Are You Tipping the Tax Man?
A lot of people leave their preparation for the end of the financial year until it is too late. June 30 falls on a Friday this year, so ideally any strategies or contributions should be finalised by Tuesday, June 27 to be included in this financial year. If you feel that your finances could do with a shake-up before June 30, here are just a few strategies that you and your financial adviser can implement now to ensure that the end of the financial year runs as smoothly as possible and you are not tipping the tax man.
Super Co-contributions (Money for free)
If you are a low or middle-income earner and make personal after tax (non-concessional) contributions to your super fund, the federal government will also make a contribution up to a maximum of $500.
To receive the co-contribution your total income must be below $51,021 for the 2017 financial year. If you are earning less than $36,021, the federal government will pay $0.50 for every dollar contributed to super, as an after tax (non-concessional) contribution, up to a maximum of $500. If you are earning between $36,021 and $51,021 the figure reduces by 3.33 cents for each dollar over the $36,021. Consequently, if you earn less than $36,021 and you make an after tax (non-concessional) contribution of $1,000, the government will contribute $500 to your Superannuation fund, or if you earn $40,000 and you put in $1,000, the government will contribute $367, subject to the eligibility requirements set by the tax office. For more information, please refer to Super Co-Contribution.
The personal superannuation contributions need to be received by your superannuation fund prior to 30 June to be eligible to receive the government co-contribution.
Spouse Super Contribution
Partners may be entitled to a tax offset of up to $540 per year on non-concessional contributions made on behalf of their spouse who is earning a low income or not working. The offset can be up to 18% on contributions of up to $3,000.
For the full benefit, the spouse needs to have an adjusted taxable income of less than $10,800. If the spouse’s total income exceeds $10,800 the contribution limit for the tax offset is reduced by $1 for each $1 that the total income exceeds $10,800 up to $13,800. If the spouse’s income exceeds $13,800 no tax offset will apply. For more information, please refer to the Spouse Contribution Tax Offset.
Update – New income limits from 1 July 2017. Legislation has been passed to increase the full rebate spouse income threshold from $10,800 to $37,000 from 1 July 2017, with a reduction on incomes between $37,000 and $40,000. The maximum rebate will remain at $540.
A coming reduction to the contributions caps after 1 July 2017 will make it harder to contribute additional funds to your superannuation fund in the future and therefore you may wish to review the amount of superannuation contributions you have made in this financial year.
You may want to consider the benefits of making additional concessional or non-concessional contributions prior to 30 June 2017 while the caps are higher. After 1 July 2017 both caps reduce considerably.
If you are less than 49 years of age you have a $30,000 cap on concessional contributions (CC), while those aged 49 and above have a $35,000 cap on CCs. Any CCs in excess of these caps are included as taxable income and taxed at your marginal rate plus an excess concessional contributions charge. Furthermore, these excess contributions may count towards the non-concessional contributions (NCC) cap.
For non-concessional contributions (NCCs), the cap is currently $180,000 per person per year. Individuals who are under 65 at any time in a financial year can bring-forward two years’ worth of future NCCs, making the NCC cap $540,000. Where these caps are exceeded, the excess contributions may be subject to excess non-concessional contributions tax.
From 1 July 2017 the caps will be as follows:
Non–Concessional Contributions: $100,000 per person per year.
Concessional Contributions: $25,000 per person per year regardless of age.
Look for ways to delay income until July where your taxable income is likely to be higher this year than the next.
Bring forward tax deductions
Where possible, look for ways to pay tax-deductible expenses now and bring forward the tax deduction. Consider pre-paying 12 months’ interest on deductible debt or premiums on your personal income protection insurance or pre-paying subscriptions, conferences and membership fees for professional associations.
If you have an investment property, consider doing minor repairs and maintenance prior to the end of financial year.
Tax deductible gifts and donations
Many people forget about the tax deductible gifts or donations they have made during the year. Dig out your receipts and have them on hand for tax return time. Alternatively, if you are thinking about making a donation, make sure you do so before 30 June 2017.
Premiums for personal income protection insurance can usually be paid one year in advance with a discount for this annual payment. This provides a significant benefit as opposed to paying in regular instalments.
It is important to understand what can be tax deductible in relation to your investments such as property, shares and managed fund investments. Most of the expenses incurred with managing an investment property – for example strata fees and council rates – are tax deductible. This also applies to shares or managed fund expenses – for example ongoing fees for financial advice. Some investment expenses, for example interest on a margin loan, may be able to be pre-paid one year in advance to bring forward the deduction. You need to confirm which fees are tax deductible and can be claimed.
The ATO will continue to focus on rental property deductions and ensure that expenses are claimed correctly. If you are a new rental property owner, you can access this fact sheet for an overview of your deductions.
Realising capital losses
The end of the financial year is a good time to assess your capital gains and work out if you have a net capital gain from stocks sold. If so, you should also be looking through the portfolio for stocks with losses that you could sell to offset paying tax on the gains. However, it is important to sell assets legitimately, not purely for taxation purposes. The ATO has issued a warning on what they consider ‘wash sale arrangements’, so be wary, certain transactions may be scrutinised as to the primary purpose of the sale.
Budget changes effective from 1 July 2017 – Summary
The superannuation reform package was announced in the 2016-17 federal budget and is set to come into effect on 1 July 2017.
$1.6 million transfer balance cap
Effective from 1 July 2017, a $1.6 million superannuation transfer balance cap will be in place on the total amount of superannuation that an individual can transfer into retirement phase accounts. It is important to note that the $1.6 million cap only applies to pension accounts. There is no limit to the amount that can be held in superannuation, however, the earnings on amounts over the $1.6 million cap will be taxed at 15%.
If you currently have a pension based account with a balance of over $1.6 million, you will need to remove the excess from retirement phase prior to 1 July 2017 to avoid additional tax being charged on your account.
If you are at or near the cap of $1.6 million in superannuation assets, you should contact your professional adviser to discuss how the changes will affect your individual circumstances.
Transition to Retirement Pensions
Effective from 1 July 2017 the tax exemption for transition-to-retirement pensions (TRIP’s) will be removed.
If you are currently drawing a TTR, you should contact your professional adviser to discuss how the changes will affect your individual circumstances.
Taking effect from 1 July 2017 the annual non-concessional cap (NCC) will be reduced from $180,000 to $100,000. The new NCC rules also allow up to $300,000 in NCCs over a 3-year period. Note that under the new rule, you can only make non-concessional contributions if you have total superannuation balances of less than $1.6 million
The current caps for concessional contributions are $30,000pa if you are under 49 years of age and $35,000pa if you are older. From 1 July 2017, these caps will reduce to $25,000pa regardless of age.
Deducting Personal Superannuation Contributions
From 1 July 2017, the 10% rule will be removed, making it easier for you to make use of your concessional contribution cap. All individuals under the age of 75 (subject to satisfying the work test for members aged 65 to 74) will be allowed to claim a tax deduction on personal contributions made into your superfund regardless of your employment status. Amounts contributed, and a deduction claimed will count towards your concessional contributions cap and will be subject to 15% contributions tax.
Division 293 tax
Individuals with an adjusted taxable income of more than $300,000 currently have their concessional contributions tax rate increased from 15% to 30% within their Superfund.
From 1 July 2017, the threshold for Division 293 tax is reduced from $300,000 to $250,000.
If you are concerned about how the rule changes in the budget may affect you, please contact your tax professional or financial adviser.
Source: Written by Roger Potter, Director of Wybenga & Partners Pty Limited, Chartered Accountants, Sydney, May 1, 2017