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Preparing for the end of the financial year
While we know that we say this every year, it does seem that time continues to speed up. Surely it was only a few weeks ago that we were welcoming in the new year? Now we find ourselves with less than a month until the calendar year’s midpoint – which of course is the end of financial year.
This is a particularly important time for investors for two reasons. First, and most obviously, as the end of financial year approaches, investors need to ensure that their taxation affairs are in order. Secondly, and perhaps even more importantly, the end of financial year is the time that many investors set aside to consider their financial position more broadly. This annual review – whilst not sufficient in itself to ensure investment success – can be a critical time of reflection and recalibration of investment strategies.
In this edition of Investor Insight, we look at some of the key taxation and strategic issues that investors may wish to address over the next few weeks.
Prepay interest on investment loans
Some lenders allow borrowers to prepay interest on investment loans. Where this is the case, the prepayment of interest may enable you to bring forward the interest expense to offset taxable income. Prepaying interest can also allow you to ‘lock in’ a fixed rate of interest, providing budget certainty. Investors should be aware that lenders may charge a fee for the prepayment of interest and should consider this expense in any decision.
Manage capital gains and losses
Investors should seek advice as to whether carried forward capital losses can be used to offset capital gains realised during the year. Similarly, selling securities that you have held for at least twelve months (that qualify for the 50% CGT discount) may be a relevant strategy to utilise any capital losses that you may have incurred. In addition, deferring or bringing forward the planned sale of an asset may be beneficial depending on your individual circumstances.
Maximising deductible expenses
Investors should ensure that they are maximizing the deductions they are able to claim from expenses incurred in earning assessable investment income. Expenses that you may be able to claim include fees for financial advice, account keeping and management fees and interest payments on investment loans. Income protection insurance may also be tax deductible.
Reviewing and prepaying your income protection
Income Protection Insurance is an important consideration for those clients with families, outstanding debts and/or a single main income earner. The Australian Taxation Office generally allows the cost of any premiums paid to insure the loss of your income to be claimed as a deduction. In addition, premiums pre-paid for up to twelve months in advance may be deductible in the year that the expense is incurred.
Rental property deductions
Landlords can claim deductions for a range of expenses such as advertising, bank charges, body corporate fees, cleaning, council rates, electricity and gas, gardening, insurance, loan interest, land tax, lease preparation expenses, legal costs, pest control, postage and stationery, property agent fees, telephone charges and water rates. You may also be able to write off the cost of certain buildings, depreciating assets and borrowing costs over time.
Efficient use of superannuation strategies
Superannuation provides a tax-efficient environment for your retirement savings. Depending on your personal circumstances, increasing the amount of wealth you hold through superannuation by making additional contributions, either through salary sacrifice or lump sum contributions, may be worthwhile. These additional contributions are capped for the 2013-14 financial year at $25,000 (or $35,000 for those aged 59 or over on 30 June 2013). However, in a very welcome recent change, unintentional contributions above this cap can be withdrawn and taxed only at the investor’s marginal tax rate. This is a significant change that will take a lot of the ‘guess and stress’ out of the end of financial year form SMSF investors.
Optimise your tax offsets
Tax offsets directly reduce your tax payable and can add up to a sizeable amount, so it pays to know all the offsets to which you are entitled – particularly given the significant changes announced in the recent federal budget papers (which, it should be noted, are yet to be legislated and so are subject to change). Eligibility for offsets will generally depend on your income level, family circumstances and other relevant conditions associated with particular offsets or rebates. Common tax offsets include the dependant spouse rebate, low-income tax offset, mature-aged worker rebate, senior Australian tax offset, medical expenses offset, private health insurance offset, the entrepreneur’s tax offset and the offset for superannuation contributions made on behalf of a low income spouse.
Making a tax deductible donation to Deductible Gift Recipients (DGRs) can represent an alternative strategy for those seeking to reduce their tax liability prior to the end of the financial year. If you have a deeper interest in philanthropy, other strategies to consider include creating a Private Ancillary Fund or establishing an account in a Public Ancillary Fund. Donations through both of these structures are tax deductible.
Review your investment strategy
Is your investment mix still properly suited to your needs? Do you have the right mix of ‘growth’ and ‘defensive’ assets? Have you thought through how much money you will need to be able to retire in comfort? Do you have adequate access to liquid cash to deal with emergencies like unexpected medical expenses or loss of income? Are you over-exposed to volatile asset classes, where sudden market movements can have a significant impact on your portfolio?
In recent years, more and more investment professionals have been preaching the importance of life cycle investing. There is a very good reason for this. With the onset of the GFC, many investors with a large portion in investments in growth assets saw a large portion of their portfolio disappear, resulting in the delay of retirement and the return to work of those who had previously retired. Many investors who were unable to return to work were forced to dramatically change their lifestyle to cope with their reduced income.
This financial year may be the perfect time to consider whether your investments provide sufficient protection for your future.
Gearing is certainly not for everyone. It can be high risk. But when used with care and intelligence, it can be a powerful portfolio tool. It can increase returns, enhance tax efficiency and even de-risk portfolios by adding to overall portfolio diversification.
Insurances – are you protected?
Insurance is an important part of any retirement planning strategy. Investors can protect against some of life’s unexpected battles by having proper life, total and permanent disability and income protection insurance in place. These policies are generally tax deductible and can often be paid through superannuation.
As always, we recommend that you consult with your accountant or financial advisor before making any investment decisions.