Beat the clock at tax time
Pretty soon it will be decision time for a number of end of financial year strategies. Here are three ways you may be able to make the most of tax time.
Every year around this time, a window of opportunity opens to help maximise your end of financial year tax strategies. And if you leave it too late, the chance to improve your financial position could go begging.
So what are some of the strategies you might want to consider?
1. Manage your contributions cap
What’s the goal?
To maximise your super contributions.
How does it work?
There are limits on how much you can contribute to super tax-effectively each financial year. These limits (referred to as ‘caps’) are important for two reasons:
- If you’ve already commenced a super contribution strategy, you need to monitor your contribution levels to help maximise your opportunities without unintended penalties.
- If you’re not using your caps, there’s an opportunity to increase your super contributions.
The following table shows what the two types of super contributions are, and what limits and penalties relate to each.
What are your contributions caps?
Concessional (before tax) contributions cap
Non-concessional (after tax) contributions cap
Types of contributions included
- Superannuation Guarantee (SG)
- Salary sacrifice (see strategy 2)
- Personal deductible (if self-employed)
- Personal super contributions you've made from your after-tax income (see strategy 3)
Maximum allowed (2012-2013)
$25,000
Tax on amounts over the cap
31.5% (in addition to the 15% paid by the super fund)
Maximum allowed (2012-2013)
$150,000
Tax on amounts over the cap
46.5%
Important information
Any concessional contributions in excess of the cap will also count towards your non-concessional contributions cap.
If you are under age 65* at any time during the financial year, you may be able to bring forward the next two years’ worth of contributions. This effectively allows you to contribute up to $450,000 at once, or at any time during the next three financial years.
* Please speak to us about the criteria you need to meet to take advantage of this.
If you have room under your caps, the next two strategies explore how you may be able to use that room to your advantage.
2. Start a salary sacrifice arrangement (using before-tax contributions)
What’s the goal?
To boost your super balance in a tax effective manner.
How does it work?
You may be able to enter into a salary sacrifice arrangement with your employer, provided you have room in your concessional contributions cap. This may allow you to contribute some of your before-tax salary directly into your super account.
The benefit of this strategy is that your before-tax super contributions are taxed at 15% — compared to your marginal tax rate of up to 46.5% (including Medicare Levy) if you took this money as cash.
An added benefit is that these potential savings are going towards your super balance, so they can compound over time and make a significant difference to your retirement savings.
Salary sacrifice arrangements differ depending on your place of work, and you may need to check what rules are in place for you. It’s a good idea to have this conversation with your employer well before 30 June as you can’t salary sacrifice income (including year-end bonuses and commission payments) to which you are already entitled — it must relate to employment income that you will earn in the future.
Remember, if you have a salary sacrifice arrangement in place, it’s important to review the strategy annually to ensure it remains appropriate for your circumstances or any changes in legislation.
3. Move assets into super (using after-tax contributions)
What’s the goal?
To place your long term investments in a tax effective environment.
How does it work?
When you hold investments like shares or managed funds outside super, you pay tax on these investments at your marginal tax rate — which could be as high as 46.5% (including Medicare levy).
However, if you held these assets inside super, those same investments would be taxed at 15% or less. Assuming your marginal tax rate is higher than 15%, these tax savings could help your investments grow faster inside super than outside super.
Once you’ve started accessing your super in the form of a pension, this strategy may become even more attractive. That’s because:
- Any earnings on the investments supporting the pension are tax-free.
- Up to age 60, the tax you pay on pension income you draw may be reduced by tax offsets, and/or you may receive some income tax-free if you’ve made after-tax super contributions.
- After age 60, any income or benefits you withdraw from super are tax-free.
This strategy is best suited to investments you’re putting aside for retirement, as you won’t be able to access them until you reach your preservation age (currently age 55) and you are permanently retired from the workforce. We can assist you in identifying any issues to be aware of with in specie transfers including capital gains tax (CGT) considerations, contribution rules and caps.
Know where you stand before 30 June
The best year-end tax strategies for you depend on your personal circumstances and goals — which may change from year to year. Likewise, the strategies can vary over time with changes to rules and regulations. To make sure you know where you stand before 30 June, please speak with us as soon as possible.
Could protecting your family also save you tax?
Income protection is a popular type of insurance that replaces a percentage of your income (usually up to 75%) if you can’t work because of sickness or injury.
This insurance may be an effective way to protect your family’s lifestyle as it can give you the money you need to keep up with your financial commitments — such as your household bills and mortgage repayments — while you focus on your recovery.
Another benefit of income protection is that premiums are generally tax-deductible. And if you pay your premium in advance before 30 June, you may be able to bring forward the tax-deduction to this financial year. Talk to us to find out more.
