Year-End Strategies, The clock is ticking

It's that hectic time of the year again when all and sundry are looking for that quick gap before the beans are counted.

It's that hectic time of the year again when all and sundry are look-ing for that quick gap before the beans are counted.

According to AM Corporation national manager of strategic services Phil La Greca, there are no "stand outs" this year, only some small gaps, most of which revolve around super and apply to selected pock-ets of clients,

However, there are also a few golden oldies worth repeating, the ex-perts say.

One strategy being touted is to take the gap before the preservation deadline.

From July 1, 1999, all contributions to super will be preserved until retirement. This means that they cannot be touched until preservation age (currently 55) or until retirement.

However, if clients make an undeducted personal contribution - one on which no tax deduction has been claimed - before June 30 this year, it will not be preserved.

Instead of waiting for retirement, clients need just resign from their present jobs to access these funds.

Westpac Financial Services technical services manager Nick Ingram cautions that while the original capital invested will be freed up, the earnings or interest from this investment must be held in the su-per until the client retires.

"To get this strategy right, clients should use a separate super fund and they should ensure that their employers make a contribution to the fund, even if it is as little as $100," he says.

Ingram believes this option is ideal for top earners with cash sit-ting in a bank or term deposit and for contractors or consultants who change jobs often.

La Greca adds: "This is a strategy for those looking for a better tax environment or those close to retirement."

But he cautions that the funds used should be money that the client really does not need.

Another once off opportunity is to use the savings rebate before it passes into legislative history on 30 June, 1999, because it has not found a place in the tax reform package.

The savings rebate provides a 7.5 per cent tax rebate on investment earnings up to $3,000 in the current year.

La Greca says one way is to invest $60,000, earning a 5 per cent re-turn, to get the full rebate of $225.

Another alternative, however, is to make a super contribution of $3,000 and to claim a rebate of the same amount.

However, La Greca says it must be an undededucted contribution - that is one on which no tax deductions have been claimed.

An oldie but a goodie is a strategy for those who have recently re-tired, especially those looking to restructure and unwind their as-sets ahead of their golden years.

If they did not work this financial year and as long as no one else has been making contributions to their super on their behalf, these clients are still able to make their own contributions to super - and claim a tax deduction.

"Those who have recently retired are likely to be negatively geared into property or shares and they could use this strategy to unwind their assets and to realise their capital gains," Ingram says.

In other circumstances, the sale of these assets would be liable to capital gains tax, but not if the contribution is made to super.

Ingram says a client who makes a super contribution of $96,000, can get a tax deduction for $73,000.

However, he says to benefit from this strategy, clients must not be older than 65 and must not have worked within one or two of the fi-nancial years that have just passed.

Still on the super front, another useful oldie is to make undeducted contributions on behalf of a non-working spouse.

If the non-working spouse earns less than $10,800 a year, an 18 per cent rebate can be claimed on the first $3,000 of contributions to a total rebate of $450.

In addition, if a couple have both been retired for some time (but under age 65) it is possible to still access the super system by hav-ing each make a spouse contribution for each other. This will allow both partners to establish tax-effective retirement income streams, La Greca says.

To receive 13 months of tax deductions, clients can pre-pay their in-terest payments on an investment loan before 30 June 1999.

By paying interest in advance, clients may be able to access lower interest rates. They also get the tax deduction within a reasonably short period after paying it, says RetireInvest.

Financial year-end is also seen as a good time to re-assess, re-balance and clear out the deadwood from client's portfolios.

Godfrey Pembroke head of research Janice Sengupta says: "Many invest-ments have shown strength over the past year. Paradoxically, great strength can introduce risk into a portfolio.

"First, an investor's targeted asset allocation becomes skewed when the market value of some asset classes rises more strongly than oth-ers. Also, some investments may have soared so much that their cur-rent price exceeds a reasonable measure of fair value.

"Theory suggests selling-down the strongly performing assets to bring a portfolio's asset allocation and risk levels back into balance."

However, Sengupta warns that practical issues such as capital gains tax liability and transactions costs will have to be considered.

"Nobody would consciously destroy wealth to minimise tax. Yet, there is a risk that this could become the reality with some of the tax-effective schemes that pop up at this time of the year," she says.

Many of these schemes offer a structure that generates negative cash flow in initial years to offset tax liability. At the same time, they promise returns on the initial capital, with some appreciation in value, 10 or 20 years down the track.

Sengupta cautions that a false sense of security about the investment merits of year-end schemes has emerged because the Australian Tax Of-fice (ATO) has started issuing product rulings on tax-effective in-vestments.

"These rulings say nothing about the product per se. They only serve to clarify the tax treatment on the assumption that the promoter im-plements the scheme in the manner specified in the product ruling," she says.

"There is still potential for a nasty tax surprise if the promoter fails to follow through on the arrangements stated in offering docu-ments."

Indeed, the ATO itself recently cautioned that it would not be able to process all the applications that it has received for product rul-ings by June 30. It also warned that a favourable ruling did not mean that it had sanctioned all aspects of a particular arrangement.

Break-out

Top five strategies

Financial planner's Top Five year-end strategies for 1998/9:

Grabbing the last chance to make unpreserved super contributions

Benefiting from the savings rebate

Getting recent retirees to make a super contribution

Re-balancing portfolios

Carefully scrutinising tax effective schemes