Twelve steps ahead of the taxman

The busiest time of the financial year is about to arrive. Life is hectic enough, but it’s likely to be more so for those who actively manage their own superannuation funds.

End-of-financial-year advice often arrives too late to be useful. So we’re giving you this list in April so you’ve got more than two months to get organised.

Today, we’ve got a dozen tips that you can take advantage of, but please seek advice before acting on the ideas in this column. Your personal situation always needs to be taken into account.

Considerable thanks go to Carlo Chiodo, senior technical marketing specialist from Aviva, for his help with some technical aspects in preparing this list.

1: Put your share of the co-contribution figure in SOON!

Every year, lower-income fund members get the opportunity to contribute up to $1000 of their own money and possibly become eligible for a $1500 government co-contribution bonus. If you’re working and earn less than $28,980, you should be eligible for the full $1500 government co-contribution for your $1000. The co-contribution falls by 5¢ for each dollar above $28,980 and trails out completely at $58,980.

The co-contribution happens every year. So why should you get your money in soon? Potentially to take advantage of low asset prices. If you have an SMSF, have the money in there, in cash, ready to pounce on assets as they become attractively priced. If you’re in managed super, find out whether you can have the money in cash for a while and try to time your entry into growth assets when asset prices are low.

2: Review your salary sacrifice arrangements

Individual circumstances need to be taken into account, but salary sacrificing makes sense to most people earning more than $30,000 a year because it is taxed at just 15% as it goes into your fund. If you take the money as salary, you will lose up to 46.5%, depending on your income.

If you have been salary sacrificing this year, or for a few years, conduct a quick check to see whether what you’re doing still makes the most sense. For instance, if you’ve recently moved into your 50s, you might be able to take advantage of the higher concessional limit of $100,000 of contributions (which includes Superannuation Guarantee contributions from your employer). You might be contributing too much and facing tax penalties.

3: Make the most of the non-concessional contributions rules

Want to know how you can get $1.2 million into superannuation? For those wanting to get after-tax money into super, the often quoted rule is that you can contribute $150,000 each year or $450,000 to cover three financial years (known as the averaging provision).

Carlo Chiodo points out that you don’t trip the averaging provisions until you put in more than $150,000 for a calendar year. So, if you put in $150,000 before June 30 this year, you won’t trip the averaging provisions. That would mean that on July 1, you could put in another $450,000.

And that’s per person. If there are two of you in your fund, you could contribute up to $1.2 million between now and July 1, if you wish.

4: Minimise capital gains tax in your personal name by transferring shares into your fund in specie

It’s been a torrid time on the stockmarket. A lot of SMSF favourites (such as financial stocks) have taken a beating. Banks have fallen by as much as 30–40%.

SMSF trustees looking to make contributions to their fund might be able to minimise the capital gains tax they pay by transferring shares into super now. The shares’ lower price means they will attract less CGT than they would have before Christmas, and by transferring them now, you’ll limit their future CGT liability. Future dividends will also be taxed at superannuation rates going forward (maximum of 15%). For more information, see A super time to transfer shares, from March 28, 2008.

5: Make the most of concessional contribution limits

We’ve discussed salary sacrificing and non-concessional limits above, but you shouldn’t forget concessional limits either. For the self-employed, self-funded retirees or those earning less than 10% of their income from an employer, you are also able to get a tax deduction for contributing to super.

If you’re eligible, and want to make a $50,000 super contribution (or $100,000 if you’re over 50), you may want to consider making a concessional contribution. It will be taxed at 15% on the way in, but the tax deduction could be as much as 46.5% (marginal tax rate). By making a $50,000 concessional contribution, you save $23,250 in personal tax, which after the $7500 contribution tax results in a total tax saving of $15,750. For a $100,000 contribution, the total tax saving would be $31,500.

6: Take a TRIP

Almost anyone who has turned 55 with a superannuation account will benefit from taking a transition to retirement pension (TRIP). In fact, anyone who isn’t on a TRIP is probably throwing away money in a total taxation sense.

You will need an accountant or an adviser to help you with the exact numbers, because everyone’s situation is different, but the theory behind it is that you take a pension, which is then taxed concessionally, and you salary sacrifice back into super at a lower rate than your marginal tax rate.

There are basically three options:

• Keep the same income each month from your pension and normal salary, but dramatically increase your super balance.
• Lower your overall income, but increase your funds in super.
• Increase your overall income by taking a pension.

For a more detailed explanation of TRIPs, see Trish Power’s column A TRIP around tax from December 21, 2007.

7: Protect some capital gains by making extra super contributions

If you made enough solid capital gains this year, you could be looking at a big tax bill that could essentially be managed through super contributions.

If you made a $20,000 gain this year – of which $10,000 was taxable because it was held for longer than a year – then a $10,000 concessional contribution (if you’re eligible, see point 5) to super would wipe out the capital gains tax (similarly to the concessional contributions in point 5) and leave you in a better overall tax position.

A similar overall outcome can be achieved for those who can’t make personal deductible contributions through salary sacrificing. If you made the $20,000 gain above, for instance, you might wish to salary sacrifice $10,000 of your salary into super, thereby reducing your taxable income by $10,000. For your $10,000 sacrifice, you’d get $8500 into super and pay up to $4650 less in income tax in your personal name.

8: Split contributions with your spouse

Contribution splitting was introduced under the old super regime, where super fund members had reasonable benefit limits (RBLs). RBLs are now dead, but there can still be value in contribution splitting with your partner. You have until June 30 this year to decide whether you’d like to make some adjustments to the contributions that were made into super in the 2006-07 year.

Why would you? Chiodo says there are two reasons for which contribution splitting can make sense. First, a younger spouse could benefit from a split if the applicant is about to reach age pension age, when super becomes an assessable asset. A second reason to do so is the reverse: if one of you is approaching 55 and wants to start a TRIP pension, you may wish to have more income in that person’s fund.

For an explanation of super splitting, see Trish Power’s Q&A column of March 13, 2006.

9: Check your insurance inside super

The removal of RBLs last year changes the amount of insurance you can tax effectively have inside super. The RBL rules effectively limited insurance inside a super fund and many fund members would therefore have extra life and total and permanent disability insurance outside their super fund. With RBLs gone, you may be able to get all the life and TPD insurance you need inside super. See my column of April 4, 2008, Insurance less of a trauma.

10. Make a contribution for your low-income spouse

Working spouses can get a tax rebate of up to $540 for making contributions of up to $3000 to the super accounts of their low or no-income spouse. A tax rebate of $540 is available for the contributing spouse, if the low-income spouse’s income is below $10,800. The rebate falls to nothing when the low-income spouse’s salary hits $13,800.

11. Review your super estate plan

When was the last time you updated your nominations for your super fund? If you haven’t done it for a while your might need to allow for changed circumstances. Do you still want to leave your super to the same person originally nominated? Are they still a dependant? Have you divorced? Has a beneficiary died? Are there other dependents to add to the list?

Is your fund now offering binding nominations for the first time? Binding nominations have to be reviewed every three years, so it might be time to update that as well.

12: Rebalance your portfolio

When was the last time you sat down and did an audit of where you have your super funds invested? There are at least two levels where this is important.

If you’re in a managed fund, have you had a look at what your super fund is invested in? Are you sitting in the default balanced option? Should you be invested more aggressively, or more defensively?

For SMSF trustees, there is a tendency to buy and hold assets in the super fund. You’re probably top-heavy in Australian shares, Australian property and cash, with little exposure to international shares or property. The arguments are growing that Australian shares have outperformed for too long (along with our dollar) and SMSF trustees too often forget to make those shares justify their place in your portfolio on a regular basis.

For a discussion of why investors should consider overseas assets, see Alan Kohler’s article from April 14: Time to adopt a US accent?

Bruce Brammall is a senior financial adviser with Stantins Financial Services.