When tax time falls during a federal election

With the federal election looming, policy and regulation proposals can lure investors into a trap of over-thinking their overall strategy.

It’s important to focus on what you know you can do, rather than make drastic decisions over changes that may never happen.

Indeed, according to Roger Cohen, senior investment specialist at BetaShares, this year isn’t different to previous years, despite the discussion around the future consequences of the Federal Election.

Making full use of super concessions

“The biggest things people can do is get money into superannuation if they haven’t made their maximum contributions,” Cohen said. “The other thing to look at is franking credits: the rules are still the same, they’re still entitled to franking credit refunds and are very valuable to offset your ordinary income.”

Cohen recommended reviewing your position with respect to realised gains and losses, as those can be used to offset each other.

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“If you have assets in a loss situation and you don’t mind selling those assets, you could sell them and realise a loss which would offset the gains,” Cohen said.

Craig Day, head of tech services at Colonial First State, said it’s an ideal time to make use of concessional contributions.

“This is your superannuation guarantee or salary sacrifice contribution, everyone has a $25,000 cap to those,” Day said. “What people can do is salary sacrifice up to the cap, taking into account their super guarantee contribution.”

These contributions can be claimed as a tax deduction, but only if they are done by 30 June.

Your other option is making personal deductible contributions, but they will also count towards the cap.

“Coming into the end of the financial year you will see some people looking to make extra contributions and claim deductions for it,” Day said.

“The other issue there is you may have clients that have previously made personal contributions.

“To claim the tax deduction, they need to tell the trustee or lodge a notice of intention with the trustee to claim that deduction, and the clients must do that within certain time frames to be able to claim the deduction before 30 June.”

Last year, people could claim tax deductions for contributions they made prior, now if they haven’t lodged their tax return they have up until this financial year to lodge their notice of intention.

“Non-concessional contributions are after tax contributions,” Day said. “This might be money sitting in a bank account or a windfall from an inheritance or sale of assets, but it’s extra money in your account that you’ve already paid tax on that you might want to add to your superannuation.”

There’s a $100,000 cap on those per year, but if you’re under 65 you can bring forward two years’ of contributions to the current year.

Dawn Thomas, executive relationship manager and senior financial advisor for WealthWise and 2018 Money Management Women in Financial Services Awards finalist, said the lump sum contribution allows greater flexibility because clients might not have been salary sacrificing during the year.

“Someone might have decided to put money in their offset account, for example their mortgage, all year then decide in June they want to put a lump sum into their superannuation,” Thomas said.

Thomas said spousal contributions is another overlooked factor, now more important than ever, because of the $1.6 million limit on pension caps.

“If you’re not making use of both partners pension caps you’re going to lose out and that’s something that’s progressive,” Thomas said.

“People need to start splitting it now, because it’s going to be difficult to try and get lump sums in just as you retire.”

General apathy towards superannuation and its potential can hold back people from all backgrounds of wealth, however, posing an issue when dealing with clients who may not be interested in fulfilling their financial potential at tax time.

“They think it’s not their money, which creates that apathy and they think it’s money the government controls,” Thomas said.

“They don’t trust it or understand it, so they don’t engage with it and we’ve been finding there’s quite a number of people who don’t open their super statement.

“So, there’s a lot of financial apathy when it comes to superannuation.”

Where will the ATO be looking?

Peter Bembrick, tax partner at HLB Mann Judd, said there’s a great deal of discussion about the Australian Tax Office (ATO) and where their focus area this year is.

“A year ago, they were focused on work related deductions and overclaiming on deductions,” Bembrick said. “Since they started focusing on that, they’ve seen a drop-off in that area, so it’s shown the ATO activity had some impact.”

Bembrick predicted this year’s focus will be on rental properties, specifically on what people will claim as deductions.

“There’s a feeling there’s been a general over-claiming of deductions on rental properties,” Bembrick said. “Travel expenses is one mistake and that’s been addressed in a legislative way; people were claiming travel expenses to inspect the property and that was deemed unreasonable.”

A major item for newer properties is depreciation allowances.

“A lot of the new housing and developments, if they have a good quantity surveyor report, ensures they’re doing the right thing,” Bembrick said.

“But there’s a lot of deductions people can claim either as write-offs for some of the actual building costs, particularly for newer developments, or just furniture, fixtures and fittings that can be depreciated over the life of the asset.

“Even furniture equipment, curtains, blinds and carpets are all perfectly fine.”

The ATO publishes tables for how long these assets should last, which Bembrick recommends people should be mindful of to avoid the risk of overclaiming.

“Repairs is a common one: understanding what’s repaired, what’s really capital and what’s replacing something,” Bembrick said. “People will claim things that shouldn’t be claimed as repairs, they should be on depreciation or on the cost-base of the asset for capital gains tax purpose.”

Interest on loans is another issue if you’re claiming it on borrowed funds. Bembrick said the basic test is what was the money used for and if that purpose was relevant.

Let’s be frank

There’s been a lot of discussion about Labor’s proposed changes to franking dividend refunds. The suggested reforms effectively mean that when you’re receiving franked income, you’re always going to pay at least 30 per cent tax on it.

Currently, if your tax rate is lower than 30 per cent you get some of the balance back, which is tied with the proposal to ensure trust income is taxed at least at the same level.

“At the moment it’s possible to filter money through a trust to different beneficiaries, so that some of it might have a tax rate of lower than 30 per cent,” Bembrick said. “The basic strategy of Labor is to ensure that everyone is paying at least 30 per cent tax on that investment income.”

He notes however, that the dividend refunds shouldn’t be the main incentive to invest in certain stocks anyway.

“Our investment decisions shouldn’t be guided too much by tax at the end of the day, something has to be a good investment to make money out of it,” he says.

Labor has proposed to cease refunding excess imputation credits from 1 July 2017, with certain exemptions for people receiving a government pension or allowance, or for self-managed super funds (SMSFs) that had at least one member receiving a government pension or allowance on 27 March 2018. 

Day said this will potentially impact both self-funded retirees, as well as self-managed super funds (SMSFs), and some larger funds.

“In response, some clients may seek to amend their asset allocation to reduce their exposure to Australian shares or implement strategies to try and qualify for a part pension or allowance,” Day said.

“However, depending on their circumstances many clients will need assistance to try and navigate these changes without exposing themselves to additional risk or reduced returns.”

Election time

With an impending Federal Election, there is some anxiety over what proposals might come into effect in the future.

Legislation around superannuation certainly affects individual income tax positions and are up for negotiation for debate around every election and every federal budget as well.

The 10 per cent employment income test that used to disqualify employees from claiming deductions for their super contributions was removed from 1 July 2017, for example, meaning both employees and self-employed people are eligible for this concession.

However, Day says it’s important to note that Labor are proposing to reinstate those rules if they win the next election, so the ability for employees to do this in the future may be limited.

Thomas said it’s best for stakeholders to be across the proposals for the different parties, but don’t let it prevent clients from making any superannuation contributions this year.

“That can happen with clients sometimes, they think because change is around the corner they’re not going to do anything at all,” Thomas said. 

“With super legislation, change happens frequently so if you stopped every time there was going to be a change you would lose out.

“Don’t let the future changes hold you back from implementing any super strategies that you want to put into for this financial year and the next financial year.”