The end of the financial year is fast approaching, so now is the best time to start preparing effective year-end strategies.  Outlined below are some commonsense planning tips.

1.    Government co-contributions

The co-contribution scheme is an effective way for eligible investors to boost their super balance, with earnings taxed at 15% rather than marginal tax rates of up to 46.5%.

If you make a personal contribution to super, the government matches your contribution on a dollar-for-dollar basis, up to $1,000.  To receive the co-contribution you must make a personal contribution into a complying fund by 30 June 2010, and your total income must be less than $61,920.  In addition, 10% or more of your income must be from eligible employment, running a business or a combination of both. You must be under age 71 and have lodged your tax return.

2.    Concessional (pre-tax) contributions

There are limits on the level of pre-tax contributions that can be made each year. The current limit is $25,000 unless you are 50 or older, in which case the limit is $50,000 (until the 2010 financial year).  Amounts contributed above this will be taxed at an additional 31.5% and will count towards your after-tax contribution limits.

Salary sacrificing involves diverting pre-tax dollars from your salary into a range of benefits; with the most common being contributions into a super account.  You will benefit by increasing your super balance, whilst also reducing your tax liability. Instead of paying tax at your marginal rate, the amount sacrificed becomes a taxable contribution received by the fund and is taxed at 15%. And, once you turn 60, payments from the fund are tax-free.
 
Salary sacrificing can be used by most employees as long as your employer allows it.  Importantly, you must have an effective agreement in place before you actually sacrifice any income, ie the salary sacrifice cannot be backdated.

By making a personal deductible contribution to super, you can reduce your taxable income and decrease your personal tax liability.  If you have sold an asset during the financial year and realised a significant capital gain, you may also be able to offset some personal income tax that would have been payable on the gain.

You may be eligible to use this strategy if you are self-employed, substantially self-employed, or under 65 and recently retired. However, you should confirm your eligibility to make a personal deductible contribution with us before actually making the contribution.

If your spouse’s assessable income (including reportable fringe benefits) is less than $13,800 and you make a spouse super contribution to your spouse’s fund, you may be entitled to receive a tax offset. As this benefit is a tax offset, you can make a direct saving against your tax liability.

You may benefit from this strategy if you have a spouse on a low income and want to boost their super savings, whilst also reducing your tax liability.

3.    Non-concessional (after-tax) contributions

There is a cap on after-tax contributions of $150,000 pa.  However, if you were under 65 on 1 July 2009, you can contribute up to $450,000 in the current year; providing you have not contributed more than $150,000 in any previous financial year after 1 July 2007, and this does limit how much you can contribute in the next two years.  Any contribution you make over the relevant cap is taxed at 46.5%. If you have also exceeded the concessional cap you may be liable for tax at 93%, so it is important that you manage you contributions carefully.
 
If you turned 65 after 1 July 2009, you can still take advantage of these provisions this financial year, but if you make the contribution after your 65th birthday, you must satisfy the work test first.   If this applies to you, this will be the last chance you will have to make a large, after-tax contribution to boost your retirement savings. If you are in this position, it may be viable to consider short-term borrowing to fund a contribution if you’re waiting for an asset to sell or to receive proceeds.

4.    In specie transfer to super

If you hold allowable assets in your own name, you may consider contributing these assets into your super account. Under super law there are selected personal assets that a member can contribute into their super account. These include listed securities, interests in a widely held trust and business real property.  Where you hold an asset personally, the income is taxed at your marginal rate of tax, whereas benefits held within super are taxed at the lower super fund tax rate (maximum 15%).

However, transferring an asset from your personal name into the name of your super fund will trigger a CGT event. Market performance over the past year has meant some assets have fallen in value, so transferring these assets into your super fund now may result in a lower CGT impact.

If you are considering this strategy you need to be mindful of the contribution caps. The asset transfer will be treated as a contribution and measured against the relevant caps.  If the value of your contribution exceeds the contribution caps, you will be charged penalty tax on the excess amount.

Where the asset being transferred is business real property, there is potential to access the small business provisions to reduce or eliminate CGT.  You may benefit from this strategy if you have allowable assets, are eligible to make a contribution to super, have not exceeded the contribution cap and you wish to boost your accumulated super benefits.

5.    Review pensions

The end of the financial year is always a good time to review your income stream.

The 50% reduction in the minimum pension payment was extended to 2009/10 due to falling asset values as an outcome of the GFC.  If you have already drawn your minimum pension, you can elect to receive no additional payments for the remainder of the financial year. This will help to preserve the capital
in your fund.

If you are over 55 and still working, you could consider a transition to retirement (TTR) strategy. There are tax incentives associated with moving benefits from accumulation phase to the tax-free pension phase, plus the ability to combine salary sacrifice with a TTR makes this strategy particularly attractive. In addition, you have the flexibility to reduce the hours you work and supplement your income by drawing a pension.

You may benefit from these strategies if you:

• are 55 or older and have retired
• are 55 and still working
• have already started to draw a pension.

6.    Gearing in super

Given relatively low interest rates and falls in many asset values, you may consider borrowing within super to invest.  However, there are restrictions that apply to this strategy that must be adhered to.

You must be comfortable with the concepts and risks associated with gearing (see separate article). This strategy may be beneficial if you would like to boost your super, but are restricted by the contribution caps. However, you must be confident that your fund can eventually pay back the loan. Given the risks involved with gearing and the rules and regulations that apply, we recommend that you seek advice before considering any gearing strategy.

7.    Prepaying interest

You may benefit from this strategy if you have borrowed money for an investment, or you are contemplating doing so before 30 June 2010. This strategy is especially tax-effective if your assessable income puts you in the top marginal tax bracket.

As long as the borrowing is used for investments that will generate assessable income, you are entitled to claim a tax deduction for the interest payable on your loan. By pre-paying the interest for 2010/11 on your investment loan now, you may be able to claim a deduction for that interest in your 2009/10 tax return.

Next steps

The end of the 2009/10 year will be here before you know it. Don’t wait until 30 June to get the ball rolling. In the immortal words of Thomas Jefferson, “Never put off till tomorrow what you can do today.”  So get started now and make an appointment with us to discuss your end-of-year strategies.