There are many tax benefits that need to be considered, such as imputation offsets and capital gains tax (CGT) discounts. However, many benefits are only realised where the investments are held at the time of the dividend declaration or income distribution, or for a specified period. Investment churn and portfolio trading that ignore tax consequences can mean a premature turnover of assets and the loss of the potential after-tax benefits on those investments.
The lead-up to 30 June gives you an opportunity to focus on a number of tax strategies that could be implemented to maximise your after-tax position. Some of these strategies may be able to be implemented before 30 June - others may be strategies that you need to implement after 30 June based on your employment arrangements.
Some of the most used strategies are:
1. Deductible superannuation contributions
Employees are generally able to make salary-sacrifice contributions out of their pre-tax salary, which will be taxed in the super fund at a maximum rate of 15 per cent provided you do not exceed your concessional contributions caps. This is instead of being taxed at your marginal tax rate, which could be as high as 45 per cent plus Medicare. If employees want to enter into a salary-sacrifice arrangement, it needs to be organised on a prospective basis. So if this affects you, you may want to consider this for 2012. Self-employed people are also able to make deductible contributions provided certain conditions are met. If you think you are self-employed, you should seek advice to confirm this and make sure you have satisfied all the necessary conditions to be eligible for the deduction.
Where deductible contributions can be arranged, the concessional contribution caps need to be considered. For 2010/11, this cap is $25,000 unless you are over 50, in which case it is $50,000. Once deductible superannuation contributions have been made, you are only able to access that money when you have reached your preservation age and satisfied other conditions. Your preservation age is between 55 and 60, depending on your birthday.
2. Negative gearing
Where you borrow to purchase an investment that generates assessable income, the interest on that loan will be tax deductible, which can reduce the tax you pay on other income. However, with negative gearing, your borrowing costs such as interest exceed your investment income. Therefore, it is important to borrow sensibly - otherwise, if you are unable to make the necessary repayments on the loan, you could lose the assets you have provided as security for that loan.
Generally, most entities are able to borrow to purchase investments. However, super funds (including self-managed super funds (SMSF)) cannot borrow except in very limited circumstances. Some SMSFs have entered into borrowing arrangements in recent years to purchase investments. If your SMSF is considering this, you should ensure the relevant borrowing is permitted under the superannuation legislation and the investment is appropriate for the fund.
3. Choose the right investment entity
Consideration should be given to the right person or entity making the investment. For example, if a couple is considering an investment, generally less tax will be paid by the person with the lowest income, as that person's marginal tax rate should be lower than the higher income earner's marginal tax rate.
It is also possible to invest via various investment structures such as a family investment company or trust, partnerships and certain super arrangements. Lower tax rates may then apply to the relevant investment income. However, the advantages and disadvantages of each structure need to be understood.
4. Superannuation government co-contributions
Where certain low-income earners make personal non-deductible superannuation contributions, they may be eligible for a government co-contribution, which can boost their superannuation savings. For 2010/11, the government will match up to $1000 of your personal super contributions provided certain conditions are satisfied.
As with deductible superannuation contributions, it is necessary to monitor personal non-deductible contributions against the relevant contributions cap to make sure you do not inadvertently trigger a cap, which could result in excess contributions tax being payable.
5. Matching capital losses with capital gains
Where you make a capital loss on the disposal of an investment, you are able to offset that capital loss against capital gains in the current year or in future years.
Timing is everything - if you have an investment that you are about to sell that will give rise to a capital loss, you need to consider whether it is better to sell it pre or post 30 June, based on whether it can be used to offset current year capital gains. If you have current year capital gain, and you sell the asset after 30 June, generating a capital loss, you will not be able to use that loss to offset the current year gain.
You may also need to think about the types of capital gains being offset by the capital loss, so that you can maximise the value of those losses.
It is important to understand the tax consequences of whatever you are considering. There are many conditions that need to be satisfied before certain tax benefits apply, so you should seek advice where appropriate.
Written by: Noelle Kelleher, Deloitte tax services partner
