Superannuation to take priority in year-end tax strategies
Superannuation is usually the biggest talking point for most financial advisers during tax season. Concessional contribution caps will certainly be top of mind this year given the pending changes, writes Janine Mace.
When it comes to talking about the 2011/12 financial year-end, it seems superannuation is likely to be the biggest topic of conversation for advisers when June rolls around.
- Related: 2012 financial planner tax checklist
From discussions about exceeding the contribution caps to off-market transfers and ‘parking’ contributions until the next financial year, super looks set to be the word.
As Peter Burgess, technical director of the Self-Managed Super Fund Professionals' Association (SPAA) notes: “In the lead up to 30 June, superannuation is usually the most topical discussion and this year that will particularly be the case.”
Count Financial technical services manager Kim Guest agrees this year is all about super. “The concessional caps are top of mind this year, given the uncertainty about what will happen,” she explains.
But despite the emphasis on superannuation, there are many other issues that need to be discussed with clients given the changing tax rates – courtesy of the new carbon tax – and the Australian Taxation Office's (ATO’s) crackdown on recordkeeping.
Limit changes head the list
Super contributions will be a key topic of conversation for Trevor Bridger, managing director of BDO Private Wealth Advisers in Brisbane. “This year it is all about taking advantage of the over 50 concessions,” he says.
Burgess agrees the pending reduction in the concessional contribution limit is a vital discussion point. “The current transitional cap for the over 50s will end on 30 June, so if the new regulations are not made by then, it will lead to a situation where everyone has a $25,000 cap on super contributions.”
According to Guest, this means financial advisers need to act now. “It is about maximising the amount you can get in this year while the $50,000 limit is still available.”
The reduced limit will also be a real danger point for some clients – particularly those utilising salary packaging.
“For the over 50s, if they have currently got a $50,000 cap and are using salary sacrifice, they need to be very careful next year as salary sacrifice arrangements need to be prospective,” Burgess notes.
He is urging financial advisers to be vigilant when it comes to the contribution caps, as many clients are still finding themselves over the limits.
“Advisers and clients need to be careful, as the penalties are very severe and once the damage is done it is hard to change. ATO discretion is only available in special circumstances,” Burgess warns.
The limits are also significant when it comes to the operations of an SMSF.
“The adviser needs to keep track if the members have paid expenses out of their own pocket and not sought reimbursement from the SMSF, as these are then counted as a contribution,” Burgess says.
“Advisers and clients need to look very carefully at what constitutes a contribution, as this it can lead to problems.”
For example, TR 2010/1 notes amounts which form a contribution can include expenses paid on behalf of the fund, debt forgiveness, and in-specie contributions.
Checking the client’s super contribution position before year-end is vital, he notes, as there may be opportunities to head off potential problems.
“It is not too late in the financial year to make adjustments to ensure you do not go over the cap, especially in the case of salary sacrifice.
"The super fund is not required by law to notify you if you are going over your cap, so you need to record it yourself and closely monitor it,” Burgess points out.
Avoiding contribution cap problems is also important given their linkage to other planning strategies.
“Disqualification will be a big problem for salary sacrifice and TTR [transition to retirement] strategies, as they depend on them,” Guest notes.
Although maximising this year’s higher contribution limit is vital, consideration also needs to be given to future planning – particularly for business clients.
“You need to discuss what the strategy will be for the new year and how any profits will be invested if super is not available,” Bridger says.
“You need to start discussing this with clients now, as if the idea is not in their heads and they continue salary sacrificing, etc, they could have an excess benefit problem very quickly next year.”
Non-concessional traps
With the big focus on the concessional caps, it can be easy to forget other traps for the unwary. Exceeding the non-concessional contribution limit of $150,000 is also a danger.
“A lot of people are breaching the contribution caps due to their personal non-concessional contributions,” Guest notes.
“The non-concessional caps are important too, so there is a need to make the best of these while they are available to the member.”
According to Burgess, this can be a particularly risky area for clients operating as sole traders.
“If an individual is claiming a deduction for a super contribution that exceeds their taxable income, any portion of it that exceeds their income will be reclassified as non-concessional. This will be a problem if the client has exceeded the non-concessional limits.”
He believes financial advisers should not be too “gung-ho” in this area. “It is better to be conservative in making claims rather than risk going over the caps,” Burgess warns.
Another superannuation opportunity that needs consideration is the upcoming changes to the co-contribution rules.
“With the co-contribution, the maximum rate is down to a $1,000 matching payment. However, if you have a lower income spouse then it can still be worthwhile,” Burgess notes. “But the contribution needs to be made prior to 30 June.”
Guest agrees co-contributions still need to be considered as they can be a “very effective contribution” for clients who can access the benefit.
“There is a halving of the co-contribution next year, so next year $46,920 will be the higher limit. This means it needs to be maximised where possible this year,” she says.
“This year is the last year that people can get the maximum contribution and for those earning $46,920 to $61,920 – it will be the last year they can get the benefit.”
Taking strategic advantage
When it comes to specific strategies for the 2011/12 year-end, the experts point to two key areas for SMSF clients.
The first relates to the ability of SMSFs to ‘park’ contributions made in June and not allocate them until the next financial year, despite the taxpayer still receiving a deduction in the year the contribution is made.
“ATO ID 2012/16 has confirmed a strategy that has been used by some in the industry.
"If clients have an SMSF and make a contribution in the financial year and they put it into the fund’s unallocated contribution reserve and then allocate it within 28 days of the following month, the allocated money is counted towards the following financial year’s contributions limits,” Guest explains.
According to SMSF Academy's Aaron Dunn, this can be very effective for some clients.
He cites the example of a client under 50 who makes a $25,000 concessional contribution during the year and then makes an additional $25,000 contribution in June, which enables a $50,000 tax deduction.
From the contributions, $25,000 is allocated to the member in the current financial year, with the second contribution taxed within the fund but not allocated until the following year (before 28 July).
Dunn says the contribution needs to be held in a ‘holding account’ or ‘suspense account’, but notes the ATO ID does not specifically refer to a ‘reserve’ account.
Burgess agrees this can be a valuable strategy for financial planners looking for ways to deal with the contribution limits.
“It is a way to manage contributions if you have maxed out the contribution cap or are close to it.”
The other strategy relates to the abolition of off-market share transfers.
“For SMSF clients, the Government has announced that from 1 July it plans to ban off-market transfers where a market exists, so if an SMSF member intends to do this with some shares, they need to do it prior to 1 July,” Burgess says.
Although the proposal is yet to be legislated, the Government has announced it intends to proceed with the change, making it important for financial advisers to take the opportunity this year while it is still available.
“SMSFs will need to get a hurry-up and not leave it to the last minute,” Burgess cautions. “Just before 30 June it can be very busy when it comes to share transfers, so it is best not to leave it to then.”
Guest agrees financial advisers need to plan for a 1 July start to the new regime and take action if necessary. However, she cautions the decision needs to consider all the implications.
“There is a need to think about the capital gains tax implications even though it can be beneficial to transfer into a vehicle with no brokerage,” she says.
Changing tax rates
Looking ahead, the new 2012/13 financial year will see the arrival of several changes to existing tax thresholds and the low income tax offset.
“We will see the introduction of the Carbon Tax payments and reimbursements and changes to the low income tax offset, so there will be some clients who benefit,” Guest notes.
“This is not a major strategy area, but planners need to be aware of it as it will affect some people.”
While there are some strategies that can be used to help clients benefit from the movement in the low income threshold from $6,000 to $18,000, she notes this is for “a specific group of clients only, such as those with a low income spouse”.
Bridger agrees the changes should be reviewed. “The Carbon Tax changes are not a great priority as the thresholds are being increased substantially, but the impact on other benefits can be very important to some clients.”
He believes the movement in the tax rates and introduction of the new assistance payments will make areas such as access to Family Benefits and the Seniors Health Card far more important.
“These need to be discussed with clients as there is a lot of change in the tax regime. If you delay these discussions until halfway through the next financial year, it is too late as the planning and education needs to be done from the start,” Bridger says.
Traditional year-end issues
Although clever tax strategies are always of interest, there are some bread and butter areas that need to be raised every year with clients.
“One of the old chestnuts is that clients need to make sure their super contributions are paid prior to 1 July if they are self-employed,” Burgess says.
Getting the paperwork right is also essential. “If they are making a contribution claim, they need to notify the fund, fill in the form and get an acknowledgement back from the fund prior to making the claim.”
Paperwork is also important when it comes to splitting super contributions. “If a couple is contribution splitting from the prior financial year, they need to make the nomination prior to this year-end,” Burgess notes.
Bridger believes good recordkeeping is becoming increasingly important. “The ATO is tightening up in respect to super, so it is important that the paperwork is right for both employees and the self-employed,” he says.
“In the future payslips will have details of super contributions and if mistakes are made, in two to three years time it can be difficult to fix.”
Financial year-end also means several time-honoured tax strategies should be reviewed.
“You have always got the traditional end of financial year tax strategies such as the timing of income and deductions. For example, payment of insurance premiums,” Guest notes.
“An oldie but a goodie is the pre-paying of interest of geared investments. It removes interest rate fluctuations and brings forward deductions.
"However, you need to keep going in the future if you decide to start it this year.”
Even the performance of investments needs to be considered in light of possible tax opportunities. “If the client is carrying forward capital losses, then they could be used to offset any gains,” Guest notes.
Bridger agrees: “The CGT position needs to be looked at and balancing losses with gains (if done legitimately) should be addressed.”
Tax – opportunity or headache?
While year-end tax discussions are important, finanical advisers need to ensure they are not breaching the tax advice rules.
They can provide general factual tax information, but require registration with the Tax Practitioners Board (TPB) to provide tax advice within the context of providing financial advice.
From 1 July, the current exemption of financial planners from the Tax Agent Services regime expires and advisers will need to be registered through ASIC with the TPB.
Members of either SPAA or the Financial Planning Association are now formally recognised by the TPB and this fulfils the requirements for registration if they also personally meet the additional fit and proper person and experience requirements.
Despite this, Burgess believes advisers still need to work closely with the client’s accountant.
“In the case of a sole trader for example, financial planners may not be privy to all their tax and income information, so they need to work with the client’s accountant – especially where there are multiple super accounts.”
He feels the problems around the contribution caps have made it more important than ever to cooperate. “This is especially so given the penalties involved and because there have been examples of practitioners having to pay because they got it wrong.”
Although financial advisers need to be careful, Guest believes tax discussions are an important area for them.
“Tax is an important consideration in any financial plan and financial planners need to consider the implications of the advice they provide.”
She believes talking about tax also helps strengthen client relationships.
“Tax discussions can be a positive tool and clients really appreciate being able to get advice on structuring their affairs to minimise the tax payable,” Guest says.
“Tax discussions and plans are not subject to market fluctuations and clients can see the increased benefits that it will achieve. This is a very important area for advisers.”
For Bridger, financial advisers can also add real value by discussing cashflow and tax with clients.
“Cashflow is an important issue for financial planners, as people’s situations are increasingly complex through the wealth that has built up over the past 20 years, which is significant.”
He sees financial advisers as uniquely positioned to help.
“Financial planners do a lot of work on cashflows and the way quarterly PAYG works, you can see large fluctuations in income and tax payments and tax refunds. So it is an important area for the individual,” Bridger says.
“You rarely see cashflow worked out for individuals by accountants, but financial planners have a good knowledge from their interactions with clients and this can be an area where it is very beneficial to work together.”
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