As we approach the end of a tumultuous financial year, there are anumber of tips and strategies that have been tried and tested and can be valuable for people seeking to improve their short-term tax and longer-term retirement position.

Despite the current financial environment, these strategies continue to offer the same tax concessions.

While markets have fallen and the capital value of investments has been eroded, the income produced by investments, as well as income from employment or business activity, may still create a tax liability. Combined with the deterioration in asset values, this will be a bitter pill for many to swallow.

It’s worth revisiting some of these tried and tested financial planning tips and, in addition, considering how the current economic environment impacts these strategies.

It’s also timely to focus on retirement planning considerations resulting from a combination of legislative changes, the global financial crisis and the associated market downturn.

Current year considerations

We start our discussion with a brief reminder of some simple strategies that may be considered, and will need to be implemented, before July 1, 2009.

Government co-contribution

Make sure that eligible people get their non-concessional superannuation contributions in before June 30, 2009. There are not too many other strategies that deliver a 150 per cent guaranteed return.

Spouse contributions

People with an eligible spouse should consider making spouse contributions before June 30, 2009. This can produce a tax offset of up to $540 (or 18 per cent) in respect of the current tax year.

And remember, the spouse contribution tax offset is available in addition to the Government co-contribution, as long as both a spouse contribution and a separate personal non-concessional contribution are made.

Deductible personal contributions

Self-employed people need to get their concessional contribution into superannuation before June 30, 2009, in order to receive their tax deduction for the current financial year.

Where people fail the <10 per cent rule, they could consider crystallising a capital gain to improve their chances of satisfying this rule.

Also, to ensure that a tax deduction can be claimed, appropriate notices of deductibility need to be served on the fund before these monies are used to commence an income stream, rolled over to another fund or subsequently cashed out.

Crystallise a capital loss

People who have crystallised a capital gain during the financial year could consider turning some of their paper losses into real losses (where appropriate) to help reduce the tax liability on their previously crystallised capital gain.

Pre-pay interest expenses

Despite the fall in the value of geared investments, interest still needs to be paid.

The good news is that it remains a tax-deductible expense, where it has been properly incurred in producing assessable income for the taxpayer.

By prepaying interest expenses the tax deduction can be brought forward into the current financial year.Planning ahead for post-July 1, 2009

Planning Ahead for post-July 1, 2009

The biggest opportunity in the lead-up to July 1 is to review all aspects of a person’s overall financial situation and consider the impact that several legislative changes, as well as the prevailing economic conditions, are likely to have on any existing strategies.

Some considerations of particular relevance to a person’s retirement planning include:

Salary sacrifice

Now is the time to start considering salary sacrifice arrangements for the year ahead.

While some people may be discouraged by the current economic climate, it might be time to consider dollar cost averaging.

By regularly drip-feeding contributions into superannuation, people can take advantage of changing investment prices.

While some people may avoid certain investment markets — such as the stock market — because of current volatility, dollar cost averaging may sit more comfortably with them.

The underlying principle of dollar cost averaging is time in the market. People must be in the market for the long term. This strategy will be of benefit to people who are considering a regular investment plan over the long term.

Review of TTR cash flow — maximum 10 per cent limit may be reduced

Transition to retirement (TTR) account-based pensions will require a recalculation of minimums and maximums as at July 1, 2009, in an environment where account balances are likely to have declined because of negative investment returns.

As TTR income streams have a maximum annual income limit of 10 per cent (calculated based on the July 1, 2009, balance), reduced account balances as at July 1, 2009, may impact people’s ability to draw down sufficient income to achieve their desired level of net income required to meet living expenses. This is particularly relevant for people who are participating in an income swap strategy.

On the other hand, additional cash flow may arise from the legislated tax cuts from July 1, 2009, and from lower home mortgage repayments resulting from the reduction in interest rates on borrowings in the past six months.

Despite the reduction in account balances, is it worthwhile continuing with a TTR income swap strategy and what changes need to be made to keep the strategy on track?

The following questions need to be considered for people who are using the TTR income swap strategy as at July 1, 2009:

• Has the person’s employment changed in the past 12 months?
• Does the person still need the same level of net income to fund living expenses as at 12 months ago? If not, what is the revised minimum net income required to fund living expenses?
• Has the TTR account balance reduced because of negative returns? If it has, the minimum and maximum income limits for 2009-10 will be lower than in the previous year. This will impact the level of replacement income required and the level of salary sacrifice contributions permissible.
• Will the person’s existing super salary sacrifice level require review because of the reduction in TTR pension income or a change in their net income requirements?
• Should the person’s superannuation accumulation account be used for topping up the existing TTR income stream using a pension refresh facility?

Consider pending change to income definitions

When considering the most suitable salary sacrifice arrangement and/or retirement income streams, it’s important to look at the impact that the change in various income definitions may have on benefits currently obtained.

For some people, due to the proposed expanded ‘income’ definition for taxation, superannuation concessions and Government benefits from July 1, 2009, the indirect benefits of salary sacrifice may be diminished. This may also apply to people receiving tax-free income from a superannuation income stream (once over age 60).

This change, if legislated, may impact on a person’s eligibility to receive certain Government benefits including the Government’s superannuation co-contribution, and certain tax and other Government benefits.

Given the uncertainty in investment markets combined with the usual end-of-year planning, the lead up to July 1 is looking like a very busy and exciting time for planning advice.

John Perri is technical services manager at AMP TapIn.