With 30 June 2016 rapidly approaching, now is the time to review your financial position and consider any superannuation and tax-effective strategies that might be appropriate for you.
Employing a number of strategies effectively now can be critical in helping ensure you achieve your financial goals and objectives.
Outlined below are some superannuation and tax planning strategies to help boost your retirement savings, maximise Government entitlements and legitimately minimise your tax payable.
Make a contribution to your super
Concessional Contributions can save you tax this year: If you are a sole trader or small business owner, you should consider paying additional money into your superannuation fund before 30 June 2016. This is a great way to boost your super and reduce your tax this financial year.
However, you need to be aware of, and monitor, your superannuation concessional contribution limit as penalty tax may apply if it is exceeded. For the 2015-16 financial year the contribution limits are $30,000, or $35,000 if you were 49 years of age or over on 30 June 2015.
Non-Concessional Contributions can save you tax and boost your retirement savings in the long term: If you have money sitting in a bank account, why not consider putting some of these funds into super. Due to the significant tax advantages in super, this strategy could save you thousands of dollars of tax now and in retirement. However, Non-Concessional Contribution caps do apply, so it is important you stay within these limits to avoid having to pay any excess tax.
Please contact our office if you would like more information about how much you can contribute to super before 30 June 2016.
Budget note: Effective Budget night (3 May 2016), a lifetime cap of $500,000 on the amount of non-concessional contributions that can be made into superannuation applies. This limit will look back to count non-concessional contributions made on or after 1 July 2007. If a person has already exceeded the $500,000 lifetime cap, they will not be penalised for any existing excess amount above $500,000. However, they will be penalised if they make any further non-concessional contributions. For more information on the recent Federal Budget announcements, please refer to our communication here.
Use salary sacrifice to boost your savings and reduce tax
If you are an employee, you can often enter into an arrangement with your employer where you choose to ‘sacrifice’ part of your before-tax salary and add it directly to your super account.
If your taxable income is likely to be more than $18,200 a year, salary sacrificing into super can reduce the tax you pay and help boost your retirement savings.
You may wish to consider using salary sacrifice for any bonuses you are receiving this year or arrange to set up salary sacrifice for next year.
Boost your spouse’s super and reduce your tax
If your spouse earns less than $13,800 per annum, you may qualify for an 18% tax offset where you contribute up to $3,000 to their super fund. That’s a potential saving of up to $540 in your tax return this financial year.
Let the Government boost your retirement savings
Government co-contributions are an easy and cost effective way to top-up your retirement savings using some of your own money, and some of the Government’s.
If your total income is less than $35,454 and you make personal contributions of $1,000 to your super account, you will receive the maximum co-contribution of $500. If your total income is greater than $35,454 but less than $50,454, your maximum entitlement will reduce progressively as your income rises.
To be eligible, individuals must earn at least 10% of their income from carrying on a business or as an employee, be a permanent resident of Australia and be under 71 years of age at the end of the 2016 financial year.
This is an easy way to boost your retirement savings and for a parent wanting to help their children, we find it is a great way to encourage future savings and give them a head start with their super.
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.
If you have a geared investment portfolio or rental property you may be able to prepay up to 12 months interest on the loan and bring forward your tax deduction to this financial year.
By pre-paying interest you are locking in the interest rate you pay for the following year. This can give you certainty around the cost of your investment and seeing interest rates are low at present, it may be a strategy worth considering.
Pre-pay your income-protection premiums
Income protection premiums are generally tax deductible. Choosing to pre-pay your premiums for the next 12 months may allow you to bring forward a tax deduction from next year into the current year – potentially saving you tax this financial year.
Donations may reduce your tax
Donations or gifts of $2 or more to approved organisations and charities are tax deductible and may reduce your overall tax. Ensure you retain receipts for donations made.
Consider investing in property inside your self managed super fund (SMSF)
If you are considering investing in residential or business property you may be able to do so through your SMSF.
There are a number of benefits in doing so:
- Your SMSF receives all income and capital growth from the property
- Your SMSF can use rental income and future contributions to help pay off the loan
- Interest expenses can be claimed as a tax deduction by the SMSF
- Income and any capital gains on the sale of the property may be taxed at lower rates
Remember: If you’re considering buying a property inside your SMSF there are a number of complex rules and regulations that apply. It is imperative you seek advice specific to your circumstances.
Split your super with your spouse
Spouse contribution splitting allows you to split certain contributions from your super account to your spouse’s – helping boost their retirement savings. If your spouse is older than you, you may also get the benefit of gaining access to your superannuation savings sooner.
You have until 30 June each year to split certain contributions made to your super fund in the previous financial year. If you would like assistance to arrange this split, please give us a call before 30 June.
Review your self managed super fund (SMSF) investment strategy to avoid being personally liable for inadequate insurance on members
The Superannuation Industry (Supervision) Regulations 1994 require SMSF trustees to consider the life insurance requirements of their members as part of the SMSF’s Investment Strategy.
When deciding whether your SMSF should own a life and disability insurance policy for its members, Trustees have the responsibility to consider any risks that could make it difficult to pay a member his or her benefit if they pass away or become totally disabled.
Property is a great example of where insurance could be useful. Property is a popular investment choice in an SMSF which could tie up much of the Fund’s value in illiquid, direct assets. On the death or disablement of a member, the SMSF may not be able to sell, or may not want to sell, the property to fund the benefit payment. Life and Disability insurance may provide the funding for the SMSF to pay the lump sum benefit when required and still retain the property in the super fund for the remaining members.
Where a claim event occurs (i.e. death or disablement), and the Trustee has not adequately considered the personal circumstances of each member when deciding to hold a contract for insurance, the Trustee may be held liable for inadequate insurance provided or offered.
As a trustee of a SMSF, it is important you and your Adviser review all your options in light of this requirement. If you have any concerns about whether you have met this obligation, please contact your adviser for further information.
Unlock your super while you’re still working
If you are aged 55 or over (as at 30 June 2015), transition-to-retirement (TTR) rules mean you may be able to access your super while you are still working. This could potentially open up a range of flexible working and lifestyle options, such as reducing your working hours without reducing your income.
If you are turning 60 years of age or more at some time in 2015/16 and commence a pension, all amounts withdrawn after your 60th birthday are tax free.
A TTR strategy can also potentially improve the tax-effectiveness of your income – which could actually help you grow your retirement savings faster.
Budget note: From 1 July 2017, the Government plans to remove the tax exemption on earnings of assets supporting TTRs. It also plans to remove a rule that allows individuals to treat certain superannuation income stream payments as lump sums for tax purposes. For more information on the recent Federal Budget announcements, please refer to our communication here.
Are you looking for a tax-effective way to sell or restructure your business?
Subject to meeting the basic requirements, small business owners can take advantage of the Government’s Small Business Concessions to reduce or even extinguish any capital gains tax from the sale of a business or business asset. If you have sold, or are thinking of selling a business before the end of the financial year, please contact your adviser to make sure you are well positioned to reduce capital gains tax on the sale of your business (see further explanation below).
New concession: From 1 July 2016, small business owners will have greater flexibility and choice to change the legal structure of their business by allowing deferral of gains or losses that would otherwise be realised when business assets are transferred from one entity to another, where undertaken as part of a genuine restructure of an ongoing business. This new concession for small business can be used in the longer term for business exit strategies, or now if you are considering a more tax effective business structure.
Reduce your Capital Gains Tax on the sale of an asset
If you sell an asset before 30 June, such as shares, a property, or even a small business, you may have to pay capital gains tax on the profit.
There are several strategies that can be implemented before 30 June that can help reduce the capital gains tax that may be payable.
Some examples may include:
- Taking advantage of the Government’s Small Business Concessions to reduce or even extinguish any capital gains tax from the sale (or transfer) of a business or a business asset.
- Employing strategies to reduce your taxable income, such as making tax deductible contributions to super, or pre-paying your interest and other expenses.
- You may trigger a capital loss by selling a poorly performing investment that no longer suits your circumstances. This capital loss can then be used to offset all or part of the capital gain.
If you have sold an asset, or you are thinking of selling an asset before 30 June, you should contact your Adviser as soon as possible to ensure that all possible actions have been taken so that you pay the least amount of tax possible.
Small business – expanding accelerated depreciation
Small businesses with an aggregate annual turnover of less than $2 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 for this financial year, the asset must be purchased, installed, and ready for use before 30 June 2016. 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.
For assets over $20,000, whilst not immediately deductible, these can be pooled and depreciated at 15% in the first income year and 30% each year thereafter. The small business low pool value threshold increased last year to $20,000, which means that the pool can be immediately deducted if the balance is less than $20,000 at the end of an income year.
This rule applies to 30 June 2017, then reducing to a $1,000 asset amount.
The above measure may significantly impact tax outcomes, improve cash flow and should also simplify tax compliance processes. For information on how you can access these benefits and to understand which assets are eligible to be deducted, please contact your Adviser.
Budget note: The small business entity turnover threshold to qualify for certain small business tax concessions, including accelerated depreciation, is proposed to increase from $2 million to $10 million from 1 July 2016. Therefore businesses with turnover between $2 million and $10 million may wish to defer asset purchases under $20,000 until after 30 June 2016. The government has not extended the timeframe for the scheme, which is still due to end on 30 June 2017. For more information on the recent Federal Budget announcements, please refer to our communication here.
Small business – tax cuts
Small business entities with an aggregated turnover of up to $2 million will benefit in the 2016 income year from the company tax rate cut from 30% to 28.5% (dividends will continue to be franked to 30%). The company tax rate for companies that have an aggregate turnover of more than $2 million remains at 30%.
For unincorporated small businesses, a 5% discount on the tax payable on the business income can be claimed as a tax credit up to $1,000 per individual per year.
To understand in more detail how the tax cuts will impact your tax outcomes, cash flow management, tax compliance processes, and how you may best capitalise on the tax savings, please contact your Adviser.
Budget note: The Federal Government proposes to reduce the company tax rate to 25% over 10 years, starting in the 2016-17 financial year. The changes will be phased in progressively, based initially on the level of annual aggregated turnover, before applying to all companies equally. For more information on the recent Federal Budget announcements, please refer to our communication here.
New startups – immediately deductible professional costs
New startups will be able to immediately deduct professional costs associated with starting a business from this financial year, rather than writing them off over five years. This tax benefit may shelter your tax payable in the initial years of commencing a business and thereby improve cash flow and tax outcomes.
Business travel deductions and logbooks
If you use a motor vehicle for business or work-related purposes you may need to record odometer readings at 30 June 2016 and prepare a 12 week log book if your existing one is more than 5 years old. It is not too late to prepare one now – if you commence the logbook prior to the 30 June 2016, the usage determined will still be appropriate for the whole of 2015/16.
Year end trust distributions – planning in advance is essential
Trust distribution resolutions must be made prior to 30th June. If these resolutions 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.
Payments and loans funded from privately owned companies
Where corporate beneficiaries have been used in the past or loans have been drawn from companies, consideration must be given to repaying monies to the companies before 30 June 2016. This is a complex area of tax and your Adviser can discuss this with you.
For more information on any of the superannuation and tax planning strategies outlined above, please contact your Adviser before 30 June 2016 to allow sufficient time to assess your situation and implement any strategies that may be of benefit.
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.