With the end of the financial year fast approaching there are a number of things to consider. The checklist below will guide you through some investment strategies and regulatory requirements that may apply to your situation.
Things to consider before the end of financial year
Should you take advantage of the tax benefits of investing in a super fund by making additional contributions?
The two main types of contributions you can make to superannuation are:
Concessional contributions. These contributions are made before tax and include; compulsory superannuation contributions made on your behalf by your employer, salary sacrifice, and any personal contributions you claim as a tax deduction. Your superannuation fund pays 15% tax on these types of contributions; and
Non-concessional contributions. These are after tax contributions and may include certain assets that you can contribute to superannuation. No tax deduction is available and your superannuation fund does not pay any tax on these types of contributions.
There are a few things to be aware of when you are making contributions:
You need to ensure your contributions are actually made prior to 30 June 2018 - which falls on a Saturday this year. This is especially important in the case of concessional contributions for which you would like to claim a tax deduction on, in the 2017/2018 financial year.
Contributions need to be received by your superannuation fund, or in the case of an SMSF in your SMSF bank account, by 30 June 2018, otherwise the deduction may not be allowed. For example, a contribution you make via Electronic Funds Transfer (EFT) late on Friday 29 June 2018 may not be processed in time to be received by your fund, or cleared in your SMSF bank account, by 30 June 2018.
You also need to ensure that you don’t exceed the, now lower, contribution caps for this financial year.
The contribution limits (caps) for this financial year are:
1 Concessional contributions include your employer’s Superannuation Guarantee contributions and these will reduce the amount you can contribute personally and claim against taxable income e.g. via salary sacrifice.
2 Generally, after age 65, you can only make contributions to superannuation if you work on at least a ‘part-time’ basis. Part-time employment is defined as ‘gainful employment’ of at least 40 hours over a period of 30 consecutive days in the financial year.
3 Once you turn 75, generally only mandated contributions (e.g. Superannuation Guarantee) can be made to superannuation on your behalf, if you are still working.
4 Non-concessional contributions are now also subject to an overall superannuation balance cap of $1.6 million.
Have you drawn your minimum pension?
In you are drawing a pension from your superannuation, you must ensure you draw the ’minimum payment amount’ required under Superannuation Law, each year, before 30 June.
If you have a retail superannuation fund, the Fund Trustee will work out this minimum payment for you. However if you have an SMSF, you and/or your Adviser will need to determine this amount.
The amount of the minimum payment amount is based on a percentage of your superannuation balance, and your age, at 1 July 2017 as follows:
If you fail to draw the minimum amount for the year, penalties may be imposed. Your SMSF could fail the pension standards and lose
its tax concessions* - that is the zero tax rate on investment earnings.
* Limited concessions may be available for small shortfalls.
Have you reviewed the tax position of your investment portfolio?
If your superannuation fund is paying tax, and you have realised capital gains this financial year, then as part of rebalancing your portfolio (see below) you may also wish to sell some other investments where you have an unrealised capital loss.
However very importantly, taxpayers should be aware of the prohibition against a ‘wash sale’ arrangement. A wash sale may occur “where an asset is disposed of, but there is no substantial change in economic interest in the asset” (Source: ATO TA 2008/7). So, if you sell an investment such as a share and then buy it back shortly for no other apparent reason other than to avoid or reduce tax, the ATO may deem this as a ‘wash sale’ arrangement and levy tax as if the transactions had not happened.
Therefore, as a general guide, whilst you may decide to sell a poorly performing share and use the capital loss to offset a realised capital gain, the sale of any share should be based on your view of the investment worthiness of that share, not merely tax issues.
Should you rebalance your portfolio?
If you have a SMSF then you are required to have an investment strategy which, amongst other things, must be reviewed regularly.
Your accountant and/or auditor may well remind you of this requirement at the time your accounts and annual returns for your superannuation fund are being prepared.
As an integral part of your investment strategy review you may also consider rebalancing your portfolio, and consider whether:
Your needs have changed (you need more or less cash);
Your investment strategy is still appropriate to your needs (you need to change the asset allocation of your portfolio); and
Your fund’s investments are still suitable for your needs.
Should you make a Spouse Contribution?
If you have a ’low income spouse‘ (a person with an assessable income* up to $40,000), then you may like to make a contribution on their behalf and claim a tax rebate on the first $3,000 of contributions made.
A tax rebate of up to 18% on the first $3,000 contributed on behalf of your spouse is available, and could result in up to $540 tax rebate to you as the contributing spouse.
*Income defined as assessable income plus reportable super contributions plus reportable fringe benefits.
Should you pay next year’s contribution early?
Provided your superannuation fund trust deed allows it, you may be able to make up to two contributions of the maximum concessional contribution amount in the financial year – one for this year, and one reserved for next financial year.
Under Superannuation Law, contributions must be allocated to members by the 28th day of the month following the contribution. What this means is you could first make the maximum concessional contribution, then make a second contribution for up to $25,000 in June and allocate that second contribution to the member on or after 1 July 2018.
Under this strategy, you don’t get to make any more contributions than anyone else, you are just paying next year’s contribution early (in June) and bringing forward the tax deduction available into this financial year. This might be very useful if you have large taxable income this year - perhaps including a large capital gain realised during the year. Your Accountant will be able to assist you further with this strategy.
Things to consider after the end of financial year
Have I completed my annual returns on time?
It is essential that your SMSF Tax Return is lodged on time. Your Accountant will advise the date that your tax return is due.
In November 2017, the ATO stated that it would take a tougher stance on overdue tax returns and they have already cancelled the ABNs of some 8,600 funds that have not lodged returns, and are contacting all funds whose prior year returns are overdue. So, if you have overdue lodgements from past financial years, you can likely expect the ATO to contact you.
Do I need to report my pension balance?
This is the first time many SMSFs will need to report their pension balances to the ATO; for pensions that were in existence at 1 July 2017; and any pensions that commenced between 1 July 2017 and 30 June 2018.
Some SMSFs have already lodged their Transfer Balance Account Reports (TBARs), but the final due date for lodgement of a fund’s TBARs for this financial year is 28 October 2018. Lodgement forms, both paper based and electronic, are available from the ATO now.
From 1 July 2018 onwards, an SMSF with any member with a balance of $1 million or more will need to lodge their TBARs 28 days after the end of the quarter in which a reporting event occurs, all other SMSFs can continue to report annually, or more regularly if they elect to do so.
Should I consider contribution splitting?
This is something that only needs to be done (in most cases) after the end of the financial year, but still may require some planning prior to 30 June 2018.
If you would like to, you can split up to 85% of your concessional contributions with your spouse, after the end of each financial year.
This might assist in equalising your superannuation balances and can be particularly useful where one of you is approaching the $1.6 million transfer balance cap.
Providing your fund allows you to split your contributions to your spouse, then in most cases all you need to do is obtain a ‘superannuation contributions splitting application’ (available from the ATO) and lodge it with your fund in the financial year after the contribution is made.
New superannuation strategies to consider for next financial year
The First Home Super Saver Scheme (FHSSS)
This is a strategy that may well be worthwhile for your children and grandchildren if they are saving to purchase their first home.
The Government now allows individuals who are saving for a deposit on their first home to utilise the tax-efficient environment of superannuation to build up their savings.
Under this new scheme, a First Home Saver can contribute up to $15,000 pa. (to a maximum of $30,000 in total) to their superannuation, in addition to their standard contributions, and then draw this money out to purchase or build their first home.
Assuming someone in this situation contributes an additional $10,000 a year to superannuation via salary sacrifice, in 3 years’ time they could withdraw around $25,892* to put towards the purchase of their first home, and together with their partner could have a combined deposit of around $51,000.
*Source: Budget 2017/2018 First Home Super Saver Scheme – Estimator.
Retirees over age 65 are now able to contribute to superannuation up to $300,000 each following the sale of their principal residence. This scheme comes into effect from 1 July 2018 and applies to sales entered into on or after that date.
If you and/or your spouse sells your principal residence that you have owned for at least 10 years, then you are permitted to contribute up to $300,000 each to superannuation (up to the total value of your sale) within 90 days of settlement, in addition to your other contributions (if any), and without the need to be working.
Additionally, if you and/or your spouse have less than $1.6 million in your pension funds, then the downsizer contribution could be moved into the tax free pension phase and boost your retirement income.
This scheme will be particularly appealing to retirees who do not currently receive the Age Pension (as a result of being over the Assets Test limit), and one or both of you have less than $1.6 million in pensions.
If you happen to have more than $1.6 million in your pension funds then the scheme may still have appeal, as the tax rate on investments in superannuation is still only 15%.
In this article we have explored a number of strategies and regulatory issues. You should contact us, your Patersons Wealth Adviser and/or your Accountant if you would like any further information or advice on any of these matters.