Summary: With only a few business days left to the end of this financial year, one of quickest tax strategies that can be adopted is to sell off lossmaking shares and realise a capital loss. This can be used to offset capital gains. Another strategy is to see if a lender will discount their interest rate if the interest is prepaid on a property loan.
Key take-out: The Tax Office determines that a capital gain has been made for an asset being sold is the time when the contract is entered into, not when the proceeds are received.
Key beneficiaries: SMSF trustees and superannuation accountholders. Category: Superannuation.
Tax reduction strategies before June 30
I have a large share portfolio and several investment properties and was wondering if there is anything I should be doing before June 30. I sold a few shares this year and have made some gains. Is there anything I can do to reduce the tax payable?
Answer: If you have shares in your share portfolio that are making losses, and look like they will not recover in the near future, you should consider selling them to realise a capital loss. These losses will reduce the gains you made on the other shares.
You should refrain from selling shares just to incur a loss and then buy them back immediately. The Tax Office regards this as tax avoidance and can disallow the loss made. If you are going to sell shares making losses there is nothing stopping you buying them back at some time in the future.
Another thing you could do relates to your rental properties. If you have loans outstanding for the properties, contact the financial institutions to see if they discount the interest rate if you prepay interest for 12 months.
The ATO does not attack the prepayment of interest for 12 months when there is a commercial reason for doing it, such as a discount on the interest rate. In prepaying the interest you will increase your tax deductions and reduce your taxable income. Where, as a result of making this loss, your income drops to a lower marginal tax rate this also reduces the tax payable on the capital gains.
One important principle that you should be aware of is when the ATO regards a gain is made. The relevant date for an asset being sold is when the contract is entered into, and not when the proceeds are received. This means if you sold shares on June 30, but did not receive the funds until July, any gain made on those shares would be assessable in the 2014 year.
Making contributions after age 65
I am not in the workforce, was 64 on July 1, 2013, and have since turned 65. Because I was under 65 at the beginning of this financial year, can I still make a concessional contribution to my SMSF before the end of June?
Answer: As you are now 65 and not working you cannot make any contributions to your superannuation fund. When someone turns 65 during a financial year they can make both concessional and non-concessional contributions before they turn 65. Once they turn 65 the work test must be passed before any contributions can be made.
Are corporate bonds subject to capital gains tax?
Can you please explain how gains/(losses) on corporate bonds are taxed upon disposal or redemption. Are they treated under the capital gains tax provisions or are they considered traditional securities and taxed as ordinary income? Also, does the answer depend on where the bond is in the capital structure of a business. e.g. senior secured vs tier 1 or 2 capital with solvency clauses.
Answer: Whenever an asset is purchased, whether it as a share or a corporate bond or some other interest security, and the investor either sells or redeems the asset for more than its cost, the profit is taxed under the capital gains tax provisions. If the asset has been held for longer than 12 months only 50% of the gain is taxable.
Where the investment is sold for less than it cost the loss is a capital loss and can either be offset against capital gains in the year it is made, or it is carried forward until a capital gain is made.
Are there two qualification periods applicable for dividend franking credits?
I always thought that if you held a share for 46 days you could claim the imputation credits when a dividend was paid. I read in a Deloitte paper recently that there are two qualification periods. 45 days prior to the dividend date and 45 days following the dividend date. It read that if you purchase shares in the 45 days before the dividend date, the shares had to be held to after the end of a second 45-day qualification period. For example, a share purchased 30 days before the dividend date would have to be held for 75 days before being sold to receive the franking credit. Is this correct?
Answer: This is the first time I have heard of there being two qualifying periods that apply to claiming franking credits for dividends paid by a company. I do not believe that this is the case as, from my reading of the relevant information on the ATO’s website, the shares must only be held at risk for the 45 day period to be able to claim the franking credits.
What are the benefits of making an after-tax contribution into super before retirement?
I am 64 years old and considering retiring within the next 12 months. I have a nest egg in the bank and $500,000 in super. Can you advise me if I’d be better off putting my spare cash into super as an after-tax contribution, with an account-based pension that I can withdraw a lump sum at any time, or leaving it in the bank?
Answer: With the yearly non-concessional contribution limit increasing to $180,000 from July 1, 2014, and $540,000 using the bring forward rule, you should consider making a non-concessional contribution before you retire.
This will mean that your cash is in an environment where it is possibly earning a better rate of return than in the bank, and the pension that you receive will be tax-free as you are over 60. In addition, as you are making a non-concessional contribution this will result in tax-free superannuation. When you die any tax-free superannuation left would pass to your beneficiaries with no further tax payable.
You should seek professional advice as there are number of strategies that you could be using before you turn 65 and retire. You may be able to improve your overall situation depending on the value of cash you have in the bank, and what the split between taxable and tax-free benefits are for your superannuation fund.
You should also consider applying for the age pension before December 31, 2014. If you are eligible for even one dollar of the age pension you will not only receive the various discounts and medical card applicable to someone on the age pension but you will also have your superannuation assessed under the current income rules. This could result in none of the account-based pension you receive being assessed under the income test by Centrelink.
Can a pension be turned off if payments are not needed?
In your column on May 12, you stated: “Once a pension has been commenced a member can stop their pension whenever they want”. My wife and I are in our 80s and receive an account-based pension from our SMSF. As we do not need the SMSF pension to live on, are we able to suspend our pensions for a while?
Answer: If you don't need the income from your account-based pensions it could be worthwhile rolling back your superannuation fund to accumulation phase. This could mean that your fund will increase if the pension being taken is greater than the income being earned by the fund. You should seek professional advice because, by stopping the pensions, your fund may be worse off. This is because when in accumulation phase it will be paying tax on the income it earns.
Note: We make every attempt to provide answers to readers’ questions, however, answers are of a general nature only. Subscribers should seek independent professional advice for more in-depth information that is specific to their situation.
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