End of Financial Year Strategies

SUPERANNUATION

Make personal deductible contributions before 30 June 2024

Making a personal contribution into super and claiming a tax deduction for the contribution can help reduce your income tax payable. Anyone under 67 years of age at the time of making the contribution can claim a tax deduction on superannuation contributions regardless of their employment arrangements. If you are aged between 67 and 74 at the time the contribution is made, you must meet the ‘work test’ or meet the work test exemption.

The ‘work test’ requires that the individual has worked at least 40 hours over a consecutive 30 -day period in the financial year the contribution is made.

The annual concessional contribution cap for the 2023-24 financial year is $27,500 however may be higher if you have access to unused concessional contributions.

As the Stage 3 tax cuts will come into effect on 1 July 2024, most will receive a greater tax benefit if they make personal deductible contributions this financial year as your marginal tax rate may be lower under the new tax rates.

Use unused concessional contribution cap from 2018-19 financial year

You may be able to make concessional contributions (CCs) exceeding the annual cap ($27,500 in 2023/24) under the ‘catch-up rules’ if you:

• had a total super balance (TSB) of less than $500,000 on 30 June 2023, and

• have unused CCs from the previous five financial years.

An individual must exceed the annual CC cap to utilise their unused CC amounts, and amounts are deducted on a first in first out basis. What this means is if you have unused CC for the 2018/19 financial year, these amounts will expire if not used by 30 June 2024 as unused cap amounts expire after five years. Also, if your TSB is going to be more than $500,000 on 20 June 2024 but is under on 30 June 2023 this year may be the last time you can take advantage of the catch-up concessional contribution provision.

Note an individual may re-qualify if their TSB drops below $500,000 in the future.

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Key considerations:

• A tax loss cannot be created with personal deductible contributions, meaning you must have enough taxable income for the deduction being claimed.
• You must lodge a Notice of Intent to Claim a Deduction form to the trustee of the relevant super fund before the earlier of:
  • lodgement of their tax return for the year,
  • 12 months after the end of the financial year in which the amount you wish to claim as a deduction was contributed,
  • commencement of an income stream, or
  • lump withdrawal (partial or full) or rollover.
• Review the amount of Superannuation Guaranteed (SG) or voluntary employer contributions you have already received this financial year.

• When determining how much to claim as a deduction, you would generally deduct an amount which may in turn reduce your tax liability. Subject to your circumstances and tax offsets available, where deductions have been claimed and your taxable income (net of the deduction claimed) is under the income thresholds calculated below, your tax liability is nil. Offsets included in these calculations include Low Income Tax Offset (LITO) and Senior Australian Pensioner Tax Offset (SAPTO):
  • resident individuals eligible for LITO – $21,884
  • resident individuals eligible for LITO and SAPTO (single) – $33,088
  • resident individuals eligible for LITO and SAPTO (members of a couple)– $29,783
• It is important to ensure contributions are classified correctly. A common trap for self-employed individuals is incorrectly classifying personal deductible contributions as employer contributions. Any contributions incorrectly classified as an employer contribution will need to be reclassified to a personal contribution before a Notice of Intent can be accepted.

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Maximise non-concessional contributions

Individuals under 75 years of age can make non-concessional contribution up to $330,000 under the three-year bring forward rule. To determine your bring forward eligibility, check your TSB on 30 June 2023. NCC is not available if TSB on 30 June 2023 is $1.9M or greater.

The non-concessional cap will be indexed to $120,000 on 1 July 2024 which means people who are eligible for the bring forward provision can make a one-off NCC of $360,000 in the 2024/25 financial year. However, the TSB remains at $1.9M which means there’s slight adjustment in TSB eligibility for the 2024-25 financial year, see table below:

It’s important to note that people who trigger the bring forward rule by making NCC in excess of $110,000 and are still in the bring-forward period in FY 2024/25 don’t have access to the increased NCC cap in 2024/25. This is because the maximum NCCs that can be made under bring forward provisions are determined in the financial year the bring forward is triggered.

Implement cash-out recontribution strategy across two different financial years

A popular strategy at the end of the financial year to maximise your tax-free component is to implement a cash out and re-contribution strategy across two financial years. How this works is to make a withdrawal up to $470,000 before 30 June 2024, recontribute $110,00 back into super before 30 June 2024 and then make a NCC of $360,000 after 1 July 2025.

Example:

Elliot is 70 years of age and his TSB on 30 June 2023 is $1.75 million which means he can only make a NCC of $220,000 in the 2023-24 financial year. His TSB has remained roughly unchanged, if he makes a withdrawal of $470,000 in June 2024 and re-contributes $110,000 via a NCC before 30 June 2024. His TSB will be approx. $1.28m well below the $1.66M limit and he’ll be able to re-contribute the entire $330,000 back into super in July 2023 as a non-concessional contribution. This can potentially save his adult children significant tax when he passes away.

Ensure contributions are received by the super fund before 30 June

When contributions are processed and allocated by a trustee, they can impact which financial year the contribution falls into. Ensure there is ample time for contributions made by electronic transfer, especially when a super clearing house is used by an employer, as it may take up to two weeks for the super fund to receive the transfer amount.

In TR 2010/1 the ATO has outlined when contributions are made:

Make an after-tax contribution to qualify for government co-contribution

If your total income is less than $43,445 and at least 10% of this income is derived from employment activities (including self-employment), you are eligible for a government co-contribution of up to $500.

Total income includes assessable income, reportable fringe benefits and reportable employer super contributions. To be eligible your TSB on 30 June 2023 must also be less than $1.9M.

 

To be eligible you need to be under the of age 71 at the end of the current financial year, have at least 10% of income attributable to employment activities (including self-employment) and generally cannot hold a temporary visa at any time during the financial year.

Make spouse contributions to receive spouse tax offset

For people who are members of a couple, if one of the individuals has assessable income, reportable fringe benefits and reportable employer contributions of less than $40,000, consider making a non-concessional contribution to the low-income spouse’s super fund. The contributing spouse may be entitled to a tax offset being 18% of the contribution, up to a maximum of $540 where the receiving spouse’s income is less than $37,000.

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Key considerations:

• The receiving spouse must be under age 74. If the receiving spouse is between age 67 and 74 they must satisfy the work test.
• The receiving spouse’s TSB on 30 June 2023 must be less than $1.9M.
• The tax offset is non-refundable.
• The contributing spouses tax offset is nil where their assessable income, reportable fringe benefits and reportable employer contributions exceed $40,000.

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Take advantage of spouse contribution splitting

For people who are members of a couple it may be worthwhile implementing a spouse contribution splitting strategy to equalise super balances between the spouses. One of the benefits of equalising balances between members of a couple is to allow each member to fully utilise their personal transfer balance cap. Other benefits of implementing a spouse contribution splitting strategy include:

• Keeping each spouse’s TSB under $500,000 to qualify for carry forward unused concessional contribution.
• Keeping each spouse’s TSB under $1.9M to qualify for non-concessional contributions.
• Improving the couple’s Centrelink asset and income test position by moving assets across to a younger spouse’s accumulation super account.
• Funding insurance premiums inside super for a low income or non-working spouse.

As you can only split concessional contributions made in the previous financial year, if required, now is the last chance to split concessional contributions made in the 2022-23 financial year.

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Key considerations:

• It is not mandatory for super funds to offer spouse contribution splitting so confirm it is offered by the your super fund before making the recommendation.
• To be eligible, the receiving spouse must be either under preservation age, or has reached preservation age but under age 65 and not retired.
• The maximum amount that can be split is the lesser of 85% of the concessional contributions for the financial year and the concessional contributions cap.
• If you wish to claim a personal tax deduction for your contributions, ensure you have lodged a valid  Notice of Intent to claim a deduction notice and received acknowledgement of its receipt from the Trustee before they apply to split contributions.

SELF MANAGED SUPER FUND (SMSF)

Contribution reserving strategy

The contribution reserving strategy involves the trustee of a SMSF allocating contributions received for a member in June to a reserve or unallocated contribution account in July (within 28 days after the end of the month in which the contribution was made).

The benefit of this strategy is that you may be able to claim a tax deduction on the concessional contributions made in the current financial year without breaching the CC cap. This is because the ATO has confirmed that where a contribution is made in June of one financial year but not allocated to the member until the following financial year, the contribution counts towards the member’s concessional cap in the year it is allocated. The ATO has also confirmed that the contributions are deductible to you in the year of contribution.

This strategy may be suitable to people who have significantly higher taxable income in the current financial year i.e. those who are retiring. As the concessional contribution cap will increase to $30,000 for the 2024/25 financial year, the maximum amount of tax deduction you can claim in the 2023/24 financial year under the contribution reserving strategy is $57,500.

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Key considerations:

• When making the contribution, separate the amounts to be allocated to the following financial year as a separate contribution.
• Use the ATO’s “Request to adjust concessional contributions” form to ensure the ATO knows what you are doing.
• Make sure your SMSF permits the use of this contribution strategy.
• If you are over age 67 when making the CC to the SMSF, you need to meet the work test (or work test exemption conditions) in the financial year the contribution is made. However, it is not necessary for you to meet the work test in the following year for the trustee to make the allocation to the member’s account.

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Ensure minimum pension standards are met

If you have an account-based pension, ensure you receive at least the minimum amount from your pension account before 30 June 2024. Funds must leave the SMSF’s bank account when making pension payments as it cannot be done via a book entry. Pension payments also cannot be made via in-specie transfer of assets.

Failure to meet the minimum pension payment requirement results in the pension being treated as having ceased at 1 July 2023 and will be taxed as an accumulation account. There will also be transfer balance cap implications.

Pensions commenced between 1 June 2024 to 30 June 2024 are not required to make pension payments in the current financial year.

TAX STRATEGIES

Prepare to claim deductions

It’ll be too late to think about tax deductions by the time it comes to lodging a tax return. Being prepared ahead of time could help you take advantage of additional strategies that may increase tax savings.

Prepay income protection insurance premiums and interest

Depending on your circumstances, you may be able to claim a tax deduction for up to 12 months of prepaid expenses such as premiums on an income protection policy (held outside of super) and interest paid in advance on an investment loan.

Year-end trust distribution

A trust resolution determines which beneficiaries will receive distributions and what portion of trust income they will receive for that financial year. Trust distribution resolutions must be made prior to 30 June to avoid trust income being subject to the top marginal tax rate. Before making the trust resolution, the trust deed should be reviewed to consider how trust income is to be determined and to which beneficiaries’ income can be distributed for the most tax effective outcome.