Tax Planning is Not About Getting a Tax Deduction in June

The financial media in May and June is littered with ‘EOFY’ (end of financial year) and tax planning strategies to minimise tax.

We view leaving your tax planning to a last-minute rush in May or June as folly.

Reduced opportunity

This is partly because governments have reduced or removed many of the arrangements that provided for a measure of tax optimisation in years gone by.

For example, in FY-07 the maximum amount of tax-deductible superannuation personal contributions was $105,113. 1 Today, it is $30,000. Furthermore, those earning over $250,00 p.a. now face an extra 15% tax on concessional contributions (division 293 tax).

Other ‘strategies’ have withered in validity, effectiveness, or legality.

The June focus on tax efficiency for a single year continues to be pushed by parties such as:

  • the media seeking content
  • accountants and financial planners who are trying to let their clients know they are thinking of them at least once a year
  • charities seeking a tax-deductible contribution before 30 June

Smarter thinking for Tax planning

More innovative thinking looks beyond superannuation contributions and beyond this year.

It offers structures and investment management flexibility that enable the capture of opportunities.

The opportunities can be:

  1. defensive (e.g. how to manage the new so-called $3m superannuation tax, or division 296 tax);
  2. situational (managing CGT , be that an investment portfolio or due to an external asset sale); or
  3. broad-based, that is further than just your own annual return.

Defensive: division 296 tax

Whilst the new superannuation tax has yet to be re-presented to parliament, the media and sectional interests have made it seem like action is required now.

SMSF investors with smart advisers are alert but not alarmed.

The traps are:

  • to plan for just the first year’s introduction
  • to consider that if your account is less than $3m it won’t apply to you
  • to take advice from the media or your next-door neighbour

This tax is invidious, complex and far reaching.

You cannot manage this on your own.

Situational:  CGT management – four critical success factors

The only way to optimise CGT on an investment portfolio is to implement four critical success factors. These are:

  1. The securities in the portfolio must be individually managed. This provides the ability to offset gains against specifically targeted losses, including the potential retention of some for later use. The use of managed funds or industry superannuation funds does not usually permit this.
  2. The portfolio must offer detailed record keeping to identify the tax position of each individual security and/ or asset in the portfolio/entity.
  3. Having up-to-date and forecast tax position of the portfolio. This is essentially whether a) there are any carry-forward losses that can be utilised; and b) are there any tax events in the upcoming year that have to be planned.
  4. The ability to execute transactions efficaciously is vital. The risk of a delayed implementation is the loss of opportunity.

The overall execution of the strategy must be done in a thoughtful and controlled manner.

Broad-based: consider family-tax management

This area is a little more complex and involves inter-generational planning. The essence is that investors should consider the overall tax opportunities of their family.

This is more than simply using a family trust to distribute income to beneficiaries. Matters considered include:

  • intended uses of the wealth
  • principles under which distribution can occur
  • scenarios where distribution should not occur
  • drafting of appropriately worded documentation, personal to the family
  • use of vehicles in addition to discretionary trusts

What to now do?

Stop thinking of tax planning as an annual exercise in getting the highest tax deduction this year.

And start thinking of having…

  • appropriate structures in place
  • investment management that affords control and flexibility
  • obtaining tax efficiency that is broader than you

…to capture opportunities

If you are interested in discussing how we can help manage your tax, please contact us.

[1] For a person aged between 50 and 70.

The information in this article is of a general nature and does not take into consideration your personal objectives, financial situation or needs. Before acting on any of this information, you should consider whether it is appropriate for your personal circumstances and seek personal financial advice.

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