Year end can be super for clients

As the nation fast approaches the end of another financial year, superannuation maintains its prime place as a popular tool for creating a tax effective year end strategies. Nicole Szollos examines areas advisers should consider.

It's coming up to that time of the year again. When the June 30 deadline

looms and financial planners and fund managers around the country are busily honing tax efficient strategies with clients, and devising plans for optimal income returns.

And at the forefront once again is that ever present, foundational topic that integrates itself into a part of most of our lives, superannuation. So what can the industry expect for this end of financial year for in terms of superannuation and tax efficient strategies?

BT Funds Management vice president product development Alyson Clarke says end of year superannuation strategies and the solutions they present are a constant theme at this time of year but strategies remain valid.

Making additional contributions or salary sacrifice before the end of a

financial year and reducing the amount of an individual's taxable income, is one popular strategy.

Increasing the total sum in a superannuation account is a tax efficient technique because a greater part of money is exposed to the lower 15 per cent contributions tax. This leaves less money to be taxed at standard marginal tax rates which, depending on individual income levels, can reach as high as 48 per cent.

Spouse contributions are another popular tax strategy within superannuation that Clarke says will be revisited by many clients and planners this year.

Superannuation contributions made by one spouse on behalf of the other are also applicable to the 15 per cent maximum superannuation tax rate and, depending on individual circumstances, spouse contributions can also be eligible for income tax rebates. Balancing the amount of super between a couple can also have other tax advantages.

Tax strategies within superannuation are used by the financial services industry each year, and one reason for the popularity is because the area of superannuation has up front benefits that also compound over time.

And superannuation, along with negative gearing, are two legitimate tax efficient strategies that, according to Clarke, the Australian Taxation Office (ATO) continues to be comfortable with.

"Everyone wants tax benefits, and super and gearing stand solid on the tax benefits," she says.

But there are other tax effective schemes where greater risk is involved and these are viewed differently by the ATO, Clarke says.

Other tax strategies are widely used but when looking at these, it is important to not focus just on tax issues and the immediate benefits but also the long term advantages, which is one of the prime principles of wealth creation.

RetireInvest technical strategy manager Jennifer Brookhouse also warns against becoming 'tax focused' when viewing strategies. She says superannuation is popular for those who can derive tax strategies from it.

But with other tax effective investment schemes, such as agricultural schemes, it is necessary to look beyond the tax advantages that are available. She says because the value of the tax reduction is aligned to the individuals marginal tax rate, tax effective strategies do not give dollar for dollar savings.

"People need to be cautious about looking at tax effective investment schemes from just the tax advantage."

"Look at the investment fundamentals, and also think about how to regain dollars further down the track," Brookhouse says.

One strategy, which can be linked within superannuation has been the use of installment warrants. These are an eligible investment for both individual and self managed superannuation funds and when used as an investment within a super fund, the fund is able to gain leveraged exposure.

"Its like margin lending without margin calls," says Macquarie Bank division director Cathy Kovacs

Kovacs says although installment warrants are an all year strategy, Macquarie sees a greater uptake of the product near the end of the financial year when more people are looking into tax efficient strategies.

But alongside the similarities from previous financial years, this year should see a couple of slight differences since the last financial year, as this is the first to witness the effects of last year's tax changes.

Clarke believes the capital gains tax (CGT) changes, and its effect of increased rebates, have been very beneficial for superannuation.

Also a first for this financial year is the refunding of imputation, or franking credits from Australian share investments. Previously excess credits were lost, but as of this year left over credits will be returned to the funds.

"Everyone benefits," says Clarke, "super funds, low tax payers, allocated pensions."

The refunding of imputation credits back into the super fund is also a benefit to come from installment warrants.

"The beauty for self managed super funds is they get all the dividend and franking credits," Kovacs says.

Although superannuation strategies have not changed dramatically over the past few years, Clarke believes there could be changes to the industry in the not too far off future.

"Super is dormant at the moment, it needs something to spice it up," she says.

At a legislative level, superannuation has not experienced any significant changes to its laws recently, and being an election year there may not be anything new before the election process is completed. But Clarke believes there is potential movement within the legislation for superanuation, especially regarding current prolific use of the re-contribution strategy, something she says is not linked to 30 June.

So what is the bottom line for superannuation strategies in light of the 30 June deadline? Clarke suggests it is focusing on the most tax efficient strategies while weighing up what is best for the client and being comfortable with which strategies are chosen. Immediate tax benefits should be taken into consideration, but alongside a long term wealth creation outlook.

Lastly, the big issue presenting itself to financial services professionals is getting whatever changes are needed for the chosen superannuation strategy and any extra deposits, in on time.

This will not be an easy task as thousands of investors start to think about the coming deadline with a number of fund managers, dealer groups and planners gearing up for a busy few weeks.

In fact the pace is so hectic a number of managers anticipate that the first months of the new financial year will be spent mopping up from the last.

"We plan on having staff staying on late in the days leading up to the end as we see a mad, mad rush leading up to and on 30 June," Clarke says.