Seven super tips before June 30

The super clock is ticking ... so here's some EOFY steps to build your balance.

Summary: Maximising your concessional contribution to superannuation before the end of the financial year using pre-tax dollars, either directly or through a salary sacrifice arrangement, is a powerful tax-effective strategy. But be careful not to exceed the government’s mandated contribution threshold as big tax penalties will be applied.
Key take-out: The minimum pension payment will increase back to pre-GFC levels after June 30, meaning those in pension phase will required to withdraw a higher percentage of their super fund balance.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.

With six weeks to go, it’s looking like financial year 2013 is going to be a year of largely pleasant memories for trustees.

Certainly not in all respects. It has been a year of legislative threats that have the potential to be particularly expensive (if implemented, which seems increasingly unlikely).

But, barring last-minute crashes in domestic and international equities markets, anyone with significant equities positions in 2013 is likely to stroll into 30 June with a smile on their face.

If you held too much cash this year, probably not so much.

No individual controls equity or property markets. As a result, your investment returns are partly out of your hands. You decide the risk, but the rest of the world decides what your returns will be.

As a trustee, there are plenty of other things that you do have control over. And, as we approach the end of the financial year, here are a few tips to make sure you make the most of those.

Here are my top seven EOFY tips.

Maximise concessional contributions (CCs)

Use it or lose it. That’s the deal with concessional contributions. If you fail to maximise your maximum contribution limit in a given year, it’s gone. For good.

For one year (FY2013), and one year only, everyone eligible to contribute has the same CC limit of $25,000.

(Interesting fact: FY2013 will go down as the hardest year ever to get money into superannuation, in both a dollar and inflation-adjusted sense. FY14 will have higher limits for the over 60s, and prior to FY12 there were higher limits in place overall.)

The over 60s will get a $35,000 limit for next year, before it widens to include relative youngies (those over 50) the following year. Obviously, this assumes the current intentions are passed into law.

Stretch yourself to hit your limit this year. Salary sacrifice a little extra. Make slightly larger deductible contributions. If you have the wherewithal to hit your limit this year, consider doing so.

Concessional Contributions II – protect capital gains

Concessional contributions, whether made through a salary sacrifice arrangement or a deductible contribution for the self-employed, helps lower your income.

While rare in recent years, many people will have taken some capital gains this year. One way of reducing capital gains tax (CGT) is to reduce your taxable income. And a good way of doing that is by making concessional contributions.

Know the contributions rules

The confusion around contributions rules are serious. Concessional contributions are subject to annual use-it-or-lose-it rules. Non-concessional contribution rules are similar, to a degree, though you can use up to three years of contributions at once under the “pull-forward” allowance.

For anyone trying to maximise their contributions, read up. Everyone’s situation is different. Over the last five years, I’ve written plenty on contribution limits. Understanding what your rights are, as they pertain to your individual situation, is important for those trying to maximise how much they can make their super work for them.

In essence, if you’re 64 or under, you can use the CC and NCC limits on an annual basis without major concerns. However, given things such as the NCC pull-forward rule and how much that can impact on your ability to get money into super, those as young as 62 need to get advice from a professional adviser on being able to maximise contributions in the lead-up to turning 65.

For those 65 and over, there are a different set of rules, which largely revolve around the work test – working at least 40 hours in a 30-day period.

Super splitting

Splitting super between spouses was once a popular strategy because of the old reasonable benefit limits. When RBLs were dropped and pensions were made tax free in 2007, they seemed a little irrelevant.

However, the Gillard Government’s April announcement that it intends to tax super fund accounts with incomes of greater than $100,000 has not just turned the spotlight on this strategy, but once again made it compulsory. (RBLs are now essentially back, with a twist.)

Even if this government doesn’t get the $100,000 limit through for taxing pensions (as it has since said it will take the policy to the election, which makes it less certain), the message is clear. Couples must even up super contributions or balances, in case this happens again in the future.

Review salary sacrifice arrangements

Salary sacrifice is a wonderful opportunity to help you make the most of our CCs. But misjudge them, or fail to understand how they interact with other concessional contributions and you could be hit with a bit tax bill.

Most importantly, with six weeks to go, you need to make sure that you don’t go over your CC limits. Going over them will increase your tax rate from the 15% on contributions to 46.5% for contributions over and above $25,000. If you are a chance of going over that limit, you still have a chance to reduce your contributions.

Alternatively, if it looks like you’re going to be well below, you have some ability to increase your salary sacrifice contributions before the end of the financial year.

See this column (Salary sacrificing’s traps) for a fuller description of what to watch out for when it comes to salary sacrifice arrangements.

Pension I – know the new pension minimums

For several years, the minimum pension payment was halved, to as little as 2%. For the last two years, it has been reduced by 25% to a minimum of 3%.  That would seem to be ending on 30 June, when pension minimums will be reinstated to their pre-GFC levels.

This means that those aged under 65 will have to withdraw 4% of their 1 July balance. Those 65-74 will have to pull a minimum pension of 5%. Between 75 and 79, it’s 6%, and it’s 7% between 80 and 84.

It jumps to 9% between 85 and 89, 11% between 90 and 94 and 14% from 95 onwards.

This will be considerably higher than in recent years, so make sure you can meet those minimums, preferably from cash balances.

Crystallise some losses?

While this has been a fabulous year for gains ... well, for most ... that also generally means there will be some capital gains tax (CGT) to pay.

One way of reducing CGT is to sell loss-makers before 30 June. Have you been holding on to a few flea-ridden dogs? If so, could now be the time to stem the losses, sell and crystallise a loss, before moving on to bigger and better investments?

This is often a good idea. But be wary of the “wash sale” rules. The ATO doesn’t look kindly on anyone (SMSF or individuals) simply selling shares to generate losses for the sake of it.

It’s okay to sell losing stocks. And it’s okay to switch jockeys and try to pick a likely better performer. What the ATO doesn’t like is people selling, for instance, 1,000 BHP Billiton shares to crystallise a $10,000 loss, then repurchasing 1,000 BHP shares that day, or shortly thereafter, where the aim is simply to reduce tax. That’s known as a wash sale.

Crystallising losses is okay. But be wary of buying back similar amounts of the same assets.

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 director of Castellan Financial Consulting and the author of Debt Man Walking. E:
Graph for Seven super tips before June 30

  • The federal government’s plan to increase the tax on super contributions from 15% to 30% for people earning over $300,000 a year will impact contributions made in this financial year, according to media reports. It is expected that when 2012-13 tax returns are lodged, the Australian Taxation Office (ATO) will assess an individual's income alongside information provided by the individual's SMSF or super fund. If the individual is liable to pay the higher contributions tax rate, the ATO will send a request for additional payment.
  • The SMSF Professionals’ Association of Australia (SPAA) says there were no surprises for SMSF advisors and trustees in last night’s Federal Budget. “SMSF trustees should now feel more confident that the superannuation system is off the Government’s radar and remains Australia’s primary retirement savings vehicle,” said Graeme Colley, head of technical and professional standards. SPAA also reacted positively to the proposed changes to the excess contributions tax regime and the establishment of a Council of Superannuation Custodians. “We look forward to working with the Government when they legislate these positive changes to super,” said Mr Colley.
  • Data from the Association of Superannuation funds of Australia (ASFA) indicates that rising costs are making it more difficult to maintain a modest retirement. The most recent ASFA retirement standard found that couples seeking a modest retirement now need $32,603 spending capital per annum. This is a slight increase on the previous quarter’s results. Higher electricity and healthcare costs could be to blame for the rise, according to media reports.
  • Double-digit growth rates are unlikely to continue in the self-managed super fund (SMSF) sector, according to DEXX&R's latest projections report. SMSF assets have increased at an annualised growth rate of 18% from $124.5 billion in December 2003 to $474.4 billion in December 2012, DEXX&R said. Final data from 2012 is not yet available from the Australian Taxation Office (ATO), but DEXX&R believes the SMSF sector entered a net drawdown phase during calendar 2012, with benefit payments exceeding inflows for the first time.

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