When year-end tax strategies rely on a federal election

Decisions regarding tax this financial year have a lot to do with the upcoming federal election and possible legislative changes. Jassmyn Goh finds out how advisers can best advise their clients on the uncertainty.

With tax time and a federal election around the corner, this end of tax year is full of uncertainty and "what ifs" thanks to possible legislative changes.

When the Federal Treasurer, Scott Morrison, announced the Government's Budget last month, it put superannuation in the spotlight with numerous proposed changes impacting tax arrangements.

As the proposals may or may not change the status of whether some year-end tax strategies will still be viable, advisers should proceed with caution when advising on tax and plan for contingencies, according to The SMSF Academy's managing director, Aaron Dunn.

"It's tricky because you've got to look at where each client is at in the lifecycle in their financial plan," Dunn said.

"There are some that will clearly be impacted by the proposals and that uncertainty raises a lot of questions at this stage on possible new legislation. There also needs to be a real process in instilling confidence in the super system.

"The devil will be in the detail in a lot of this once we understand the framework and which side of government wins the election. I don't think Labor has shown all their cards yet in respect to particular contributions and they've really only made some commentary around the reduction of the threshold for division 293."

Concessional contribution caps

For the 2016 financial year, members can take advantage of the higher $30,000 cap (with the option of salary sacrifice to life contributions) and those aged over 50 can contribute up to $35,000.

However, if the Coalition wins the upcoming election and legislates their proposal, from 1 July 2017 the cap will be reduced to $25,000 per year for all ages.

"Taking advantage as much as possible of existing concessional contribution caps is important and that may provide opportunities for individuals that have abnormal levels of income in a particular year," Dunn said.

"By looking at utilising a contribution reserving strategy it would enable them to get tax deduction in the current year for the contribution that they have made, and effectively have the attribution of the contribution for the following year that they've claimed in the current year.

"That would be one strategy worthwhile utilising in this time frame. It's when you get to the following year that we may see that reduction in the cap so the ability to claim the tax deduction may be somewhat reduced going forward."

Colonial First State executive manager for technical services, Craig Day, said people that were eligible should maximise contributions both this year and next in case the proposal gets legislated.

"There is an opportunity to get as much as you can while you can," Day said.

"The other way people can get money into superannuation over and above the superannuation guarantee (SG) is by a salary sacrifice arrangement. In the lead up to the financial year, it's important to check those arrangements that it won't push them over the concessional cap."

Day said the two main reasons salary sacrifice could push a member over the limit was through a substantial pay rise and high income earner employers contributing up to the maximum contribution rate.

Splitting income

The Government's proposal for a $1.6 million cap on retirement income balances, effective 1 July 2017, could see those who breach the cap subject to a tax on both the amount in excess of the cap and the earnings on the excess amount.

According to HLB Mann Judd Sydney tax partner, Peter Bembrick, advisers should proceed on the assumption that the proposals do go ahead to avoid exceeding the caps.

"If we assume either party will be winding back concessions on super it makes sense to recommend that they maximise what they can get into super this year and next year before the caps get reduced," Bembrick said.

While Bembrick said it would be difficult for most people to build up $1.6 million in super (and $3.2 million for a couple), there was still only so much you could put in every year within concessional and non-concessional caps.

"You don't want to be in a situation where one spouse has $1 million in their super and the other one has $200,000. It's better practice and planning if you can get each person a reasonable level of super balance."

"It's always an incentive through the marginal tax rate to split income or to use things like family trusts."

Dunn said it was important for advisers to identify clients that had the capacity to increase concessional contributions.

"Contribution splitting between spouses can allow the primary bread winner to contribute the maximum concessional contributions. In some instances they may have an ability where they don't use it in a particular year and use rolling limit rather than losing it in the case it is now," he said.

"The management of those things will be important going forward and that planning could start now even though it won't potentially kick in until 1 July 2017."

Transition-to-retirement

Another what if proposal that may come into legislation from 1 July next year is the removal of the tax exemption on transition-to-retirement (TTR) pensions.

Currently, TTR pensions allows people aged between the preservation age and 65 to access tax-free withdrawals that are available to those aged 65 and over.

Dunn said advisers and clients should take advantage of the position and the rules as they stand today as it will be a few years if the proposal is legislated.

"We have a few years to utilise the tax exemption that sits within the fund, the benefit of a higher concessional contribution rate post 1 July 2017 reduction, and the measure of not allowing for the member to make an election in respect of how the benefit is taken," he said.

"Certainly there exist opportunities within TTR to look to optimisie a tax effective point of view. Not only the benefit of the strategy, but how the tax outcome on the individual basis and how it is treated to them.

"There was a lot of concern within the adviser community that it would be abolished, and the fact that we can live to fight another day as there will be a few years before the measures get potentially introduced means we should get the most out of TTR."

Negative gearing

Also tied to the election is the future of negative gearing.

Bembrick said the biggest risk to using negative gearing as a tax strategy would be if Labor won the election and brought in its proposed reform.

"If they do win whatever announcement Labor makes still needs to be legislated and then there will be questions of how much grandfathering there would be," Bembrick said.

"Should they stop doing something because they might lose a deduction? Not necessarily but it's a tough one. You just have to advise on the rules as they are."

"Don't ignore it but there's a good chance that nothing will change. It comes down to not really changing advice at this stage but be aware of the possibilities."

CPA Australia's head of policy, Paul Drum said while the public spotlight had been on negative gearing of investments for some time, the good news was that nothing had changed for this financial year.

"Investors can still borrow — or gear — investments. But of course it is only prudent to consider such a strategy if you are predicting a positive return on the investment sometime in the future," Drum said.

Value in deductions

Besides super tax strategies and concerns, advisers should also look at maximising a client's personal deductible contributions, according to Day.

"If you've got income protection policy — prepaying the premiums to allow you to bring forward 12 months of deductions into this year is always a good one," he said.

"Or if you're able to prepay interest expenses for geared investments, such as an investment property or margin loan, this may allow you to bring forward those deductions but prepaying is for only a maximum of 12 months."

Westpac Financial Planning partner and executive financial planner, Roger Perrett, said the deductions could come from prepaying loans and claiming a tax deduction from interest for borrowing costs.

"If your investment properties or shares have running costs and depreciations the primary deductions come from interest," Perrett said.

Drum warned that no one would be getting rich by simply claiming tax deductions.

"Notwithstanding this inalienable truth, certain small businesses are able to get an immediate tax deduction for nearly all individual assets purchased by 30 June 2016 that cost less than $20,000, to the extent it is used for an income producing purpose and is installed ready for use by the end of the financial year," he said.

Capital gains tax

Perrett said the main tax trap in terms of working around the capital gains tax (CGT) was the dates for selling property.

"If the customer or investor is potentially selling, it's better if possible to exchange contracts after 1 July but there's a trap where you think ‘oh I'm exchanging this financial year but I don't sell until next financial year, in 6 weeks, and I've deferred the sale for a further 12 months'. But that's not true because it's on exchange and not settlement. It's when you sign the contract," he said.

Again, the CGT 50 per cent discount on selling assets remains up in the air as Labor has proposed to halve the discount to 25 per cent on assets purchased or acquired after 1 July 2017.

"That won't impact when people sell but may bring forward people's purchasing decisions to make sure they get the entitlement of a 50 per cent CGT discount. But it's completely dependent on the election outcome," Day said.

Time is of the essence

Perrett warned that 30 June would roll around quickly and encouraged advisers to get their client's affairs in order.

"Sometimes the customer doesn't see the value in talking to their adviser in March. But it's important for advisers to know their client's movements in the year," he said.

"Suddenly it's tax time and they're on holiday and tax planning is the last thing on their list, and this is the time we need them in the country."

Perrett said Westpac used a diary type system in terms of booking in clients for a review but even this aspect could easily get the best of advisers.