new material added to the course:
Salary packaging is a way of providing employees with the ability to change the structure of their remuneration package and receive some of their salary in the form of non-cash benefits. The most popular benefit negotiated is for motor vehicles. A deduction for the benefit is made from your salary thus reducing your taxable income and tax payable.
Retirees with substantial retirement savings should seek ways to minimise unnecessary tax. Strategies that save tax include holding most super and non-super assets in an allocated pension, splitting super between spouses or applying the recontribution strategy, ie withdrawing a lump sum out of super and reinvesting it back into super before starting a pension.
Most retirement strategies aim to be either tax or Centrelink friendly, which is mostly determined by the size of the investor's retirement savings. Investment earnings in an allocated pension are tax free and pension payments receive a 15 per cent tax rebate, making allocated pensions one of the most tax-effective ways to fund your retirement.
The recontribution strategy involves withdrawing the tax-free post-1983 part as a lump sum from super ($129,751 this financial year), and reinvesting it back into super, either in the spouse's name, for income-splitting purposes, or in the member's name. The strategy effectively converts funds that would have been taxable in retirement into tax-free retirement income. For those who have accumulated more super than their lump-sum reasonable benefit limit (RBL, $648,946 this financial year), you can buy two allocated pensions, one with $648,946, and the second allocated pension with the excess. The second pension will not attract the 15 per cent tax rebate, but the retiree is spared from paying excess benefits tax of 48.5 per cent.
Another tax-saving strategy is to balance super amounts between spouses. This will involve withdrawing a lump sum from one spouse's super fund and putting it into the other spouse's fund. Other investments held outside super such as shares or managed funds can be sold and contributed to the spouse's super to maximise the benefit of accessing two tax-free thresholds throughout retirement.
Timing of departure from the workforce: By waiting until early in the new financial year you may reduce the amount of tax required. There will be the new ‘transition to retirement' option to consider for those over 55.
For those who are already in retirement, realising the value of your assets may affect your Centrelink payments. There are pros and cons of taking a Term Allocated Pension, which is only counted at 50 percent asset value by Centrelink.
And while the co-contribution is means-tested, it's possible for middle- to higher-earners to double dip by salary sacrificing into super and then making an after-tax personal contribution that receives the co-contribution. Because salary sacrifice into super isn't counted in the co-contribution means tests, you can boost your co-contribution entitlement or become eligible through a salary sacrifice strategy.
There is no incentive for lower earners on the new 15 per cent rate to salary sacrifice into super because they are better off making an after-tax contribution and claiming the co-contribution.
Exploiting Bracket Shifts
Over the next 3 years, the ATO will be reducing income taxes. Brackets will shift outward, allowing higher income at each tax rate. Ideally it is best to have income taxed at next years lower rate if the income can be defferred.
The end of the financial year historically sees investors looking to off-load investments. But before doing this it is important to be aware of possible Capital Gains Tax (CGT) implications. The end of this financial year may not be the best time to look at selling shares or other assets as you may be hit for a large CGT bill, depending on your other earnings and the length of time you have held that asset. Investors should delay asset sales until the new financial year. Instead of selling June 30, sell July 1. You will get a lower tax rate and a year extra to pay your bill.
Anyone considering a redundancy or retirement payout should negotiate with their employer to pay them after July 1.
If you're expecting a bonus, you may also be able to defer it until after June 30. Bonuses are taxed according to the date they're paid, so ask your employer if it can be delayed until the new tax year.
Don't get paid in advance if you're taking holiday or long service leave that straddles the change of financial year.
If you have a private company, it may be worth waiting until the new tax year to pay dividends. Investors in products like bank bills can ensure any new investment matures
after June 30.
Many investors also split the sale of assets over two tax years to keep the tax rate down.
Investors who know they are going to realise a big capital gain could take out an investment loan early in the financial year. In the same year that they made the gain, they could claim a tax deduction for the interest paid on the loan and then prepay the following year's interest, giving them two years' interest deductions against their taxable income when calculating the gains tax.
The other method of deferring income to next year is boosting your tax deductions this year. A tax deduction this year could be worth 43.5c. Next year it will be 31.5c.
Pay for any necessary work expenses now, rather than putting it off until the new financial year. If you have bills, pay them before the end of the financial year instead of the due date in the new year.
Attend to repairs and maintenance on business equipment and cars in the final weeks of the tax year.
Income protection insurance is tax-deductible, so your annual premium should be paid in full by the end of the tax year.
If you are able to make a tax-deductible super contribution, this is a good way to reduce your taxable income this year. The self-employed and other "eligible persons" (anyone who earns less than 10 per cent of their income from employment) can claim a full tax deduction on the first $5000 they contribute each year, plus 75 per cent of any excess up to age-based limits.