Having a financial plan in action is one of the most important things you can do in…
The end of financial year will soon be upon us. But once you get past all the build-up and hype over sales and bargains, there are a few key things you could be doing to get more bang for your buck, and we are not talking about cheap flat-screen TVs.
Salary Sacrificing Bonuses
The advantage of salary sacrificing a work bonus into your super is that you can put in pre-tax money, boost your super and reduce your taxable income at the same time. This basically means you are reducing the amount of tax you will need to pay in the year. These benefits depend on your own individual marginal tax rate and the concessional contributions cap, which generally is limited to $25,000 per year and set to increase to $27,500 pa from July 2021.
To put this into perspective, if you pay tax at the highest marginal tax rate of 47% (includes Medicare levy), you can contribute a bonus straight into super and pay only 15% tax on that income. This is a saving of 32% tax. If your income surpasses $250,000 for the financial year, you may be up for an additional 15% tax on these contributions. Superannuation Guarantee contributions (contributions made on your behalf by your employer) are included in this limit. Although this can be an excellent strategy to take advantage at the EOFY, you will need to check first with your employer to ensure that this is possible in your workplace. You would also need to organise with your payroll department ahead of time to set this up before you are entitled to the bonus.
Making a Co-contribution to Your Super
When talking about bang for your buck, this could be an opportunity to make up to $500. To get the maximum co-contribution from the government ($500 each financial year), you’ll need to add $1,000 into your super and earn under $39,837 (for the 2020-21 financial year). The maximum co-contribution then reduces as your income increases. Every after-tax dollar that you contribute, the government will match it with their own payment of fifty cents. As your income increases, the amount that the government will add to your contributions will start to reduce on a sliding scale. As seen in the table below, once your gross income reaches $54,837, you will not receive any co-contribution. Visit the ATO to find out if you qualify.
|Income||Personal super contribution of $1,000||Personal super contribution of $800||Personal super contribution of $500||Personal super contribution of $200|
|$39,837 or less||$500||$400||$250||$100|
|$54,837 or more||$0|
Making Contributions for Your ‘Other Half’
Making a spouse super contribution gives the opportunity to save up to $540 in tax. If your significant other earns less than $40,000 then you might want to consider a super contribution on their behalf. This isn’t actually a reduction in your taxable income, it’s a tax offset, so the spouse making the contribution (the higher earner) will achieve a tax saving of up to $540 by making an after-tax contribution to their spouse’s super of $3,000. A lower tax offset may be available if you contribute less than $3,000 or your spouse earns more than $37,000 p.a. but less than $40,000 p.a.
The tax offset is calculated as 18% of the lesser of:
- $3,000 minus the income over $37,000 that the lower income earning spouse earned.
- the total amount contributed to the spouse’s sup up to a maximum of $3,000 (i.e. 18% x $3,000)
For example, Ben’s wife earned $37,500, Ben’s maximum tax offset reduces to $450 being 18% x $3,000 less $500 which exceeds $37,000. He can contribute $2,500 (after tax) to get the tax offset of $450. If Ben’s wife earns $10,000 per year and Ben contributes $2,000 into his wife’s superannuation account, he would receive a $360 (18% x 2,000) tax offset, which will reduce his income tax when he completes his 2020/21 tax return.
Rework Your Portfolio to Reduce Capital Gains Tax
Before this financial year is out, it is a great idea to ensure that your investment portfolio is still meeting your requirements and expectations. You may consider reworking and re-balancing your portfolio, as well as consider selling off any under-performing shares. Reviewing your portfolio can be useful in certain scenarios, however assessable capital gains may arise in some instances. If you are lucky enough to have made a capital gain, review your portfolio to work out if you have any carried forward capital losses from previous years or triggered any capital losses in the financial year to offset the capital gains, so you can decrease your overall capital gain and tax liability. If feasible, it is favourable to sell investments held for at least 12 months, as this makes you eligible for the 50% capital gains discount.
If you have a low-income earning spouse, you may also give thought to whose name the investment or savings account is in, but it is best to seek tax advice on this.
Bring Forward Your Expenses, Reduce Your Taxable Income
A potential strategy to save at tax time is to bring forward next financial year’s expenses that are tax deductible to this financial year and to possibly delay some income to the next financial year. For example, you might also want to look at the idea of paying a year’s worth of income protection premiums or pre-paying margin loan interest in one hit before the end of this financial year, as opposed to regular instalments next financial year. Pre-paying yearly professional memberships or subscriptions related to work are another clever way to take advantage of tax savings.
While these tips won’t see you jumping on any click frenzy sales or lining up to snag a bagful of bargains, now is an excellent time to get smart and tax aware, in order to save or even make some money, which could be just about as satisfying.
Everyone’s financial scenario is different, so some of these tips may or may not apply to your situation. For specific advice, speak to a financial adviser to work out a strategy to meet your individual goals.
Get in contact with Elliot Watson Financial Planning today 02 4038 1623.
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