The shifting priorities of end of year tax planning

End of financial year is always a busy period for financial planners, but it also represents a big client engagement opportunity, writes Janine Mace.

While there are few advisers who miss the old days when the end of the financial year meant a flurry of anxious clients looking to save tax through exotic investment schemes, it doesn’t mean 30 June is now a complete non-event. 

These days it is more about ensuring all the paperwork is done, rather than worrying about dodgy strategies to save tax.  

In fact, most experts believe speaking to clients about tax this late in the financial year is largely a waste of time.

As Strategy Steps director Louise Biti explains: “End of year tax planning is now more of a housekeeping issue than a planning strategy issue.” 

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She believes it is more about looking forward than back. “It is a good stake in the ground for the end of the year, but also for the coming year.” 

For most clients, year-end should be about superannuation and retirement, rather than reducing tax, according to MLC head of technical services Gemma Dale. 

“The intention of the 2007 superannuation changes was to encourage people to think long-term and to not be doing short-term tactical planning.

"There is a very clear need for everyone to consider their retirement plan every year. Long-term pre-retirement planning is very important and tax conversations are part of that,” she notes. 

SMSF Professionals’ Association of Australia technical director Peter Burgess, agrees: “It is important to reinforce that superannuation is a long-term thing and that there are benefits to planning that way.” 

It is also a great opportunity to demonstrate the value of an ongoing relationship with an adviser. 

“Year-end is a call to action, but it needs to be turned into a long-term conversation with clients. Every year you can have a conversation about strategy, not markets,” Dale says. 

An important point to remember in any conversations about tax and superannuation is that this year 30 June falls on a Sunday, so any strategies or contributions need to be finalised by Friday 28 June to be included in the 2012/13 financial year. 

To help advisers in their discussions with clients, the following is a list of key strategy areas to review: 

1. Superannuation contributions 

Contribution caps 

Ensure the client will not exceed their contribution caps. “Don’t go over the caps as limits are now $25,000 irrespective of age. It is very relevant this year as it is down from $50,000 last year,” Burgess notes. 

“With non-concessional contributions, you need to count all the contributions to all funds and also the payments made to cover insurance premiums in other funds.” 

Make additional contributions prior to 1 July if the caps have not been fully utilised. “Look at superannuation and encourage clients to make the maximum contribution they can afford and to consider next year’s personal salary sacrifice contributions,” Biti suggests. 

Deductible contributions 

To have deductible contributions counted in this financial year, make certain they are received by the trustee by 30 June.

“Ensure they are made early enough to be counted in this financial year. There are a number of cases where contributions were put into a clearing house and not paid to the fund by year-end,” Burgess notes. 

Eligible clients intending to claim a tax deduction for personal contributions need to lodge a notification of intention to claim a tax deduction form with the fund trustee before submitting their tax return.

For claims relating to 2011/12, this needs to be submitted before 30 June 2013, or the deduction will be disallowed.  

Salary sacrifice 

Review instructions for salary sacrifice arrangements to ensure the contribution caps are not breached in the coming year due to increased salary or changes in circumstance. 

Consider the impact of the 1 July increase in Superannuation Guarantee (SG) to 9.25 per cent on current arrangements.

“This is a small increase, but the first in a series of incremental changes. Where a client salary sacrifices up to the cap, you need to check carefully so they don’t blow their caps. It is especially dangerous where they are using both caps, as breaching a cap has huge implications,” Dale says. 

Co-contribution 

Clients with an adjusted taxable income below $46,920 can consider making a non-concessional contribution to receive the maximum co-contribution of $500.

“The co-contribution has reduced to $500, but it is still worthwhile at 50% matching,” Burgess notes. 

Spouse contribution 

If a spouse has an adjusted taxable income of less than $13,800, the other spouse may be eligible to claim a tax offset of up to $540 for contributions to their account. 

Insurance 

Review the benefits of taking out insurance through superannuation. “However, the client needs to also consider increased contributions at the same time to maintain their super balance,” Dale notes. 

Spouse contribution splitting 

To split 2011/12 concessional contributions, a request needs to be submitted to the member’s fund by 30 June.

“Splitting can be valuable as it will help equalise benefits and hedges against the Tax Office changing the rules, as you can use two people’s contributions,” Biti says. 

Contributors aged 65 

Eligible clients close to age 65 should consider making non-concessional contributions over the $150,000 cap to trigger the bring forward rule if they plan to contribute in the following year.

“As clients get closer to 65, they need to plan carefully so they can get the maximum amount into superannuation prior to turning 65,” Dale notes. 

Clients who have triggered the bring forward rule need to monitor where they are in the three-year period. 

2. Self-managed superannuation 

Compliance 

Check all the necessary paperwork has been completed for the SMSF. 

Review the fund’s investment strategy, document the review in the trustee minutes and make any necessary changes to the documentation. 

Ensure all the fund assets are in line with its investment strategy and are noted at market value for reporting purposes. Consider diarising this activity for completion each year. 

Ensure the investment strategy considers members’ insurance needs. “This has needed to be done since August. It is very important to do it, as this is an area where auditors will check,” Biti warns. 

Pensions 

Check the minimum pension payment has been taken by 30 June or the fund will be deemed as being in the accumulation phase for the whole year.

“For those not on a monthly payment cycle, be very careful that you meet the payment rules. If the ATO rules are not met, then it is not tax exempt,” Burgess notes.

Although the ATO has issued guidelines on underpayment, these are no help for clients receiving annual or quarterly payments. 

If a member plans to start a SMSF pension from 1 July and they made a personal super contribution in 2012/13 and plan to claim a deduction, ensure an intention to claim form is submitted before starting the pension.

“Otherwise you risk losing the ability to claim the deduction,” Biti warns. 

Determine pension payments for the coming year. 

In-house assets 

Ensure the value of in-house assets does not exceed 5 per cent of total assets. “If it was breached last year, the assets must be sold and the position rectified by 30 June,” Biti says.  

In-specie transfers 

One of the major action points this year is ensuring any planned in-specie transfers into an SMSF take place before 30 June, as they will have to be done on-market from 1 July 2013.  

“I expect to see a flood of people wanting to put through off-market transfers, so you need to do it early, as registries may be swamped. In the hustle and bustle to get the transaction complete before 1 July, clients need to be careful not to breach their caps in the process,” Burgess notes. 

Reserving strategies 

Consider whether a contribution made in June to the SMSF is allocated immediately to the member account and counted in this year’s cap, or is added to the contribution reserve and allocated to the member by 29 July [ATO ID 2012/16].  

Advisers need to be aware the ATO is clamping down on this strategy, so care in executing it is required, Burgess warns.

“The ATO expects contributions will be allocated to the member and you need to have a reason for not doing it. To minimise excess contributions tax is not a reason.”  

3. Income streams 

Check the minimum and maximum payments for transition-to-retirement (TTR) pensions have been made. “The pension minimums are back up to where they were originally, so planners need to be reviewing TTRs,” Dale says. 

Review the effectiveness of each client’s TTR strategy to determine whether or not to continue. 

4. Centrelink 

Review whether clients wish to make a financial gift. “June is the time to review gifting, as you can give $10,000 before 30 June and then after 1 July as well,” Biti says. 

Recheck whether clients are under Centrelink benefit thresholds, Biti also suggests. “Changes to the income and assets test thresholds were introduced in March 2013, so it is time to reassess whether they can now get in under the threshold.”  

5. Taxation 

Health insurance 

High income earners wishing to avoid the Medicare Levy Surcharge need to review their salary for next year and consider taking out private health cover from 1 July.

“To avoid the surcharge totally, it needs to be done for the whole year,” Biti explains. 

Tax deductible expenses 

Consider prepaying up to 12 months of deductible expenses (eg, income protection insurance premiums) to bring forward the tax deduction into this year. 

Defer income 

Review whether it is possible to defer any income into the new financial year.

“Check if clients have any interest that can be deferred into the next year. For example, a term deposit currently rolling month-to-month, or a cash management account that could be locked into a term deposit,” Biti suggests. 

Trusts and companies 

Check if trusts and companies can be used and how the distributions from them are made. “Distributions to those on lower tax brackets can be very worthwhile from a trust,” Biti notes. 

Go gearing 

With super dominating year-end conversations, there is often little consideration given to other tactics, but many experts believe there is still a role for traditional strategies.  

Pre-paying interest on margin loans and geared investments to remove interest rate fluctuations and bring forward deductions is an old favourite. 

Cathy Kovacs, BT Financial Group’s head of equities and gearing strategies, expects this strategy to be more popular this year, particularly given the improved investment conditions.  

“The measurement for volatility of the Australian share market last year was 17 per cent, compared to 11 per cent now. We anticipate the appetite for gearing will be higher than last year,” she says. 

“Margin call rates are at historically low levels and for prepayment of interest, indications are rates will be below 7 per cent.” 

Kovacs believes gearing remains a good strategy to raise with clients at this time of the year. “This is a tried and true strategy. It is very topical in the run up to 30 June to discuss ways to manage a client’s tax obligations, especially as the opportunities to do so become less and less,” she says.  

“For advisers, they need to have the confidence to have these conversations with clients and frame it properly so they can consider the advantages.” 

This includes flagging strategies such as protected loans, which offer a set rate for prepaid interest.