Year-end tax strategies: keeping your house in order

Janine Mace outlines what financial advisers should be doing to ensure their businesses are adequately prepared for the end of the financial year.

Getting ready for the end of the tax year needs year-round thought, writes Janine Mace. She explains what financial planners should be telling their clients.

In the old days, tax strategies were a big feature of the run-up to June 30, with tax-driven investment schemes popping up like mushrooms after rain.

These days, financial year-end is more about checking that the paperwork is in place and the investment limits on various structures have not been exceeded.

As Strategy Steps director Louise Biti explains: “Tax is an interesting topic as everyone wants to minimise the tax paid, but on a personal level there is not that much you need to do any more.

“Some strategies are about reducing tax, but really most are just deferring tax until the next year. True savings are made when the tax rate changes and the amount of tax paid can be reduced,” she says.

With no rate changes occurring this year, Trevor Bridger, managing director of BDO Private Wealth Advisers, agrees the emphasis has shifted.

“The days when you used to be flat out at the end of the financial year are mostly gone, as many people are doing things more regularly throughout the year now,” he says.

“For the vast majority of clients, all that needs to be reviewed is any shortfalls in the contributions caps, rather than making last minute decisions.”

The slow elimination of major tax minimisation opportunities has changed the landscape, according to Biti: “Most things are fiddling around the edges rather than major strategies.”

However, this does not mean it is not worth raising the topic with clients. “It is about tinkering and doing a health check,” she says.

Strategy to the fore

MLC head of technical services Gemma Dale agrees the emphasis is different. “In the past few years the focus has shifted and it is not about maximising contributions or minimising tax, it is now all about optimisation,” she says.

“There are now not as many benefits available in terms of tax cash flow planning, unless you already have long-standing plans in place.”

It is now the financial plan that is centre stage at year-end.

“We are really in a situation where the overall strategy takes precedence and minor tactical opportunities in relation to tax can be utilised, but they are not driving the overall strategy,” Dale explains.

“For financial planners, everything has to be realigned to the long-term strategy rather than trying to solve problems in a short time period before year end.”

This means thinking ahead and considering the client’s future circumstances.

“In a progressive tax system, you need to think about whether the client’s income will be higher this year or next, due to things like retirement or a pay cut, and make appropriate changes. You also need to make sure everything is in order for next year,” Biti says.

BT Financial Group technical consulting senior manager, Bryan Ashenden, agrees that year-end can be an appropriate time to reassess.

“June 30 should never be when June 30 tax planning is done. It is a good time to focus on the area, but never leave it to the last minute to do it,” he says.

“For year-end, use it as the trigger to review the client’s financial affairs generally. See it as an opportunity for review to ensure everything is in place for 30 June and the year ahead.”

Although there are few important tax issues this year, one that advisers may need to raise with clients is next year’s flood levy. While some clients may want to limit their income to avoid the levy, others may feel the opposite.

“Some people will feel comfortable paying the levy and so will not be trying to shift the income, but the adviser needs to discuss it with the client,” Dale says.

Biti agrees: “The flood levy could lead to a 0.5-1 per cent higher tax bill next year, so bringing forward income could be beneficial. However, as always, you need to weigh up the benefit versus the costs involved in limiting your payment of the tax.”

Prepaying to save

For clients with geared investments such as margin loans, prepayment of interest can represent savings.

“With gearing, it may be worthwhile prepaying interest payments in June, but you need to consider the cost and impact,” Biti says.

“It also fixes the interest rate, so if you believe interest rates will rise, you get a double benefit.”

Dale agrees this can be worthwhile, but cautions there are traps – particularly if future margin calls cannot be met.

“Prepayment of interest can be appealing, especially if you can lock in a good interest rate, but you need the cash flow to support it and to fund the ongoing investment.”

Ashenden is cautious about making a blanket call to prepay interest.

“When it comes to prepaying interest, it is not necessarily sensible in every situation. You need to think about where interest rates are going versus the interest rate you are offered by the provider. Will you be better or worse off by prepaying?” he asks.

“When do you get the benefit of the tax refund? It could be months away, so the client may not really be better off. You can’t just draw a simple line and say it is the best way for every client.”

With investment markets rising and many clients now sitting on capital gains, using capital losses accrued during the global financial crisis should be considered.

“If the client is carrying forward capital losses from previous years and if they have capital gains, they need to consider cashing in some of their assets to use them up,” Biti suggests.

“Capital losses are diminishing in value each year, so it can be better to sell capital gains assets. People fear selling assets that are performing well, but it can be important to take gains along the way.”

Another point to check is private health insurance cover, particularly for clients who have taken redundancy, cashed in assets or received some form of one-off income.

“If a client has abnormal income this year and it has taken them over the threshold for the Medicare Levy Surcharge and they don’t have private hospital cover, they need to review their position,” Biti says.

Superannuation remains important

Although many tax strategies have disappeared, one that is remaining is superannuation.

“Super contributions are still a big opportunity for people, especially for the self-employed,” Biti says.

However, the complexity and prescriptive nature of the rules mean advisers need to take care. Dale urges advisers to check thoroughly and aim to achieve the best results, rather than emphasise tax minimisation.

“Our advice now is everyone needs to optimise their contributions to super, not to maximise them,” she says.

“Advisers need to make sure clients are making use of the contribution rules as well as they can, but not overusing them.”

Dale believes advisers need to manage contributions carefully. “Otherwise, it can cost the client dearly in tax payments,” she says.

She says contribution caps are the number one topic planners seek technical advice on from MLC, particularly towards year-end. “The intricacy around the legislation means the adviser needs to be very careful,” she adds.

Rules disallowing deductions if the order of the transactions is incorrect mean advisers need to tread carefully. MLC is currently developing a ‘decision tree’ to help with the process, with work to date highlighting at least 10 different points where minor decisions can be significant.

“Many of these decisions have a huge impact and cannot be changed,” Dale says.

“The regulations now don’t allow super fund administrators to change contributions and deductions and this is something advisers need to get their heads around.”

Ashenden agrees: “The adviser needs to check all contributions – especially in relation to the concessional caps – as even the simple 9 per cent plus salary sacrifice could take someone over the limit.”

He recommends addressing these issues well before June while there is still time to do something. “Maybe do not plan to go to the full amount, to ensure you do not go over the maximum in case you have forgotten something.”

Ashenden believes advisers need to review both concessional and non-concessional contributions and consider how best to take advantage of the opportunities.

“If you are 64 now, you may not want to put in $150,000 this year, as you would not be able to take advantage of the three-year $450,000 non-concession limit,” he says.

A worthwhile but often overlooked tax opportunity is the co-contribution benefit.

“Make sure if the client’s income is less than $61,920 that they consider making a co-contribution,” Biti suggests.

Dale agrees: “If the client has some extra cash flow, they can start to look at co-contributions again. It is not a big benefit, but it is worthwhile.”

Extra cash flow could also be used for salary sacrifice. “If they have not used up all their contribution caps they could look at salary sacrifice between now and the end of the financial year,” Dale says.

“You could do it for three to four months, but you would need an accommodating employer. You can commence a salary sacrifice arrangement at any time and then cease it if you are concerned about the cap,” she adds.

While there are few opportunities open to retirees, Dale has a suggestion. “It is mostly at the margin, but if you commence a pension after 1 June, you do not have to take a payment,” she says.

The transition-to-retirement (TTR) rules also allow some creativity. “If you start a TTR you can take up to 10 per cent in one go. If you take it almost at the end of the year you can take it as a lump sum,” she says.

SMSF strategies

Getting the paperwork right is particularly important for self-managed superannuation funds (SMSFs) at year-end.

“It is important to tidy up before you get to the end of the financial year and ensure everything is in place. You need to ensure all the paperwork is in order and the reporting is done correctly,” Biti explains.

When it comes to SMSF trustees, Ashenden believes it is essential not to leave contributions to the last minute as the key is the date the cheque is presented, not when it is drawn.

“Do not leave writing a contribution cheque until 30 June to ensure the cheque is presented in time to make the deadline. If you leave it to the last minute you could find it will not be accepted as this year’s contribution,” he warns.

Pension streams also need checking. “If the fund has an account-based income stream, you need to ensure you have made the minimum income payment required,” Biti says.

If members are switching to become pensioners, the SMSF should review its tax losses.

“Often on 1 July people start moving their SMSF from the accumulation to the income phase, so it may be worth checking on whether the fund is carrying forward tax losses and whether it can bring forward expenses so you do not lose the opportunity to claim these deductions when it moves to the pension phase,” Biti says.