Year-end financial planning can seem overwhelming, but it’s a valuable opportunity to implement tax time tricks that will set yourself up for lower taxes and greater wealth accumulation into the future. By implementing the right strategies, you can not only reduce your tax liability this year but position yourself for increased financial security.
Common year-end tax minimisation strategies include reducing your CGT by maximising your superannuation contributions, prepaying interest for a tax deduction and offsetting capital gains against a loss.
While lesser-known strategies include legally breaching the annual concessional super contributions cap and restructuring ownership of your investment assets to minimise tax on future income.
Scott Girdlestone, Director, Wealth Advisory at William Buck explores these strategies and more, to assist you in your year-end planning and set you up for greater wealth accumulation beyond 30 June.
1. Selling an investment asset at the right time? Offset capital gains and reduce your Capital Gains Tax (CGT) this year
Year end is a good time for investors to review their portfolios and make decisions to minimise their CGT liabilities and maximise their after-tax position. One way to do this is to match losses in your portfolios with gains. To offset a loss against a gain, both must be realised. This means you must sell both prior to 30 June to reduce your tax bill.Say you purchased an investment that’s taken a hit due to interest rate rises and the current valuation says it’s worth significantly less than it was when you bought it. You may consider offsetting the loss against a gain elsewhere in your portfolio.
The ATO doesn’t require you to offset gains against losses from the same type of investment asset. However, you can’t offset a capital loss against other types of income and there are some exemptions to CGT including your home, and typically personal assets such as furniture. It’s worth noting collectables can attract CGT.
2. Restructure the ownership of your investment assets to match high income producing assets with low tax environments
If your investment asset values are down on what you paid for them, it’s not all bad news. In fact, this presents an opportunity to restructure the ownership, matching high income producing assets with low tax environments. This can reduce your tax obligations for years to come – a valuable strategy to increase your financial position.For example, if you purchased a high-income producing asset in your name and your partner is on a lower marginal tax rate, you could transfer the asset to your partner (or another low tax structure, e.g., potentially a trust or super), reducing the tax on future capital gains and ordinary investment income. The transfer is considered a sale for CGT purposes, but if you’re in a loss or minor positive position there can be considerable future tax benefits in making the transfer.
Say you’re in the 47% marginal tax bracket and have $500,000 worth of Australian shares paying a 6% dividend yield (including franking credits), tax payable would be $14,100. However, if your partner is on a 21% tax rate, then the tax payable falls to $6,300, representing a tax saving of $7,800 every year. When you consider low tax environments such as superannuation where the tax rate is 15% (or potentially 0%), the tax saving can be even higher.
3. Save up to 32% in personal income tax by using the ‘catch-up’ provisions to legitimately breach the annual limit and reduce CGT
By making a tax-deductible personal concessional contribution to your super account, you can offset your capital gain and reduce your CGT liability.Generally speaking, the tax-deductible part of your super contribution will be taxed at 15% and you can contribute up to $27,500 per year by way of a concessional (tax deductible) contribution.
If you didn’t contribute your full amount of concessional contributions for any financial year since 1 July 2018, carry-forward rules mean you can add the remaining amount to this year’s limit. This means you can claim up to $130,000 as a tax deduction this financial year to offset against other income, saving you a marginal tax rate of 32% or up to $56,300 in personal income tax. To access this provision, you must have a total superannuation balance less than $500,000 at the beginning of the financial year and not maximised your concessional contributions each year.
4. Due to the impact on markets last year, your Total Superannuation Balance (TSB) may have dropped, and you might be eligible to make a non-concessional contribution now
Your eligibility to make non-concessional super contributions is determined by your TSB, which is measured on 30 June the prior financial year.Last financial year, equity markets fell from late February to late March before beginning to recover, giving many the false indication that markets were back to pre-pandemic levels. However, it’s only now that the ASX has clawed back all its losses. Therefore, at 30 June last year, your TSB may have been sitting at less than you realise.
Check your balance at 30 June 2022 and if it was below $1.7m, consider contributing up to $110,000 or a maximum of $330,000 depending on your prior year balance and contribution history.
5. Consider a tax-effective Trust distribution strategy to maximise after-tax income
If you’re the Trustee of a Discretionary Trust, you need to complete a Trustee resolution prior to the end of 30 June. Neglecting to complete and sign the resolution prior to 30 June means the trustee could be assessed on the trust’s taxable income at the highest marginal tax rate.The timing of the resolution means careful planning is required, particularly if the income is not certain prior to the end of the year, to anticipate future income and incorporate flexibility into your resolution.
If your trust deed allows it, consider a tax-effective distribution strategy to maximise after-tax income by streaming capital gains and franked distributions (dividends) to the beneficiaries who can benefit the most from this income.
You can also consider corporate structures to defer paying tax on income indefinitely, which is akin to an interest free loan on the tax that would have been payable above 30%. However, you should avoid distributing discounted capital gains to companies wherever possible as it may lock in a much higher tax outcome than might otherwise be the case.
6. If you’re considering a charitable donation do it in a high income year to maximise the benefit of your generous gift
If you’ve had a high-income year, due to the sale of a business or investments, and have always thought about donating to a charity this is the year to do so. Contributions can be made directly to a charity (or charities) and as long as the organisation has deductible gift recipient (DGR) status then you can claim a tax deduction. If you’re wanting to donate regularly you could also consider a large amount in one year, if it’s advantageous from a tax perspective to do so and start your own private ancillary fund (PAF) to get the deduction upfront and then make grants from the fund each year to the cause of your choice.
For wealth building advice tailored to your unique circumstances, contact your local William Buck wealth advisor.