With the end of financial year (EOFY) fast approaching, now is an opportune time to take stock of your financial situation, goals and objectives, and do any last minute fine-tuning (where applicable).
Given this, we provide you with several EOFY planning tips worth considering, which could help not only reduce your tax bill, but also build and protect your wealth.
Contributing to superannuation
In our article, ‘Compounding super: Retirement planning at age…’, we highlight the benefits of contributing to superannuation earlier rather than later in life.
For 2018/19 the concessional contributions cap is $25,000 per annum, regardless of your age; however, this may be an appropriate time to consider whether to make personal deductible contributions (if elected, the Labor party has proposed to reintroduce the 10% test, which would again prevent most employees from claiming a personal tax deduction, and also remove the ability to carry forward unused concessional cap amounts).
The concessional contributions cap generally includes employer contributions (Superannuation Guarantee, voluntary and salary sacrifice) and personal deductible contributions.
In a nutshell, making concessional contributions to your superannuation could help you reduce your personal income tax and build wealth for retirement within a tax-effective environment (and, if applicable, purchase your first home via the First Home Super Saver Scheme).
- The non-concessional contributions cap is $100,000 per annum (if elected, the Labor party has proposed to reduce this to $75,000). If you are under age 65 in a financial year, you can use the ‘3-year bring forward rule’ to bring forward your next 2 years of non-concessional caps and make up to $300,000 of non-concessional contributions (if elected, the Labor party has proposed to reduce this to $225,000). If you are not under age 65 in a financial year, the 3-year bring forward rule ceases to be available unless you started a bring-forward period in a previous financial year and it’s still operational.
- No non-concessional contributions are allowed if your total superannuation balance as at June 30 of the prior financial year was $1,600,000 or more (and the 3-year bring forward rule phases out from $1,400,000).
Please note: If the 3-year bring forward rule was triggered in 2016/17, and not fully utilised by 30 June 2017, then transitional rules apply.
The non-concessional contributions cap generally includes personal contributions not claimed as a tax deduction and spouse contributions, but excludes, for example, Government co-contributions, downsizer contributions and eligible small business sale proceeds up to CGT cap.
In a nutshell, making non-concessional contributions to your superannuation won’t reduce your personal income tax, but could help build wealth for retirement within a tax-effective environment (and, if applicable, as stated above, purchase your first home).
Other contribution considerations
In addition to the above, consider the following:
- Government co-contribution – you may be eligible for a co-contribution of up to $500 from the Government if you make non-concessional contributions to your superannuation
- spouse contribution – you may be able to claim a tax offset of up to $540 if you make non-concessional contributions to your spouse’s superannuation
- contribution splitting – you may be able to arrange to transfer an amount of your concessional contributions from the previous financial year to your spouse’s superannuation (please watch our animation for further details)
Managing capital gains/losses
Depending on your personal circumstances, it could be worthwhile deferring the sale of an asset with an expected capital gain (and the applicable capital gains tax liability) to a future financial year. This could be beneficial if you expect that your income will be lower in the future compared to this year.
Importantly, regarding the sale of an asset (and the crystallisation of a capital gain), consider the following:
- If you defer the sale of an asset until it has been held for 12 months or more, you may be entitled to the 50% capital gains tax discount (if elected, the Labour party has proposed to reduce the discount to 25%, however, they have stated this change would not apply to assets you currently own). Whereas, if you hold an asset for under 12 months, any capital gain made may be assessed in its entirety upon the sale.
- If you have a crystalised capital gain this year, you could review whether it‘s appropriate to offset this capital gain by using an existing capital loss (carried forward or otherwise) or selling an asset that is currently sitting at a loss.
In a nutshell, deferring the sale of an asset with an expected capital gain, and offsetting a crystalised capital gain with a capital loss, could help reduce your personal income tax.
Please note: The above takes a tax planning perspective; however, when it comes to the sale of an asset that triggers a capital gain or loss, decisions should also be consistent with your overall investment strategy.
Prepaying deductible interest or bringing forward deductible expenses
Depending on your personal circumstances, it could be worthwhile prepaying deductible interest or bringing forward deductible expenses if you expect that your income will be lower next financial year.
Below are a few areas you could consider applying this to:
- income protection insurance premiums
- interest payments on investment loans for things such as property or shares
- donations to charities endorsed by the ATO as ‘deductible gift recipient’ organisations
- work-related expenses, such as car, travel, and clothing expenses, and self-education expenses
- cost of repairs/maintenance to investment properties (rented out or available/advertised for rent)
In a nutshell, prepaying deductible interest or bringing forward deductible expenses could help reduce your personal income tax, fund further philanthropic endeavours, and protect wealth (management of lifetime risks).
As you can see from above, with June 30 on the horizon, it’s best not to leave your fine-tuning to the last minute!
Importantly, by seeking professional advice, an assessment can be made as to which EOFY planning tips may be appropriate for you, based on your financial situation, goals and objectives. We can help with this.
- if you run your own self-managed superannuation fund, watch our animation, ‘An end of financial year checklist for SMSFs’, as many of your responsibilities fall at or around the end of financial year
- if you want to get a head start on preparing your tax return, read our article, ‘Checklist: Preparing for tax time the easy way’, as it will help with organising your receipts, tax invoices and documents
If you have any questions regarding this article, please do not hesitate to contact us.