(03) 9020 2905PORTFOLIO POINT: A year to celebrate the positive whims of the market, sure. But don’t miss putting the cream on the top.
With six weeks to go, it’s looking like financial year 2013 is going to be a year of largely pleasant memories for trustees.
Certainly not in all respects. It’s been a year of legislative threats that have the potential to be particularly expensive (if implemented, which seems increasingly unlikely).
But, barring last-minute crashes in domestic and international equities markets, anyone with significant equities positions in 2013 is likely to stroll into 30 June with a smile on their face.
If you held too much cash this year, probably not so much.
No individual controls equity or property markets. As a result, your investment returns are partly out of your hands. You decide the risk, but the rest of the world decides what your returns will be.
As a trustee, there are plenty of other things that you do have control over. And as we approach the end of the financial year, here are a few tips to make sure you make the most of those.
Here are my top 7 EOFY tips.
Maximise concessional contributions (CCs)
Use it or lose it. That’s the deal with concessional contributions. If you fail to maximise your maximum contribution limit in a given year, it’s gone. For good.
For one year (FY2013), and one year only, everyone eligible to contribute has the same CC limit of $25,000.
(Interesting fact: FY2013 will go down as the hardest year ever to get money into superannuation, in both a dollar and inflation-adjusted sense, given FY14 will have higher limits for the over 60s and prior to FY12, there were higher limits in place.)
The over-60s will get a $35,000 limit for next year, before it widens to include relative youngies the following year. Obviously, this assumes the current intentions are passed into law.
Stretch yourself to hit your limit this year. Salary sacrifice a little extra. Make slightly larger deductible contributions. If you have the wherewithal to hit your limit this year, consider doing so.
Concessional Contributions II – protect capital gains
Concessional contributions, whether made through a salary sacrifice arrangement or a deductible contribution for the self-employed, helps lower you income.
While rare in recent years, many people will have taken some capital gains this year. One way of reducing capital gains tax (CGT) is to reduce your taxable income. And a good way of doing that is by making concessional contributions. (See above.)
Know the contributions rules
The confusion around contributions rules are serious. Concessional contributions are annual use-it-or-lose-it rules. Non-concessional contribution rules are similar, to a degree, though you can use up to three years of contributions at once under the “pull forward” rules.
For anyone trying to maximise their contributions, read up. Everyone’s situation is different. Over the last five years, I’ve written plenty on contribution limits. Understanding what your rights are, as they pertain to your individual situation, is important for those trying to maximise how much they can make their super work for them.
In essence, if you’re under 64 or under, you can use the CC and NCC limits on an annual basis without major concerns. However, given things such as the NCC pull-forward rule and how much that can impact on your ability to get money into super, those as young as 62 need to get advice from a professional adviser on being able to maximise contributions in the lead up to turning 65.
For those 65 and over, there are a different set of rules, which largely revolve around the work test – working at least 40 hours in a 30-day period.
Super splitting
Splitting super between spouses was once a popular strategy because of the old reasonable benefit limits. When RBLs were dropped and pensions were made tax free in 2007, they seemed a little irrelevant.
However, the Gillard Government’s April announcement that it intends to tax super fund accounts with incomes of greater than $100,000 has not just turned the spotlight on this strategy, but once again made it compulsory. (RBLs are now essentially back, with a twist.)
Even if this government doesn’t get the $100,000 limit through for taxing pensions (as it has since said it will take the policy to the election, which makes it less certain), the message is clear. Couples must even up super contributions or balances, in case this happens again in the future.
Review salary sacrifice arrangements
Salary sacrifice is a wonderful opportunity to help you make the most of our CCs. But misjudge them, or fail to understand how they interact with other concessional contributions and you could be hit with a bit tax bill.
Most importantly, with six weeks to go, you need to make sure that you don’t go over your CC limits. Going over them will increase your tax rate from the 15% on contributions to 46.5% for contributions over and above $25,000. If you are a chance of going over that limit, you still have a chance to reduce your contributions.
Alternatively, if it looks like you’re going to be well below, you have some ability to increase your sal sac contributions before the end of the financial year.
See this column (6/10/10) for a fuller description of what to watch out for when it comes to salary sacrifice arrangements.
Pension I – know the new pension minimums
For several years, the minimum pension payment was halved, to as little as 2%. For the last two years, it has been reduced by 25% to a minimum of 3%. That would seem to be ending on 30 June, when pension minimums will be reinstated to their pre-GFC levels.
This means that those aged under 65 will have to withdraw 4% of their 1 July balance. Those 65-74 will have to pull a minimum pension of 5%. Between 75 and 79, it’s 6%, and it’s 7% between 80 and 84.
It jumps to 9% between 85 and 89, 11% between 90 and 94 and 14% from 95 onwards.
This will be considerably higher than in recent years, so make sure you can meet those minimums, preferably from cash balances.
Crystallise some losses?
While this has been a fabulous year for gains … well, for most … that also generally means there will be some capital gains tax (CGT) to pay.
One way of reducing CGT is to sell loss-makers before 30 June. Have you been holding on to a few flea-ridden dogs? If so, could now be the time to stem the losses, sell and crystallise a loss, before moving on to bigger and better investments?
This is often a good idea. But be wary of the “wash sale” rules. The ATO doesn’t look kindly on anyone (SMSF or individuals) simply selling shares to generate losses for the sake of it.
It’s okay to sell losing stocks. And it’s okay to switch jockeys and try to pick a likely better performer. What the ATO doesn’t like is people selling, for instance, 1000 BHP Billiton shares to crystallise a $10,000 loss, then repurchasing 1000 shares that day, or shortly thereafter, where the aim is simply to reduce tax. That’s known as a wash sale.
Crystallising losses is okay. But be wary of buying back similar amounts of the same assets.
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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 strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is director of Castellan Financial Consulting and the author of Debt Man Walking. E: bruce@castellanfinancial.com.au