detrimentally affect other employee benefits such as defined benefit, redundancy, termination or insurance arrangements. - Ensure that salary sacrifice arrangements do not lead to a decrease in the SG contributions the employer would otherwise make based on the original salary amount. - Employed clients who have realised significant capital gains (eg sale of investment property or shares portfolio) may wish to consider increasing their salary sacrifice for the remaining months of the financial year to reduce their taxable income. Personal deductible super contributions If you derive less than 10 per cent of your income from sources where they are regarded as an employee you may be End of Financial Year planning tips 2014 Page 2

3 eligible to claim a tax deduction for your personal super contributions. To qualify, your assessable income plus reportable fringe benefits (RFBs) plus reportable employer super contributions (RESCs) from employment must be less than 10% of your total assessable income, RFBs and RESCs for that year. You must complete a Notice of Intention (NOI), also known as a s290 notice, to claim a tax deduction and lodge this with your super fund. To ensure that the NOI is validly processed, you must notify the trustee of your intention to claim a tax deduction and receive an acknowledgement from the fund by whichever of the following dates occurs first: - before you lodge your income tax return for the income year in which the contribution was made; - by the end of the income year following the income year in which the contribution was made; - otherwise, 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 NOI. Personal super contributions that the ATO allows as a tax deduction in the individual s tax return will count towards their concessional contributions cap. The amount of personal contributions that can be claimed as a tax deduction is limited to the member s taxable income, ie taxable income cannot be reduced below zero (and also consider the member s taxfree threshold, potentially $20,542 in including LITO). Claims for a deduction that otherwise result in negative taxable income are disallowed to that extent and the relevant amount of the contribution counts towards the member s NCCs cap. - If employer super contributions are also received, make sure these are taken into account when determining how much to claim as a personal tax deduction as well as whether the client meets the less than 10% rule in order to be eligible to claim a tax deduction for personal super contributions. RESCs include those where the employee influenced the rate or amount of contribution, eg salary sacrifice. SG and other award or mandated contributions are not included as RESC. - A valid NOI cannot be revoked or withdrawn, but it may be varied to reduce the amount claimed in relation to the contribution (including to nil), so long as it is within the timeframes set out above. - Sole traders, or partners in a partnership, who intend to claim a tax deduction for personal super contributions must contribute the funds as a member contribution for which a tax deduction is sought rather than as an employer contribution. - Contractors need to determine whether they are actually considered to be an employee for SG purposes. If a contractor is an employee for SG purposes then the income from contracting is attributable to employment activities under the less than 10% rule, which may rule out eligibility to claim a tax deduction for personal super contributions. Non-concessional contributions (NCC) Individuals are also subject to caps on the amount of after tax, NCCs that can be made without incurring penalty tax. NCCs End of Financial Year planning tips 2014 Page 3

4 within the cap are not taxed by the receiving fund. For the 2013/14 financial year, the NCCs cap is $150,000 per year or $450,000 if using the bring-forward rule. From 1 July 2014, the NCCs cap rises. In line with the increase in the concessional contributions cap, the NCCs cap increases to $180,000 per year or $540,000 if using the bring-forward rule. You should be aware that once triggered, the bring-forward amount will not benefit from any indexation while it remains in force. Individuals who were under age 65 on 1 July 2013 have the opportunity to trigger the bring-forward rule and make NCCs of up to $450,000 before 30 June 2014 (provided the bring-forward rule has not been triggered in the previous two financial years). However, be aware that if a client triggers the bring-forward rule this financial year, their NCCs cap will be fixed at $450,000 until 1 July 2016 and they will not benefit from the indexation that will occur from 1 July Note that for any contributions made after their 65 th birthday clients will need to satisfy the work test to be eligible to contribute to super. Those aged 65 or more (but less than 75) on 1 July 2013 who haven t triggered the bring-forward rule can make NCCs of up to $150,000 this financial year, subject to satisfying the work test. - For individuals who are approaching age 65 and wish to maximise the amount they can contribute to super, careful planning needs to be done in relation to triggering a bring-forward period, ie don t trigger it too early, especially if clients won t meet the work test after age Clients wishing to maximise the amount that can be contributed within a relatively short time also shouldn t trigger the bring-forward rule too early. For example, for a client who will be turning age 65 after 1 July 2014, the optimum NCCs plan is to contribute $150,000 prior to 30 June and $540,000 from 1 July. - Contributions are counted against the relevant caps in the year in which they are received and credited to the client s super fund. - Ensure that self-employed and other eligible clients who can claim a tax deduction for their personal superannuation contributions complete and lodge the NOI paperwork within the specified timeframes. An intended concessional contribution will be a NCC and counted under the NCC cap where it can t be claimed due to not providing NOI - When planning to maximise contributions by not triggering bring forward provisions in and then using the bring forward provisions in , care should be taken to ensure that clients do not inadvertently trigger the bring forward provisions in Common situations leading to breaches occur where the client either does not inform you of their contribution history or in the case of self-employed clients, by their accountant claiming a lower amount than initially planned for. Government co-contribution Individuals who derive at least 10 per cent of their income from employment and/or carrying on a business and who make personal NCCs may be eligible for a government co-contribution. Income for this 10 per cent test is the individual s assessable income, reportable fringe benefits (RFB s), and reportable employer superannuation contributions (RESC). End of Financial Year planning tips 2014 Page 4

5 The co-contribution income thresholds for this financial year are outlined in the table below: Financial year: 2013/14 Maximum entitlement ($): 500 Lower income threshold ($) 33,516 Higher income threshold ($) 48,516 The actual amount of co-contribution payable depends on your actual income. Income for this purpose includes assessable (ie gross) income, RFBs and RESCs, less any amounts for which the individual is entitled to claim a tax deduction as a result of carrying on a business. The individual s eligibility for the co-contribution reduces by $ per dollar of income in excess of the lower threshold. Individuals must also be under age 71 at the end of the relevant year and meet the work test for any contributions made after reaching age 65. 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 RFBs plus RESCs does not exceed $10,800. The offset reduces once the receiving spouse s total income exceeds $10,800, cutting out at $13,800. Note, that if the recipient spouse is aged 65 or more (but under age 70); they need to satisfy the work test to be eligible to receive the contribution. Contribution splitting Members who hold an accumulation interest in a super fund are able to split their concessional contributions (including personal deductible and employer SG and salary sacrifice contributions), provided the fund offers this facility. Only certain contributions may be split with a spouse and other qualifying conditions must be met. The main reasons for considering a contribution splitting strategy are: - splitting contributions to a younger spouse (under Age Pension age) to shelter assets against the Centrelink means tests. - splitting contributions to an older spouse for earlier access to tax-free benefits - accessing two low-rate thresholds for any superannuation withdrawals made between preservation age and age 59 effectively doubling the amount that may be withdrawn as a tax-free lump sum to $360,000 in the 2013/14 financial year (ie $180,000 x 2) - funding term life and total and permanent disability (TPD) insurance premiums for a low income or nonemployed spouse through their super fund. 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. To split contributions made in 2012/13, a request must be made to the relevant fund by 30 June Once the member has made this application, they cannot make another one for the same contribution period. Further information on contribution In specie super contributions Depending on the fund, it may be possible to make an in-specie contribution of shares, managed funds, or other assets End of Financial Year planning tips 2014 Page 5

6 such as business real property for selfmanaged super funds (SMSFs), instead of cash. This may provide your clients with an opportunity to get existing investments into super so that future growth will be in a low or no tax environment. - Transferring assets such as shares, managed funds and real property, where allowed, into a super fund generally constitutes a capital gains tax (CGT) event. - Asset transfers must be conducted at market value at the time of the transfer. As such, a formal valuation of real property may be required. Life insurance through super It can be beneficial to have life insurance within super. Where premiums for life insurance are being funded through super contributions, the effective cost of insurance cover may be lower for self-employed and unsupported persons, employees making salary sacrifice contributions and those making spouse contributions. - While paying the premiums for life insurance cover through super can be tax effective, clients need to be aware that extra tax may apply if an insurance benefit is paid out through a super fund. Broadly, for life insurance, tax may apply to proceeds if the beneficiary is a non-tax dependant, including an adult child. For TPD insurance, tax may apply on a benefit payment from a super fund and there may be difficulties in accessing the benefit from the fund. - Insurance premiums paid via super reduce a member s retirement savings. It may not be possible, due to the contributions caps, for the member to make extra contributions to adequately 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 do not apply to members who joined the fund before 1 July 2014 and who are covered in respect of these types of insured benefits before 1 July Pension drawdown Where a fund member is in pension phase it is important, especially for SMSFs, to ensure that the annual required minimum pension payment is met, otherwise the fund risks losing the pension tax exemption for that financial year. I will be in contact their SMSF clients prior to 30 June to ensure the minimum required pension payment has been met and for all clients to review their income needs for the next 12 months. - Clients who have transition to retirement pensions should contact us to review the pension being drawn down and the level of salary sacrifice contributions. - If a pension is commenced from 1 June, no pension drawdown is required for that financial year. - Clients with account based pensions, especially SMSFs, must pay the minimum pensions before 1 July Opportunities to manage tax more effectively Employment termination Where you may have the ability or opportunity to choose your leaving End of Financial Year planning tips 2014 Page 6

7 employment date, they may be able to optimise the tax treatment of payments received. - In a redundancy situation, the amounts able to be received tax-free are indexed at 1 July each year and are based on years of completed service. So, if an employee is able to extend their termination date in a redundancy to a service anniversary or beyond, then an additional tax-free amount will also apply. With the employer s agreement, you may be able to take annual or long service leave to extend your termination date. - Be aware that the Medicare levy increases from 1 July 2014 by half of one per cent to two per cent. This will affect taxable payments received by clients ceasing employment after 30 June. - Terminating employment after 1 July rather than before may also mean that marginal and concessional tax rates can be best utilised if little or no other taxable income is earned that year, eg terminating from age 60 and receiving only tax-free account-based pension income. - Terminating on 1 July however will impact those who wish to claim a tax deduction for personal super contributions. Having just one day of employment in a financial year means that the person must satisfy the 10% test (see above) to claim a tax deduction. Any taxable termination payments received in that case count adversely towards the 10% test. Manage capital gains tax Where there is a potential CGT liability from selling an asset during the year or as a result of a corporate action, it may be appropriate to sell another asset to crystallise a loss. Realising a loss allows you to offset capital gains and thus minimise or even eliminate a tax liability they may otherwise be facing. At the same time, this strategy may allow you to offload a low-quality, underperforming asset that has little likelihood of recovering in the short to medium term and to invest in a better quality asset. - The ATO issued taxpayer alert TA 2008/7 in relation to wash sales. A wash sale occurs when a taxpayer disposes of an investment, but repurchases the investment or retains an economic interest in the investment and the disposal has crystallised a capital loss. Selling and immediately buying back the same asset may be viewed by the ATO unfavourably as a wash sale and the ATO may disregard the loss created by the sale of the asset. - Individuals may be able to make personal deductible contributions to offset some CGT liability see above. - The CGT disposal event usually occurs when contracts are exchanged, rather than at settlement date. This can be particularly important in the case of real property transactions where the two events may be up to six weeks apart, or longer. Clients wishing to offset CGT by making a tax deductible super contribution must make the contribution in the same year as the CGT event. Prepay deductible expenses A tax deduction may be claimed for up to 12 months worth of interest prepaid on an investment loan on a rental property, or margin loan on a share portfolio or managed investment, provided the loan has a facility allowing this. End of Financial Year planning tips 2014 Page 7

8 In addition, the payment of other deductible expenses, such as professional memberships or pre-paying salary continuance/income protection insurance by 30 June 2014 reduces taxable income. As with all other strategies, you need to consider the cost and impact of doing so. This may also be a good strategy if you believe that interest rates are likely to rise in the near future as pre-paying an investment loan fixes the interest rate. Be aware that the Medicare levy increases by half of one per cent to two per cent from 1 July Thus, maximising deductions in 2014/15 may be a more effective strategy in some cases than bringing forward the deductions to 2013/14. Private health insurance Individuals and families with income above the Medicare levy surcharge threshold without adequate private health insurance may be liable for up to 1.5 per cent Medicare levy surcharge for any period without adequate cover. The 2013/14 threshold is $88,000 for single people and $176,000 for families with up to one child; the threshold increases by $1,500 for each child after the first child. The definition of income for Medicare levy surcharge purposes includes taxable income, Reportable Fringe Benefits, Reportable Super Contributions (Your SGC and salary sacrifice amounts) and total net investment losses less the taxable component of superannuation lump sums within the $180,000 low-rate threshold for individuals aged between 55 and 59 inclusive. The private health insurance rebate is subject to an income based means test. Individuals and families may not be eligible for the full 30 per cent tax offset in respect of their private health insurance premiums, depending on their income. In conjunction with the reduced tax offset, from 1 July 2012, the rate of Medicare levy surcharge for individuals and families without private patient hospital cover increases depending on the level of income. Nevertheless, it may still be more cost effective for affected families and individuals to take out qualifying private health insurance rather than pay the Medicare levy surcharge. Gearing exercise caution A gearing strategy involves borrowing money to make an investment. The ultimate objective of a gearing strategy is for the after-tax total return from the investment to be greater than the after-tax cost of the finance, notwithstanding this may not be the case initially and the client may start out negatively geared. The interest and other costs associated with obtaining finance to purchase investments are usually tax deductible (there may be only a partial deduction for some loan types eg protected equity loans ). Generally to be tax deductible, the purpose of the loan must be to produce assessable income of the taxpayer (ie not loans used for personal purposes or home mortgage) and the borrower and the recipient of the investment returns should generally be the same legal entity. - 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 to meet your clients investment objectives is used. - Remember that gearing magnifies returns, both upwards and downwards. Issues such as cash flow, insurance, End of Financial Year planning tips 2014 Page 8

9 use of appropriate assets 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. - For those clients looking to bring forward a tax deduction, it is often possible to pre-pay the interest on an investment loan for up to 12 months in advance. If you have any questions, please contact me: Tel: Client Summary Some key issues of importance to clients include: - Where 30 June is a critical cut-off date don t leave things to the last minute eg super contributions. - Some strategies work better if implemented after 30 June eg NCCs bring-forward, claiming tax deductions due to increase in Medicare levy. - Some strategies must be implemented before 30 June eg co-contribution, spouse contribution, concessional contributions, spouse contribution splitting, assessment of the client s realised CGT position, minimum pension payments requirement. - Some strategies may need to be assessed to determine whether implementation pre or post 30 June is better in the client s circumstances e.g termination of employment, NCCs bring forward if contribution eligibility will be an issue due to client s age and holding certain types of life insurance in super. End of Financial Year planning tips 2014 Page 9