By Paul Trimble, Director, Westlawn Business Services 18 June 2014
With the end of financial year almost upon us, understanding what you could do before and after 30 June can provide real benefits for employees, investors and small business owners.
Such things as bringing forward tax deductions or delaying the receipt of income within the rules can mean paying less tax this year. And when it comes to superannuation, make sure you maximise the tax deduction this year or salary sacrifice the right amount so you get the best possible outcome and don’t end up with tax penalties.
Higher tax deductible contributions cap if you’re 60 or older
For anyone under age 60 this financial year, the maximum amount of tax deductible contributions that can be made to super without penalty is $25,000.
However, for anyone aged 60 and above, the maximum amount is $35,000.
These contributions include salary sacrifice, Superannuation Guarantee (SG) or personal deductible contributions (if you qualify). To maximise your contributions before 30 June contact your Westlawn Business Services Accountant so that your salary sacrifice agreement with your employer allows the maximum to be salary sacrificed.
If you’re over age 65, you’ll need to meet a work test to contribute to super in most cases. You’ll need to work for at least 40 hours during 30 consecutive days at any time during the financial year to make tax deductible and non-deductible contributions to super.
Claiming a tax deduction for personal super contributions
If you’re self-employed, an investor, in receipt of a pension and receive less than 10% of your income, fringe benefits and other related payments from employment, you may qualify for a personal tax deduction to super.
If you intend claiming a tax deduction make sure you’re eligible to claim and seek advice if you’re unsure. You need to notify your super fund of the amount you wish to claim as a deduction before the end of the next financial year, that is, before 30 June 2015. (The deductible amount cannot always be determined until tax and income have been calculated.) Remember to keep all relevant paperwork to save stress when the time comes to see your accountant.
Making after-tax contributions to super
You can make after-tax contributions to super which could come from:
Your personal savings
Transferring personal investments
An inheritance, or
The sale of investments.
This financial year the maximum personal after-tax contribution is $150,000. However, if you’re under 65 you can contribute up to $450,000 over a 3-year period.
This allows you to make substantial contributions to super and build up your retirement savings. The way it works is that if you’re under 65 and make total after-tax contributions of more than $150,000 in a financial year, the bring forward rule is triggered. This allows you to make non-deductible contributions of up to $450,000 in total over a fixed 3-year period commencing in the year in which you contributed more than $150,000.
This may sound like a real bonus, however, you need to ensure you don’t exceed the after-tax contribution caps because there may be penalty tax payable. This could be as high as 46.5%.
Planning issue: From 1 July 2014, the after-tax contributions cap increases to $180,000 which means if you trigger the bring forward rule a total of $540,000 can be contributed over the fixed 3-year period. One trap that may occur is if you trigger the bring forward rule before 30 June, the maximum amount will be $450,000 for the fixed 3-year period.
Beware of excess contributions tax
Anyone making large super contributions should be careful to avoid excess contributions penalties. This can apply to any tax deductible and non-tax deductible super contributions. The maximum amount of tax payable can be up to the maximum tax rate of 46.5% plus additional penalties.
If your adjusted income is less than $48,516 you can take advantage of the government co-contribution by making after-tax (non-concessional) super contributions before the end of the financial year. For every dollar of eligible contributions, the government contributes 50 cents to your super up to a maximum government co-contribution of $500. (Applies to business income as well as salary/wages.)
For 2013/14, the maximum government co-contribution is payable for individuals on incomes at or below $33,516 and reduces by 3.33 cents for each dollar above this, cutting out completely once an individual’s total income for the year exceeds $48,516.
Drawing super pensions
If you’re in pension phase, make sure the minimum pension has been paid to you for this financial year. Otherwise, any income earned on your pension investments in your super fund will be taxed at 15% rather than being tax free (if the pension rules are met by the fund).
Drawing super lump sums
Once you reach 60, all lump sums from super are tax free. However, before age 60 any lump sums that include a taxable component can be taxable. The taxable component includes the tax deductible contributions plus any income that has accumulated on your super benefit. No tax is payable on taxable amounts of up to $180,000, in total, you receive prior to age 60. This amount is indexed annually.
If you’re eligible to draw amounts from super, you may defer receiving the amount until after reaching age 60 or until a later financial year when you may end up paying a lower rate of tax.
SMSF fund expenses
For SMSF members in the accumulation phase, tax deductions for expenses are not usually significant, but it’s important to ensure expenses are actually incurred or paid before 30 June to be deductible in the current financial year.
Disclaimer Westlawn Business Services Pty Ltd provides this information for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.