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Get your end-of-financial-year strategy sorted

 

7 June 2018

 

 

 

 

 

This is the time to manage tax liabilities and maximise wealth strategies, explain Scott Graham and Jerome Carlin

While you should review your wealth strategy through the year, tax makes June every year the crunch time for financial strategising as the new financial year draws closer.

And while you’re working out what you need to do before the financial year ends, it’s the perfect time to evaluate your own longer term financial objectives to see what needs reviewing and double-check you’re on track.

But in the immediate term, here’s three key points to consider for an end-of-financial-year EOFY strategy.

Proposed tax threshold changes

 

What

Why

1.

Defer income from certain sources to limit impact on your cash flow.

Wealthy people and small business can pay substantial sums to meet tax liabilities, seriously affecting how much cash they have on hand.

2.

Superannuation can have a central role in your planning, especially self-managed super funds.

Contributing to super can be an excellent tax strategy. While the new total super balance limit is $1.6 million, there’s still significant advantage in the tax rate applied to super contributions up to that limit.

3.

The much-discussed topic of negative gearing.

There are a range of favourable tax concessions available to those who negatively gear.

 

An equally important point in developing your strategy is getting professional tax advice, which you should obtain prior to making any major decisions – it could be the single best decision you make in your planning.

Cover the basics

Tax outcomes for your investments depend on their nature and your particular circumstances. Here is a list of basic issues you may consider as part of your planning.

Basic issues: assets and dividends, accelerate deductions, philanthropy

Assets and dividends

  • Delay sale of assets if you are likely to make a profit. Postpone for a few months and pay tax the next income year.
  • Dispose of assets now if you’ll make a loss and have a gain to offset.
  • Private companies could defer dividend payment. (Consider the shareholders’ tax position in timing this, if possible.)
  • Small business can take advantage of the $20,000 instant asset write-off: this has been extended to June 2019.

Accelerate deductions

  • Prepay deductible interest, margin lending and income-protection insurance premiums.
  • Depending on cash flow, you may pre-pay interest and other deductible investment expenses.
  • Bring forward investment property expenses, and you may claim deductions this financial year. Put in place a depreciation schedule.
  • Write off bad debts subject to tax law requirements.

Philanthropy

  • The tax treatment of gifts to registered charities means that you may be able to give more back to the causes you care about.
  • Ideal time to review your giving plans is when you realise a significant gain, as part of the proceeds could be used to establish a charitable trust.
  • Changes to the superannuation law from 2016 are also triggering reviews of giving plans.

Focus on superannuation

Superannuation, particularly for SMSFs, can play an important part in EOFY planning.

There is a restriction on the amount you can hold in a pension account (tax-free retirement savings) and how much you can add each year to your super fund. So in the weeks left before July 1 you can:

  • focus on contributing to your maximum concessional limits (most people under 75 years old can claim an income tax deduction of a maximum of $25,000 for personal super contributions)
  • figure out the best way to conform to the $1.6 million pension account limit (to ensure no penalties for non-compliance)
    • by transferring a certain percentage of your concessional contributions to your eligible spouse you may access your super sooner (if your spouse is older), reduce your total balance if you are nearing the $1.6 million cap, and boost your spouse’s retirement savings.
  • for SMSFs’ transitional capital gains tax relief, some funds with pre-1 July pension balances above $1.6 million or transition-to-retirement pensions will need to determine whether to claim CGT relief in the 2016-17 SMSF annual return (due date for lodgement has been extended to June 30, 2018).

From July 1, 2018, if you downsize your family home of 10 years or more and are aged 65 or over, you may be able to contribute up to $300,000 from the sale proceeds to your superannuation. If you have a spouse, they could also contribute up to $300,000. These contributions do not count towards your before or after-tax contribution caps. You can find out more from the Australian Taxation Office.

Get a gearing strategy

EOFY is also the time to review whatever investment gearing options you have in place and make changes, if necessary, for the coming year.

If you’ve borrowed to invest then the interest you’re paying may be offset for tax purposes against earnings from that investment. But there’s a lot more to think about in deciding to gear an investment.

Ask yourself these questions

Over the term of the geared investment, will the rate of return consistently exceed the cost of the borrowing (the interest you’re paying)?

If the rate of return falls below the cost of the borrowing, the strategy will destroy wealth, not enhance it.

Will paying interest and maybe principal on your borrowings be uncomfortable?

Debt service always includes payment of interest and may include repayment of principal – an investor who uses a gearing strategy needs to be certain of adequate cash flows from all sources.

How easy is it to unwind the geared investment if you need to?

Selling or liquidating the asset won’t cut it if it’s still not possible to repay the loan.

 

Scott Graham is a director and Jerome Carlin a senior investment advisor at ANZ Private.

 

To discuss what this insight could mean for you, talk to your ANZ Private Banker directly, or contact us below.

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This material is current as at May 2018, but may be subject to change. This information is also our interpretation of the law and does not represent tax advice. Before making any financial decision, ANZ recommends you obtain professional financial and taxation advice specific to your circumstances.

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