By Rashesh Bhavsar
Here are some top end of year financial planning strategies
As End of Financial Year (EOFY) coming closer, it is a time to consider your current financial situation and review some of the strategies, which can be quite useful to minimise your tax, boost your superannuation and secure your income.
- Making Concessional (Before tax) Contributions to Superannuation to minimise tax
Concessional contributions are before-tax contributions that can include employer contributions, contributions made under a salary sacrifice arrangement and tax-deductible contributions by an individual. You, or your employer, generally receive some type of tax advantage when a concessional contribution is made to a super fund.
Contributing money into superannuation can be an effective way to save for retirement and can provide you with tax relief.
For self-employed individuals, this can be done by making personal deductible contributions. These contributions are concessional contributions and are taxed at a maximum of 15 per cent rather than at the individual’s Marginal Tax Rate, which can be up to 45 per cent for the 2014-2015 financial year.
An additional 15 per cent concessional superannuation tax applies to people who earn above $300,000.
For those who are employed, this can be done by salary sacrificing to superannuation. Salary sacrifice contributions are also concessional contributions (also known as pre-tax contributions) and are taxed at a maximum of 15 per cent in comparison to individuals Marginal Tax Rate of up to 45 per cent.
These strategies can reduce the amount of tax you pay while saving for your retirement.
As an annual cap applies to all superannuation contributions, it is important to discuss your options with licensed and qualified financial planners before making any contributions to superannuation.
For the 2014/2015 year (1 July 2014 to 30 June 2015) There are 2 annual concessional contributions caps you need to be aware of when considering before-tax contribution strategies, namely: $30,000 cap for anyone aged 48 or under as at 30 June 2014; and $35,000 cap for anyone aged 49 years or over as at 30 June 2014.
Exceeding superannuation contribution caps can result in you paying additional tax and penalties.
As an annual cap applies to all superannuation contributions, it is important to discuss your options with your financial planner.
- Making Personal Contributions to Superannuation to qualify for the Government Co-contribution
Non-concessional contributions may also be referred to as ‘after-tax contributions’.
Most common types of non-concessional (after-tax) contributions include: non-concessional (after-tax) contributions that you make, or your employer makes on your behalf, from your after-tax income; contributions your spouse (including a same-sex spouse) make to your super fund (unless your spouse makes the contributions because they’re your employer); and personal contributions that are not claimed as an income tax deduction.
2014-2015 Non-concessional cap:
$180,000 (under age 65)
Access to government co-contribution: You can also make superannuation contributions $1,000 from after tax money where you may benefit qualify for the Government Co-contribution of up to $500 if your taxable eligible income is going to be less than $34,488 p.a. in financial year ending 2015. Any income above this threshold will reduce your govt co-contribution entitlements. No entitlements will be received if your eligible taxable income will be above $49,488 p.a. in financial year ending 2015. There are also other conditions to meet to access government co-contribution.
Contact your financial planner before 30 June to find out if you are eligible for the Government Co-contribution.
3) Secure your Income and claim tax deduction
As you build your family’s wealth, it becomes increasingly important to protect your assets and earning capacity.
Income protection insurance provides up to 75 per cent of your income should you become unable to work due to illness or injury. Income protection insurance premiums are generally tax deductible whether funded within or outside super (but at different rates). But if you take income protection in your own name (outside super), you can pre-pay a year’s worth of premiums and may be entitled to a tax deduction in the current financial year that would otherwise be tax deductible in the following financial year.
You can choose waiting period between 14 days to 2 years, but most common ones are 30 days and 90 days. Longer the waiting period, cheaper the premium.
You can choose benefit period from 2 years to up to age 65. Some insurance companies offers up to age 70 to professionals. Shorter the benefit period, cheaper the premium. Normally, professionals and white collars workers choose benefit period up to age 65 and blue collars normally choose benefit period up to 5 years as it might be maximum benefit available to them.
You can choose the type of income protection cover according to your needs.
Agreed-value insurance, the most expensive option pays out a benefit agreed to reflect your income at the start of the policy. This type’s not affected by any fluctuations in income – kind of like ‘agreed value’ car insurance cover, rather than market value.
Indemnity value policies are cheaper and more common. These verify your income at the time of making a claim and may adjust your benefit accordingly. So your payout salary can depend on things like maternity leave, working part time or becoming unemployed.
Indemnity value policies provided by super funds are the cheapest, with fewer features and less flexibility. They may also be limited to a shorter time period.
The writer is a financial advisor, CEO & Co-Founder of the Fortune Wealth Creation Group, and can be reached at firstname.lastname@example.org