There are a unique set of challenges this financial year as people begin to recover from the negative economic impact of the COVID-19 pandemic, meaning advice around year-end tax strategies will be of particular importance for people.
The COVID-19 impact was combined with legislative changes with downsizer contributions to superannuation, the superannuation guarantee (SG) amnesty and bring-forward contribution changes. These were all key topics which advisers sought technical advice on in the final quarter of 2020, according to BT.
According to Todd Want, director of tax services at William Buck, planners will need to reach out and provide more advice to those clients who had a rather atypical year, either in terms of surprisingly positive financial results or on the downside.
“From business and private groups perspective, advisers should be looking in particular at those clients who may have had a different year where this would be more profit than they would normally have or way less profit than they would normally have,” Want said.
“Obviously businesses which have received JobKeeper and the boost would need to be conscious with their year-end strategies that the next financial year is likely to be a very different year again.”
Similarly, Bryan Ashenden, head of financial literacy and advocacy at BT, said that due to a number of changes experienced by individuals and companies over the last few months and a changing economic situation, it was even more important for advisers this year to engage with their clients.
“All these things combined when we are coming out of that COVID-19 environment now, are probably of high importance but it is also a great opportunity for the advisers to talk to their clients and really demonstrate the value of their advice.”
Colin Lewis, head of strategic advice at Fitzpatricks Private Wealth, said the key differences advisers and their clients needed to consider this year were mainly around superannuation.
“The big thing I am going to be stressing to my advisers for their clients this year is this whole thing about the super and I think the big story around this, leading up to 30 June, is around the superannuation indexation,” he said.
From 1 July, the transfer balance cap, contribution caps and the total superannuation balance test limiting certain contributions are going to increase, which may create the opportunity for people to get more into super and keep more in it if they put off doing certain things until after 30 June, Lewis said.
Also, the opportunity in the current financial year arising from the increase in the concessional contributions cap involves the ‘contribution reserving strategy’, an arrangement whereby contributions made to a self-managed super fund (SMSF) in June will be allocated in the new financial year.
Lewis explained that, with the higher concessional contribution cap applying from 1 July, this strategy may allow people to claim a larger tax deduction this financial year and a maximum deduction of $52,500 (up from $50,000). At the same time, any unused cap amounts from 2018/19 and/or 2019/20 may be available because the second contribution will now be $27,500 as it is being tested against the higher concessional contribution cap in the financial year of 2021/22. However, he warned, it was important to remember to allocate this contribution by 28 July.
Melinda Measday, superannuation director at HLB Mann Judd, agreed that superannuation will continue to be an important tax planning tool.
“Make sure you leave yourself time before 30 June to work out what contributions have already been made by your employer, then contact your superannuation fund and transfer the top-up contribution to the fund so it is received by 30 June,” she said.
“If your super balance is below $500,000, you may also be able take advantage of any unused cap from the 2020 tax year and make a top–up concessional contribution.
“If you have had a windfall or sold a large asset and have extra cash, you can also make a non-concessional contribution to superannuation.”
This kind of contribution is tax free and the cap is currently $100,000 per annum, set to increase to $110,000 per annum after 1 July, 2021.
According to Measday, the advantage of contributing these extra savings to superannuation is that the maximum tax rate someone will pay on the earnings is 15% whereas if the funds stayed in their own name, the tax on earnings would be at the marginal rate of tax, which may be significantly higher.
“You may also be eligible to bring forward an extra two years’ worth of contributions allowing you to make $300,000 contributions before 30 June, 2021. As the cap is increasing, waiting until 1 July, 2021 to make these contributions would mean you can pay in $330,000.”
On estate planning within superannuation, Lewis said the unusual past year meant that some people may be re-considering going into retirement phase, even though moving super into a retirement phase would mean going tax free.
“Traditionally, people liked to do that but this year is different,” he said.
Lewis reminded that the transfer balance cap limits the amount people can move into the tax-free retirement phase and this will increase to $1.7 million (up from $1.6 million) which could mean people will be able to get more into a tax-free account-based pension from 1 July but it will all depend on what they have done up to 30 June.
“The more you have used of the current $1.6 million cap before 30 June, the less of this increase you will get,” Lewis explained.
“You will only benefit from the full $100,000 increase where you have not transferred any super into retirement phase, nor received a death benefit income stream before 1 July. If you have used the entire $1.6 million cap, then you get no increase and you will receive some increase where you have had super in retirement phase but haven’t used the full $1.6 million cap.
“Normally, people would want to get as much money into super’s tax-free retirement phase as soon as possible, but with the transfer balance cap increasing, it may be worthwhile waiting until after 30 June to start an account-based pension (or move more money into retirement phase), so as to have more in the tax-free environment for the long-term.
“Accordingly, if you are looking to get as much money into super as possible, you should avoid triggering the bring-forward rule this financial year by limiting your non-concessional contributions to $100,000, thus giving you the ability to trigger it next year to get more into super,” he added.
Ashenden agreed that a key consideration for estate planning was the increase in the transfer balance cap and how the payment of a death benefit pension may impact this.
According to him, this reiterates the need to consider whether pensions are set up as reversionary binding pensions or not.
“When a pension is set up as a binding reversionary pension, the amount assessed to the transfer balance cap of the recipient (beneficiary) is the balance as at the time of death of the original pensioner, but is not assessed until 12 months after the date of death,” he said.
“As a result, if someone who established a binding reversionary pension has passed this financial year, it will not be assessed to the beneficiary’s transfer balance cap until the next financial year (i.e. on or after 1 July, 2021). This means it is potentially going to be assessed against a higher transfer balance cap, meaning the beneficiary has the potential to keep a greater value inside the tax-free pension environment.
“If the pension was not a binding reversionary pension, it will have been assessed to the beneficiary transfer balance cap at the time it commenced to be paid as a death benefit pension for its value at that time. That would have been against this year’s (lower) transfer balance cap. Therefore, careful planning and professional advice can help to manage through these complexities,” he said.
Following this, it will be a particularly important financial year for those aged 66 and 67 as they will need to consider any potential superannuation contribution strategies, Ashenden said.
He reminded that it was announced in the May 2019 Federal Budget that the ability to utilise the bring forward provision and contribute up to three years of contributions in one year would be extended from the year in which a person turns 65 to the year in which they turn 67.
“That change was due to take effect from 1 July, 2020 – the start of this current financial year. However, the amending legislation to give effect to this has stalled in Parliament. As a result, there is no certainty this change will pass and take effect from 1 July, 2020.
“Contributions should only ever be made based on existing law, meaning until the change has been made, the bring forward provisions are not currently available for those who turned 66 or 67 this financial year.”
However, with the impending changes to the total super balance threshold (the level at which to make a non-concessional contribution) increasing from 1 July, 2021, to $1.7 million and the annual non-concessional contribution cap also indexing from $100,000 to $110,000 at the same time, Ashenden said that careful consideration needs to be given to how much to contribute this financial year (if able to do so) whilst still maximising the potential for contributions next financial year.
According to Measday, in order to contribute before 30 June, 2021, people who are between 65 years and 75 years old will have to pass a work test, which must indicate they have worked at least 40 hours within 30 consecutive days in that financial year. After 1 July, 2021, this will only be needed if the person is between 67 years and 75 years old.
“A work test exemption is now available for an additional 12-month period from the end of the financial year in which the member last met the work test to those with less than $300,000 in superannuation.
“Those over-75 are unable to make personal concessional contributions to superannuation and funds can only accept mandated employer contributions (i.e. super guarantee contributions).”