Clever Year-end Strategies  26th May 2009

It’s often the case in dealing with the demands of every day life, we forget the financial year will soon be drawing to a close. There are, however, great benefits to getting in early with your financial year-end planning.

We’ve identified four strategies to consider as the tax year draws to a close. Three of them may boost your retirement savings while paying less tax, and the fourth is a tax-effective way to purchase insurance. And this is just the tip of the iceberg!

We have other strategies which may be suitable for you, all designed to improve your financial position. So why not make this year-end a clever one?

1. Boost savings and minimise tax via salary sacrifice
If you’re likely to receive a bonus before 30 June 2009, you should consider asking your employer to salary sacrifice your payment into superannuation. By using this strategy, you may pay less income tax this financial year and make a larger after-tax investment.

When you sacrifice a bonus into superannuation, the contribution is taxed at a maximum rate of 15%.

If taken as cash, your bonus will be taxed at your marginal rate (which could be as high as 46.5% (1)). Depending on your circumstances, a salary sacrifice strategy could reduce the tax rate payable on your bonus by up to 31.5%.

2. Top up your super with help from the Government
If you earn less than $60,342 (2) pa, you may want to make personal after-tax super contributions before 30 June 2009.

This could enable you to receive a Government co-contribution of up to $1,500 to help increase your retirement savings.

To qualify for the full co-contribution, you need to contribute at least $1,000 and earn $30,342 (2) pa or less. A reduced amount may be paid if you contribute less than $1,000 A reduced amount will be paid if you contribute less than $1,000 and/or earn between $30,342 (2) and $60,342 (2) pa.

3. Contribute for your spouse and save tax
If your spouse has a lower income, you might want to make super contributions on their behalf from your after-tax pay or savings.

And, if you use this strategy before 30 June 2009, you may receive a tax offset of up to $540 this financial year, while increasing your spouse’s retirement savings at the same time.

To qualify for the full tax offset of $540, you need to make a minimum after-tax contribution of $3,000 into super on behalf of your spouse. Your spouse must also earn $10,800 (2) or less in the financial year in which the contribution is made.

If your spouse earns more than $10,800 (2), a reduced offset may be payable. The offset cuts out if your spouse earns $13,800 (2) or more per annum.

To use this strategy, your partner must be classified as a spouse under the relevant legislation. This includes a married or de facto spouse but does not include a partner (married or de facto) who lives permanently in a different home (3).

4. Protect yourself and be tax-effective
The reason so many Australians don’t have adequate insurance protection is because of concerns about its affordability. However, insurance doesn’t have to be costly.

Life cover is critical for securing the financial future of those you would leave behind if you died. It works by insuring yourself for a particular amount, and in the unfortunate event that you die, the insurer pays that amount to your beneficiaries.

Total and Permanent Disability insurance offers financial security by providing you with a lump sum if you suffer a disability and couldn’t work again. A lump sum payment is ideal if you need to pay off debts or your medical costs, or make alterations to your home that may have become necessary due to your disability.

You may save on your premiums if you take out life and Total and Permanent Disability (TPD) insurance through a super fund, rather than via a separate policy outside super.

The same tax concessions that apply when investing in super also apply to insurance purchased through a super fund.

If you’re eligible to make salary sacrifice contributions you may be able to purchase insurance through a super fund with pre-tax dollars.

If you earn less than $60,342 (2) pa and you make personal after-tax super contributions, you may be eligible to receive a Government co-contribution that can help you cover the cost of insurance.

If you make super contributions on behalf of a low income spouse, you may be able to claim a tax offset of up to $540 pa that can be put towards insurance premiums for you or your spouse.

If you earn less than 10% of your income (2) from eligible employment (eg you’re self-employed or not employed), you can generally claim your super contributions as a tax deduction - regardless of whether they are used in the fund to purchase investments or insurance.

These tax concessions can make it significantly cheaper to insure through a super fund (4) than outside super.

For more information on these and other clever strategies designed to boost your super while saving you tax, speak to us.

Note: Caps apply when making contributions to your superannuation. Please speak to your financial adviser for more information.

1 Includes a Medicare levy of 1.5%.
2 Includes assessable income plus reportable fringe benefits. Other eligible conditions apply. Please see us or the Australian Taxation Office website for more information.
3 This measure will apply to same-sex couples from the 2009/10 financial year.
4 Lump sum tax may be payable when a superannuation death benefit is paid to a non-dependant, or a TPD benefit is received by a disabled fund member. However, to compensate for the potential tax liability, you could consider taking out a higher level of insurance. While this will generally increase the premiums, the after-tax cost may be lower than insuring outside super, when you take into account the up-front tax concessions available.

(Courtesy of MLC)