June 30 not such a taxing time anymore

The days of tax bonanzas are over with many planners welcoming the sanity and sensibility that now accompanies the end of financial year. While work still remains at this time of year, Jason Spits writes that planners can face 1 July without major upheavals or client concerns.

Financial planners looking for a good reason to make regular contact with a client can't really go past June 30 as a trigger date to initiate discussions around tax, super, life insurance, trusts, aged care and even estate planning.

While it may still be a busy time for advisers, many claim the days of clients trying to back fill an entire year with deductions and contributions is over.

Rather, the end of the financial year has become a reminder to wrap up the plans of the outgoing year and begin to make plans for the years to come.

Superannuation

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One of the key areas to consider for most clients at this time of the year is superannuation, and ensuring any allowable contributions have been made.

HLB Mann Judd partner, personal wealth management, Jonathan Philpot, believes while this is a basic and first point of consideration in end-of-year tax and financial planning, the long-term nature of superannuation contributions are the real strength of this strategy.

"The old adage of use it or lose it applies to superannuation contributions and clients should be encouraged not to waste a year of deductible contributions," Philpot said.

"Each year that is not used to make a contribution is a year lost that could have been used to reduce personal tax and build retirement savings."

This year is also the first in some time deductible contributions limits have increased, with those aged under 50 now able to contribute $30,000 and those over 55 able to contribute $35,000.

Philpot said that while this is a long way off the previous heights of around $100,000 in past years, the aggregate nature of these contributions is where clients should be focused.

"Superannuation needs time to be allowed to build up because the days of being able to make large deductible contribution are over. However, people in their 40s and above can still benefit by salary sacrificing up to the limit or by moving investments outside of superannuation to within that system and can do so by the non-concessional limits."

BT Financial Group technical consultant— advice, Tim Howard, said that non-concessional contributions, while much higher at $180,000 a year, offer super clients a three year catch-up period in any one year period.

Super fund members must be below age 65 at the start of the financial year and can bring forward up to three years' worth of non-concessional contributions in a single financial year for a total non-concessional contribution of $540,000.

"The timing, rules and limits around these contributions can get complex, which is why it is important that clients receive advice around the best way to contribute to super before the contributions caps you have available this financial year are gone forever," Howard said.

Investments

Closely tied to super is the issue of investments and how best to manage any gains and losses which have resulted from market activity over the past year.

AP Financial Services principal Adrian Patty said these two areas were related because people aged over 55 should really be considering whether to hold investments and to generate capital gains and losses outside of superannuation, where the latter offers a better tax treatment on investments.

However, for clients who may not be over that age or still wish to retain assets outside of superannuation, Patty said the focus on investments should be long-term capital appreciation and not short-term tax crystallisation.

"There are less structured products and schemes around tax than in the past and a strong focus on personal contributions to super and wealth has developed. The Federal Government has reduced or removed tax loopholes and these efforts are aimed at aligning assets with government policy," he said.

"In the past, tax breaks were given on these arrangements, because it was believed they were in the public interest and provided investments but those tools today are more limited in number."

Despite this, Patty said the usual benefits of offsetting capital gains and losses still applied and should be actively used, particularly for those who may have used a geared strategy in the past year.

"Advisers need to plan with clients as to which year they wish to be in a higher tax bracket and in which years they wish to pay tax in advance," Patty said.

Philpot said there can be a short-term temptation to trigger capital gains events for end-of-year tax planning but this should be balanced against the longer term plans behind the investments.

"If a client has stocks that have performed well it would make sense not to sell them until after 30 June to offset any gains into the next financial year. However, if stocks have to be sold, it would be best to be those stocks which have been held for the long-term, and a bounceback in the market is unlikely to improve," Philpot said.

The aim of good advice and investing is to set up a level of personal wealth first and then consider the pension last. Focusing on the pension first is really about relying on the Government to boost the pension in the future beyond just the level of inflation.

"There is not much point in selling just for capital gains tax reasons and clients should be encouraged, particularly at this time of year, to only sell if it matches their investment criteria, and planners should not let tax overtake that criteria."

Personal Tax

While bracket creep received a quick glance before the Budget - mainly in the media - the Federal Government left tax brackets as they were.

Philpot said this was because the arrangement works for the Government and it was unlikely that anyone would knock back a pay-rise even if it moved them into a new tax bracket.

Yet options remain to deal with the problem even if the Government is reluctant to tackle it.

According to Howard, bracket creep can be overcome by making concessional contributions to superannuation, prepaying deductible expenses such as income protection insurance premiums or interest on investment loans such as margin loans or investment loans.

"The only downside being you won't be able to claim these deductions next financial year, as you have brought them into this financial year," Howard said.

Patty regards bracket creep as manageable, but is cautious around trying to plan beyond the ability of the Government to control the issue.

"There is not much you can do beyond the established responses. The Government retains controls of the uptake of taxes and no-one in Government is likely to give away any ability to do that. Bracket creep gives the Government the ability to plug the Budget in one year and give back to tax-payers in another year."

Pensions

While the most recent Federal Budget left superannuation and capital gains tax alone, there were changes introduced around the pension assets test that will come into force from 1 January 2017.

According to Howard, these tests will apply only to the upper limits of assets, which will be reduced in line with a lower taper rate and impact the level at which pension entitlements will be calculated for every $1000 a retired client has over the lower asset test limit.

Howard said this change — if it is legislated — will result in some asset tested part pensioners with higher levels assets losing some or all of their entitlements to the pension.

"It is important to note that the Government has indicated that they will ensure those who lose their pensions under the new measures will still be entitled to or retain their health care cards or be able to move to the Commonwealth Seniors Health Card, which will provide them with the same or comparable pharmaceutical benefits to which they are currently entitled under the pension concession card," Howard said.

Philpot said this news has been greeted with some very poor suggestions for pensioners to rid themselves of assets that would threaten their pension, but stated this was a risky move that put much faith in the pension staying the same and meeting their needs in the future.

He said a client with around $700,000 in assets would need to get rid of $400,000 to get under the threshold to receive a pension but consuming that level of assets was a poor strategy.

"The aim of good advice and investing is to set up a level of personal wealth first and then consider the pension last. Focusing on the pension first is really about relying on the Government to boost the pension in the future beyond just the level of inflation," Philpot said.

Patty said the Budget changes are another example of a policy direction affecting advice, and pre and post retirees should see the changes in the Budget as the need to build a buffer in their personal savings.

"This is a tax issue that stems from a wider downturn in the Budget but the larger issue behind it is ‘what is sustainable?', and investors should consider how the Government may answer that question before banking on the pension," Patty said.

Aged Care

Aged care also escaped any unnecessary Budget attention, having already undergone changes as at 1 June 2014, which Stephen Rooke, Principal — Business Advisory Services at William Buck said has played into the hands of those who may be seeking a care facility in the next few years.

Rooke said those seeking aged care can now negotiate with operators as to how much capital and income they will need to enter a facility, moving away from the past situation where the price of entrance into a facility was set and payable in full at the outset.

"The opportunity here is that advisers can now help clients plan which assets and which income streams will be used to fund aged care and match investments to upfront and ongoing aged care costs," Rooke said.

"There are still limits on what can be done and the operators of new facilities will have big upfront costs and are likely to want people who can pay their asking price while operators of older facilities may be more open to negotiations, so it would pay to shop around for a suitable location and financial outcome."

Rooke said those not yet seeking aged care should consider planning assets and incomes for times when they will need it and to make these plans while they are still well, and advisers should be asking those forward looking questions at the end of the financial year.

Long-term tax planning

According to Rooke, these type of discussions can also lead into the areas of family trusts or charitable trusts, which require longer time considerations than just the end of the financial year.

Family trusts can serve to direct income to family members on lower marginal tax rates while also providing protection for assets held in the trust.

Equity Trustees general manager — philanthropy, Tabitha Lovett, believes many advisers are familiar with these type of trust structures but are less familiar with charitable and philanthropic trusts.

Lovett said the level of advisers providing guidance to clients around philanthropic giving has climbed since the introduction of the Future of Financial Advice (FOFA) reforms. However, advisers may still be unaware how receptive clients can be to the idea and the ease in which trusts can be created and maintained.

According to Lovett, the best interest duties, and the need to demonstrate value to clients inherent in FOFA, has seen advisers considering philanthropic and charitable giving as part of tax and estate planning strategies.

Lovett said philanthropic trusts can be set up in two days with a minimum of $20,000 seed funding and are being created increasingly by self-managed superannuation fund trustees — many who chose to oversee the investments of the philanthropic trust.

Any funds placed into a trust would be immediately tax deductible, with ongoing donations and the maintenance of the trust able to be folded into a wider financial plan and estate plan where clients intended for the trust to be perpetual.

"This is a straightforward conversation for financial advisers to have with their clients but there may be a lack of awareness of how easy they are to set up or some concern about the client's own future needs," Lovett said.

"Advisers can act here to assist clients to only place in what they would normally give to charitable causes with the advantage that the client controls the direction of the giving."

"They can also communicate there is more to life than the accumulation of wealth and shift from focusing on the superficial or ‘what's in it for me' to what can I do long term with the wealth that has been created. The idea of doing good resonates with clients and this conversation is not usually poorly received when raised by an adviser."