End of Financial Year Planning

With the end of the financial year fast approaching, it’s timely to review your financial plans and strategies.

This is particularly important this financial year due to several significant superannuation changes that have applied for the first time in 2017-18, and some others that are starting on 1 July 2018. Here are some relevant superannuation aspects to consider.

Please feel free to contact me to discuss how this can improve your situation

Make the most of super: Concessional contributions

Super typically remains a tax-effective structure through which to hold investments to accumulate retirement savings. However, current contribution caps and rules mean that planning ahead over the longer term is the best way to maximise the benefits.

Particularly worth noting are the following changes:

1. This financial year is the first where the concessional contributions (CCs) cap of $25,000 applies to everyone eligible to contribute, regardless of their age and existing super.
2. 2017-18 is also the first financial year where the less than 10 per cent employment income rule no longer applies when looking to claim a tax deduction for personal superannuation contributions.
3. Eligible people can make voluntary contributions from 1 July 2017 that can qualify for release under the First Home Saver Super Scheme.
4. Eligible people can make ‘downsizer’ contributions from 1 July 2018.
5. Beginning in 2018-19, a person can commence to accrue unused amounts of their CCs cap and ‘carry-forward’ these unused amounts. The first year a person can make additional CCs from their accrued unused amounts is in 2019-20, provided their prior 30 June total superannuation balance (TSB) was under $500,000.

Personal deductible super contributions

Before 1 July 2017, clients who derived income from employment during the financial year were only eligible to claim a tax deduction for personal super contributions if, in broad terms, that employment income was less than 10 per cent of their total income from all sources.

From 1 July 2017, this condition no longer applies.

Broadly, this means any individual who is eligible to contribute to super will be able to claim a tax deduction for their personal super contributions. Note, if the person is under 18, some employment/self-employment income must also be derived and personal contributions to untaxed funds and certain defined benefit funds are not deductible.

As a result, from 1 July 2017, putting prospective salary sacrifice arrangements in place is no longer a necessity for employee clients.

That is, an employee client’s surplus income, bonus or other windfalls (such as a capital gain or inheritance), can now be contributed at any time in the financial year, with the client eligible to claim a personal tax deduction for the contribution.

However, despite this increased flexibility, many clients may prefer the disciplined approach of regular savings into super via salary sacrifice and may continue to do so.

Clients wishing to make deductible personal super contributions will have to be disciplined savers. For some clients, it may be difficult to save the after-tax salary amount needed to get the same effective tax deduction that is provided by salary sacrifice.

The removal of the less than 10 per cent employment income rule will also be particularly welcomed by employed persons whose employers:

1. do not offer salary sacrifice arrangements; or
2. who may be otherwise disadvantaged from entering into a salary sacrifice arrangement, such as where the employer uses salary sacrifice contributions to reduce or eliminate their SG obligation. (Note, at the time of writing, the Government is proposing to ban such arrangements.)

Importantly, the ‘paperwork’ requirements to qualify for a deduction for a personal superannuation contribution have not changed. That is, the member must complete a valid ‘Notice of Intention’ (NOI) to claim a tax deduction, lodge this with their super fund, and receive an acknowledgement from the fund within prescribed timeframes.

Planning points

• Personal, tax-deductible super contributions will count towards an individual’s CCs cap. If employer super contributions are also received, clients will need to ensure these are taken into account when determining how much to claim as a personal tax deduction.
• The amount of personal contributions that can be claimed as a tax deduction is limited to the member’s taxable income, i.e. taxable income cannot be reduced below zero.
• Also requiring consideration is the member’s tax-free threshold, potentially $20,542 in 2017-18 including the Low Income Tax Offset (LITO), or higher for those eligible for the Seniors and Pensioners’ Tax Offset (SAPTO).

Non-concessional contributions (NCCs)

The new rules from 1 July 2017 limit the ability to bring-forward contributions and the amount as the client’s prior 30 June TSB gets closer to $1.6 million.

In addition, from 1 July 2017, a client will basically not be eligible to make NCCs when their TSB prior to 30 June is $1.6 million or more. This is shown in the Table 1.

Table 1

Total super balance as at 30 June

Available NCC cap

Bring-forward period

< $1.4 million

$300,000

3 years

$1.4 – < $1.5 million

$200,000

2 years

$1.5 – < $1.6 million

$100,000

General NCC cap only

≥ $1.6 million

nil

n/a

Planning points

• TSB is measured every 30 June. For example, a client’s TSB may exceed $1.6 million in one year, leaving them with no NCCs cap in the following year. However, if a subsequent 30 June TSB is below $1.6 million, perhaps due to withdrawals or investment performance, the client will have a NCCs cap in the following year.
• Where a client intends to make NCCs in the following financial year but is concerned about the level of their TSB, it may be possible to reduce their TSB by making a withdrawal or taking more income from pension accounts.
• Making a withdrawal from the spouse with a higher super balance where possible and contributing in the name of the spouse with a lower super balance, can assist in keeping the TSB of each spouse under $1.6 million.
• If a client triggered the NCC bring-forward in 2016-17 (or previously in 2015-16) but had not fully utilised the bring-forward amount prior to 1 July 2017, a reduced transitional bring-forward cap will apply for the balance of the bring-forward period.
• Qualifying amounts from small business capital gains tax (CGT) concessions may be contributed, irrespective of the client’s 30 June TSB. However, once contributed, they will count towards future TSB calculations.
• Contributions are counted against the relevant caps in the year in which they are received and credited to the client’s super fund. Don’t leave contributions to the last minute!

Spouse contributions

In 2017-18, a tax offset of up to $540 is available for spouse contributions of $3,000 where the receiving spouse’s total income1 does not exceed $37,000.

The offset reduces once the receiving spouse’s total income exceeds $37,000, cutting out at $40,000.

Contribution splitting

Members who hold an accumulation interest in a super fund are able to split part of the prior year’s CCs (including personal deductible, employer SG and salary sacrifice contributions) with their spouse, provided the fund offers this facility.

Only certain contributions may be split with a spouse and other qualifying conditions must be met. The amount that can be split is the lesser of 85 per cent of the CCs or the member’s CCs cap.

The main reasons for considering a contribution splitting strategy is to:

• help equalise the super balances of each person – this may, for example, assist with keeping each partner’s TSB under $1.6 million;
• shelter assets against the Centrelink means tests by splitting contributions to a younger spouse (who is under their Age Pension age);
• access tax-free benefits earlier by splitting contributions with an older spouse;
• access two low-rate thresholds for any super withdrawals made between preservation age and age 59; and
• fund term life and total and permanent disability (TPD) insurance premiums for a low income or non-employed spouse through their super fund.

Planning points

• To split contributions made in 2016-17, a request must be made to the relevant fund by 30 June 2018. Once the member has made this application, they cannot make another one for the same contribution period.