The end of the financial year is an ideal time to consider your financial structuring for the year ahead. However if you have not yet put plans in place for this financial year it is not too late to put them into action. Here are some strategies to consider and as always, please seek individual financial advice before taking any action.
- Making a personal contribution of up to $1,000 into super to receive the government co-contributions.
- Making non-concessional contributions into super to get these assets into a tax friendly environment
a. This can include an in specie transfer of assets if you use a fund that allows this
- Making a concessional contribution into super to reduce tax payable on income and get assets into a tax-friendly environment
- Making a contribution into your spouse’s super fund if they are a low income earner and by doing so receiving a tax offset whilst also getting assets into a tax friendly environment
- Bringing forward any relevant tax deductions
Thanks go to BT & Asgard for providing the following details.
To be eligible for the co-contribution you must make a personal contribution into a complying super fund by 30 June 2011. Your total income (comprising assessable income, reportable fringe benefits and amounts salary sacrificed to super) must be less than $61,920 and 10% or more of your total income must be from eligible employment, running a business or a combination of both. You must be under age 71 at the end of this financial year and lodge a tax return.
There is a cap on non-concessional contributions of $150,000 per year. If you were under the age of 65 on 1 July 2010, you can contribute up to $450,000 in the current year using the ‘bring forward’ provisions, although this limits how much you can contribute in the next two years. Any contribution you make over your relevant cap is taxed at 46.5%.
If you turned 65 on or after 1 July 2010, you can still take advantage of these provisions this financial year, but if you make the contribution after your 65th birthday, you must satisfy the work test before making the contribution. If this applies to you, this will be the last chance you will have to make a large, non-concessional contribution to boost your retirement savings. If you are in this position, you could consider short-term borrowing to fund a contribution if you’re waiting for an asset to sell or to receive proceeds.
You can use this strategy if you were 64 or under on 1 July 2010 or you turn 65 in the 2010-11 financial year and meet the work criteria.
In specie transfer of assets
If you hold allowable assets in your own name, you may consider contributing these assets into your super account. Under superannuation law there are some personal assets that a member can contribute to their super account. These include listed securities, interests in a widely held trust and business real property. Where you hold an asset personally, the income is taxed at your marginal rate of tax. Benefits held within super are concessionally taxed at the super fund tax rate (a maximum of 15%).
Transferring an asset from your personal name into the name of your super fund will trigger a CGT event.
If you are considering this strategy you need to be mindful of the super contribution caps. The asset transfer will be treated as a contribution and measured against the relevant caps. If the value of your contribution exceeds the contribution cap, you will be charged penalty tax on the excess amount.
Where the asset being transferred is business real property, there is potential to access the small business provisions.
You may benefit from this strategy if you have allowable assets, are eligible to make a contribution to super, have not exceeded the contribution cap and you wish to boost your accumulated super benefits.
There are limits on the level of concessional contributions that can be made each year until 30/06/2012. The current limit is $25,000 unless you are 50 or older, in which case your limit is $50,000. Amounts contributed above these limits will be taxed at an additional 31.5% and will then count towards your non-concessional contribution limits. The two strategies you can use are salary sacrificing and personal deductible contributions:
Salary sacrificing involves diverting pre-tax dollars from your employment salary into a range of benefits.
One of the most common forms of salary sacrificing is making pre-tax contributions into your super account.
The benefits of this strategy are two-fold. Firstly, you’ll be bumping up your super contributions. Secondly, you can potentially reduce your tax liability. Instead of paying tax at your marginal rate, the amount you salary sacrifice becomes a taxable contribution received by the fund. The contribution (plus any income earned on the investment) is generally taxed at a maximum rate of 15%. And, once you turn 60, payments from your super fund are tax-free.
Salary sacrificing can be used by most employees. You will need to check that your employer allows you to salary sacrifice. In addition to this, you must have an effective salary sacrifice agreement in place.
A word of caution, if you are relying on your employer to make your salary sacrifice and employer contributions take care in knowing exactly when those payments are sent to your super fund. Even though your pay slip says that the benefit has been accrued it may not actually be paid to your fund for a number of weeks. This is crucial if you are trying to get the maximum amount of contributions into super. Contributions over the allowable limits can see you up for hefty excess contributions tax.
Personal Deductible Contributions
By making personal deductible contributions to super, you can reduce your taxable income and therefore decrease your personal tax liability. If you have sold an asset during the financial year and realised a significant capital gain, you may also be able to offset any personal income tax that would have been payable on the capital gain.
If you are self-employed, substantially self-employed, or under 65 and recently retired, you may be eligible to make a personal deductible super contribution. You should confirm your eligibility to make a personal deductible contribution with your financial adviser before proceeding.
If your spouse’s assessable income (including reportable fringe benefits and reportable employer super contributions) is less than $13,800 and you make a contribution to your spouse’s super fund, you may be entitled to receive a tax offset. As this benefit is a tax offset, by implementing this strategy you can make a direct saving against your income tax liability.
There is an 18% tax offset available for eligible contributions for low-earning spouses. If your spouse earned less than $10,800, a contribution of $3000 could earn you a rebate of $540. The rebate cuts out at $13,800.
Eligible spouse contributions are treated as non-concessional contributions so are not taxed at 15% on the way into the fund. They are separate to the co-contribution. That is, you can’t claim both.
You may benefit from this strategy if you have a spouse on a low income and want to boost your partner’s super savings whilst reducing your own tax liability.
Transition to Retirement
If you are over 55 and still working, you could consider a transition to retirement strategy. This strategy may have a number of benefits. There are tax incentives associated with moving super benefits from accumulation phase to the tax-free pension phase plus there is the ability to combine a salary sacrifice arrangement with a transition to retirement income stream.
In addition, you have the flexibility to reduce the hours you work and supplement your income by drawing a pension.
You may benefit from these strategies if you are over 55 and still working.
Bringing Forward any Relevant Tax Deductions
You could consider bringing forward any relevant tax deductions into the current financial year. What this does is effectively lower your taxable income and therefore the amount of tax that you would otherwise pay.
For individuals, self-employed or small business owners, this might mean pre-paying the interest on your investment property loan, margin loan or repairs on a rental property. Other examples may include, prepaying income protection insurance premiums ahead of 30 June.
NB - Keep in mind that this is only bringing forward a tax deduction not reducing tax over your lifetime. So if you thought you were going to earn more next year you might actually want to keep that deductible expense to offset against income next year.