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We’re on the home stretch now towards the end of the 2016-17 financial year. With just under five weeks to go, and a number of significant changes coming up, we have shared ten superannuation and taxation planning strategies you may want to consider in order to boost your retirement savings, maximise Government entitlements, avoid potential penalties and ultimately, reduce your tax payable.
1. Make a contribution to your super
Before 1 July, you may want to consider taking advantage of the current contribution caps before they are reduced.
The current concessional contribution cap is $30,000 (or $35,000 for those aged 49 years or over on 30 June 2015). From 1 July, this cap will drop to $25,000, regardless of age. If you are a sole trader or small business owner, making a concessional contribution before 30 June is a great way to boost your retirement savings and reduce your tax this financial year. However, you will need to be vigilant as tax penalties may apply if you exceed the contribution limit.
The current non-concessional contribution cap is $180,000. From 1 July, this cap will drop to $100,000. If you have money sitting in a bank account, you may want to consider contributing some of it to super. You could save thousands of dollars now and in retirement with the tax advantages offered by super. Those eligible may also want to take advantage of the bring-forward rule which currently totals at $540,000 as this is the last chance to do so before the bring-forward cap is reduced to $300,000.
2. Split your super with your spouse
With the introduction of the $1.6 million pension cap on all new and existing pension accounts from 1 July, you may want to consider splitting your superannuation with your spouse. Contribution splitting allows you to transfer a certain percentage of your concessional contributions made this year to your spouse. Your spouse must be under 55 (if retired) or between 55 and 65 (if not retired) and the split must be completed before 30 June. Contribution splitting may be worth considering if you want to:
- Potentially gain access to your super sooner (if your spouse is older)
- Reduce your total balance if you are nearing the $1.6 million cap
- Boost your spouse’s retirement savings
3. Reconsider your transition to retirement income stream (TRIS)
If you are one of the many Australians who, at some stage, started a transition to retirement income stream (TRIS), you will need to consider the impacts of the upcoming changes and determine if maintaining your TRIS is still worthwhile, or if there is an alternative tax-effective strategy. There are two key changes coming into effect from 1 July that will impact individuals receiving a TRIS:
- Individuals will no longer be able to elect to take payments as lump sums
- Removal of tax exception for income related to TRIS (from 1 July, 15% tax will be introduced)
Transition to retirement income streams were designed with the aim of helping individuals with the transition from workforce to retirement, allowing them early access to their super in the form of an income stream. Despite the upcoming changes, there are cases where TRIS pension accounts may still be beneficial and tax-effective for super members. It would be worth seeking professional advice to determine if you should keep your TRIS active, or consider an alternative strategy.
4. Review your super strategy in light of the $1.6 million pension cap
If your pension account is nearing, or exceeds, the $1.6 million pension cap, you will need to review your superannuation strategy to avoid potential penalties. There are a few options you can consider. Firstly, you can transfer the excess back into accumulation phase, where the earnings are taxed at 15%. Alternatively, you can withdraw the excess (providing you satisfy condition of release) and invest it elsewhere, where earnings are taxed at your individual marginal tax rate. Either way, it is important to remember there will be tax penalties involved from 1 July for pension accounts which exceed the cap and so action is required before end of financial year.
This cap will also apply to reversionary pensions whereby the total amount after the transfer of one pension to the other following death must remain below $1.6 million. Therefore, if the total pension balance between you and your partner exceeds $1.6 million, you may also need to review your estate plan to ensure you and your family get the best financial outcomes in the future.
5. If your business turnover is under $10 million, you may now have access to some small business entity concessions
In the 2016-17 Budget, the Government announced an increase to the small business entity turnover threshold from $2 million to $10 million. From 1 July 2016, businesses with a turnover of less than $10 million will be able to access a range of concessions which were previously only available to business entities with a turnover of less than $2 million.
The current $2 million turnover threshold will be retained for access to the small business capital gains tax concessions.
6. Thinking of buying a new asset? The $20,000 immediate asset write-off for small business entities has been extended to 30 June 2018
Small businesses with an aggregate annual turnover of less than $10 million are able to immediately deduct the cost of each and every depreciating asset that they purchase for less than $20,000. In order to access the deduction, the asset must be purchased, installed, and ready for use before 30 June 2018. An immediate deduction can be claimed to the extent to which the asset is used for income earning activities (i.e. business purposes).
All assets (including new and second hand) are eligible, except for a small number of exclusions. There is no limit on the number of eligible assets costing less than $20,000 that you can immediately deduct.
7. Small business tax cuts
From 1 July 2016 the company tax rate has been reduced from 28.5% to 27.5%. This lower rate will now apply to small businesses with an annual aggregated turnover of less than $10 million that are companies, corporate unit trusts or public trading trusts. The company tax rate will remain at 30% for all other companies that are not small business entities.
8. Pre-pay your interest on your investment loans
When you borrow money to make an investment that will generate assessable income (often called gearing), you are generally entitled to claim a tax deduction for the interest on the money borrowed.
Considering interest rates are low at present, it may be worth considering prepaying up to 12 months interest on the loan if you currently have a geared investment portfolio or rental property. Doing so will allow you to lock in the interest rate you pay for next financial year (giving you certainty around the cost of your investment) and will bring forward your tax deduction to this financial year.
9. Pre-pay your income protection premiums
If you have income protection insurance, you could claim your premiums as a tax deduction. If you choose to pre-pay your premiums for the next 12 months, you can bring forward a tax deduction from next year to the current year – potentially reducing your taxable income this financial year.
10. Year end trust distributions – planning in advance is essential
A trust resolution determines which beneficiaries will receive distributions and what portion of trust income they will receive for that financial year. Trust distribution resolutions must be made prior to 30 June. If they are not made by this date, the income of the trust will be subject to the highest marginal rate of tax (which could be significantly higher than the rate which would otherwise apply). In addition, the trust deed should be reviewed to consider how trust income is to be determined and to which beneficiaries income can be distributed for the most tax effective outcome.
If you would like more information on any of the strategies mentioned above, please get in touch with us on (07) 3391 5055 or via firstname.lastname@example.org before 30 June to allow enough time for us to assess your situation and implement any strategies that may be of benefit to you.
Disclaimer: This article contains general information only and is not intended to constitute financial product advice. Any information provided or conclusions made, whether express or implied, do not take into account the investment objectives, financial situation and particular needs of an investor. It should not be relied upon as a substitute for professional advice.