30 June 2020 Checklist

With the end of financial year approaching, now’s the time to make the most of opportunities to maximise super and tax benefits.

Superannuation

For many people, super remains a highly tax-effective structure through which to hold investments to accumulate retirement savings and to also maintain their risk/insurance protection. However, current contribution caps and rules mean that planning ahead over the longer term is the best way to maximise the benefits of super.

In summary: 

• The concessional contributions (CC) cap remains at $25,000 for all eligible contributors. This includes any superannuation guarantee contributions (usually 9.5% of your salary) you receive from your employer, voluntary salary sacrifice contributions and any personal contributions you claim a tax deduction for.
• Under the carry forward rules, eligible contributors can use previously accrued amounts of CCs cap accruing in 2018-19 and later years. The first year a person can make additional concessional contributions from their accrued unused amounts is in 2019-20, provided their prior 30 June ‘Total Superannuation Balance’ (TSB) was under $500,000.
• Since 1 July 2017, the requirement that an employed individual must earn less than 10% of their income from employment-related activities to qualify to claim a tax deduction for a personal super contribution no longer applies. Broadly, this means any individual who is eligible to contribute to super will be able to claim a tax deduction for their personal super contributions (note: if under 18 some employment/self-employment income must also be derived).

Personal super contributions that the ATO allows as a tax deduction in the individual’s tax return will count towards their concessional contributions cap. If employer super contributions are also received, clients will need to make sure these are taken into account when determining how much to claim as a personal tax deduction.

 

Non-concessional super contributions

Individuals are also subject to caps on the amount of after-tax or non-concessional super contributions that can be made without incurring a penalty. Non-concessional contributions are not taxed by the receiving fund.

Individuals are also subject to caps on the amount of after-tax or non-concessional super contributions that can be made without incurring a penalty. Non-concessional contributions are not taxed by the receiving fund.

The new rules from 1 July 2017 limit the ability and amount of bring-forward that can be triggered as the individual’s prior 30 June balance gets closer to $1.6 million. In addition, since 1 July 2017, an individual will not be eligible to make non-concessional contributions when their 30 June balance is $1.6 million or more. This is shown in the table below:

 

Total super balance as at 30 June	Available non-concessional cap	Bring forward period
<$1.4 million	$300,000	3 years
$1.4 – < $1.5 million	$200,000	2 years
$1.5 – < $1.6 million	$100,000	n/a
> $1.6 million	Nil	n/a

Government super co-contribution

Individuals who derive at least 10% of their income from employment and/or carrying on a business and who make personal non-concessional contributions may be eligible for a government co-contribution. Income for this test is the sum of the individual’s assessable income plus reportable fringe benefits plus reportable employer super contributions.

The co-contribution income thresholds for this financial year are:

Financial year	Maximum entitlement	Lower income threshold	Higher income threshold
2019-20	$500	$38,564	$53,564

The maximum co-contribution amount of $500 will be available for a non-concessional contribution of $1,000 or more by the member, subject to the income test above. Individuals must be under age 71 at the end of the relevant year and meet the work test for any contributions made after reaching age 65. A person will also have no non-concessional cap space for 2019-20, if their super balance on 30 June 2019 was $1.6 million or more.

Spouse super contributions

In 2019-20, a tax offset of up to $540 is available for spouse contributions of $3,000, where the receiving spouse’s assessable income plus reportable fringe benefits and reportable employer super contributions does not exceed $40,000. The offset reduces once the receiving spouse’s total income exceeds $37,000, cutting out at $40,000.

If the recipient spouse is aged 65 or more (but under age 70), then they must satisfy the work test to be eligible to receive the contribution. The receiving spouse must be under age 70 at the contribution date for the contributor to be eligible for the tax offset.

In addition, the recipient spouse must not have non-concessional contributions totalling more than their non-concessional cap for 2019-20 or at 30 June 2019, have a total super balance of $1.6 million or more.

Super contribution splitting

Members who hold an accumulation interest in a super fund are able to split part of their prior year’s concessional contributions with their spouse, provided the fund offers this facility. Only certain contributions may be split with a spouse, and other qualifying conditions must be met. The amount that can be split is the lesser of 85% of the concessional contributions or the member’s concessional contributions cap.

The main reason for considering a contribution splitting strategy is to help equalise the super balances of each person – this may assist with keeping each partner’s total superannuation benefits under $1.6 million.

 

Pensions

Pension drawdown

Where a fund member is in pension phase it is important to ensure that the required annual minimum pension payment is met, otherwise the fund risks losing the pension tax exemption for that financial year.

On 22 March 2020, the federal government announced that the minimum pension drawdown rates would be temporarily halved for the 2019-20 and 2020-21 financial years. This was due to many retirees seeing a significant drop in their pension account balance as sharemarkets fell due to the Covid-19 pandemic.

If a pension is first commenced from 1 June, no pension drawdown is required for that financial year. If a pension is commenced part way through a financial year, the required pension drawdown is pro-rated for the first year. Since the 2017-18 financial year, lump sum commutations from the pension account no longer count towards the minimum required pension income payments.

The minimum annual income payment is calculated as a minimum percentage of the account balance at 1 July each year as per the following table:

There is no maximum limit for Account based pensions. If you have a Transition to Retirement (TtR) pension, you must not draw more than 10% of the account balance in income during the financial year.

 

Age at start of 1 July each year	% of account balance (2019-20 & 2020-21)	% of account balance (from 2021-22)
Under 65	2%	4%
65-74	2.5%	5%
75-79	3%	6%
80-84	3.5%	7%
85-89	4.5%	9%
90-94	5.5%	11%
95 +	7%	14%

 

Opportunities to manage tax

Should you wish to consider the strategies outlined below, we recommend you speak with our office first to ensure the strategy is beneficial to your particular circumstance. We also recommend that you obtain specific taxation advice from your accountant or tax adviser.

Ceasing employment

Where there is some flexibility around the date an individual ceases employment, they may be able to optimise the tax treatment of payments received. For example, terminating employment from 1 July rather than before may mean that marginal and concessional tax rates can be best utilised if little or no other taxable income is earned that year, eg terminating from age 60 and subsequently receiving only tax-free account-based pension income.

Manage capital gains tax

Review investment portfolios and potential capital gains. Where there is a potential CGT liability from selling an asset during the year or as a result of a corporate action, it may be appropriate to sell another asset to crystallise a loss. Realising a loss allows the taxpayer to offset capital gains and thus minimise or even eliminate a tax liability they may otherwise be facing. At the same time, this strategy allows investors to offload a low-quality, under-performing asset that has little likelihood of recovering in the short to medium term and to invest in a better-quality asset.

It is important to note however that the ATO issued taxpayer alert TA 2008/7 and tax ruling TR 2008/1 in relation to ‘wash sales’. A wash sale occurs when a taxpayer disposes of an investment but repurchases the investment or retains an economic interest in the investment (including via an associated entity) and the disposal has crystallised a capital loss. Selling and immediately buying back the same asset would likely be viewed by the ATO unfavourably as a wash sale, and the ATO may disregard the loss created by the sale of the asset.

Prepay deductible expenses

A tax deduction may be claimed for up to 12 months’ worth of interest prepaid on an investment loan on a rental property, or margin loan on a share portfolio or managed investment, provided the loan has a facility allowing this.

In addition, the payment of other deductible expenses, such as professional memberships or pre-paying salary continuance/income protection insurance by 30 June 2020, reduces taxable income.

Working from home expenses

From 1 March 2020 until at least 30 June 2020, special arrangements are in place to make it easier for individuals to claim expenses they have incurred while working from home during the COVID-19 pandemic.

If you have incurred work-related expenses and you have not been reimbursed by your employer, you can claim these expenses at a rate of 80 cents for each hour you work. To use this method, you will need to record the number of hours you have worked, such as a diary or timesheet.

The claim covers all of your additional running expenses such as:

• Electricity and gas
• Decline in value and repair of capital items such as office furniture
• Cleaning expenses
• Phone and internet expenses
• Stationery
• Decline in value of computers and devices

For example, if you worked from home for 7 hours a day on the weekdays between 1 March and 30 June 2020, that’s 84 working days (in NSW) or 588 hours. Using the 80 cents COVID-hourly rate, you could claim $470.40. The rate covers all your expenses and you cannot claim individual items separately, such as office furniture or a computer.

The COVID-hourly rate can be claimed per individual (it is not limited by household). That is, if you have multiple people working from home in your household, each person can claim the 80 cents per hour rate for the hours they have worked from home.

Should you have any concerns or wish to discuss the 30 June checklist, please do not hesitate to contact the office and ask to speak with your financial adviser.