While death and taxes are inevitable, the amount of tax you pay can vary depending upon what decisions you make leading up to 30 June. With less than 5 months left to go, this is the time to plan your affairs to consolidate your tax position for the 2016 financial year.
Personal Tax Planning Measures
Depending upon age and cash flow you should consider:
- Maximising your concessional Superannuation contributions. The concessional caps for 2016 financial year are:
If employed then this may involve entering into a salary sacrifice arrangement with your employer to sacrifice the difference between your concessional cap and the Superannuation Guarantee Charge payable by your employer.
If self-employed or retired then you should look to maximise this contribution where possible.
If 65 years of age or over (but not yet 75), then you must firstly satisfy a work test before making any form of contribution to superannuation. The work test requires that you are gainfully employed (including being self-employed) for at least 40 hours in a 30 day consecutive period.
Superannuation Contributions – Double Deduction
It is permissible for a Self-Managed Superannuation Fund (SMSF) trustee to accept a concessional contribution from a member or an employer but hold that contribution in a Contributions Reserve for up to 28 days after month end from when the contribution was made before it must be allocated to a member.
If you are thinking of retiring in the 2016 financial year or if you have a one off capital gain, a reasonable bonus from an employer or a significant profit or income, you should consider if you are able to make a concessional contribution of $35,000 or $30,000 (depending on your age) in June 2016.
Where the contribution is made in June and the contribution is to be held in a “Contributions Reserve” account until after 30 June but it is allocated by the trustees to the member prior to 28 July then this amount will not be counted against your 2016 concessional cap. That is, because the amount is allocated in July, the concessional contribution will be a 2017 concessional contribution. For an employee, you may end up with a concessional excess cap position in 2017 but this may still provide an overall tax benefit in 2016 tax year.
This strategy will not suit everyone. Hence, it is important to discuss this opportunity with our office to assess its suitability for you.
Superannuation – Withdrawal & Re-Contribution
The Withdrawal and re-contribution strategy has been around for a while. This strategy involves withdrawing “taxable” components and the re-contributing the money as a “tax-free” component. However, it has not been used widely since changes to the superannuation rules in 2007 that saw income streams payable to persons aged 60 and over as tax free.
With budget deficits, the economy sluggish and a lot of talk about an overhaul of our taxation system, superannuation tax concession is again on the political radar. It may be that no change is made but it seems to be an ever increasing probability that changes will be made. What these changes would be is anyone’s guess at this stage. To date the following have been suggested:
- Tax funds in pension mode where a member’s earnings is above a certain amount
- Tax pensions irrespective of earnings
- Increase tax on contributions such that contributions are taxed at the equivalent of the members marginal tax rate
- Re-introduce a Reasonable Benefit Limit system to cap tax concessions within super
For those able to draw a lump sum (i.e.: those who are permanently retired from the workforce, or have attained the age of 65 or those who have Unrestricted Non Preserved benefits), this lump sum could be withdrawn and re-contributed (provided that if you are between 65-75 years of age that you satisfy the work test).
The benefits of doing a withdrawal and re-contribution include:
Prepay interest on Investment Loans
Where you have an investment loan (whether that be for a property or a share portfolio) and a higher than expected level of income (due to bonuses, a capital gain, employee shares etc.) then consider prepaying interest in June 2016 for up to 12 months.
This will bring a further deduction in for the 2016 tax year and minimise tax.
If you use this strategy and the income is ongoing then you should consider using this as an ongoing strategy. The prepayment of interest creates a “double” deduction in the first year. If you do not prepay the interest in the following year then you may have income from the investment but no interest expense deduction. However, this is not a problem if you are looking to retire and/or your income drops significantly the following year.
Restricting Investment Holdings
With volatile investment markets investors have felt the pain in their portfolios. However, a down market can also produce an opportunity to review where you hold your investments.
It is worth considering whether or not there are benefits for you in moving assets and restructuring holdings. As such, you should be mindful of:
- Any opportunity to move investments from either a personal holding or a discretionary trust holding to a superannuation environment
- The possibility of moving investments to a superannuation fund. You should be mindful of your non-concessional contribution of up to $180,000 each year or up to $540,000 over a 3 year period if utilising the “bring forward’ rule.
- Ensuring that you quantify the tax outcome before transferring assets. This is not to crystallise a large capital gain and to create a tax payable. The purpose of asset transfer is to improve asset protection, provide an opportunity to simplify your tax and financial affairs and to consider estate planning implications. It is not to crystallise a large capital gain and create an increased tax payable amount.