10 Hot tips for the End of Financial Year – Part 1

Are you ready for 30 June?  Over the next few weeks we’ll be posting our hot tips for year-end tax planning. Simply head to our news blog every Monday where we will drill down on opportunities to optimise your financial position.

This week we’re focusing on maximising contributions to superannuation and prepaying interest to minimise tax.

1. Maximise contributions to superannuation

Background

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.

Case Study

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:

Michael Sandra
Before 30 June 2015
15 year exemption amount $1,355,000 $1,355,000
After tax contributions $180,000 $180,000
Deductible contributions $35,000 $35,000
On or after 1 July 2015
After tax contributions $540,000 $540,000
Total $2,110,000 $2,110,000

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

Background

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.

Case study

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.

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.