With the end of the financial year fast approaching, it may be the time for financial advisers to review certain strategies and ensure their clients are maximising opportunities. The following article provides a summary of common end of financial year (EOFY) opportunities, highlighting the potential tips and traps that are worth considering.
Maximise concessional contributions – concessional contributions (CCs) are capped at $25,000 for the 2020/21 income year and will be indexed to $27,500 from 1 July, 2021.
If certain requirements are met, individuals can carry forward unused amounts from the 2018/19 and 2019/20 financial years and make contributions above the annual cap without having to trigger penalties. As the carry forward arrangement was introduced on 1 July, 2018, unused caps from previous financial years cannot be carried forward to future years. To be able to take advantage of the carry forward arrangement before 30 June, 2021, individuals’ total superannuation balance (TSB) on 30 June, 2020, must have been below $500,000.
Maximise non-concessional contributions – non-concessional contributions (NCCs) are capped at $100,000 for the 2020/21 income year and will be indexed to $110,000 from 1 July, 2021. If certain requirements are met, individuals can bring forward two years of NCCs and contribute up to $300,000 before 30 June, 2021, without having to exceed the cap. To be able to take advantage of the full bring forward arrangement before 30 June, 2021, the individual must have been below age 65 on 1 July, 2020, and their TSB on 30 June, 2020, must have been below $1.4 million.
Should the full bring forward amount be contributed before 30 June or after 1 July considering the indexation of the cap? If the bring forward is triggered after 1 July, 2021, up to $330,000 can be contributed as opposed to a maximum of $300,000 if triggered before 1 July, 2021. The optimum outcome may be limiting NCCs to $100,000 in 2020/21 and using the bring forward after 1 July, 2021. By doing this, a total of $430,000 can be added to super for a couple of months (June-July).
Accessing the co-contribution – individuals with assessable income of below $54,838 may qualify for the government co-contribution of up to $500 if they make a NCC of $1,000 before 30 June, 2021. To qualify for the co-contribution:
- At least 10% of assessable income must be received from employment or self-employment arrangement;
- The individual must be below age 71 at the end of the financial year;
- They must have TSB of less than $1.6 million on 30 June 2020; and
- They must lodge a tax return for the 2020/21 income year.
Make a spouse contribution – ITAA 1997 s290-230 – couples with one spouse earning a low income or no income, may benefit from the spouse tax offset if the high-income earner makes a spouse contribution into the low-income earner spouse’s superannuation.
The maximum offset that can be claimed is $540 where the low-income earner spouse’s income is below $37,000 and $3,000 is contributed before 30 June. The contribution amount is not limited to $3,000, however, the maximum offset that can be applied is limited to $540 ($3,000 at 18%). The amount contributed will count toward the receiving spouse’s NCC cap for the year and can only be accepted if their TSB was below $1.6 million on prior 30 June. The amount can be contributed regardless of the work test if the receiving spouse is below age 67. If aged between 67 and 75, the receiving spouse must meet the work test requirement or the one-off work test exemption. The contributing spouse does not need to meet any eligibility criteria.
Contributions splitting – another way to increase spouse’s super is implementing the contribution splitting strategy. The strategy allows eligible spouses (married or de facto) to split up to 85% of concessional contributions (including mandatory employer contributions) made in the prior financial year. 30 June, 2021, is the deadline for splitting concessional contributions made in the 2019/20 income year. Amounts split are assessed as a rollover for the receiving spouse and do not count towards the receiving spouse’s contribution caps.
First Home Super Saver (FHSS) Scheme – individuals saving for their first home may benefit from making voluntary contributions to super before 30 June. The FHSS Scheme allows first home buyers to make voluntary contributions of up to $15,000 to superannuation per financial year while saving towards the deposit in a tax-effective environment. After contributing for a couple of years, they can withdraw these contributions (up to $30,000 per individual) and use the proceeds towards the acquisition of their first home.
Reviewing Transition to Retirement (TTR) strategies – individuals transitioning to retirement may benefit from the review and refresh of strategy before 30 June. In reviewing the strategy, the indexation of concessional contributions to be taken into consideration together with the increase in the rate of superannuation guarantee charge (SGC) to 10% (both changes are due on 1 July, 2021). TTR pensions may be refreshed in June without having to draw a minimum amount from the new pension that commences in June.
Commencing a retirement income stream – with upcoming indexation of the transfer balance cap (TBC) from $1.6 million to $1.7 million, when recommending a new retirement income stream to individuals who have not started a transfer balance account or partly used the TBC in the past, consideration may be given to whether the new pension should commence before or after 1 July, 2021. If commenced after 1 July, 2021, these individuals may take advantage of the indexed cap and be able to transfer greater amounts to a tax-free pension. Individuals that have fully utilised the current TBC will not benefit from the upcoming indexation.
Self-managed super fund (SMSF) contribution reserving – this strategy allows SMSF members to make personal deductible contributions over the annual cap in June and claim a tax deduction for the current year. The contribution is then allocated to the member's account before 29 July and counts towards the next year’s cap. The strategy may be beneficial to an individual with a TSB greater than $500,000, and as such, not eligible to utilise the carry forward arrangement.
SMSF meeting the minimum pension requirement – SMSF trustees with members in the retirement income phase must ensure the minimum pension requirement is met before 30 June. Otherwise, the income stream will be taken to have ceased for income tax purposes at the start of the year and they will lose the eligibility to claim exempt current pension income (ECPI) for that year.
SMSF with in-house assets – generally speaking, in-house assets cannot be more than 5% of the fund’s total assets. In normal circumstances, if at the end of the financial year the level of in-house assets exceeds 5% of the fund’s assets, the trustees must prepare a written plan to reduce the market ratio to below 5%, and the plan must be executed before the end of the following financial year. However, due to the economic impact of COVID-19, the Australian Taxation Office (ATO) will not be undertaking compliance activity if in-house assets exceeded 5% on the 30 June, 2020, and trustees have been unable to execute the rectification plan before 30 June, 2021, because the market has not recovered.
Pre-pay income protection premiums – individuals holding income protection insurance outside of superannuation can pre-pay premiums for the next 12 months to bring forward the tax deduction to the current financial year. This may be beneficial where individual has larger than expected taxable income for the current year.
Prepay interest on investment loan – similar to pre-paying income protection premiums, pre-paying deductible interest on an investment loan before 30 June, 2021, will bring forward the tax deduction to the current financial year.
Trust distribution resolution – trustees wishing to make beneficiaries of the discretionary trust presently entitled to trust income for the 2020/21 year by way of making a resolution, must do so before 30 June, 2021, unless the deed specifies otherwise. The resolution establishes beneficiaries assessed on the trust’s net income.
Gifting – social security recipients wishing to gift an amount or an asset within the allowable disposal amount can do so before 30 June. These individuals can gift up to $10,000 before 30 June and another $10,000 after 1 July, 2021, a total of up to $20,000 over June and July. Individuals in receipt of government benefits can gift up to $10,000 in a single financial year or up to $30,000 over five rolling financial years. However, the amount gifted in any given financial year cannot exceed $10,000 or the deprivation rules will be applied.
The approaching end of the financial year presents a great opportunity for advisers to ensure that their clients are strategically positioned to maximise the opportunities appropriate to their personal circumstances. It is important that you have these opportunities front of mind during your ongoing engagement with your clients, and allow sufficient time to implement appropriate strategies prior to 30 June.
Anna Mirzoyan is technical and compliance officer at Lifespan Financial Planning.