With the end of financial year approaching us it is an ideal time to ensure you are making the most of opportunities in the current financial year, as well as preparing for any changes the new financial year brings.
Both the concessional and non-concessional contribution caps will remain at current levels for the 2016–17 financial year. However, this doesn’t necessarily mean you should leave your current contribution strategies unchanged.
Using spare concessional cap
If you are able to put further funds into super but have not yet fully utilised your concessional cap, you should consider doing so prior to 1 July 2016. The caps operate on a use it or lose it basis, so those who don’t take action may miss out on a potentially valuable tax saving. Employed clients often have to make voluntary concessional contributions via regular salary sacrifice, it is important to take action as soon as possible to ensure maximum salary sacrifice for the remainder of the financial year.
Of course, the effectiveness of making concessional contributions will depend on your personal tax position, so it is important to analyse whether concessional or after tax contributions will provide the best outcome.
Reaching age 49
If you are reaching age 49 during the 2015-16 financial year, your concessional cap will increase from $30,000 to the higher $35,000 cap from 1 July 2016 – allowing an additional $5,000 of concessional contributions next financial year.
Beware of salary increases
Employed people who are already maximising their concessional cap may need to adjust their existing salary sacrifice contributions from the start of, or early in the financial year due to an increase in their employer’s compulsory SG contributions, or risk making excess contributions. This may be due to:
- Salary increases applying from 1 July (or shortly afterward) impacting the calculation of SG
- The SG maximum earnings base increasing from 1 July, meaning employers will be obliged by super law to pay SG on earnings up to $206,480 (rather than $203,240 for this financial year).
Non-concessional cap – has a bring forward ended?
Where you have previously paid a large sum into your superannuation and have triggered the bring forward rule (currently $540,000 over 3 years), it is important to keep track of when it ends so that you can again, as funds become available, make non-concessional contributions to build your retirement balance.
From 1 July 2016, anyone who last triggered the bring forward rule in the 2013–14 financial year will no longer be within their bring forward period and can make further contributions.
Those who triggered the bring forward rule in the 2014–15 or current financial years will still be within their bring forward period next financial year (and are only able to contribute any part of the $540,000 that they have not yet made).
Non-concessional cap – best use of the bring forward
Where you want to maximise your non-concessional contributions and are able to trigger the bring forward rule in this financial year, this is often not the best course of action.
An alternative strategy that should be considered is to simply make $180,000 of non-concessional contributions prior to 1 July 2016 (after allowing for any already made during the financial year), which leaves the bring forward rule to be triggered early next financial year. People who use this strategy may be able to make non-concessional contributions of $720,000 over a short period of time, instead of $540,000.
Those approaching age 65 who will not be working on beyond that age should also consider when they trigger the bring forward rule if they want to maximise their non-concessional contributions as much as possible. Generally, the best strategy is to ensure that the bring forward rule is triggered for the final time in the financial year you reach age 65 (the last time it is available) – this allows people in this situation to effectively contribute an additional two years’ worth of non-concessional contributions ($360,000). Note, if you are not intending to meet the work test, work 40 hours with a 30 day period during the financial year, it is important to ensure any contributions are received by the fund prior to reaching 65.
People in this situation who reach age 64 this financial year could consider only contributing $180,000 of non-concessional contributions in this year, to leave the bring forward available for next financial year.
People in this situation who turn 63 this financial year could consider contributing $180,000 this and next financial year, leaving the bring forward free for 2017–18.
Contribution splitting transfer requests
Some of you may be able to split up to 85% of your concessional contributions with an eligible spouse each financial year. If keeping your super fund open, the transferring spouse must submit their transfer request at some time during the following financial year. This means that for continuing fund members who have made concessional contributions in 2014–15 and wish to split to their spouse, they will need to submit their transfer request by 30 June 2016.
If however you are ceasing to be a fund member during the year of contribution, transfer requests must be made at some time during that year. Fund members who are rolling or cashing out their benefits in 2015–16 who have also made concessional contributions in 2015–16 that they wish to split to their spouse will need to submit their transfer request by 30 June 2016.
Will you turn age 56 during 2016–17?
The gradual increase in preservation age from 55 to 60 began last July, effectively meaning that no-one reaches preservation age during the current financial year.
However, this changes from 1 July, with anyone who turns 56 during 2016–17 having reached their preservation age on their birthday. This is important because:
- You can then commence a transition to retirement pension/strategy (if beneficial to your personal circumstances)
- If retiring permanently from the workforce, you have unrestricted access to their super.
Timing deductions for best tax outcome
As with the end of any financial year, it is important for you to maximise any tax deductions that you may be entitled to, but also ensure where possible that the deduction is able to be claimed in the financial year where it has the most impact. This may mean incurring deductible expenses by 30 June to reduce taxable income in this financial year, or if your marginal tax rate is expected to be higher next financial year, delaying deductible expenses until after 30 June.
Some of the deductible expenses you may wish to bring forward to this financial year rather than waiting until next financial year include:
- repairs and other eligible ongoing expenses relating to an investment property
- ongoing expenses incurred in running a business
- eligible self-education expenses
- home office expenses
You may also have a range of ongoing expenses which are tax deductible. These could include:
- interest incurred in producing assessable income (eg, interest on an investment loan)
- ongoing financial advice or investment fees incurred by the client relating to investments that produce assessable income
- income protection insurance premiums
You are also allowed to prepay up to 12 months’ worth of these expenses and claim a tax deduction in the year of payment. For example, you could prepay your 2016–17 income protection insurance premiums in June 2016 and claim a full tax deduction in your 2015–16 income tax return.
It is important to note that your ability to claim a tax deduction for certain expenses may depend on your specific situation, your eligibility to do so should be confirmed with your accountant.
Start the planning ASAP for 1 Jan 2017
The upcoming assets test changes that apply from 1 January 2017 will mean for many:
- a reduction in your pension entitlements (in some cases to Nil)
- Strategies that can be used to reduce assessable assets under the assets test are up to twice as effective once the new rules commence.
Now may be the time to start thinking about talking to your adviser about taking any action that’s required to optimise your social security entitlements from 1 January 2017. Strategies to consider could include:
- maximising the super balance of the younger member of a couple (where one is under age pension age)
- purchasing long term annuities with a depleting asset value
- making principal home improvements
- gifting within allowable limits
- gifting more than 5 years before qualifying for a social security pension
- Purchasing funeral bonds or prepaid funerals.
These are just some of the issues you need to consider so make sure you talk to your independent advisor before taking any action.
General Advice Warning – Any financial advice contained in this website (or publication if applicable), is general in nature only as it has not taken into account your individual needs, objectives, or financial situation. You should take these matters into account before acquiring a financial product and you should obtain a copy of the Product Disclosure Statement (PDS).