How you manage the tax breaks that commence, are being reduced or will disappear from 1 July will have a lasting impact on your clients' portfolios.
Up for grabs is the opportunity to maximise concessional contributions, before they become effectively means tested, to ensure better eligible termination payment (ETP) outcomes for clients looking to retire or being made redundant and to ensure trust deeds are as robust as possible.
In some cases, it will be better for clients to act swiftly to make the most of the old tax rules while they are still available.
In other cases, delaying action until the new financial year will be more advantageous for them.
Either way, timing is of the essence both in terms of preventing wasted opportunities and because good tax planning takes time, it is not just an annual event.
According to MLC head of technical services Gemma Dale, it is important to regard tax planning as a driver in a financial plan rather than simply as an adjunct.
"This is a long-term financial plan. There are tactical opportunities but please don't make them a primary driver," Dale says.
Keeping tax strategy simple and understanding its connectivity within a client's portfolio will prevent many issues high on the Australian Taxation Office's (ATO) agenda, including excess contributions, the disclosure of foreign income and split loan arrangements.
The profile of your clients, their net worth and the industries in which they work will heavily influence the applicability of the tax changes taking effect from 1 July.
For an adviser with small business clients, the disappearance of the entrepreneurial tax offset, the immediate write off of all assets valued under $5000 and the proposed reduction in the company tax rate to 29 per cent will be important.
For an adviser servicing the higher net worth market, resolution of trust income and the pending changes to private health insurance will be important discussions to have with clients.
Get in before they go
There are a number of time-sensitive tax breaks available to clients before 1 July that will be useful to some clients before the rules and laws change in 2012/13.
This list is by no means definitive, but highlights a range of tax issues ready for discussion with your clients.
Transitional ETP rules
The transitional rules that currently apply to ETP payments expire on 30 June. They will impact on clients who may be in a tenuous employment situation, have the opportunity for a voluntary redundancy or are considering retirement.
While it is often considered by clients that deferring payment to a new financial year is the best way to reduce tax, this may not in fact be the case.
This is because this financial year is the last year that a client can use the transitional ETP rules and potentially benefit from contributing the money to either super or paying less tax on the ETP itself.
According to Dale, the issue warrants a conversation with potentially affected clients.
"If they [the client] are under the existing conditions in place since 2006, certainly talk about the timing of their decision and the impact post July 1. Make them aware of the consequences," she says.
Pros and cons of housing shares in an SMSF
There are rules that relate to the buying of listed company shares from self-managed superannuation fund (SMSF) members and these will change from 1 July.
While it is not yet clear what the new rules will be, Deloitte Private partner Paul Hockridge says how a client chooses to house the shares, whether it is inside or outside an SMSF, could have important consequences for them.
For example, Hockridge says from an asset protection point of view, if the shares are owned by an individual, they are exposed to creditors. This is not the case if they are housed within their SMSF.
Concessional contributions
capped and means tested
"There is real anxiety around the impact of that [concessional contributions]," Dale says.
In May last year, the federal government announced that from 1 July 2012 individuals aged 50 and over with total super balances below $500,000 could make up to $50,000 in concessional contributions a year.
"A client may ask, should I try and maximise my contributions to my spouse with a lower income? I can see the benefits of this," Dale says.
Another important issue around concessional contributions is exceeding caps, especially inadvertently.
Dale recommends advisers take a number of steps with their clients to ensure this does not happen. Educating clients about the painful process of breaching the cap is the starting point.
"Those days of your super fund just fixing it are over. The obligation falls on the individual," Dale says.
Also important is to understand the different ways contributions can be exceeded (more on this later). Dale says it took MLC six months to build software to assist planners in this process, an indication of just how many factors need to be considered.
Co-contribution reduction
Currently the government will match up to $1000 of personal super contributions in a year, however, from 1 July the super co-contribution will be halved.
This means over the coming months and before the end of this financial year, it is particularly worthwhile for low- to middle-income earners to contribute to their super to maximise their end benefit.
"This is the last time they will get a free gift from the government. It is best to maximise it," Institute of Public Accountants senior tax adviser Tony Greco says.
However, the government has also announced a low-income earners government superannuation contribution, which is designed to better target those who need most help in saving for their retirement.
This means clients with an adjusted taxable income of up to $37,000 will receive a low-income superannuation contribution of up to a maximum of $500.
According to Dale, when you add what the co-contribution will be in the new financial year together with the low-income earners contribution, people will not be substantially worse off.
Trust income and trust deeds
Resolutions as to who receives the income derived from trusts must be decided upon by 30 June.
Given much of the income information is not available before this date, Greco says a formula-based approach is the way to go.
"It does not have to be exact numbers," he says.
Failure to do this will have consequences on a trustee's tax bill and the chance of paying the highest marginal rate of tax.
And while on the topic of trusts, Hockridge says now is a good time to read the trust deeds in their entirety, particularly those dating back to the 1970s and 1980s.
He says often a beneficiary can be mistakenly excluded in the trust deed. Further, some trust deeds require a separate resolution to distribute income and capital gains.
"So you need to read it and to keep reading because you may need approval," he says.
Also, he suggests checking the trust deed to see whether in fact income can be streamed and a particular class of income can be sent to a particular beneficiary.
Tax conversations
There is a range of tax issues that will be particularly useful to discuss with your client to ensure adequate planning to accommodate changing tax rules as well as new points of emphasis by the ATO.
Private health insurance
Clients need to consider whether they want to keep their existing private health insurance in the light of proposed changes to the private health insurance rebate and Medicare levy surcharge for high-income earners.
Changes that commence in the new financial year will require clients to decide if they are willing to pay higher premiums or terminate their cover and pay a higher Medicare levy surcharge.
According to a technical paper prepared by MLC's Jennifer Brookhouse in February, many high-income earners will still be better off from a cash-flow perspective by paying private health insurance premiums, not the Medicare levy surcharge.
Rethinking contributions
The traditional strategy of waiting until the mortgage is under control and then dumping money into superannuation is no longer effective.
According to HLB Mann Judd tax partner Peter Bembrick, changes to concessional contributions mean the message to clients is to start early.
Bembrick says for a client in their early 40s who is earning good money, making some contributions to super but who has a big mortgage, a basic strategy could be to certainly get the mortgage paid down, but to start putting something extra into super.
Eliminating excess
contributions
Superannuation coming from a few different sources and the timing of salary sacrificing contributions are two common ways clients can inadvertently exceed their maximum contributions.
In the first instance, Bembrick says an individual may have one super fund primarily to provide life insurance, but also another fund that is regarded as their main super vehicle.
"The contributions used to fund the premiums in the first fund still count towards the contribution limits. So it is important to be aware of all the sources of superannuation contributions and plan to make sure that the combined total stays below the limit," he says.
Another source of exceeding contributions is the timing of salary sacrificing, which often occurs in late June.
Bembrick says if the contribution is not received by the super fund until 1 July, the ATO treats this as a contribution made in the new financial year and this may cause the limits for that year to be inadvertently exceeded.
In last year's budget, the government introduced a $10,000 withdrawal of excess contributions, which would then be taxed at a client's marginal rate of tax rather than at the penalty rate of 46.5 per cent.
This withdrawal can only be used the first time a member breaches the concessional contribution cap from the 2012 income year onwards and relates to excess concessional contributions made in the 2012 income year and beyond.
Overseas income
The ATO is increasingly focusing on the declaration of income earned overseas.
"More people are getting contacted to make sure they are reporting foreign income," Bembrick says.
The tax office uses data from traditional sources such as banks, financial institutions and investment bodies, employment information and welfare payments, as well as having online access to information held by ASIC.
Banking transactions captured by AUSTRAC, Australia's anti-money laundering and counter-terrorism financing regulator and specialist financial intelligence unit, are also used.
Investment loan arrangements
Also on the increase is the ATO's activity in the split loan arrangement arena.
In the 2004 Commission of Taxation v Hart case, the High Court of Australia ruled that splitting a loan did not permit a tax deduction for compounding interest on the part used to pay off an investment property.
The message is keep things simple; nothing fancy because the ATO is focusing on the way things are structured. In practice, this means keeping things separate, such as paying off private debt first and establishing interest-only investment loans.
Significant tax changes on the horizon
From 2012/13, there could be some significant changes made to income thresholds and marginal tax rates, as well as a reduction in the low-income tax offset.
These together will also impact on the effective tax-free threshold for ordinary income. Currently the effective tax-free threshold is $16,000 a year, however, from 2012/13 this will increase to $20,542 and from 2015/16 to $20,979.
"The numbers look completely different to us, but the consequences are not that severe," Dale says.
These changes are part of the Clean Energy Legislative Package introduced to Parliament in September last year. They are currently draft bills.
Company tax rates are also set to change for small businesses from the 2013 financial year.
Treasurer Wayne Swan recently released draft laws to cut the company tax rate for small business to 29 per cent. The tax cuts for all other companies are proposed to take effect from 2013/14.
Another important change will be the gradual increase of the superannuation guarantee from 9 per cent to 12 per cent from 1 July 2013. «
