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A checklist of taxation and super strategy considerations before 30 Jun 2017
5 May 2017

Attached is a checklist of taxation and super strategy considerations before 30 June.  
Next year sees the commencement of new legislation surrounding super, with the biggest changes seen in 10 years.  In some cases this provides cause for rethinking what you can achieve this year under the more generous Super Contribution Provisions.   For a summary of the new Super Rules coming into effect on 1 July 2017 refer to Hudson article dated 01/12/16.  

There are 3 Sections to this Checklist

A.  Tax  minimisation strategies  prior to  30 June 2017

B. Tax deductions to be prepared for

C.  Super strategies to consider before 30 June 2017

A.  TAX  MINIMISATION STRATEGIES  prior to  30 June 2017


1.  Reducing Taxable Income with Additional CONCESSIONAL super contributions 

If your taxable income is going to be above $37,000 you may wish to consider some additional super contributions to reduce your taxable income. 


Refer Hudson article dated 24/2/2017 for details surrounding Concessional Contributions as well as the information below. 


Two different Limits (CAPS) apply depending upon your age.

Age Group2016/17 CAP
 # Aged under 50
$30,000

Aged  50 or more 

$35,000 


  If you turn 50 before 30 June 2017, then you fall into the higher CAP category. 

You may have one last opportunity to reduce your taxable income and either salary sacrifice from your last pay or if self employed make a larger personal (& deductible) contribution to lower your taxable income for the year.  

CAUTION –  if more than 10% of your income is received in the from of wages or salary (including and salary sacrifice or Fringe Benefits), then you are considered a salary/wage earner. If you are unsure of whether you are self employed or salary /wage earner, check with your accountant. 

For salary and wage earners


It is a little too late to make any major changes as you CANNOT make any personal contributions and claim as a deduction.  However you can for example still sacrifice all of your last month’s wage (if you have cash reserves) – if you are looking to reduce your taxable income.  

Trap 1.  Make sure you account for your employers ‘Super Guarantee’ (SG) contributions in your calculations.

Trap 2 –  Check Timing – Your pay slip does not necessarily match the timing of when the super fund receives employer or sacrificed contributions, so if you are running up to your Concessional CAP, be sure to check in with your super fund on the count so far (your pay slip may mislead you (for eg. Your June 2016 contribution may have arrived in July 2016 and therefore counted in this year’s Cap). 

For the self-employed

This includes sole traders and Partnerships or business structures that involve only dividends or distributions (ie nil wages), you have a little more flexibility to make late contributions.  

  • Review your projected taxable income for this year and if you (and or spouse) are likely to exceed $37,000 in taxable income, you can benefit from making lump sum contributions to super to lower your income tax. If you have a company structure, you will need to consult with your accountant about how to fund and classify the contribution. 
  • For the genuinely self-employed (i.e. unincorporated) – Before making contributions – check with your accountant that you qualify as being substantially self-employed (often referred to as the 10% rule).

Trap  – Make sure you account for any life insurance premiums that may be structured under a super policy.
    

Check your contribution classifications are correct

Contributions received by your super fund will be classified as ‘concessional’ (tax deductible to the payer) or ‘non-concessional’ (not tax deductible). 


If your contributions have been incorrectly classified as ‘non-concessional’, it can prevent your accountant from claiming the deductions (in the case of the self employed / small business). This is an easy mistake to make when making your own contributions to super as a self employed person. 

Tip 1 – Make sure your accountant is aware of any personal concessional contributions you have made – pointless exercise if you don’t actually claim the deductions – your super fund should provide a summary statement.  You will have to complete a form “intention to Claim a Tax Deduction”  to advise your super fund you intend to claim the tax deductions. 


Tip 2 
– If you work for yourself under a Company (Pty Ltd) structure – paying yourself wages, any contributions need to be paid by your company and represented as employer contributions if your company is to claim them as a tax deduction.  


Tip 3
 – Even after 30 June, it is not too late to correct classifications if an error is detected. On this note, it is worth checking your 2015/16 contribution classifications as you still have (in some cases) until 30 June 2017 to correct those. 


2. Spouse contributions Rebate

If your spouse’s income is under $10,800, you can make a contribution of up to $3,000 and claim up to a maximum 18% rebate ($540 maximum).  This phases out to nil once the receiving spouse’s income is above $13,800.  In assessing Spousal income, you must also include any reportable Fringe Benefits or additional contributions (or salary sacrifice) mandated above Super Guarantee (SG) levels.  

3. Pre-payment of deductible expenses 

This strategy is only suitable to someone who is going to be in a higher tax bracket this year than they will be next year (usually due to a one-off event such as capital gains, large bonus, or alternatively are retiring or taking maternity leave and expect to have a low-income next year.  Some examples to consider for prepayment – 

  • Prepayment of next year’s investment loan interest in June this year bringing the expense forward .
  • Attending to any investment property maintenance issues or payment of expenses in advance.


Relevance ? –  with today’s wide tax brackets this has much less impact than it once did.  There is the old age argument, that it’s better to get the tax refund from the ATO a year earlier, but for me this strategy is really best used for when this years Marginal Tax Rate looks like being unusually higher than next years (as might be in the case of a large capital gain).    

4. Review shares/managed fund portfolios and current gain/loss positions 

If you may are sitting on unrealised capital tax losses in your investment portfolio at the moment and are considering selling down or replacing investments, this can present a suitable tax minimisation strategy in some cases: 

If you have realised capital gain elsewhere (shares and especially property), crystallising losses can reduce the impact of capital gains tax on your other capital gains.  This could be particularly relevant if you are looking to change your asset allocations (for example, selling Australian shares to increase global share exposure via managed funds).

Caution – tax washing – The ATO takes a very dim view of selling shares to create a capital tax loss to then buy back the same shares.  In this case the only purpose of the strategy would be to avoid tax – and thus invoke Part IV A of the tax act. 

B. TAX DEDUCTIONS TO BE PREPARED FOR

5. Depreciation on Investment property –  Make sure you have a depreciation(s) schedule for your accountant including Building Write-Down as well as fixtures and fittings (white goods, heating/cooling systems, carpets, etc). If your investment property is under 40 years old (or had a major renovations in the last 40 years), there will be deductions available. Seek advice from your accountant if you are uncertain.  If you have recently purchased a property, you may need to engage the services of a Quantity Surveyor to prepare the appropriate schedules for your investment property.

6. Investment loan deductions – Mortgage broker and loan establishment fees, stamp duty charged on the mortgage, title search fees charged by the lender, valuation fees for loan approval, costs for preparing and filing documents on the loan, and lender’s mortgage insurance – are all tax deductible items.   If your total borrowing expenses are more than $100, the deduction may be spread over five years or the term of the loan, whichever is less. These expenses are often overlooked when doing tax returns. 

7. Income Protection Insurance Premiums – where the policy is held outside of Superannuation. 

C.  SUPER STRATEGIES to consider before 30 June 2017

8. Do you qualify for the government’s co-contribution scheme in 2017 ? 

Quick Facts

  • Only personal ‘non-concessional’ contributions qualify (ie not tax deductible)
  • The maximum matching rate is 50 cents for every $1 of eligible personal super contributions. 
  • The maximum benefit this year is $500  for a $1,000 personal contribution
  • The maximum benefit applies if your income is under $36,021.
  • The benefit cuts out if your income is above $51,021.
     

Qualifying

You will be eligible for the super co-contribution if you can answer yes to all of the following:

  • you made one or more eligible personal super (non-concessional) contributions to your super account during the financial year
  • you pass the two income tests described below  
  • Income Threshold Test – your income (including fringe benefits, and salary sacrifice, etc)  is under the higher threshold of $51,021
  • 10% Eligible Income test  – 10% or more of your total income must come from employment-related activities, carrying on a business, or a combination of both.
  • you were less than 71 years old at the end of the financial year
  • you did not hold a temporary visa at any time during the financial year (unless you are a New Zealand citizen or it was a prescribed visa)
  • you lodged your tax return for the relevant financial year.


How to calculate and maximise your benefit. 

This is made very easy for you by the following Government Website which calculates your benefit for you and how much you need to put in.  Remember to include any fringe benefits and any Salary sacrificed income in your income figure as well as any other taxable income.  

https://www.moneysmart.gov.au/tools-and-resources/calculators-and-tools/super-co-contribution-calculator

The amount you put in yourself as a personal non-concessional contribution needs to be double the amount of your potential co-contribution benefit. 

Full Benefit –  If your income is under the lower threshold of $36,021 you can qualify for the maximum benefit of $500 co-contribution.  You would need to put in double the con-contribution yourself amount as a personal contribution to gain the benefit.   

Partial Benefit – If your income is between the two thresholds ($36,021 and $51,021), you may qualify for at least a partial government co-contribution. The benefit reduces from the maximum benefit of $500 by 3.33 cents for every dollar you earn over $36,021 until it cuts out at $51,021.   


Example – If your income (for the year) is $45,000, your maximum benefit is $201.  You would therefore need to contribute $402 to qualify for your full entitlement. 

Tips 

  1. Make sure your contribution is a personal ‘non concessional’ contribution.  You cannot claim a tax deduction for this contribution. 
  2. Note this to your tax agent when completing your tax return.
  3. Even if you borrowed the money from say a home loan at 5.0% to fund a contribution of $1000, the interest cost for one year would be $50 compared to a maximum potential benefit of $500.  You could then pay the loan off over the next year. 
  4. If you retired this year and your income is lower than normal or if you are now only working at more modest levels than you once did, this could also apply to you. 

This is FREE MONEY for your super.  If you have been saving to invest long term anyway then this is a no brainer. 

9. Making Large Non-concessional Contributions


If you have been considering making a large NON-CONCESSIONAL contribution to super with cash you are sitting on or about to receive from sale of investment assets or a windfall gain such as an inheritance, it is worth considering the impact of contributing before 30 June 2017 before the personal contribution limits drop considerably from $180,000 to $100,000 per annum per person.   For those with enough cash to consider the 3 year bring forward provision, this means a drop from  $540,000 to $300,000.  

10 . Rebalance Super Levels between Spouses

It is a better year to build your spouse’s super (if well under your own balance) by utilising the $540,000 3 year provision.  This strategy (much like the re-contribution strategy below) will be dependant upon your capacity to qualify for ‘unpreserved’ Lump Sum withdrawals (free of tax) and your spouse’s qualification to take advantage of the ‘3 year bring forward provision’.    

The benefits are two-fold :  

(a) increasing the tax free component of your collective super balances  (benefiting potential future children beneficiaries with reduced tax).

(b) lowering your current Super balance further under the new $1.6 Million CAP allowing further contributions to Super in the coming years. 

(c ) sheltering assets to a younger spouse for Centrelink benefits.

Caution : The qualifications for this strategy are specific and complex and it is recommended that they be discussed and implemented through an adviser.

11. Re-Contribution Strategy 

If you are looking to reduce the amount of ‘Taxable Component’ applicable to your super balance via a ‘re-Contribution Strategy’, then this year may be a better year to do this (to utilise the higher $540,000  CAP under the 3 year bring forward provision).  

This strategy could benefit your children in the form of reduced taxes upon ultimate inheritance of any super balance or in the case of retirees under age 60, reduce the assessable amount of your pension income.  There are strict criteria to qualify for this strategy – refer to  Hudson Report issued 28/4/2017  – for details on this strategy and the criteria. 

Caution : The qualifications for this strategy are specific and complex and it is recommended that they be discussed and implemented through an adviser.

12 . Super splitting (to spouse only)


Super splitting is the process of rolling over your previous year’s “Concessional” contributions (less the 15% tax) to your spouse.  Once 30 June 2017 arrives, the window for rolling over last years’ 2015/16 contributions to your spouse will close. 

Reasons why you would consider this: 

  • Useful strategy in levelling out super balances between spouses as a natural hedge against legislative risk.
  • Spousal age gap: 
    • Shelter assets to younger spouse (for Centrelink benefits), or
       
    • To increase accessibility of super by splitting to the older spouse – closest to preservation age. Similarly super splitting to an older spouse may allow you to get the assets into the tax-free arena of Allocated Pensions (no tax on earnings of the asset base).




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