Year-end tax planning
June 2016 is a great time to ring your clients and ask them in to discuss year-end tax planning; year-end tax planning for the year ending 30 June 2017 that is. To be frank, two weeks out from 30 June is too late to do anything of substance other than make sure you have the compliance details ticked off.
Effective tax planning takes place over years, and even decades. Not days.
First things first: choose the right structure
Effective tax planning starts with effective investment structures. Many, but not all, clients will be better off investing via trusts, companies and/or super funds. The tax benefits will add two or three percentage points to the annual return, and over time this compounds out to a significant difference.
Rough calculations suggest after ten years a top rate taxpayer will be more than 30% better off from investing in a company structure, compared to their own name, based on long term average equity investment yields.
Even better results are achieved by investing through a super fund.
To maximize after tax return you must first minimize tax. It makes sense to spend some time and energy thinking through how to do this. Sharpen your saw before you cut your wood, and make sure you recommend the correct structure to your client.
Second things second: choose the right investments
Some investments have better tax characteristics than others. It also makes sense to spend some time and energy thinking through what investments should be selected.
Homes are CGT free, and exempt from the age pension assets test. The Russell ASX Long Term Investment Report 2016 identifies Australian property as the highest earning asset class over the last twenty years. With populations, affluence and aspirations rising fast this is probably not going to change.
Encouraging clients to invest in their homes makes a lot of sense tax wise.
Businesses are effectively CGT free for most clients. The small business CGT concessions combine to eliminate any CGT payable on disposal.
Encouraging clients to invest in their businesses makes a lot of sense tax wise too.
Don’t forget business premises: the small business CGT concessions usually cover business premises too. This means the doctor’s surgery, the trader’s shop, the manufacturer’s factory and the transporter’s depot are all CGT free investments.
(And business premises often generate a net reward above a mere rent: the extra profit and synergistic value caused by bigger, better, more appropriate and more secure premises. This can be many times the rent earned on a standard investment property.)
Third things third: get the super happening
Superannuation is not an investment as such. It is more a medium, or structure, for investing. Put this distinction aside for a moment and stand in your client’s shoes: they see super as an investment in itself. And to be frank it’s an investment that’s hard to beat: tax deductions on the way in, tax concessions along the way, and tax concessions or even 100% tax exemptions on the way out. It does not get any better.
You should encourage every client to pay as much super as they can afford, and a bit more, every year, starting as early as possible and ending as late as possible. Get the super snowball running as big as possible, as hard as possible and as long as possible.
Its courses for horses but, in summary, investment efficiency requires tax efficiency, and tax efficiency requires smart investment structures and smart investment selection. With a big emphasis on super.
June 2016 is the time to get your clients in to discuss year-end tax planning for 2017.
And what can be done now?
Having said this, our attention still needs to turn to what can be done in the next two weeks or so to help clients get their 2016 year-end tax planning under control
On the super side of things, make sure contributions are physically paid well before 30 June. Don’t wait until the last moment: do it now. And if you are dealing with a big fund be aware they sometimes decide the cut off is 28 June not 30 June. It’s impossible to argue with them, and the best approach is to pay early so you do not have worry about their arbitrary and arrogant abrogations.
The contributions caps for 2016 are $30,000 under age 50 and $35,000 over age 50.
With new lower caps probably applying from 1 July 2017 it’s critical your clients contribute as much as possible now. Your self-employed clients should consider gearing employee contributions for themselves and other related persons: this can turn a good strategy into a great strategy.
Make sure clients with SMSF pensions pay at least the minimum amount before 30 June.
Remind clients in-house assets are best avoided, but if they are there they must not be more than 5% of total assets at 30 June.
Double check geared SMSFs have all documents in order, and any related party loans are administered on a strict arms-length basis, with interest and principal paid on time every time.
Consider whether clients should transfer contributions, pay co-contributions or claim spouse tax offsets for the 2016 year.
Pre-paying deductible outgoings, using debt if necessary, can be a good strategy, particularly if it effectively pushes taxable income into a lower tax rate year.
If clients have capital gains they should consider disposing of capital loss assets before 30 June, to minimize their net capital gain for the year.
A big bugbear is unpaid distributions from family trusts to related companies. The ATO can probably apply Division 7A of the Income Tax Assessment Act to treat the unpaid amount as an un-frankable dividend: this is tantamount to double tax, and is a hefty penalty.
The best advice is pay out all trust distributions, and do not leave them unpaid as at 30 June.
Interested in doing even more for your clients?
Send your clients a copy of Dover’s “Fifty Ways Financial Planners Can Save Tax” and invite them to peruse it and to contact you for a meeting if assistance is needed. This manual has been written as a guide to what financial planners can do to reduce their own tax liabilities, and works wonderfully well as a check list for what your clients can do too.