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End of Financial Year and Post July 1 Strategies

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In our financial planners views, here are some EOFY and post July 1 strategies.

If you can, you should consider maximising your concessional contributions, which you make on a pre-tax basis.

This is a superannuation guarantee which you get 9.5% from your employer. These are salary sacrifice contributions that you can claim a deduction for in your personal name. If you maximise this, you may be able to beat the lowering limit on how much you can put on a pre-tax basis starting 1 July.

However, employees may have limited opportunities to make additional concessional contributions. This could be beneficial if you’re expecting a bonus that will be paid and allocated to your account before the EOFY. Those who are self-employed can make personal contributions any time before 1 July to take advantage of this year’s cap.

You can also maximise your non-concessional contributions, which you make on an after-tax basis. The current $180,000 per annum cap will be reduced to $100,000. The bring-forward rule for those under 65 will be reduced from $540,000 to $300,000.

It matters to those with a large super balance especially to those who have over $1.6 million in their accounts. Now is your last opportunity to contribute but make sure you do not exceed the cap because it can get pretty expensive and painful to manage.

If you haven’t used your bring-forward in the past few years, you can use the full $540,000 before 30 June, cash out and re-contribute to your own Super or spouse’s account. This can be beneficial to couples in terms of estate planning and not exceeding the $1.6m limit.

However, one issue could be transition to retirement which will make assets in the pension phase be treated like an accumulation save tax-wise. You should do your numbers and decide if this can still be beneficial to you.

For the new $1.6 million transfer balance cap, there are advantages and disadvantages. If your balance grows more than $1.6m in pension phase, the full amount still gets the concessional tax treatment as long as your transfer does not exceed the cap.

However, if you lose money in pension, it is still the $1.6m that you transferred that is assessed. You cannot transfer more than this even if your balance is below $1.6m. Excess transfer balance tax may apply.

You may commute back to accumulation which is still better than paying your marginal rate. You may also withdraw and invest outside Super. SMSF trustees can start a pension anytime as long as they have met a condition of release without CGT.

However, those who have been in pension phases for a while and want to continue a pension while they sell their assets and pension phases with 0% CGT now have to commute back to accumulation save and pay CGT. The cost base can be reset to market value effectively on 30 June.

You may also want to defer the sale for CGT purposes if you’ve held an asset for more than 12 months because it could get a 50% discount if you’re an individual or 33% discount for Super funds.

You may also reduce the tax liability with losses through offsetting. There is no set formula so you can look at multiple assets which can give you the best outcome from a CGT perspective. You can use a FIFO method this year and a LIFO method the next. You can also carry forward a loss indefinitely so always keep the records of your losses.

Another strategy is to bring forward deductions and potentially delay income if you have the cash flow and get your customers to pay you on 1 July and that week.

That’s simply shifting tax this year to the next. You should also think about the interest rates, particularly on margin lines and investment property loans. If you prepay the interest that takes you forward to the end of June, you can claim all the deductions for the interest in the previous FY.

Small businesses should not forget about their incentives from the government as well.

They can write off any asset this year up to the value of $20,000 purchase amount, excluding GST. You can only claim a deduction against assessable income so don’t buy unnecessary assets just to write them off.

The EOFY is a good time to review your investment strategy and check if it’s still appropriate. Things to review are your asset allocation, security selection and sector allocation. It is also a good time to review your stocks and throw out some bad ones before you move on to the 2017-18 years.

The assets supporting the accumulation and pension accounts are separate for both tax and investment purposes. Currently, you can use two methods for determining the tax payable in an SMSF: the proportionate and segregated methods.

The proportionate method treats all your assets as a pool and determines the tax rate that applies as a formula. The segregated method, on the other hand, requires that separate accounts are run for the different pools in the fund and tax is applied based on the income on those assets.

However, starting 1 July, you can only use the proportionate method for SMSF tax purposes.

Interestingly, you can still run segregated accounts for investment purposes. You should have a documented investment strategy for each account and keep them separate so all domestic equities are supporting your pension and all fixed income are supporting your accumulation fund.

There is value in putting high returning assets into the pension account and putting the lower returning assets into the accumulation account.

For more information about superannuation in Australia, contact a Specialist to discuss your particular circumstances.

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Disclaimer: This article contains general information; before you make any financial or investment decision you should seek professional advice to take into account your individual objectives, financial situation and individual needs. Click for more detail regarding this disclaimer.

Related:  Should a TRIS be converted to an Account Based Pension when a condition of release has been met? by Topdocs

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