Are you ready for 30 June? We’ve pulled together our hot 10 tips for year-end tax planning. Take a look at our list below to see how we’ve drilled down on opportunities to optimise your financial position.
1. Maximise contributions to superannuation
The end of financial year offers a great opportunity for individuals who wish to maximise their retirement benefits by making additional contributions to the concessionally taxed superannuation environment.
Current rules permit individuals under the age of 49 to make concessional (before tax) contributions up to $30,000 per annum or up to $35,000 per annum if over the age of 49.
Individuals under the age of 65 are also permitted to make non-concessional (after tax) contributions of up to $180,000 per annum or $540,000 by bringing forward two years of contributions, then nothing further for three years.
In addition to the above contribution limits, some small business owners may be able to contribute up to $1.355 million as a non-concessional contribution if eligible under the current Small Business CGT Concession rules.
Michael and Sandra age 63 and 61 respectively have been running a bed and breakfast business since 1999 and are considering selling the business along with the property they operate the business from. The business is their only major asset apart from their principal residence and they expect to receive net proceeds of $4,220,000 from sale of their business.
As Michael and Sandra have owned the business for over 15 years and satisfy the basic conditions for small business CGT concessions, any capital gains resulting from the sale of the business will be disregarded. Furthermore assuming the business is sold prior to 30 June 2015, they can contribute all of the business sale proceeds into superannuation as illustrated in the table below:
|Before 30 June 2015|
|15 year exemption amount||$1,355,000||$1,355,000|
|After tax contributions||$180,000||$180,000|
|On or after 1 July 2015|
|After tax contributions||$540,000||$540,000|
The benefit of contributing the business sales proceeds to superannuation is that all future earnings and capital gains will be taxed at the maximum tax rate of 15%. This tax rate compares very favourably to individual tax rates which can be as high as 49% if the proceeds were invested outside of superannuation.
Since the sale of the business is in connection with Michael and Sandra’s retirement and they are both over the age of 60, they may also commence account based pensions from their superannuation accounts. In pension phase tax on earnings and capital gains will be 0%. Any pension payments to them will also be tax free.
2. Prepay interest to minimise tax
The interest cost associated with investment loans is generally tax deductible in the year the cost is incurred. This presents an opportunity for individuals to pre-pay up to 12 months of interest and bring forward the deductions to reduce their tax liability in the current financial year.
Michael is a senior executive earning $300,000 per annum. He owns an investment property with a debt of $400,000. Interest only repayments for the 2015/16 year is $18,000 per annum.
If Michael was to pre pay this interest prior to 30 June 2015, he will be able to bring forward the deduction resulting in a tax saving of $8,820 for the 2014/15 year.
3. Spouse contribution tax offset
Spouse contributions tax offset applies to superannuation contributions made on behalf of non-working or low income-earning spouses, whether married or defacto. The maximum tax offset is 18% of super contributions of up to $3,000 resulting in a tax offset of $540 (maximum) each financial year.
To be eligible, the spouse receiving the contribution must have income less than $13,800 in the relevant financial year.
Jason and Natalie are age 45 and 50 with 2 children. Jason works full time earning $100,000 per annum whereas Natalie is currently not working as she is looking after the children.
Jason can make a non-concessional (after tax) contribution of $3,000 into superannuation for Natalie before 30 June 2015. This will entitle Jason to a tax offset of $540 which he will be eligible to claim in his 2015 tax return.
4. Low income super contribution
The low income super contribution (LISC) is a government superannuation payment of up to $500 to help low-income earners save for retirement. Individuals earning $37,000 or less a year from employment or self-employment, may be eligible to receive a LISC payment.
Maria earns $33,000 per annum as a childcare assistant. In the 2015 year Maria’s employer makes a super guarantee (SG) contribution of $3,135 into her super fund. Upon lodging her 2015 tax return, Maria will be entitled to a low income super contribution of $470 (being 15% of the $3,135 SG contribution) paid directly into her superannuation account.
Maria must lodge a 2015 tax return to claim the low income super contributions.
5. Super co-contribution
Low or middle-income earners may be eligible for a maximum amount of $500 from the government super co-contribution scheme to help boost their retirement savings.
To be eligible, individuals must make a non-concessional (after tax) contribution to their superannuation and must not earn in excess of $49,488 for the 2015 financial year.
Maria earns $33,000 a year as a childcare assistant. In 2014/15 year Maria’s employer makes a super guarantee (SG) contribution of $3,135 (9.5%) into her super fund and in addition Maria makes an after tax contribution of $1,000. Upon lodging her 2015 tax return, Maria will be entitled to a super co-contribution of $500 (being 50% of the $1,000 after tax contribution) paid directly into her superannuation account. This amount is in addition to the $470 (LISC) her super fund will receive on her employer SG contribution. Please see section Low Income Super Contribution (LISC) for more details.
Maria must also lodge 2015 tax return to claim the co-contribution.
6. Instant write off of low cost assets for small business owners
An immediate deduction is available for depreciating assets costing $1,000 or less that are used in the course of running a small business.
Barry runs a small business and wishes to purchase a laptop valued at $850 and a printer valued at $900 for business use prior to 30 June 2015. As each of the asset is less than $1,000 Barry can claim a total of $1,750 as a deduction against his business income resulting in reduced tax liability for the 2015 year.
7. Medical tax offset for self-funded Age care residents
Self-funded age care residents earning less than $90,000 (singles) or $180,000 (couples) can claim 20% of the age care expenses in excess of $2,218 per annum. The expenses that can be claimed under the net medical tax offset include daily care fees, income tested fees, extra services fees, accommodation charges and periodic payments of accommodation bonds. This offset is expected to be phased out in 2019.
Maria is an age care resident earning annual income of $70,000 from her investment and property portfolio. Maria’s age care expenses for the 2015 year are as per below:
Daily care fees: $47.49 per day ($17,334 p.a.)
Means tested fees: $69.93 per day ($25,528 p.a.)
Daily accommodation payments: $62.87 per day ($22,947 p.a.)
Total: $180.29 per day ($65,805p.a.)
Based on Maria’s income, tax payable in the 2015 years is approximately $15,922 (excluding Medicare levy). Maria is eligible to claim a medical tax offset for her age care fees as per below:
Medical tax offset = ($65,805 – $2,218) X .20 = $12,717
The net medical tax offset will reduce Maria’s tax liability from $15,922 to $3,205, a saving of $12,717.
8. Personal deductible super contributions for self employed
Self-employed individuals can claim a tax deduction on any personal superannuation contributions they make given they meet the following eligibility criteria:
- Personal contributions must be made to a complying super fund or retirement savings account;
- The individual must be under age 65 or over 65 and meet the work test;
- For those earning employment income, less than 10 per cent of the individual’s assessable income, reportable fringe benefits and reportable employer superannuation contributions must come from being an employee.
For the 2015 year individuals under the age of 50 may claim up to $30,000 whereas individuals over the age of 50 may claim up to $35,000.
George is age 56 and operates a courier business as a sole trader earning $84,000 per annum. In the 2015 year George has business deductions of $30,000 reducing his taxable income to $54,000. His tax liability for the 2015 year is estimated to be $10,177 including Medicare levy.
George can make a personal contribution of $35,000 before 30 June 2015 and claim a deduction for this amount in the 2015 tax return. This will reduce his tax payable to $0. The amount contributed to superannuation will be taxed at 15% providing George with a tax saving of $4,927.
Superannuation benefits are generally preserved and cannot be accessed until a condition of release has been met. However, since George is over the preservation age for the 2015 year (55 years) and working he may access 10% of his superannuation benefits per year in the form of a non-commutable income stream.
9. Transfer personal investments to super
Earnings on assets held inside superannuation are taxed at a maximum rate of 15% whereas capital gains for assets held for 12 months or longer are taxed at maximum of 10%. Further, in pension phase earnings and capital gains tax on assets held inside superannuation is 0%. In contrast, earnings on assets held in personal names are taxed at the marginal tax rate of up to 49% and capital gains on such assets held 12 months or longer attract 50% discount reducing the maximum rate of tax to 24.5%.
This strategy involves transferring personally held investments to superannuation to take advantage of the concessionally taxed environment. Careful planning however is necessary to minimise the impact of resultant capital gains.
Garry and Tali are self employed farmers age 61 and 62 drawing an annual income of $50,000 each.
They have a joint portfolio of listed shares valued at $350,000 with accumulated capital gains of $140,000 and are seeking advice to optimise their tax position as they approach their retirement at age 65.
As Gary and Tali are under the age of 65 they are eligible to make non-concessional (after tax) contributions of up to $180,000 each per financial year and concessional contributions of $35,000 each per financial year to their superannuation.
Accordingly, they can transfer the shares as a contribution to their superannuation as follows:
— $175,000 each before 30 June 2015
As both Gary and Tali are self-employed, they are also eligible to claim up to $35,000 of their contributions as a tax deduction.
The table below compares the tax position for each of Gary and Tali for the 2015 year before and after implementation of the share transfer.
|Dividends @ 4%||$7,000||$7,000|
|Personal contribution deduction||($35,000)|
|Income Tax payable||$11,047||$11,047|
|Low income tax offset||($100)||($100)|
|Total tax payable
As illustrated above, Gary and Tali are able to transfer their share portfolio to their superannuation with no impact to their personal tax position in the 2015 year. The personal contribution of $35,000 each will attract 15% tax ($5,250 each) inside superannuation however as explained below, the longer term benefits of the strategy will far outweigh the 15% contributions tax payable.
Further the benefit of transferring the shares to superannuation is that going forward the maximum tax on income will be 15% and capital gains will be 10%. These tax rates compare favourably to tax on earning at their marginal tax rate of 34.5% and capital gains at 17.25%. Once the shares have been transferred, they may commence a non-commutable pension from their superannuation accounts. Since both of them are over the age of 60, pension payments will be tax free. In pension phase tax on earnings and capital gains will be 0%.
10. Income protection and deductible contributions
Income protection payments are taxed at individuals marginal tax rate, however the resulting tax liability can often be minimised by making tax deductible superannuation contributions and supplementing the forgone income from other sources such as superannuation.
Damian, age 49 suffered an accident that left him unable to work. He is in receipt of income protection payments of $90,000 per annum.
In addition, Damian received $500,000 from a Total and Permanent Disability pay out from an insurance policy held through his superannuation fund. His current superannuation balance is as follows:
Damian is using his income protection payments and additional ad hoc lump sum withdrawal from his superannuation to meet his medical and living expenses.
Since Damian is under the age of 65 he is eligible to make concessional (deductible) contributions to superannuation. These contributions can assist Damian to reduce his tax liability on income protection payments that are being taxed at his marginal tax rate of 39% as the deductible contributions will be taxed at maximum of 15%.
The reduction in income from making the contributions can be supplemented by drawing an account based pension of $25,000 per annum from his superannuation balance. $10,500 (42%) of the pension payments, will be tax free and the remaining $14,500 (58%) of the pension payments will attract 15% tax offset, meaning the tax on these payments will reduce from his marginal tax rate of 39% to 24%.
The table below compares the tax and cash flow position following implementation of deductible contributions strategy for Damian:
|Taxable Account Based Pension||$14,500|
|Less Deductible contributions||($35,000)|
|Tax payable (including Medicare levy)||$23,047||$15,525|
|Less 15% tax offset||$2,175|
|Total tax payable||$13,350|
|Tax free Account Based Pension||$10,500|
|Net Disposable Income||$66,953||$66,650|
As illustrated above, by employing the deductible contributions strategy Damian will end up with approximately the same net cash flow as before however his personal tax liability will be reduced $9,697.
Taking into consideration the 15% tax payable on the concessional (deductible) contributions totalling $5,250 the net benefit of the strategy to Damian will be $4,447 per annum. Further, in pension phase, tax on earnings will be reduced to zero as opposed to 15% tax payable on his current superannuation earnings.
The information presented is general in nature and not to be used, relied or acted upon without seeking professional advice to ensure that the information appropriate for your individual circumstances. William Buck accepts no liability for any errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice.