Strategic advice around tax decisions at this end of financial year is predominantly focussed on being extra vigilant in terms of balance caps and super contributions given the changes to superannuation legislation that took effect from 1 July, 2017.
These changes saw most of the 2016 Federal Budget proposals put into action. Some of the reforms included:
- The transfer balance cap reform was introduced to limit how much super could be transferred from the accumulation super to the retirement phase super to $1.6 million;
- The non-concessional contribution was reduced from $180,000 to $100,000; and
- The concessional contribution cap was reduced to $25,000 for everyone regardless of age.
As well, with the Federal Budget scheduled to be brought down on May 8, accountants and planners are urging clients to plan ahead and ensure they are prepared for any possible change.
A common strategy recommended when planning year-end tax approaches was to ensure that, subject to cashflow and budget, superannuation members were maximising contributions to their super funds within the $25,000 limit.
A key takeaway from the reforms was that the concessional contribution amount was reduced from $35,000 for those 49 and over and $30,000 for everyone else to $25,000 across the board.
Tracey Sofra, financial planner and 2017 winner of the Money Management Women in Financial Services Financial Planner of the Year Award, said this is still the most effective strategy to reduce taxable income and increase the refund you are entitled to.
“It’s not just spending for the sake of spending,” she said. “With superannuation, even though the contribution is taxed at 15 per cent when it hits the account, you’re still at a 15 per cent benefit, and it’s the benefit of having that money invested for your future.”
The value of $25,000 is inclusive of the 9.5 per cent super guarantee paid by your employer as well as any salary sacrifice you may have taken.
As such, Sofra said advisers should ensure clients are mindful of what they are putting into their super accounts.
“Obviously younger people won’t want to put in too much because of the preservation rules, and high-income earners should be wary of exceeding their cap.”
This was also true for self-managed superannuation funds (SMSFs), and the same rules apply for trustees of these accounts.
Joseph Hoe, financial planner at WealthWise, said the 2017 reforms also allow members to make a post-tax contribution into their SMSFs and claim tax deductions without satisfying the prior “ten per cent” test.
Another strategy common amongst financial planners was to make use of the non-concessional contributions to superannuation, again, subject to cashflow and individual budget.
The 2017 reforms saw these contributions reduced from $180,000 to $100,000, but the “bring-forward” rule, which allowed superannuation members to bring forward their contributions for the next three years and contribute $300,000, is yet to be tinkered with.
“If the client has surplus income, they can make use of the non-concessional contributions of $100,000, or use the ‘bring forward’ rule to contribute $300,000,” said Hoe.
These non-concessional contributions are sourced from your after-tax income, which means the full contribution will reach your superannuation account, but can only be made by those with a total superannuation balance of $1.6 million or less.
“We need to be extra vigilant in terms of whether the trustee wants to make a non-concessional contribution following the reforms that took place last year,” said Hoe.
“One of the simplest strategies is to take the money out, if the client is able to, so as to bring the balance down from $1.6 million to allow the client to make those contributions in the next financial year.”
Finally, Sofra said that consolidation of super funds was deemed to be a good way to maximise tax benefits as well.
“You want to make sure you only have one super account so you’re not incurring fees, but be mindful when you’re doing that you’re not losing insurance,” she said.
“If there’s income protection or life insurance with your multiple super accounts, and you roll over the whole account, you will lose all those benefits.”
INVESTMENTS AND EXPENSES
Financial planner and director of Story Wealth Management, Anne Graham, identified offsetting capital gains with capital losses as another strategy.
“If clients have investments they are looking to sell, and they might realise they’re in capital gain, they should look at assets that have losses attached to see if it’s worthwhile selling the assets that have a loss to offset the gain,” she said.
Graham said the main caveat, however, is to make sure that it’s in the client’s best interest and that it suits their goals and objectives.
She found that, particularly with high-income clients, those planning to retire should consider the timing of selling investment properties so as to limit the client’s taxable income.
“You’d perhaps sell it in the next financial year so that the client’s taxable income is lower.”
As well, clients are urged to ensure they claim all tax-deductible expenses, especially if looking to retire within the next year.
“You would want to bring all your expenses forward and incur them this financial year so you get the tax deduction for it,” Graham said.
Sofra added that rental property owners would also look to claim for improvements made to the investment, and that any maintenance should be done prior to June 30 to claim those deductions this financial year.
She said to be mindful, however, that there was a direct nexus between the income earning capacity and the expense incurred.
“If it’s a capital cost, for example making improvements must be depreciated – it couldn’t be claimed in the one year – but if you’re fixing it, repairs are deducted in the year they’re incurred.”
REFORMS TO COMPANY TAX RATE
Tax partner at HLB Mann Judd Sydney, Peter Bembrick, said an interesting reform concerning small and medium enterprise (SME) clients is the lowering of the company tax rate, and it’s worth a discussion with clients as to whether they choose to pay dividends before year end.
The scope of what constitutes a small business has changed from $2 million in turnover, to $10 million and now $25 million, and is only expected to increase.
The company tax rate of these small businesses will change from 30 per cent to 27.5 per cent, but Bembrick highlighted that although the company tax payable is reduced, the dividends will also be franked at 27.5 per cent.
Bembrick said that, at the high level, the planning issue arises where the company is going from a large business to a small business due to the increase in the threshold.
“If they have retained earnings, so profits that have been taxed at 30 per cent, and the dividends are paid this financial year, they can frank the dividends at 30 per cent” he said.
“This benefits the individual as the credits are paid through a family trust and come back to the individual who will receive the 30 per cent franking credits.”
After 1 July, 2018, small business owners will only get to frank dividends at 27.5 per cent, but have paid tax at 30 per cent. The tax credit that gets attached to the profits is lower, and in effect, a permanent loss of tax.
“The discussion with the client is, should you perhaps consider paying dividends before year end to get the full benefit of your franking credits.”
PROPOSED REFORMS TO FRANKING CREDITS
Australian Labor Party leader, Bill Shorten, has proposed to stop SMSFs from receiving tax refunds for franking credits received from Australian company dividends.
Despite the Federal Opposition claiming the proposals would not affect those in retirement already, the reforms are being objected to by many parties.
“For those who are not in a retirement environment, it will certainly eat into their cash flow and they may have to reduce things like eating out from twice to once a week,” said Hoe.
“Those in the golden age group, so 50 to 60, where it’s the prime time to accumulate for the next phase of their life (retirement), they’re using their franking credits to save as much as possible, and they play a major role in terms of their pursuing a reasonable retirement lifestyle.”
Sofra agreed, and added that as retirement income is reduced, pensioners would need to draw into their allocated pensions to make up for the loss of capital.
Those who may have previously not qualified for the aged pension following the reforms that took place in 2017 may now qualify.
“People who have these balances have decided to not live off the system, and we’re punishing them for it,” said Sofra. “There is no encouragement in Australia to put your money away – they want to knock you down.”
Graham affirmed that the general consensus across planners and advisers, however, is that the proposed reforms won’t impact year-end tax strategies for the 2017/18 financial year.
“Not at the moment. It’s something for advisers to keep in the back of their mind as clients will be asking how it might impact their future,” she said.
“It’s always wise to be aware of these things so you’re prepared, but it can be difficult to plan around announcements as they constantly change.”
Graham added that the upcoming budget could hold some changes to tax, so advisers should be reminding clients to be prudent and plan ahead.
In the long term, adviser sentiment says the best environment to retire in is an allocated pension, which has made increasing super the primary strategy.
Sofra said, however, that advisers should not place too much emphasis on maximising tax benefits for the sake of it and should always keep their clients’ goals and profiles in mind.
“It all has to come back to the risk profile of the client. If the client is not comfortable with growth-type assets, you would limit your exposure to property and shares irrespective of franking credits,” she said.
“Leading up to retirement, it’s about managing how much money we can get into super because allocated pensions are the most favourable tax-effective place to retire.”
Graham agreed, adding that client goals should remain a priority for advisers as “the only constant is change”.
“If you’re planning on things staying the same for the next five years, you’re kidding yourself,” she said. “If it’s appropriate to use a strategy for a client now, you want to take advantage of what the rules are when you know them.”
“Don’t do things just for the tax benefit because it changes your perspective on things. You might do something that might save you $1,000 tax, but it ends up costing you money in the long run.”