30 June 2018 Checklist
With the end of financial year approaching, now’s the time to make the most of opportunities to maximise super and tax benefits. This is particularly important this financial year due to several significant superannuation changes that have applied for the first time in 2017-18, and some others that are starting on 1 July 2018.
For many people, super remains a highly tax-effective structure through which to hold investments to accumulate retirement savings and to also maintain their risk/insurance protection. However, current contribution caps and rules mean that planning ahead over the longer term is the best way to maximise the benefits of super.
Particularly worth noting are the following changes:
* This financial year is the first where the concessional contributions cap of $25,000 applies to everyone. This includes the superannuation guarantee contributions (usually 9.5% of your salary) you receive from your employer, voluntary salary sacrifice contributions and any personal contributions you claim a tax deduction for.
* Eligible people can make ‘downsizer’ contributions from 1 July 2018. Refer to the downsizing article in the April 2018 Affinity Accounting Newsletter for additional information.
* Beginning in 2018 -19, a person can commence to accrue unused amounts of concessional contributions cap and ‘carry-forward’ these unused amounts. The first year a person can make additional concessional contributions from their accrued unused amounts is in 2019-20, provided their prior 30 June ‘Total Superannuation Balance’ (TSB) was under $500,000.
* From 1 July 2017, the requirement that an employed individual must earn less than 10% of their income from employment-related activities to qualify to claim a tax deduction for a personal super contribution no longer applies. Broadly, this means any individual who is eligible to contribute to super will be able to claim a tax deduction for their personal super contributions (note: if under 18 some employment/self-employment income must also be derived).
Personal super contributions that the ATO allows as a tax deduction in the individual’s tax return will count towards their concessional contributions cap. If employer super contributions are also received, clients will need to make sure these are taken into account when determining how much to claim as a personal tax deduction.
Non-concessional super contributions
Individuals are also subject to caps on the amount of after-tax or non-concessional super contributions that can be made without incurring a penalty. Non-concessional contributions are not taxed by the receiving fund.
The new rules from 1 July 2017 limit the ability and amount of bring-forward that can be triggered as the individual’s prior 30 June balance gets closer to $1.6 million. In addition, from 1 July 2017, an individual will not be eligible to make non-concessional contributions when their 30 June balance is $1.6 million or more. This is shown in the table below:
|Total super balance as at 30 June||Available non-concessional cap||Bring forward period|
|<$1.4 million||$300,000||3 years|
|$1.4 – < $1.5 million||$200,000||2 years|
|$1.5 – < $1.6 million||$100,000||n/a|
|> $1.6 million||Nil||n/a|
Government super co-contribution
Individuals who derive at least 10% of their income from employment and/or carrying on a business and who make personal non-concessional contributions may be eligible for a government co-contribution. Income for this test is the sum of the individual’s assessable income plus reportable fringe benefits plus reportable employer super contributions.
The co-contribution income thresholds for this financial year are:
|Financial year||Maximum entitlement||Lower income threshold||Higher income threshold|
The maximum co-contribution amount of $500 will be available for a non-concessional contribution of $1,000 or more by the member, subject to the income test above. Individuals must be under age 71 at the end of the relevant year and meet the work test for any contributions made after reaching age 65. A person will also have no non-concessional cap space for 2017-18, if their super balance on 30 June 2017 is $1.6 million or more.
Spouse super contributions
In 2017-18, a tax offset of up to $540 is available for spouse contributions of $3,000, where the receiving spouse’s assessable income plus reportable fringe benefits and reportable employer super contributions does not exceed $37,000. The offset reduces once the receiving spouse’s total income exceeds $37,000, cutting out at $40,000.
If the recipient spouse is aged 65 or more (but under age 70), then they must satisfy the work test to be eligible to receive the contribution. The receiving spouse must be under age 70 at the contribution date for the contributor to be eligible for the tax offset.
Super contribution splitting
Members who hold an accumulation interest in a super fund are able to split part of their prior year’s concessional contributions with their spouse, provided the fund offers this facility. Only certain contributions may be split with a spouse, and other qualifying conditions must be met. The amount that can be split is the lesser of 85% of the concessional contributions or the member’s concessional contributions cap.
The main reason for considering a contribution splitting strategy is to help equalise the super balances of each person – this may assist with keeping each partner’s total superannuation benefits under $1.6 million.
Where a fund member is in pension phase it is important to ensure that the required annual minimum pension payment is met, otherwise the fund risks losing the pension tax exemption for that financial year.
If a pension is first commenced from 1 June, no pension drawdown is required for that financial year. If a pension is commenced part way through a financial year, the required pension drawdown is pro-rated for the first year. Commencing in the 2017-18 financial year, lump sum commutations from the pension account no longer count towards the minimum required pension income payments.
The minimum annual income payment is calculated as a minimum percentage of the account balance at 1 July each year as per the following table:
|Age at start of 1 July each year||% of account balance|
There is no maximum limit for Account based pensions. If you have a Transition to Retirement (TtR) pension, you must not draw more than 10% of the account balance in income during the financial year.
Opportunities to manage tax
Where there is some flexibility around the date an individual ceases employment, they may be able to optimise the tax treatment of payments received. For example, terminating employment from 1 July rather than before may mean that marginal and concessional tax rates can be best utilised if little or no other taxable income is earned that year, eg terminating from age 60 and subsequently receiving only tax-free account based pension income.
Manage capital gains tax
Review investment portfolios and potential capital gains. Where there is a potential CGT liability from selling an asset during the year or as a result of a corporate action, it may be appropriate to sell another asset to crystallise a loss. Realising a loss allows the taxpayer to offset capital gains and thus minimise or even eliminate a tax liability they may otherwise be facing. At the same time, this strategy allows investors to offload a low-quality, under-performing asset that has little likelihood of recovering in the short to medium term and to invest in a better-quality asset.
It is important to note however that the ATO issued taxpayer alert TA 2008/7 and tax ruling TR 2008/1 in relation to ‘wash sales’. A wash sale occurs when a taxpayer disposes of an investment but repurchases the investment or retains an economic interest in the investment (including via an associated entity) and the disposal has crystallised a capital loss. Selling and immediately buying back the same asset would likely be viewed by the ATO unfavourably as a wash sale, and the ATO may disregard the loss created by the sale of the asset.
Prepay deductible expenses
A tax deduction may be claimed for up to 12 months’ worth of interest prepaid on an investment loan on a rental property, or margin loan on a share portfolio or managed investment, provided the loan has a facility allowing this.
In addition, the payment of other deductible expenses, such as professional memberships or pre-paying salary continuance/income protection insurance by 30 June 2018, reduces taxable income. This may also be a good strategy if you believe that interest rates are likely to rise in the near future, as prepaying an investment loan fixes the interest rate for the agreed period.
Should you have any concerns or wish to discuss the 30 June checklist in more detail, please do not hesitate to contact the office
The Affinity Accounting Team