Year-end tax strategies - avoiding unpleasant surprises

No-one likes a surprise when wrestling with tax and superannuation, and financial planners heading towards the end of financial year seem primed on what is about to change. However, as Jason Spits writes, a Federal Budget from the new Government still lies in wait.

Financial planners live by their calendars, slotting in client reviews and updates while sending out statements and making portfolio changes on a regular basis. But there is one date that unites them all – June 30. 

Regardless of their client demographic, every planner needs to set their client’s house in order before the financial year ends while also keeping a close eye on any changes to relevant rules and regulations. 

And while this annual event may have consumers scrambling to find the box of receipts under the bed, many planners have factored in the end of this current financial year when it started in the middle of last year. 

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Crowe Horwath principal of Wealth Management Patrick Giddy said the days of planners scrambling to get everything done before 30 June are over, with planners having to set the wheels in motion earlier due to the growing complexity of their clients’ financial affairs. 

“There used to be a last minute rush for many planners but many are now actively ‘forward planning’ for the end of the financial year.

"This is happening particularly where superannuation is becoming a larger part of many clients’ wealth portfolios, with a need to plan for specific events such as making contributions or bringing forward contributions,” Giddy said. 

According to Giddy, much of the previous rush to tax time was removed when the Australian Tax Office (ATO) restricted tax-effective investments some years ago by removing the 13-month deduction rules. 

Budget impact 

However Giddy says planners still have to await possible changes from Budget night before finalising plans for clients ahead of 30 June, with legislative risk a real concern in the closing weeks of the financial year. 

“There is less speculation around this year’s Budget than in previous years and this may be because of the change in Federal Government, with proposed changes – particularly around superannuation – having been dropped,” Giddy said. 

Robina Financial Services director of financial services Troy Theobald said while the Federal Budget may add to the work of a planner, it is also a clarion call for some clients who have yet to act. 

“Budget night does create clarity around what we may need to do before the end of the financial year and also gives us pointers as to who we should be contacting about specific changes that come out of the Budget,” Theobald said. 

“The timeframe between the Budget and June 30 also gets rid of any procrastination that clients may be having because they can see they have two months to act and get everything in place.

"It also means we can act for the end of one financial year and have discussions about what they can do at the start of the next financial year.” 

Rede Accountants director Ken Ludeke said that despite the implementation of the Future of Financial Advice (FOFA) legislation, planners are not facing a huge raft of tax-time changes but do need to be aware of some specifics in the area of superannuation. 

“FOFA has added to the time burden of accountants and planners with the need to send out Fee Disclosure Statements, which is in essence sending out more documents to clients restating numbers they already have,” Ludeke said. 

However, he said advisers will not have to spend more time to understand many of the year-end strategies, as they have either been in place for some time or have been announced well in advance. 

“The rules around co-contributions or spouse contributions have not changed in any way, so advisers can focus on some of the other larger changes which have taken place,” Ludeke said. 

Focus on trustees 

Among these larger changes are new penalties for self-managed superannuation fund (SMSF) trustees; changes to concessional and non-concessional contribution caps; and tax paid on superannuation contributions for those earning more than $300,000. 

Ludeke said the fines for SMSF trustees were important to note, as these fines were high, would be applied to each trustee of a fund, and would need to be paid personally and not from the assets of the fund. 

“These will be fines of up to $10,200 per trustee, regarded as personal penalties for breaches of the regulations relating to the SMSF trustee duties,” Ludeke said. 

The new penalty regime will take effect from 1 July 2014. It will also include civil and criminal penalties for those promoting early release schemes; ‘education directions’; and ‘rectification directions’ for trustees. 

Under the education directions, SMSF trustees may be required to undertake education courses regarding the obligations of a trustee, while rectification directions will require trustees to take actions to rectify any contraventions.

This will need to be accomplished within a set time, with proof provided to the ATO of their completion. 

Crowe Horwath principal for superannuation & SMSF Kathy Evans said the ATO in the past had the ability to penalise trustees – but the powers were at a much lower level than those that will soon commence. 

According to Evans, moving the financial penalties to above $10,000 per SMSF trustee will bring more rigour to the space and clamp down on those who are consistently in breach of their obligations. 

“The ATO will not slap honest mistakes but does want SMSF trustees to take their tasks seriously. Ninety-eight per cent do the right thing each year but a handful either lodge late or do the wrong thing and a clean-up of the SMSF space will be a good thing,” Evans said. 

SMSF trustees can’t claim ignorance either, according to Evans, with the ATO releasing a form two years ago which required trustees to acknowledge their obligations as trustees. 

In fact, now is the time for lax SMSF trustees to get their house in order, with the ATO treating SMSFs that have two or more tax returns yet to be lodged as a “non-person”, effectively closing off many of the benefits in having an SMSF, according to Evans. 

“A fund that is treated as a ‘non-person’ is unable to receive contributions from employers, unable to receive rollovers or transfers and cannot borrow money to invest in property.

"Trustees in this situation also face the possibility of being penalised for not lodging their returns on a vehicle that can no longer act as an SMSF,” Evans said. 

Myers McCann financial planner Bill Antoniou said while it was important to keep an eye on the SMSF sector, many of the rule changes which will begin at 1 June 2014 will benefit superannuants across the board – and planners need to consider whether to take action before or after the end of the financial year. 

Super caps create opportunities 

Antoniou said the change that will affect the widest number of people relates to increases in concessional contribution caps. The applicable age limits to access the contributions limits are being reduced while the level of contributions will rise (see Table 1). 

“The shift of funds into the concessional environment should see a large transfer of wealth for baby boomer clients, and advisers need to be upfront on the planning decisions they need to make in the coming months,” Antoniou said. 

“Both advisers and clients will need to decide if they take action under the current caps or wait until they have changed in the new financial year.” 

This decision making would also apply to non-concessional contributions, which will increase by $30,000 to $180,000 in the 2014/15 financial year (see Table 2) and have an impact on what people under 65 can bring forward over a three-year period (Table 3). 

Evans said people under 65 years old may be able to make non-concessional contributions of up to three times their non-concessional contributions cap over a three-year period, but need to note the cap applies from the first year it is exceeded. 

“For example if $160,000 is contributed in 2013/14, the $450,000 cap applies for the three-year period,” Evans said. 

“These limits are a step in the right direction but we have lost the flexibility of previous years, and [lost] a number of options for people close to retirement to ramp up their superannuation. 

"Even for those who have been operating under the superannuation guarantee it would be better if the caps were higher, but the sector has to take what it can get for the time being.” 

The news is not great for those earning above $300,000 either, with the introduction of an additional tax of 15 per cent on concessional contributions into superannuation. 

This threshold will include any income received by an individual, Giddy said, including taxable income, fringe benefits, investment income and even tax-free government benefits. 

“Anyone in this situation will pay 30 per cent tax on their concessional contributions, with the additional tax payable by either the superannuation fund or by the income earner, without being able to claim any credit for the additional tax,” Giddy said. 

“This is not a new announcement, but clients do often forget that this will apply from 1 July and are shocked when the tax bill arrives.” 

While these changes will create work for planners, Theobald said that not enough people would be able to benefit from the higher contribution caps because it was difficult to get wage earners and wealth accumulators into superannuation at present. 

“Every dollar in a family budget is watched, with few spared for superannuation. The 9.25 per cent superannuation guarantee contribution by employers is not a cost an employee has to wear and is seen as a bonus. It is not seen as an investment, nor are people seeing superannuation as part of a savings solution,” Theobald said. 

New calendar year also requires changes 

Antoniou said the engagement with superannuation does not increase as balances grow but as the time to retirement decreases – and the need to order financial affairs becomes more pressing. 

As such, changes related to deeming rules and how Centrelink assesses pensions – which will begin from 1 January 2015 – will attract specific interest and require advisers and clients to act in the coming months. 

Under the new system, normal deeming rules will be applied from 1 January 2015 to superannuation account-based income streams, whereas now they are concessionally assessed.

However grandfathering rules will apply to income streams that are in place before this date and in situations where the member also receives a Centrelink or Department of Veteran Affairs pension or allowance before 1 January 2015. 

What this means, according to Antoniou, is that some people will need to both apply for and receive a pension and generate a superannuation account-based income stream if they wish for their pension to be concessionally assessed. 

“These changes should not be news for planners and create an opportunity to ensure that in the new financial year the plans of their clients reflect the changes in the regulations,” Antoniou said. 

“If planners have been engaged with their clients throughout the year, then they should expect their clients will see them as the first point of contact when dealing with these issues and preparing for the end of the current financial year.”