In the coming months we will be providing detailed recommendations for end of financial year superannuation and tax planning strategies. As expected, the tax reform proposed by a potential Labor Government is creating a great deal of uncertainty, however, our advice remains that investors should not make any major changes based on these proposed changes. This is for several reasons, firstly, the Federal Election is now looking closer than many expected and secondly, the independent parties who will form the Senate have generally been at odds with the franking credit and negative gearing proposals.
There are also concerns regarding the introduction of a flat tax rate of 30% for income generated by a family trust, reducing the ability to distribute income between family members. Again, action should only be taken if this legislation is passed, rather than proactively given the likely capital gains or other tax implications of doing so. Family trusts will remain the second most tax effective entity behind superannuation, particularly following the introduction of the $1.6m superannuation cap, and more so for those earning over $90,000 where the marginal tax rate hits 37%.
As the 30th of June approaches, we suggest all SMSF trustees and superannuants take a closer look at the following:
The contribution limits remain the same as 2018, with every Australian able to make just $25,000 in concessional or pre-tax contributions (including salary sacrifice, Super Guarantee and self-made contributions). For anyone earnings in excess of $18,200 (the tax-free threshold) concessional contributions, taxed at 15% within your super fund, represents a great tax saving opportunity.
Australian’s are also eligible to contribute up to $100,000 in non-concessional of after-tax contributions that are not taxed upon entry to your
super fund. For those nearing 65 years of age, the bring-forward rule, allowing you to contribute $300,000 in a single year, may be worth considering. However, given the Coalition proposals to increase the age at which the work test must be met to 66 and 67 in future years, it may be best holding off on utilising the bring-forward rule until after the election, particularly if you are currently 64.
In return for the tax exemption provided on both the income and capitals of investments held in the pension phase of superannuation (now capped at $1.6m) you are required to draw a minimum amount of your balance each year. The minimum annual drawdown runs across the financial year and is applied to the value of your pension balance on 30 June 2018 for the current financial year as shown in the table below. It is imperative that the minimum is drawn, otherwise your fund may be deemed to be in accumulation phase and taxed applied at the normal rate of 15%.
It’s important to note for those with balances over $1.6m, that the minimum drawdowns will be lower following the introduction of this cap, and also that your balanced can and will likely exceed $1.6m due to the application of earnings, meaning the minimum pension may be higher than the previous year.
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
With most SMSF tax returns now completed and lodged, it’s an opportunity to make sure you have your estate planning strategy in place and to confirm that any binding nominations, which direct your superannuation benefits to your beneficiaries are up to date and valid. Superannuation remains a non-estate asset, as a result, its payment is controlled by the trustees of the super fund, with a binding death nomination the simplest way to have certainty that it will either be paid directly to your beneficiaries or to your estate. It’s important to ensure any nomination is witnessed by independent people.
As with the binding nomination and estate planning review, it’s also an opportune time to take stock of the fees you are paying for the completion of your tax return. Technology has greatly improved particularly in the SMSF sector, which the most anyone should be paying for a SMSF tax return being $2,000 to $2,500 per year. If you are paying more than this, it’s worth discussing with your accountant to work out if there is any way this service can be simplified and achieved at a lower cost.
As a non-strategic opportunity, we suggest investors look across their portfolios at this time of year and considering whether they should be making adjustments to their current portfolios. Our approach is the reverse of many, in that we generally recommend cutting back and taking profits on winners, and increasing the losers, where they offer substantial value.