Bruce Brammall, 18 April, 2018, Eureka Report
SUMMARY: End of financial year is fast approaching. But you can get ahead of the game with these seven tips.
Never has it been more important for your superannuation for you to get ahead of the game and understand the rules, before the end of financial year rush.
A raft of new thresholds for superannuation kicked in on 1 July last year. And not updating your super settings could be … catastophic might be a little dramatic, but it wouldn’t be far off.
Proper preparation is essential. The good news is that, with a bit over two months to go before EOFY, you’ve largely got time to fine tune things.
No-one likes the end of financial year panic, so today I’ll take you through some of the biggest and most important considerations to keep abreast of with about 10 weeks go to the EOFY.
- Adjust salary sacrifice arrangements
This really should have been done before now. And if you pay close attention to your super, you probably have.
But if you haven’t made adjustments to the reduction in the concessional contribution (CC) limits from FY17 from $30k for the under-50s and $35k for the over-50s, then it might not be too late.
You will need to find out how much by way of CCs you have put into super to date, then make immediate adjustments.
Where would the problem lie? If you are earning $110,000 a year and are receiving $10,450 in SG contributions, you might have had your salary sacrifice set at $1625 a month (under-50s, $30k) or $2045 a month (over-50s, $35k). Obviously, if you haven’t made adjustments prior to now, you’re on course to break your CC limit by $5000 or $10,000. But you might be able to cancel your last few months of salary sacrifice contributions to keep you under your limit, or reduce how much you blow your cap by.
- Use the new rules for extra CCs
If you haven’t salary sacrificed to this point, but wish you had, well, it’s not too late.
From 1 July 2017, the “10% rule” regarding employees was removed, allowing almost everyone to make contributions and get tax deductions (similarly to salary sacrifice arrangements) by putting money directly into your super fund in the lead up to 30 June, as a lump sum, or in parcels.
This is an important new way of equalising how people can get money into super.
I hope it leads to a lot more people putting a lot more money into super in June, as they are looking for tax deductions, or simply wanting to make further contributions to their super.
But don’t leave it right until the last minute. Contributions to super funds count for the year that they are received. If you send it on 28 or 29 June (30 June is a Saturday this year), particularly by Bpay, there’s a chance it won’t be received by the super fund until 3 July. If it arrives on 3 July, it will be counted towards your FY19 contributions.
- Make decisions on capital gains tax relief
If you had more than $1.6m in pension or transition-to-retirement pension on 30/6/17, then you were able to potentially take advantage of the CGT relief provisions that were outlined to soften the blow of the new transfer benefit cap (TBC), of $1.6m.
Those decisions need to be made soon, if they have not been made yet.
It’s not a blanket decision to say “yes” for your whole portfolio. It can be made asset by asset and it should be made asset by asset. There will be assets in most portfolios where you want to apply for the CGT relief, while other assets (potentially, where you’re sitting on losses) where you don’t want the CGT relief, so that you can use a future CGT loss to offset other gains.
It is a complex decision-making process, which might go down to evaluating each parcel of a particular share that you bought over an extended period. Don’t leave this complex work until too close to the deadline. Sit down with your adviser and/or accountant to work through this process, sooner rather than later.
And understand that you need to make these elections, which are irrevocable, before you put in your self-managed super fund’s returns for the FY17 year.
- Make minimum pension payments before 30 June
An annual piece of advice – make sure that you make your minimum pension payment before 30 June.
If you don’t meet the minimum pension payment, the ATO deems you super fund to have NOT been in pension for the whole financial year, meaning you’ll pay tax on income and gains for that period. And any payments will be considered super lump sums for both income tax and SIS Regulation purposes.
This would also then mean starting a new pension the following financial year, which could have even broader implications, potentially also for pensions with benefits tied to social security.
- Protect capital gains with CCs
Making concessional super contributions to help reduce capital gains tax is nothing new, except with how much easier it has become as a result of point 2 above.
If you have made a capital gain, you can effectively reduce how much CGT you will have to pay (or more precisely, how much tax you have to pay for the entire year) by making concessional contributions.
That is, if you have made a capital gain of $50,000 (reduced to $25,000 for assets held longer than a year), then a concessional contribution will generally reduce your taxable income and might allow you to pay less tax on your capital gain, particularly if it impacts on your marginal tax rate.
But, in any case, a $10,000 CC will save you tax return of up $4700, while you’ll pay a maximum of 23.5% on the capital gain itself.
- Make the most of non-concessional contributions (NCC) rules
The annual limit for NCCs was dropped from $180,000 a year to $100,000 a year as of 1 July 2017.
The usual rules apply. You can make them up to age 65 with few restrictions – and can, in fact, use the pull forward rule to put in up to $300,000 in one year. But this will limit how much you can put in for the subsequent two years.
Come this time of year, it’s important to know the rules even more clearly.
If you have enough money to tip into super, then you and your partner could get in up to $800,000 into super (combined) over the next three months.
The pull-forward rule is only tripped if you put in more than $100,000 in a financial year. If you do put in more than $100,000 (say $110,000) in the current financial year, then you are limited to putting in another $190,000 over the following two financial years.
But if you put in no more than $100,000 this financial year, then you can contribute, on 1 July 2018, $300,000, which would trigger the pull-forward rules and maximise your contributions for the FY19, FY20 and FY21 years.
There are extra restrictions as of this year on making NCCs. If you already have more than $1.5m in combined super, then you are limited to making $100,000 in NCCs. If you have between $1.4m and $1.5m, then you are limited to putting in one year’s worth of NCCs, plus one year of pull forward.
Only if you have less than $1.4m in super can you use the maximum pull-forward rules to put in $300,000 in one year.
- Spouse super splitting
The imposition of the $1.6m transfer balance cap (TBC) has bought back the “spouse super split” as a critical part of many more couples’ financial planning.
It never used to matter for a couple if one member had a $10 million super balance and the other had diddly squat. Nothing was taxed, in anyone’s hands.
But with the new $1.6 TBC, if you have more than $3.2m in super and it’s unevenly split, you are literally donating extra to the tax office.
One way that “evening up” super balances can be helped is via “spouse super splitting”. This essentially means being able to transfer your concessional contributions for one spouse to another (less the 15% contributions tax) after the end of a financial year.
How does that work? Let’s say one spouse has a large super balance and received the full $25,000 in CCs for the year. The partner has a small super balance and received nothing in CCs for the year.
The partner with the higher contributions could use the spouse splitting rules to roll over $21,250 ($25,000 less 15% contributions tax) to the partner’s account. If this is done every year, it can go a long way to evening up super balances.
Be aware that you only have until the end of the following financial year to do the spouse split. That is, for the financial year ending 30/6/17, you will need to give super funds the instruction to do the spouse split rollover before 30/6/18.
There are actually many more hints I’d love to give, but the above are largely new opportunities for this year, or with new numbers and limits that need to be taken into your calculations.
I will aim to revisit this in the next month.
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 managing director of Bruce Brammall Financial and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s sixth book, Mortgages Made Easy, is available now.