There are a number of checks that investors and taxpayers should make before the end of the financial year to ensure that they not only take full advantage of all regulations available to them, but also to avoid falling foul of them.
HLB Mann Judd Sydney’s Jonathan Philpot (wealth management partner) and Peter Bembrick (tax partner) agree that, because many people don’t understand all the regulations affecting personal tax and superannuation, they can end up giving the government a larger share of their income and wealth than they need to.
“There are a number of steps that people can take to minimise their tax before the end of the financial year, not just to help this year but to affect future years’ as well,” says Mr Bembrick.
“Usually it means finding out how regulations affect their circumstances and then taking action before the end of the financial year. Once 30 June has passed, the number of options becomes more limited.”
HLB Mann Judd says that, of the many opportunities available, the most frequently ignored include:
Some tax issues
1. Pay interest in advance
For those who have tax-deductible debt such as loans used to acquire investments, Mr Bembrick suggests paying 12 months interest in advance in June 2013.
“Prepaying interest means that it will be deductible in full in the 2013 tax return.
“In addition, where taxpayers have deductible and non-deductible debt, they should try to structure the deductible debt as interest-only, so that any principal repayments go first against the non-deductible debt such as your home mortgage.
“However, be wary of any ‘split-loan’ arrangements that are promoted as shifting more of the repayments on a multi-purpose loan facility towards the non-deductible debt as they may not be acceptable to the ATO.
“The safest approach is to keep distinct deductible and non-deductible loans and ensure that any transactions are kept separate so there can be no question on the deductibility of interest on the loans used for investment purposes,” Mr Bembrick says.
2. Consider CGT implications of portfolio changes
With recent changes in investment markets and economic conditions, some investors may have had reason to review, and perhaps rebalance, their investment portfolio.
When doing so, it’s important to be aware of the capital gains tax (CGT) implications of selling any investments, including the timing, says Mr Bembrick.
“For example, investments held for at least 12 months – whether by an individual, super fund or family trust – may be able to access the CGT discount.
“In addition, realising a capital loss on an investment in the same tax year as a large capital gain on another investment may help cash flow as the net taxable gain may be relatively small,” he said.
He warned that a scenario to be avoided is to derive a large capital gain late in the 2013 financial year, and a large capital loss early in the 2014 financial year, as investors would pay tax on the gain for 2013, while carrying forward the 2014 capital loss to future years.
Review whether investments are positively or negatively geared, and consider any suitable changes to this set-up to ensure a more beneficial tax outcome.
“If one spouse earns more than the other, any positively geared investments should be set up in the name of the person earning less to minimise the tax paid on investment earnings,” says Mr Bembrick.
“Negatively geared investments might be held by the higher earning spouse, but remember that this can become a trade-off later, as capital gains tax on any future gains will be in the hands of the higher income earner.”
4. Family trusts
Mr Bembrick says another investment approach to consider is acquiring investments through a discretionary family trust.
“This approach allows flexibility when allocating distributions of income and capital gains. It can be especially useful where the income earned by the different family members changes over time. Other benefits include greater asset protection and succession planning.
“Care is still needed with negatively geared investments as any net tax losses would be trapped in the trust, but would be available to offset against future trust income,” Mr Bembrick says.
5. Capital gains tax records
“It is important to keep good records to back up any items disclosed in tax returns, as you never know when you might be asked to provide documentary evidence about transactions,” Mr Bembrick says.
“This is especially true when it comes to CGT, because the normal five year time limit for keeping records does not apply.
“Say, for example, that you acquired a rental property in 1995, undertook substantial renovations in 2001, and eventually sold the property in 2013 for a large capital gain.
“As evidence of the CGT cost base for the property, you may need to provide records covering the original purchase in 1995, the cost of the renovations in 2001, and any selling costs incurred in 2013. It’s obviously much easier to deal with this if you have good habits now, rather than having to search for the records later,” he said.
Mr Philpot says that superannuation can be a minefield, both when trying to take full advantage of the tax breaks that are available, and in avoiding mistakes and pitfalls which will attract penalty charges.
6. Review contributions
“It’s a good idea to check the level of super contributions made this financial year, especially people who are salary-sacrificing,” Mr Philpot says.
“The concessional contribution limit is $25,000 for this financial year and contributions over this sum risk being taxed at the top marginal tax rate.
“A number of people have been caught out by this in recent years, so it’s worthwhile spending fifteen minutes reviewing super before the end of the year and stopping any more contributions to make sure you aren’t one of them, and liable for thousands of dollars in tax.
7. Additional contributions
Mr Philpot says that on the other hand, he sometimes finds that people could have contributed more than they did but have left it too late, so this is worth checking as well.
Those who have money outside of the super structure and who nearing retirement but are still under age 65 could consider making non-concessional contributions.
“Non-concessional contributions of up to $150,000 each or $450,000 (using the ‘bring forward’ provision) can significantly increase super balances,” Mr Philpot says.
Mr Bembrick added that superannuation is still one of the most tax-effective ways to invest, even considering any proposed changes, so it’s worthwhile topping up super wherever possible.
“Everyone should consider making the maximum tax-deductible superannuation contribution of $25,000 before 30 June 2013, either by salary-sacrificing if you are an employee, or by making a personal contribution if you are self-employed.”
8. Transition to retirement strategies
Those who have already reached age 60, or who are turning 60 prior to 30 June 2013, should consider starting a transition to retirement pension, says Mr Philpot.
This is a tax free pension of up to 10% of the super account balance each year.
“This strategy is likely to be more popular next financial year when the proposed contribution limit for those over age 60 increases to $35,000 and a salary sacrifice together with a transition to retirement pension strategy will be available.
“However commencement of the transition to retirement pension prior to 30 June 2013 will provide an additional few months of tax free earnings.”
9. Pension payments
Ensure that the minimum pension is being withdrawn from the superannuation fund, even if you are not yet receiving a regular pension payment, says Mr Philpot.
The minimum pension for this financial year for those under age 65 is 3% and between 65 and 75 is 3.75%. For the 2014 financial year these minimum withdrawals will increase to 4% and 5% respectively.
“Anyone who has commenced a pension or a ‘transition to retirement’ pension must withdraw the minimum pension prior to 30 June 2013, to ensure the pension account retains its tax free status.”
10. SMSF compliance
Anyone planning to transfer listed shares into their SMSF as part of a superannuation contribution should do so prior to 30 June 2013, as the government proposes to restrict the acquisition and disposal of assets between a SMSF and a related party after 1 July 2013, even when the transfer is at market value.
The shares would need to be sold on open market and then the cash contributed into the SMSF to enable to fund to purchase the same shares.
HLB Mann Judd Sydney is a firm of accountants and business and financial advisers, and part of the HLB Mann Judd Australasian Association.
For more information please contact:
Peter Bembrick – Phone: 02 9020 4223 or Jonathan Philpot – Phone: 02 9020 4196
18 April 2013