Super’s eight point checklist

PORTFOLIO POINT: June 30 is fast approaching. But you’ve still got time left to maximise your superannuation entitlements.

Aaargh! It’s the end of May! Grand final time for superannuation. Starting tomorrow morning (Thursday), there are just 25 business days until the end of the financial year.

It’s not too late. As always, at this time of year, I’ve got my checklist of things that I want you to tick off to make sure that you’re either (a) not making avoidable mistakes, or (b) picking up some easy tax benefits that come as part of the superannuation deal in Australia.

Today, I’ve got 8 tips. Some of them are things you might be all over already. But I’ll be raising a few issues that tend to slip the mind of even good SMSF trustees or super members.

1. Check you’re not blowing your      concessional contribution limit

We’ve been through the concessional contributions limits quite a bit recently, so most of you will be well aware that if you’re over 50, you have this current financial year and next to make CCs of $50,000. If you’re under 50, then you’re stuck with $25,000 a year.

But what’s important to do at this time of year is to check to make sure that your super fund isn’t going to receive too much from you in the way of CCs. They can take a bit of work, but is worthwhile.

Things can be made very tricky by the timing of contributions to your super fund. If you have an employer making Superannuation Guarantee contributions and you have been making salary sacrifice contributions on top of that with the aim of getting close to the limit, then you need to find out exactly what contributions have been made and what contributions WILL BE made before June 30 this year.

Many employers will deliberately pay their June contribution to super in June, earlier than they do for the rest of the year. This is because they will only get the tax deduction for the current year if the contribution is made in the current year. If they don’t make the contribution for the month or quarter of June until July 28, then they will have to wait until the following financial year to make the expense claim.

This can lead to your super fund receiving two lots of payments in June. If that occurs and you blow your CC limit, the extra contributions will become non-concessional contributions (NCCs) and will be taxed at an extra rate of $31.5% (for a total of 46.5%). This can lead to the 93% tax problem we’ve discussed previously (see 6/4/11) if you are also at or near the limit for your NCCs.

Call your super fund and find out exactly what contributions have been made already this financial year. Then call your employer/pay office and and find out when the June contribution is going to be made.

There is still time to make changes now. You could decrease or increase your salary sacrifice arrangements for June based on what is going to occur during June to try to keep yourself under the limit.

2. Make an after-tax contribution to get      the Government co-contribution

The limits for the co-contribution were frozen again for this year. If you earn less than $31,920 for the 2010-11 financial year, then you could be eligible for the $1000 co-contribution.

The co-contribution is reduced by 3.333 cents for each dollar that your income exceeds that amount. If you earn $30,000 and contribute $1000, then you’ll receive $1000 from the government, if you meet all of the conditions
click here,  http://www.ato.gov.au/Individuals/content.aspx?menuid=0&doc=/content/42616.htm&page=3&H3  The benefit cuts out for those earning more than $61,920.

If not for you, then potentially for your spouse (or kids if you want to give them a headstart).

3. Make an eligible contribution for a      low-earning spouse

There is an 18% tax offset available for eligible contributions for low-earning spouses. If your spouse earned less than $10,800, a contribution of $3000 could earn you a rebate of $540. The rebate cuts out at $13,800.

Eligible spouse contributions are treated as non-concessional contributions so are not taxed at 15% on the way into the fund. They are separate to the co-contribution. That is, you can’t claim both.

4. Check your investment strategy

The ‘investment strategy” of a SMSF is not some mythical, in-your-head conceptual idea that you’ve been meaning to write down on paper at some stage, but you haven’t because you’re too busy doing the investing itself.

It’s a requirement. An investment strategy is an important document and needs to be in writing. The fund’s auditor and the ATO will get more than a little stroppy if they can’t find it when they want to. For more information on what an investment strategy needs to contain, click here (May 30, 2008).

If you’ve been sitting out of the market in cash this year, or you’ve reverted to cash because of your feelings about the market, or have begun ploughing in the belief the market is undervalued, then you might find that your current investments sit outside of your SMSF’s investment strategy. That means one of two things. It’s either time to update your investment strategy, or you need to update your investments. And while you’re reviewing everything else in the lead-up to the end of the financial year, you should add this little job to the list.

5. Crystallising losses/in specie transfers

Wanting to drop some more money into super? But don’t have any spare cash lying around? Well, have you considered in-specie transfers?

You can transfer in some assets, including shares, into a super fund, without the need to sell them to cash and put the cash into the super, which risks you being out of the market at a bad time. Shares can be in-specie transferred.

There can be several benefits to transferring existing shares into super. For a start, you might be able to crystallise losses outside super (potentially to offset gains) and transfer assets into super where, if you’re soon to start a pension, you might never have to pay tax on them ever again.

For more information, check this column (March 28, 2008).

6. Review pension payments

There are set minimum pension amounts for everyone on a super pension. And then there’s the maximum pension of 10% for those on a transition to retirement (TTR) pension.

For the last few years, however, there has been a temporary reduction in those minimums, as the government didn’t want to force people to be drawing down on capital when asset prices were at lows. (Next financial year, you will have to take 75% of the “normal minimum pension”.

Table: Minimum drawdowns for pension funds for FY2010-11

With a little over a month to go, it would be a good time to make sure that you haven’t breached the limits, either the minimums or maximums, or are on track to breach them, as there can be serious consequences. Check the pension payments from the fund and make sure you are within your limits.

7. Protect capital gains by making super      contributions

Made some big capital gains this year, through the sale of some assets? Well, if you’re eligible, consider making some last minute concessional contributions to reduce your overall taxable income.

For example, someone earning $200,000 a year who makes a taxable capital gain of $50,000 (after the 50% discount) would lose $23,250 of that gain. However, make a concessional contribution to super and you’ll only pay $7500 in tax on the way into the fund.

8. Make the most of the end of year for non-concessional      contributions

If you have a large sum of after-tax money you want to get into super, then May and June can be a good time to get in extra. A husband and wife can potentially dump up to $1.2 million in non-concessional contributions into super over the next six weeks or so. For more information on this strategy, click here for one of my December columns (December 1, 2010)

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It’s a busy time of year for most businesses and most employees. But delaying making some final checks on your super fund can be very costly indeed.

Take a few hours to check out how you can make the most of super before the new financial year dawns.

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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are advised to consult your financial adviser.

Bruce Brammall is director of Castellan Financial Consulting and author of Debt Man Walking.